Novartis AG (NYSE:NVS) dominated the news headlines in the pharmaceutical space when it said it would buy AveXis, Inc. (NASDAQ:AVXS) for $218 a share of $8.7 billion. The premium of around 80 percent on AVXS stock is astounding. The question next is: will it help NVS stock grow?
Novartis forecasts a slightly negative impact on core earnings through the next two years but by 2020, the acquisition will add positively to results. Even if the acquisition broadens Novartis’ research pipeline and potential products in the next few years, the price paid is disconcerting.
The premium prices the deal to perfection, leaving little room for any delays, headwinds, or disappointments. Chances are high that Novartis shareholders will suffer a goodwill write-down if AveXis does not perform as expected.
Big Pharma Buyouts Are Back, Starting with NVS Stock
The Novartis-AveXis deal has similarities to Alexion Pharmaceuticals (NASDAQ:ALXN) buying Synageva in 2015 for $8.4 billion in net cash. The buyout was driven by the addition of over 30 diverse programs under Alexion’s belt. Yet this is one of the worst deals in the history of biotech acquisitions.
Similarly, Novartis is paying for the deal all in cash for a company whose products are not even close to getting to market. The competition for AAV vector manufacturing (using viruses for gene therapy) is immensely competitive.
Novartis now faces competition from established companies that include Ionis Pharmaceuticals, Inc. (NASDAQ:IONS) and Biogen Inc. (NASDAQ:BIIB). At these billion dollar valuations, companies like Abeona Therapeutics Inc. (NASDAQ:ABEO), with a market cap of around $670 million even after the 16 percent intraday rally on April 9, looks cheap for value investors.
Recent deals in 2018 included acquiring AAA, signing a licensing deal with Spark in January to license Luxturna, along with an agreement to divest OTC JV with GlaxoSmithKline plc (NYSE:GSK), are aligned with the company refocusing the core business. Looking ahead, the company wants to have focused medicines that are powered by digital or data.
In its merger presentation, Novartis highlighted the importance of AAV9, or adeno-associated Virus 9 platform, in the gene therapy platform. A more detailed point on AAV9 is that it is capable of crossing the blood-brain barrier, potentially giving more treatment options for CNS diseases.
SMA Treatment Opportunity
SMA, or spinal muscular atrophy, has a market potential of 23,500 patients. Respectfully, patients suffer from the disease but the potential revenue for treatment is limited. The hope for investors is that the clinical studies are successful in proving the safety and efficacy of gene therapy will lead to the development of more drugs.
This hope is a big one and brings plenty of risk to NVS stock if the company fails to bring a product to market. The risks for AVXS-101 is especially glaring when considering how early the product is in clinical trials.
AveXis redesigned its manufacturing process to gear up for an approval of the drug. In the meantime, the company will file a BLA submission and prepare for a pre-license inspection.
AveXis has two other drugs in Phase 1b. One asset, CGF166, studies the treatment of hearing loss. CPK850 is indicated for Retinitis pigmentosa. Further, the company has three other studies in the preclinical phase. Their indications are for Rett Syndrome, Inherited ALS-SOD1, and one is in the area of Ophthalmology and hematology.
Novartis shareholders are optimistic the deal strengthens the company. Shares rose on the day. In the medium term, AveXis will have little room to face any delays in its clinical studies. Plus, any disappointing results from the studies will take away Novartis’ growth potential.
It is too early to worry about those risks and at a forward P/E of around 14 times, NVS stock has plenty of cash and credit to fund the acquisition.
Disclosure: Author does not hold shares in any of the companies mentioned.