Last December, Pfizer (PFE 6.09%) essentially out-licensed its tumor necrosis factor-like ligand 1A (TL1A), PF-06480605 (now RVT-3101), to Roivant Sciences (ROIV 2.84%) by forming a new company with the precision drugmaker. Per the terms of the deal Pfizer owns a 25% equity stake in the new company, along with the drug's commercial rights outside of the U.S. and Japan.
Although the deal didn't exactly raise eyebrows among investors at the time, Merck's recent $10.8 billion acquisition of Prometheus Biosciences for its rival TL1A therapy, PRA023, raises some serious questions about Pfizer's decision to offload its internally developed anti-inflammatory and anti-fibrotic candidate.
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Background
RVT-3101 is presently in mid-stage development for a type of inflammatory bowel disease (IBD) known as ulcerative colitis. Prior to this licensing agreement, Pfizer was also in the midst of advancing the biologic therapy into mid-stage development for Crohn's disease, another common form of IBD. Taken together, these two IBD indications represent a biologic therapy market worth approximately $15 billion per year.
Although there are scores of advanced biologic therapies already available for IBD, a large proportion of patients have to cycle through various therapies over the course of their lifetime due to either a loss of efficacy or serious adverse events. As a result, a substantial unmet medical need exists for novel biologics for both frontline (treatment-naive) and second-line (individuals who have stopped responding to a frontline therapy) patients.
Pfizer and Roivant appear to be initially developing RVT-3101 as a potent new option for second-line patients who express known biomarkers for ulcerative colitis. A similar developmental approach is likely to unfold for the therapy's potential Crohn's disease indication for competitive reasons. The caveat here is that the duo's ultimate development goal for RVT-3101 will clearly be dependent on the drug's mid-stage results in both settings.
Meanwhile, Merck and Prometheus seem to be intent on trialing PRA023 as both a frontline and second-line therapy for IBD, with pivotal studies expected to kick off in both ulcerative colitis and Crohn's disease later this year.
Commercial opportunity
As a precision medicine for second-line IBD, RVT-3101 could easily haul in over $2 billion a year in global sales, based on the sheer size of this market and the well-documented need for new therapeutics in this setting. With the potential to expand into other high-value inflammatory and fibrotic disease areas such as rheumatoid arthritis, systemic lupus erythematosus, pulmonary fibrosis, among many others, RVT-3101 may even be able to break $5 billion a year in peak sales by the middle of the next decade.
In fact, Pfizer and Roivant have already signaled their intentions to explore the therapeutic's utility in multiple disease areas with a high degree of unmet medical need.
What's important to understand is that wide array of diseases worth upward of $200 billion per year in current sales might be treatable via TL1A blockade. So a $5 billion a year peak sales estimate isn't exactly an outlandish revenue forecast for a novel anti-inflammatory and anti-fibrotic agent -- especially for one with a potential best-in-class clinical profile in some of these high-value indications.
Merck and Prometheus, in fact, think PRA023 represents a viable "pipeline-in-a-drug" opportunity similar to what AbbVie has done with its flagship anti-inflammatory therapy Humira over the past decade. Humira, for example, has garnered numerous label expansions in the inflammatory disease arena -- from IBD to rheumatoid arthritis and plaque psoriasis.
As a result, AbbVie's Humira has averaged over $20 billion in sales over the past three years, making it one of the best-selling drugs in the world. Humira's staggering commercial success underscores the enormous commercial potential of next-generation therapeutics like RVT-3101 and PRA023.
Why did Pfizer offload a potential mega-blockbuster?
Pfizer has a fairly big hole to fill with its COVID-19 product sales on the decline. And this forthcoming revenue dip has been the impetus behind the drugmaker's slew of recent acquisitions, such as the $43 billion buyout of cancer specialist Seagen, the $6.7 billion deal for IBD player Arena Pharmaceuticals, and the $5.4 billion acquisition of the rare blood disorder drugmaker Global Blood Therapeutics. Viewed in this light, the wisdom behind this Roivant agreement isn't altogether clear.
Two key issues appear to lie behind this decision to out-license this novel IBD therapeutic. First up, RVT-3101 is chasing PRA023 from a development standpoint in both ulcerative colitis and Crohn's disease. PRA023, in effect, could be on the market for both ulcerative colitis and Crohn's disease by 2026 under a best-case scenario. RVT-3101, on the other hand, wasn't slated to yield top-line mid-stage data in Crohn's disease until mid-2026 and this proposed trial has seemingly been delayed by this deal, according to the publicly available info on clinicaltrials.gov.
First-mover advantage in this space could be all the difference between reaching mega-blockbuster territory (greater than $5 billion a year in sales) and simply hitting blockbuster status ($1 billion a year in sales). While a blockbuster drug would be a boon for a small company like Roivant, it wouldn't be a needle-moving event for a mega-cap company like Pfizer.
Secondly, and perhaps most importantly, Pfizer has high hopes for its other IBD candidates, such as etrasimod (acquired in the Arena Pharmaceuticals deal) and ritlecitinib, an alopecia areata candidate the drugmaker is also trialing in IBD.
So by offloading RVT-3101 to a partner, Pfizer accomplished two key goals. Namely, the drugmaker can avoid the risk associated with losing first-mover advantage in this emerging therapeutic category, and it can still enjoy some upside potential if RVT-3101 is approved through both its equity stake in the new company, along with its commercial rights to the drug in ex-U.S. territories. Another minor issue is that IBD trials are fairly expensive to run. So Pfizer could benefit from the cost-savings associated with trialing the drug through a partner.
Bottom line: Pfizer's decision to offload RVT-3101 may seem counterintuitive at first glance due to the drug's staggering commercial potential. But a more nuanced look at the situation shows that it was indeed a smart move by the pharma titan.
Investing takeaway
Now, there is an important investing addendum to this story. Roivant, a mid-cap drugmaker, may have landed an underappreciated gem in this Pfizer deal for RVT-3101. Even as a second-tier therapy for IBD and perhaps a handful of other inflammatory conditions, this drug could easily morph into the company's flagship product with over $2 billion in annual sales. And some investors apparently have already picked up on this possibility based on the stock's positive reaction to this landmark deal (up 67.2% since the deal was announced):
The big picture is that Roivant might be poised for a rather sizable uptick in its share price over the next five to 10 years, thanks to this novel IBD medication. Aggressive investors, in turn, may want to take a closer look at this biotech growth stock soon.
