Now that Spark Therapeutics (NASDAQ: ONCE) agreed on a definitive merger with Roche (OTCMKTS:RHHBY) for $114.50 a share, only one question remains for investors. Should investors keep holding Spark stock now and after the deal is done? Probably, and here’s why.
Spark Stock and the Merger
To assess the merits of the deal, look at the price Roche paid. Both Roche and Spark investors need to ask why the former was willing to pay a premium of over 200% to acquire the latter. The total value of the deal, at the time of the announcement on Feb. 25, is $4.8 billion.
Spark’s acquisition risk is high, too, because it only has one marked product. Voretigene neparvovec, or Luxturna, is a gene therapy that treats Leber’s congenital amaurosis. Novartis AG (NYSE: NVS) is responsible for the marketing aspect of the therapy.
Roche has plenty of strong sales growth in its two main divisions: pharmaceuticals and diagnostics. In the fourth quarter, sales grew in the high single digits. In fact, sales grew for seven consecutive years. It stands to reason that Roche wants Spark to get ahead in the gene therapy market.
When it comes to treating genetic diseases, Spark has a fully integrated offering. Plus, Spark is the only biotechnology company that successfully commercialized a gene therapy in the U.S. market. With that achievement, Roche needs Spark Therapeutics to get ahead.
Spark’s CEO Jeffrey D. Marrazzo said that genetic diseases are immediate and vast, so it will need Roche’s resources and reach to accelerate the development of more gene therapies.
Spark will have full autonomy under The Roche Group and will build on its hemophilia A program. In 2018, Luxturna launched in the U.S. with great success. The company demonstrated it could commercialize the drug and secure patient access.
It cut most of the risk with the launch and after establishing treatment centers, patients have a channel for market access and reimbursement. Completing a licensing agreement with Novartis will help drive uptake for the therapy outside of the U.S.
Spark has a few products whose developments within the hemophilia programs progressed. SPK-9001 for hemophilia B was transitioned to Pfizer (NYSE: PFE). SPK-8001 and SPK-8016 for hemophilia A progressed last year.
The FDA designated SPK-8001 breakthrough therapy designation. And last December, the company shared the drug’s safety profile at ASH; 9.7 years after follow-up, subjects showed no inhibitors, no thrombotic events, and no persistent or unresolved transaminase elevations.
Spark’s Phase I/II study of 8016 are underway. When the company shares the updated data in mid-2019, it may further validate Roche’s purchase of the company.
Spark is also targeting the inhibitor population, which would increase the addressable market of the therapy. Inhibitors, or neutralizing antibodies to factor VIII, occur in as many as 30% of the population who have severe or moderately severe hemophilia A.
Earnings and Spark Stock
Spark reported revenue of $64.7 million last year, with $27 million from net product sales of Luxturna. $37.8 million comes from the company’s agreement with Pfizer and Novartis.
Despite R&D costs falling after the commercialization of Luxterna, SG&A costs still rose last year. It rose to $124.9 million, up from $111.1 million from the prior year. These costs are due primarily to higher salaries and stock-based compensation. For the year, Spark lost $78.8 million, or $2.11 a share.
Investors may look at holding Roche stock for the long-term in light of the Spark acquisition. Roche is well-diversified and has a healthy cash flow to fund the costs related to this deal. Still, the pay-off will likely take at least a year, if not more.
This is due to shares trading close to yearly highs, plus unforeseen write-offs related to this acquisition that may shake investor confidence. Fortunately, shares pay a dividend yielding 3.1%, so investors will still earn regular income while waiting patiently for the stock to go up.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.