Just in case you've forgotten, merger and acquisition activity in the biotech sector is alive and well.
Over the weekend, we witnessed the latest sizable deal in the biotech sector go down with global pharmaceutical giant Roche (NASDAQOTH:RHHBY) announcing it would pay $8.3 billion in cash, or $74 per share, to acquire InterMune (UNKNOWN:ITMN.DL), a 38% premium over the company's closing price on Friday.
According to the press release from InterMune, the buyout is expected to be earnings-neutral to Roche in 2015, but it should be earnings-accretive for each year beyond 2016. Specifically, the buyout is being undertaken by Roche to "broaden and strengthen its respiratory portfolio globally," and it plans to use InterMune's EU and Canada-approved idiopathic pulmonary fibrosis (IPF) drug Esbriet (also known as pirfenidone) as the jumping-off point for its expansion.
IPF is a progressive, rare, and eventually fatal lung disease that causes scarring of a patients' lung tissue, rendering them less able to absorb oxygen. It's estimated that some 70,000 to 200,000 people in the U.S. suffer from IPF. There is no cure for IPF, and in the U.S., at least for the moment, there are no drugs specifically approved to treat IPF.
But, that could be about to change.
Pirfenidone: a slam-dunk approval?
In February, InterMune reported its long-awaited ASCEND phase 3 trial data on the efficacy of pirfenidone. The findings from ASCEND demonstrated that just 16.5% of pirfenidone-treated patients at week 52 experienced a decline in their forced vital capacity (FVC) from baseline of 10% or greater, or had unfortunately passed away. Comparatively, 31.8% of patients in the control group had their FVC decline by 10% or greater, or had patients pass away. The difference between the two is a statistically significant 47.9% reduction in patients that experienced a meaningful decline in FVC or death.
Additionally, nearly one in four pirfenidone patients (22.7% to be precise) exhibited no decline in FVC compared to just 9.7% of placebo group enrollees, a 132.5% improvement between baseline and week 52.
It's this data that allowed pirfenidone to be resubmitted to the FDA in May as a treatment for IPF -- InterMune received a complete response letter (i.e., rejection) in 2010 -- and to achieve the breakthrough therapy designation from the Food and Drug Administration in July. The current timeline has pirfenidone on pace to receive a thumbs-up or thumbs-down decision from the FDA on or before Nov. 23, 2014.
Logistically, this makes sense
From a number of angles, purchasing InterMune makes a lot of sense for Roche.
To begin with, there are no FDA-approved IPF treatments in the U.S. Although Esbriet hasn't sold exceptionally well in overseas markets, bringing in just $35.7 million in sales in the second quarter, albeit that was up 148% from the year-ago period, the opportunity for healthy margins in the U.S. is clearly on the table. Given the rare nature of the disease, as well as the factors that influence prescription drug pricing in the U.S., pirfenidone's pricing should be attractive enough to be an impressive growth driver for Roche.
Pirfenidone/Esbriet also complements Roche's existing respiratory products well. Roche already has asthma drug Xolair and cystic fibrosis drug Pulomzyme approved and on the market. It also has a handful of clinical-stage respiratory compounds, including lebrikizumab for severe asthma, with an expected filing date (assuming all trials go according to plan) in 2016, quilizumab for asthma with a filing expected in 2017, and lebrikizumab being examined as a treatment for IPF. However, note that lebrikizumab isn't expected to be filed for approval for what looks to be at least three more years, according to Roche's pipeline data.
The deal also takes a lot of the launch execution risk off the table for InterMune. I'm pretty certain any investor is going to agree that Roche's marketing team is among the best in the world, and Roche's considerably deeper pockets allow InterMune's research team to focus on product development and quality and worry less about marketing and product launches now.
Finally, it will add to Roche's profitability beginning in 2016. Anytime investors see the word "accretive" in the effects of a merger or acquisition, they tend to be happy campers.
But this part doesn't make much sense
But, as a tried and true skeptic, there's one aspect of this deal I don't particularly care for: the premium Roche ponied up to acquire InterMune.
On one hand, Roche could find incredible success if pirfenidone is the only drug approved to treat IPF in the U.S. But the chances of the IPF treatment field staying free and clear of competition look slim.
Privately held Boehringer-Inegelheim has an experimental IPF drug, nantedanib, currently under priority review by the FDA that was accepted in early July. Like pirfenidone, nantedanib was effective at outperforming the placebo and lessening the decline of lung function in its two IMPULSIS studies. In other words, Roche may have just bought into a field that's about to get crowded.
Secondly, Wall Street estimates for pirfenidone amount to approximately $1.1 billion in peak annual sales. Yet, as InterMune's only approved therapy, Roche is paying between seven and eight times that amount. Anything north of a premium of three-to-five times peak annual sales can be a potential red flag as the rewards from the deal may not equal the amount paid before pirfenidone loses its exclusivity many, many years down the road.
Who wins? Who loses?
The big winner here are IPF-diagnosed patients. Roche has considerably deeper pockets and a much more experienced marketing team. Therefore, access to pirfenidone/Esbriet and education of physicians surrounding the drug are likely to improve.
It's also a monstrous win for InterMune shareholders. InterMune wasn't expected to turn the corner to profitability until 2016 anyway, and its slow launch of Esbriet in Europe certainly had existing shareholders on edge. With Roche paying a hefty premium, in cash nonetheless, I don't see how InterMune's stakeholders couldn't be happy with this deal.
If anyone loses on this deal, it could be Roche and its investors. Though InterMune's pirfenidone is likely to provide an EPS boost for the company beginning in 2016, the remainder of InterMune's pipeline is comprised of a few preclinical compounds targeted at fibrotic diseases, as well as a solitary midstage study (LOTUSS) of pirfenidone as a treatment for systemic sclerosis-related interstitial lung disease. Put plainly, Roche spent more than $8 billion to acquire a single rare lung disease drug that may soon face competition, and whose sales may now struggle to top $1 billion annually.
I, for one, think Roche grossly overpaid, but that's going to be for investors and time to decide.