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  • Jonathan Poyer

Biotech M&A Deal Volume Picking Up

The S&P biotech index continues to hold above the 200 day moving average as the S&P 500 broke below, exhibiting the relative strength of the sector.

Biotech M&A returned to the forefront with news Horizon Therapeutics (HZNP) was in preliminary sale talks with Sanofi (SNY), Johnson & Johnson (JNJ) and Amgen (AMGN).

HZNP is subject to Irish takeover laws and thus disclosures are more transparent than a corresponding process for a US domiciled company. Subsequent to the initial disclosure JNJ indicated that it does not intend to bid while SNY and AMGN remain in the process, with any potential offers expected before the Irish takeover panel's 42 day window closes in January. This deal appears much more likely to get done compared to rumors earlier in the year regarding Merck (MRK) for Seagen (SGEN).

HZNP has ~double the current revenue, similar 5 year forward estimates and is estimated to be accretive ~immediately compared to 4 years or more for the rumored SGEN deal. HZNP is a case study in M&A itself as management transformed the company from a declining primary-care focused business into an orphan drug powerhouse. HZNP's lead programs were acquired in two of the highest ROI M&A transactions in recent memory. Tepezza, HZNP's insulin-like growth factor-1 receptor (IGF-1R) inhibitor indicated for the treatment of Thyroid Eye Disease that will do ~$2 billion in revenue this year and up to ~$4 billion at peak, was acquired in mid 2017 from River Vision (private) for $145 million upfront and an additional $277 million has been paid in contingent milestones (only a 0.893 percent earn out for revenue >$300 million remains outstanding). Krystexxa, HZNP's PEGylated uric acid specific enzyme indicated for the treatment of chronic gout that will do ~$700 million this year and ~$1.5 billion at peak, was acquired in 2015 for ~$510 million from Crealta Holdings (private). Remarkably, Crealta itself acquired Krystexxa out of the 2013 bankruptcy of Savient Pharmaceuticals (historical SVNT) after they failed to gain commercial traction during the early launch. '

Ravicti and Buphenyl, HZNP's nitrogen-binding agents indicated for patients with urea cycle disorders that will do ~$325 million this year and ~$350 million at peak, were acquired from the ~$1.1 billion buyout of Hyperion Therapeutics (historical HPTX) in 2015. Finally, Procysbi, HZNP's cystine-depleting agent indicated for the treatment of nephropathic cystinosis that will do $205 million this year and $225 million at peak, was acquired from the ~$800 million takeout of Raptor Pharmaceuticals (historical RPTP) in 2016. In sum, HZNP's M&A acumen enabled them to spend ~$2.8 billion to acquire ~$3.2 billion of current revenue and ~$6 billion of peak revenue that accounts for the majority of the estimated ~$30 billion deal value for SNY or AMGN to acquire pro forma HZNP by January 2023.

In stark contrast, Nestle (NESN SW) paid nearly the same amount (~$2.6 billion) to acquire Aimmune Therapeutics (historical AIMT) for peanut allergy therapy Palforzia that has failed to generate any meaningful revenue in the ~2 years following approval. Nestle recently announced they are exploring strategic alternatives for Palforzia, suggesting a complete wipeout of the deal value.

Fundamentals are expected to play an increasing role in M&A target selection as deal volume picks up in 2023.

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