Biotech Buyer Prays a Monster Premium Will Be Enough

(Bloomberg Gadfly) -- In a typical takeover, a bidder usually offers up to 50 percent more than its target's share price to clinch the deal. Not in biotech.

Novartis AG's new boss Vas Narasimhan has just reinforced the vogue for bidding high for drug discovery companies by agreeing to pay an 88 percent premium for Nasdaq-listed gene therapy specialist AveXis Inc. He deserves the benefit of the doubt.

Biotech Buyer Prays a Monster Premium Will Be Enough

The deal, worth $8.7 billion, recycles most of the $13 billion the Swiss pharmaceuticals group is set to receive from last month's agreement to sell its share of a consumer healthcare joint venture to partner GlaxoSmithKline Plc.

Narasimhan, who took up his job in February, is clearly in a hurry -- Novartis gained the right to exit the joint venture at the beginning of March.

Novartis offers some plausible reasons for chasing AveXis. The U.S. group's lead therapy is for the most severe type of spinal muscular atrophy, a dreadful, life-threatening disease. This uses a different approach to an existing treatment sold by U.S. neurology specialist Biogen Inc. Assuming approval comes, the first sales could land in 2019.

Furthermore, Novartis gains the underlying technology which could have other applications -- perhaps in oncology. AveXis also brings some manufacturing capabilities in gene therapy.

Financially, it's all bad news in the short-term as Novartis will pick up an additional R&D burden. But since the deal is cash funded, revenue -- if it comes -- could start boosting Novartis' earnings per share in 2020.

Biotech Buyer Prays a Monster Premium Will Be Enough

As for returns, Novartis promises these will be "well in excess" of the cost of capital without giving a time frame. Based on the limited forecasts for AveXis's profitability, the threshold looks unlikely to be met within five years.

That is the trouble with biotech deals -- their true value takes years to become clear. If approvals don't materialize or sales disappoint, this will prove a costly deal. But Narasimhan knows the success of this transaction will emerge during his tenure. He will be held accountable for his promises.

Prices in recent biotech deals have been driven up by interlopers -- just think of Sanofi's trumping of Novo Nordisk A/S for Ablynx NV. With Biogen a possible rival bidder here, Novartis investors will have to hope the premium is evidence of an auction just completed -- and not the starting point for one about to begin.

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

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

To contact the author of this story: Chris Hughes in London at chughes89@bloomberg.net.

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