Children's Hospital’s $50 Million Bet Turns Into a $456 Million Payday

(Bloomberg) -- A nonprofit Philadelphia children’s hospital made a modest bet on an upstart drugmaker. Six years later, it reaped an almost half-billion-dollar reward.

Children’s Hospital of Philadelphia in 2013 spun off a gene-therapy company working on a new treatment for a rare form of blindness that its scientists had helped develop, agreeing to invest $50 million and becoming the venture’s largest shareholder.

On Monday, that investment paid off spectacularly for the 164-year-old hospital when Roche Holding AG agreed to pay $4.8 billion to buy the spinoff, Spark Therapeutics Inc. Children’s Hospital of Philadelphia Foundation, which had a 10.6 percent stake, according to data compiled by Bloomberg, stands to make about $456 million on the deal. That’s on top of the estimated $285 million the foundation made in earlier share sales.

The hospital’s total proceeds of $741 million would represent a more than 20-fold return in less than six years. That calculation is based on the roughly $33 million that Spark says Children’s Hospital ultimately ended up investing in the company. That compares with a 123 percent return on the Nasdaq Biotechnology Index since March 13, 2013, the day Spark Therapeutics was created.

“You can count on one hand deals where a hospital or university made 400 or 500 million bucks,” said Henry Bienen, president emeritus of Northwestern University, who helped the school license rights to the drug that became Pfizer Inc.’s Lyrica.

The deal will also pay off handsomely for a handful of key Spark insiders. Chief Executive Officer Jeffrey Marrazzo has about $90 million riding on the deal, according to data compiled by Bloomberg, including shares he owns outright and equity awards. The cut for President Katherine High, a hematologist who spent years pioneering gene therapy at Children’s Hospital before joining the company, comes out to roughly $24.5 million. Spark Chairman Steven Altschuler, a former CEO of Children’s Hospital of Philadelphia, is set to cash in about $7.8 million.

Children’s Hospital founded Spark both to accelerate gene therapy commercialization “and to create a new stream of funding for future scientific discovery,” said Madeline Bell, the hospital’s chief executive officer, in a statement. “We are reviewing the impact of this announcement and will be developing plans to build upon our mission.”

The hospital declined to comment on Bloomberg’s calculation of its investment return.

Spark went public in January 2015 and its first drug, a gene therapy for blindness, was approved in December 2017. Roche agreed to pay $114.50 a share for Spark, about 122 percent above Friday’s closing price.

Other universities and academic medical centers have made hundreds of millions on drugs they helped develop, typically through royalty streams on medicines. UCLA made $520 million when it sold its royalty rights to the prostate cancer drug Xtandi to Royalty Pharma in 2016. And Northwestern made $1.4 billion from royalties on Lyrica for nerve pain and seizures, Bloomberg Businessweek reported in 2016.

Xtandi had more than $1 billion in annual sales when UCLA sold the royalty rights. And so did Lyrica back in 2007 when Northwestern sold rights to about half of its royalties. By contrast, Spark’s revenue was just $64.7 million last year.

Analysts project its lead product, Luxturna for blindness, will reap $76 million in sales this year. The treatment costs $425,000 -- per eye.

Much of the value in the deal for Roche may be in a gene-therapy product for hemophilia that has yet to hit the market.

Thanks to its early investment, Children’s Hospital will reap a windfall long before it’s clear how big the sales of Spark’s gene-therapy products will be.

©2019 Bloomberg L.P.