Nektar Therapeutics-Bristol-Myers Squibb Deal: A Buyout Must Wait

(Bloomberg Gadfly) -- Investors love it when a company's value booms, but they may not always love the consequences.

Take San Francisco biotech Nektar Therapeutics. Its market cap soared to $14 billion earlier this month, from about $2 billion a year ago, driven partly by tantalizing early trial results for a combination of its lead medicine with Bristol-Myers Squibb & Co.'s blockbuster cancer drug Opdivo. 

Bloomberg News reported on Feb. 2 that Nektar was exploring options, "including a sale." But its swollen valuation made a takeover less likely. Instead, Bristol on Wednesday announced a deal to pay as much as $3.6 billion for a stake in Nektar's medicine. 

Nektar's apparent inability to find a buyer at its nosebleed valuation let Bristol strike a deal that, while expensive for a licensing agreement, is a lot cheaper than a takeover. It's still good news for Nektar, which will get Bristol's help paying for some big and expensive clinical trials. But investors may be left wondering what kind of windfall they might have gotten in a calmer market. 

The deal certainly favors Nektar in structure and value. Bristol's upfront payment is exceptionally large -- especially for such an early stage product -- with significant potential milestone payments.

But Nektar's data created a situation where a rich licensing deal was possible, but a buyout wasn't.

A group of immune-boosting cancer drugs called PD-1/L1 inhibitors -- including Bristol's Opdivo -- can produce dramatic results in some cancer patients. But "some" is the key word; many patients don't respond. In a small trial, Nektar's medicine appeared to boost Opdivo's effectiveness in treating several types of tumors, raising hopes that Opdivo could rake in billions more in future sales. That tantalizing prospect -- and the general market hype surrounding cancer combinations -- propelled Nektar shares to enormous heights.

But this was an early-stage trial in a tiny number of patients. It's possible larger trials won't bring the same results. A potential Nektar buyer might have been willing to stomach such a risk at a lower price tag, but not at upwards of $14 billion.

So Nektar seems to have concluded this Bristol deal is the best it can do for now. That's probably true; Nektar is valued more highly than several companies with medicines far closer to market.  

Nektar will still get 65 percent of the global profit its medicine generates. But it remains highly exposed to trial failures, even as the licensing deal makes it a less-attractive buyout candidate. While Nektar keeps risk, Bristol minimizes its own, while giving its lagging Opdivo franchise a much-needed upside.

Nektar's buyout dreams aren't dead. Juno Therapeutics Inc. was acquired by Celgene Corp. in January after having previously done a major licensing deal with its future parent. Pharmacyclics Inc. was acquired for $20 billion by AbbVie Inc. even though Johnson & Johnson had halfsies on the firm's lead medicine. But those deals came after several years and several rounds of additional trial data.

None of this is to say this is a bad deal for Nektar; it's about as good as licensing deals get. The company would have had a tough time on its own funding the investment needed for its medicine to reach its considerable full potential. But the big payday for stakeholders is likely further away and more uncertain than they might have hoped a few weeks ago. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

  1. I'm including Bristol's purchase of million of Nektar stock (at a nice premium) as part of the upfront. 

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