(Bloomberg Opinion) -- Novartis AG’s latest biotech bolt-on requires a big leap of faith. The Swiss drugmaker’s $9.7 billion deal to buy Medicines Co. pays the U.S. cardiovascular specialist’s shareholders a huge chunk of the potential gains to be had from its novel treatment for lowering bad cholesterol. Investors will have to console themselves that Novartis is big enough to absorb the cost of failure if things go awry.
Hopes for loss-making Medicines Co. rest entirely on its inclisiran drug. Novartis sees a host of benefits here compared to existing anti-cholesterol medicines, not least that inclisiran can be administered just twice a year during regular checkups. The determinant of success, however, will be the treatment’s ultimate cost-effectiveness versus existing remedies. That right now is hard to gauge given it has yet to be launched and the competitive response is unknown.
Inclisiran has just emerged from late-stage trials and regulatory filings are imminent. That at least reduces the risks relative to a more speculative early-stage biotech investment. Still, the acquisition hands Novartis the costs of finalizing development and bringing inclisiran to market. The buyer anticipates a relatively slow ramp-up in sales. Using its existing marketing team for heart-failure treatment Entresto will help, but even with that obvious advantage, the increased operating and financing cost burden will weigh on Novartis’s earnings per share in the near term.
The offer price is about 80% over where Medicines Co. had been trading over the last three months, a premium worth over $4 billion using the target’s fully diluted share count. Novartis’s pledge is that returns will be well in excess of the target’s cost of capital. But investors will probably have to wait until the second half of the next decade for that moment to come. As Bloomberg Intelligence points out, this deal is the most expensive among a spate of recent biotech acquisitions when measured as a multiple of expected 2023 sales.
How good could it get? One can only guess. Novartis cites broker forecasts indicating that by 2030 inclisiran sales might reach $6 billion to $7 billion (without adding any probability weighting). The Swiss drug giant is eyeing margins at the upper end of 30% to 40% for the pharma division in which Medicines Co. will sit. On that basis, success might add roughly $2.3 billion to operating profit, which would be worth over $30 billion in market value if you apply the 14 times multiple that Novartis’s peers trade on today. But forecasting a decade hence and converting that into today’s money is a highly problematic exercise. Discounting the upside back at 10% would get to a number in line with what Novartis is paying, while a rosier outcome on sales and margins would make the deal cheap. Investors will rightly be wary of making too many assumptions in Novartis’s favor.
Novartis claims this could be its biggest-selling, and by implication highest-margin, product, beating psoriasis treatment Cosentyx, which is estimated to generate $3.5 billion of revenue this year. It’s a bold prediction. Medicines Co. is undoubtedly worth more to Novartis than as a stand-alone, but it’s going to be some time until the buyer will prove it has earned back the premium it’s paying.
To contact the editor responsible for this story: Melissa Pozsgay at mpozsgay@bloomberg.net
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Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
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