Novartis’s $5.3 Billion Eye Disease Deal Adds Cash for Bigger Bets 

(Bloomberg) -- While Novartis AG bets on cutting-edge science in pursuit of the next breakthrough drugs, its deal to pay as much as $5.3 billion for an eye medicine adds a less risky and more predictable product to its futuristic lineup.

In buying Xiidra from Takeda Pharmaceutical Co., the Swiss pharma giant gains a drug that’s forecast to become a blockbuster. With about $400 million in sales last year, Xiidra treats a condition known as dry-eye that may affect more than 30 million people in the U.S. The disease can hinder daily activities like reading and driving and permanently damage vision if untreated.

That injects some certainty into Novartis’s stable of drugs at a time when it’s advancing into uncharted territory for big pharma -- complex treatments that aim to fix the root causes of a host of devastating illnesses. Cell and gene therapies are among novel approaches that come with dramatic results for patients, along with doubts surrounding the long-term benefits and business model. But investors are questioning the price it’s paying for Xiidra.

“It’s lovely cash flow. It grows the top line. No one disputes the drug works,” said Ketan Patel, a fund manager and Novartis shareholder at Edentree Investment Management in London. “But did you have to pay an extraordinary amount of money to get it?”

Novartis will need to significantly boost the drug’s sales over the next several years to justify the price tag, he said. Excluding the $1.9 billion of potential milestone payments, the $3.4 billion Novartis is shelling out upfront values Xiidra at 8.5 times 2018 sales, “a big price tag given market dynamics,” according to Sam Fazeli, a Bloomberg Intelligence analyst.

Competing Drug

Allergan Plc’s competing blockbuster Restasis is set to face cheaper generic copies in the second half of the year, Fazeli said. Xiidra could rack up peak sales of as much as $1.4 billion, according to Elizabeth Krutoholow at Bloomberg Intelligence.

Xiidra, which inhibits inflammation, is the first dry-eye treatment approved for both the signs and symptoms of the condition and has demonstrated additional benefits in late-stage studies, according to Basel, Switzerland-based Novartis. The company also will get about 400 employees tied to the drug. Bloomberg reported the potential sale on Wednesday. The first milestone payment would be due once Xiidra hits annual sales of $1.2 billion.

Novartis believes it can turn the eye-drop treatment into a blockbuster, and “we feel there’s very little risk for us on that journey,” Paul Hudson, head of its pharmaceutical business, said in an interview.

Under Chief Executive Officer Vas Narasimhan, Novartis has sharpened its focus on innovative drugs for cancer and rare illnesses. These include Zolgensma, a gene therapy expected to get approval this month to treat a devastating muscle disease. The company has split with contact-lens and surgical-products division Alcon, ditched a stake in a consumer-health venture and carried out three crucial acquisitions in his first year at the helm.

What Bloomberg Intelligence Says

“Ignoring $1.9 billion of future sales milestones, cash of $3.4 billion values Takeda’s dry-eye drug Xiidra at 8.5x 2018 sales, which is a big price tag, given market dynamics.”

-- Sam Fazeli, pharma analyst
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Narasimhan said in an interview last month that he plans to spend an amount equivalent to more than $10 billion a year on acquisitions and is scouting medicines outside the company, concentrating mainly on nervous system, eye and metabolic illnesses.

Novartis said in April that it expects to launch its drug brolucizumab, a treatment for a form of blindness, by the end of this year. The company has said it’s developing gene therapies, next-generation drugs and other technologies for an array of eye diseases. Xiidra fits into that business well, Hudson said.

“I’ve been looking at this medicine enviously from the sidelines since its launch,” he said.

U.S. prescriptions for dry-eye are forecast to climb as an aging population, prolonged device time and the use of contact lenses increases the incidence of the condition, the company said in a presentation. Novartis said it will now look at opportunities to expand the treatment beyond the U.S. and Canada.

©2019 Bloomberg L.P.