Private Biotech M&A Scorecard: Excellent financial exits, middling clinical returns (Part 1)

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Here are some stats for you: From 2007-13-

67 private biotechs acquired for total deal value greater than $250M,

27 with upfronts greater than 5x invested capital

47 if you could the milestones as well

Only 1 of them will, unequivocally, result in a $1B drug

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Let’s start from the ground up- It’s been well established that biotech VC returns over the past decade haven’t just been competitive vis-a-vis other sectors, they’ve been positively dominant. As @LifeSciVC points out in one of his recent blogs, M&A has been a major driver of these returns, even accounting for the strength in the IPO market. I thought it would be an interesting exercise to follow some of the high-flier exits in their afterlife and see if the returns in the clinic match up to their financial billing.

correlation exit data on biotechs- vs other sectors

Methodology: Using the excellent HBM M&A report as a reference, I selected the ‘high-flier’ private, VC-backed biotech exits from 2007-13. To qualify as a high-flier, the upfront should be >$250M and/or >5x on invested capital. The $250M mark, as I have discussed elsewhere in this blog, has been established as the lower bound of a ‘typical’ top quartile biotech exit, whether M&A or IPO. Out of the 49 companies that met these criteria, I removed the 10 that were acquired after the results of the Ph III were known. One of the goals of this exercise was to determine the predictive capabilities of the buyer and how their expectations of clinical results played out vis-à-vis the price they paid. Clinically de-risked assets clearly don’t lend themselves to this analysis, and as such only covet a brief portion of this note below. Of the remaining 39, 7 are likely too early to judge conclusively one way or the other (think AZ-Spirogen, Merck-Smartcells or Takeda-Envoy). The final 32 were graded on a scale of 1 to 10 – a combination of commercial potential, progress in the clinic, competitive differentiation- all with a focus primarily on the lead asset-, and plotted against the deal upfront. I recognize that certain transformative drugs have had passed through several hands, Ibrutinib being a great example, but for this analysis I focus on VC-backed exits. Only upfronts have been taken into consideration- if the program didn’t pan out in the clinic, the majority of the milestones that often tend to be backloaded to commercial success won’t pan out anyway.

Before we dive into the results, I should clearly demarcate the differences between what I’ll refer to hereon as ‘drug value’ vs ‘deal value’. Drug value is defined by the factors mentioned above- commercial, progressive de-risking in the clinic, competitive differentiation/value to patients. A couple of examples here to illustrate the point- A PI3K in CLL today with peak sales potential of $300M would generously be described as ‘incremental’, and scores low on our scale. Deal value speaks more to the predictive abilities of the buyer. If said PI3K was acquired for $10M upfront in Ph II, then the buyer clearly comes out ahead. I mention the $1B figure in the opener, and I don’t take it lightly. With the exception of a few orphans, commercial potential generally, generally, equates to clinical differentiation, and that’s good enough for our purposes.

Again, the argument of this piece focuses on transformative assets, with a view to determine if the financial payouts to VCs have any correlation to drugs with clinical, and by extension, commercial potential. Transformative ala Kalydeco, Imbruvica, Eylea, Xtandi, Harvoni/Sovaldi, Soliris…

Results- Drug value:

biotech M&A scorecard

The natural assumption (you know by the title of this post its not going to be the correct assumption) would be straightforward- that there would be some degree of correlation between drug value and what a buyer pays for it. The reality is anything but. There is actually a slight inverse correlation between the two parameters if you believe the results of this analysis. Admittedly, there is a degree of subjectivity here (I’ll attempt to distil them with some quantitative analysis later in Part 2). Pretty self-explanatory, but anything over 5 in this figure is an acquired company with an asset that’s making a difference.

The underperformers (Less than 5): 22 of the 32 companies fall in this bucket. Outright blowups such as Novacardia, Alantos, Ilypsa place themselves, with nominal residual value in IP/backup zombie assets all coming in under 1. Then there are the likes of Marcadia and AkaRx, where the lead assets have failed but backups are still being pursued- most of the backups are based on the same MoA premise, which does little to inspire confidence and have accordingly been placed between 1 and 2.5. The more controversial ones are the ones between 2.5 and 5, the likes of Avila, Aragon, Calistoga, Proteolix, Pearl (quite a few!). As I circulated this draft, I was asked “But Calistoga produced an approved drug!”, “JNJ had success with Zytiga, they know the prostate cancer space”, “Avila?? Its Celgene- they don’t make mistakes!!”. I recognize the concerns. I don’t agree with them.

  • Calistoga- CAL101/Zydelig is hardly competitive vs. the likes of Imbruvica and SoC in CLL, especially given the black box. The launch so far (50 TRx, week 13) pales in comparison to Imbruvica’s at the same time point (500 TRx).
  • Avila- Great management team, but again, a drug that will be incremental at best IF it reaches the market. Celgene took a $129M write-off recently on reduced peak sales potential, which probably reinforces the point. I certainly hope the work in inflammatory indications pans out.
  • Aragon- Zytiga’s growth has been stultified by Xtandi, and given the MoA for ARN-509 it’s hard to imagine an outcome that markedly betters the Xtandi data. I could have placed Aragon in the ‘too early to tell’ category, but we do know today that even in a best case scenario the drug will take several years to show any OS advantage, which at best will be marginal.
  • Proteolix- An interesting case study. Clearly Kyprolis created massive financial value both for Proteolix as well as Onyx investors, but a flattening $250M annualized run rate, CV risk, competition from Celgene and emerging data from the likes of selinexor… suggests Tony Coles is a genius!
  • Pearl Therapeutics- Another LAMA/LABA?

The outperformers (Greater than 5)- I wouldn’t expect there to be too much consternation here. Asfotase alfa from Enobia is the very definition of a transformative drug, both for patients as well as commercially. Zelboraf and T-Vec from Plexxikon and Biovex respectively will be >$750M drugs with a sub-niche of their own. Early evidence from Amplimmune suggests elegant synergies with AZ/Medimmune’s checkpoint inhibitors. Lucitanib from EOS is probably the best FGFR inhibitor, and data suggests efficacy in a particularly retrenchment form of breast cancer. Kai/Amgen’s (yes, Amgen can make good acquisitions too!), AMG416 had impressive Ph III data in hyperparathyroidism and should be a $500M drug at its peak.

Too early to tell- The 7 companies in this bucket are Amira, Okairos, Arresto, Spirogen, Envoy, CorImmune and Smartcells. Where these 7 place on this chart will either reinforce or correct the title of this blog piece. Amira and Arresto (probably can put Stromedix under the same umbrella, though it didn’t make the cut for the broader analysis) both have a high bar to meet with the recent developments in IPF and liver fibrosis.

The punchline is that only about 1 in 3 of these successful exits has had/ is on track to have a similarly solid clinical impact. While 1 in 3 would ordinarily be considered a phenomenal success rate for biotechs under usual circumstances, we’re talking about the crème-de-la-crème of biotech exits, companies bought by big biotechs/pharma that are generally considered to have a veritable halo of ‘validation’. At least from a personal standpoint, I would have expected a hit rate at a minimum of 50%, which coincidentally, is the rate at which the milestones have been paid according to SRS, so the expectation is not unfounded. Even if all 7 ‘too early to tell’ companies have a best case outcome, we fall short of the 50%. As is the case if you don’t agree with some of my ‘controversial’ underperformers. I mentioned earlier that I selected for clinical stage assets only- even for the clinically de-risked products it’s hardly a 100% hit rate. Quillivant XR from the Nextwave/Pfizer alliance has already run into some issues, Shire divested its regenerative medicine unit from the acquisition of Advanced Biohealing (16x u/f to invested cap) after taking a massive writeoff. Overall, marketed products generally met the $250M u/f exit cutoff but were 2-3x-ers due to the amount of invested capital it took to get them there. Given this fact pattern, I would love to take a look at the underlying SRS data to see if it’s simply 50% of numerical milestones that have been paid or 50% by dollar volume, especially considering how backended and commercially reliant they tend to be.

So far we have reasonably established that a high upfront is no guarantee of clinical success (the beauty of biotech!). But what about that inverse correlation? If we were to expand the inclusion criteria below the $250M, do we get more ‘transformative’ drugs. Well, yes, but for every Corthera (serelaxin) there is an Alnara (solipura sold by Lilly to Anthera for pennies on the dollar, certainly a <5), and a SARcode (lifitegrast, too early to tell, could go either way, just like their clinical trials!). There is however, one glaring positive outlier- orphan drugs. It isn’t an even 100%, don’t get me wrong (see Alnara), but certainly right up there. I have already mentioned Enobia as the fantastical clinical + commercial unicorn, but what of Zystor, LEAD Therapeutics, Lotus Tissue Repair, Ferrokin– all terrific drugs and that too bought at bargain bottom prices! Kudos to Alexion, Biomarin and Shire- based on this evidence I look forward to tracking Zacharon’s and Taligen’s progress in the clinic.

Deal value:

Speaking of bargains, how do these drugs stack up from a deal value standpoint? A PI3K with $300M revs is a lot more valuable for $50M upfront vs the other way round. And, if big biotech/pharma is looking at this inverse u/f-drug value correlation, what can we expect in the future?

Stay tuned for part 2…

This article was originally published on Biotech VK at the following link … Private Biotech M&A Scorecard: Excellent financial exits, middling clinical returns (Part 1)

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