Japan’s Takeda leads off 2017 M&A season with gutsy deal to buy US cancer specialist Ariad for $5.2 billion; it’s expensive, but probably worth it

Skitterphoto / Pixabay

Japan’s Takeda Pharmaceutical Co. Ltd. agreed to acquire Ariad Pharmaceuticals Inc. (Cambridge MA) for $24 per share in cash, or an enterprise value of approximately $5.2 billion, boosting its oncology portfolio, the companies announced earlier in the week.

@TakedaPharma acquires @AriadPharm for $24 per share in cash, valued at $5.2 billion Click To Tweet

The transaction, which represents a premium of about 75% to Ariad’s closing share price on January 6, 2017 has been approved by the boards of directors of both companies and is expected to close by the end of February, according to FirstWord Pharma.

The acquisition will bring Takeda Iclusig (ponatinib), which is approved for the treatment of certain patients with chronic myeloid leukemia and acute lymphoblastic leukemia. Takeda also gains the experimental drug brigatinib for non-small-cell lung cancer (NCSCLC).

Takeda noted that Ariad’s guidance for 2016 forecast revenue for Iclusig of between $170 million and $180 million, with peak sales of brigatinib estimated to exceed $1 billion, once approved.

Takeda CEO Christophe Weber remarked:

“we will broaden our hematology portfolio and transform our global solid tumor franchise through the addition of two innovative targeted therapies.” Weber added that “opportunities to acquire such high-quality, complementary targeted therapies do not come often.”

The FDA, which last year awarded brigatinib orphan-drug status for the treatment of certain patients with (NSCLC), accepted the drug for review in October. Takeda expects the ALK (anaplastic lymphoma kinase) inhibitor will be approved in the US in the first half of this year, with world-wide filings to follow.

The Japanese drugmaker said that the acquisition “will provide immediate revenue, bring considerable long-term revenue potential and deliver synergy savings.” The company added that the deal is expected to be neutral to earnings in the 2017 fiscal year and accretive to earnings in the following year.

The acquisition comes after Ariad has faced criticism about the price of Iclusig. In October last year, US Senator Bernie Sanders reprimanded the drugmaker for price increases on the therapy, while Sanders and US Representative Elijah Cummings of Maryland later asked the company to provide documentation justifying the price hikes.

Last year, Valeant Pharmaceuticals International Inc.’s (Laval Québec) talks to sell its Salix stomach-drug business to Takeda for roughly $10 billion broke down amid last-minute disagreements over price and other matters.

Teva closed Wednesday off 2% for the week at $34.28 in New York, while Ariad rocketed 72% to $23.70.

Steve’s Take:

I do believe we just chalked up the first M&A deal of the early New Year, and my sense is there are many more to come–despite President-elect Trump’s comments Wednesday about drug prices and their ensuing drag on Pharma stocks.

Although arguably expensive, Teva captured the kind of deal that major drugmakers are all vying for nowadays; namely Ariad Pharmaceuticals–a cancer-focused specialist with a marketed product to immediately ring the cash register and a pipeline that offers near-term prospects.

In a deal valued at $5.2 billion, Takeda plans to fork over $24 per share for Ariad and its leukemia drug Iclusig and its late-stage ALK-inhibiting lung cancer drug brigatinib, now under priority review at the FDA. That’s a very rich 75% premium to Friday’s closing price.

With the patent on its blockbuster multiple myeloma med Velcade expiring this year, Takeda reportedly set aside $15 billion last fall to make deals, focusing on cancer, gastrointestinal disorders and neurological diseases.

Its new Crohn’s disease drug, Entyvio, has gotten out of the blocks quickly, as has its top seller’s intended successor, Ninlaro, but the company needs more than a couple of products to make up the Velcade difference in the near term.

Meanwhile, Takeda has been completely refurbishing its R&D, ditching some drug partnerships, striking new ones and cutting back its clinical operations in the UK. It’s centering its R&D on two hubs in Japan and Boston, plus a biotech-oriented research center in San Diego, says FiercePharma.

On paper, Ariad is a fit with Takeda Oncology, with its expertise in blood cancers and plan to branch out into different forms of the disease. In a Monday (January 9, 2016) note, SunTrust’s Yatin Suneja called Ariad “a very attractive commercial stage oncology biotech,” and called brigatinib a “likely best-in-class ALK+ inhibitor” that’s likely to win approval by its FDA due date of April 29.

Analysts see Iclusig as a $500 million-plus product at peak, and those two meds could be garnering $2 billion in US sales next decade, Suneja said.

Takeda could be taking on a bit more than Iclusig’s revenue, however, unless the drug-pricing debate in the US cools down considerably. After Trump’s indictment of Pharma about high prices Wednesday though, that could take a while.

One reason Iclusig has been so successful in recent periods is that its price has ratcheted up repeatedly–once per quarter last year, in fact, to the point where its list price sits at $199,000, up from $115,000 when approved in 2012.

Those increases already have put Ariad in the crosshairs of some lawmakers investigating drug prices–in this case, Sen. Bernie Sanders and Rep. Elijah Cummings of Maryland, who’ve demanded documents about Iclusig’s sales numbers and pricing decisions.

Meanwhile, there’s another potential danger ahead: a rival bidder. The combination of 1) current revenue, plus 2) solid pipeline is a coveted one in pharma M&A these days, and some companies have been willing to pay an eye-popping premium.

Pfizer coughed up $14 billion for Medivation and its prostate cancer med , and Johnson & Johnson appears ready to pay dearly for Actelion and its cardiovascular portfolio.

“Given the scarcity of commercial-stage oncology assets, and significant synergies that could be extracted with an established oncology player, it is possible that other bidders emerge,” Suneja said, calling the price “fair” at 2.6 times the firm’s peak revenue forecast.

Rival suitors would have to step up quickly; the deal is set to close by the end of February and both companies’ boards have already approved it.

“The deal confirms our investment thesis on [Ariad] and in our view reads through positively to other commercial-stage oncology stocks” including Exelixis and Incyte, Leerink Partners Michael Schmidt wrote on Monday (January 9, 2017. The premium price “highlights the scarcity value of these growth assets,” he added.

Takeda expects Ariad to add to earnings beginning in 2018.

Bottom Line:

Although it’s early in the New Year, Takeda’s buy of Ariad punches a hole in the premise that biotechs with waning valuations will be the chief M&A targets of 2017.

Ariad’s doubling in share price over the course of 2016 defied sector-wide trends, which saw biopharma shares tank in January and never quite recover, Seeking Alpha notes.

Yes, it helps that the target had a marketed, if toxic, oncology product and a second one waiting its turn for an approval decision within months. Still, Takeda is placing a big bet with a payout that is double that of a sellside-derived valuation of Ariad’s assets.

Wall Street puts sales of Ariad’s Iclusig at $314 million and the candidate brigatinib at $324 million in 2022, leading to a net present value of $1.1 billion and $1.2 billion, respectively, combined–less than half the price Takeda is paying.

With the deal structured as an all-cash transaction with no contingency payments, Takeda apparently believes that it can wring more growth from these two products than Ariad could.

Iclusig, of course, had at one time been forecast to reach blockbuster numbers in chronic myeloid leukemia and Philadelphia chromosome-positive acute lymphoblastic leukemia, Seeking Alpha points out. But that was before the US FDA jerked it from the market after accounts of vascular occlusion in at least 35% of patients.

Takeda’s gamble will do little to erase the reputation of Japan’s big Pharma groups overpaying for biotech assets. This 75% premium for Ariad is the highest of the 10 biggest deals recorded by a Japanese company, Seeking Alpha noted.

M&A at a steep premium isn’t for the timid, especially with all the nerve-racking, drug-pricing uncertainty on the political landscape. But thinking back, when Takeda paid a 53% premium to acquire Millennium Pharmaceuticals for $8.8 billion in 2008 it made an even bigger bet–that Velcade would become a blockbuster and that Ninlaro would succeed in the clinic. That deal has probably come close to paying off. Takeda, however, needs a repeat here with Ariad.

Steve's Take: So who’s next to step up to the M&A plate and swing for the fences? Batter up! Click To Tweet

So who’s next to step up to the M&A plate and swing for the fences? Batter up!