If ever there was a “story” biotech IPO worth grabbing even a tiny piece of, this is it.Steve's Take: If ever there was a #biotech #IPO worth grabbing even a tiny piece of, this is it Click To Tweet
First, the story: Two decades ago Jean-Paul and Martine Clozel had to sell their house and work out of a rented garage when they started biotech company Actelion Ltd. (Allschwil CHE).
Twenty years later, after selling the Swiss company to Johnson & Johnson (New Brunswick NJ) in an unusual, $30-billion deal, the husband-and-wife (both physicians) team is starting over again. They are embarking on the creation of a new global biotech player–armed with nearly $1 billion in capital, a deep-pocketed partner in J&J and soon, a stock listing in Zurich, according to Morningstar.
Dr. Clozel, 61 years old, is slated to walk away with about $1.5 billion for his 5% stake in Actelion. J&J persuaded him to sell only after agreeing to let him strip out Actelion’s early-stage research and development to form a separate company.
The US healthcare giant, eager to replenish its pipeline as some top-selling drugs face competition from cheaper competitors, was willing to pay a hefty price tag. That, and its agreement to the unorthodox deal structure, cleared a hurdle that tripped up previous Actelion suitors: Dr. Clozel’s well-telegraphed reluctance to give up his independence over years of deal speculation.
“My first reaction to J&J was that I didn’t want to sell,” Dr. Clozel said in an interview.
He now will become chief executive of the new firm, which doesn’t yet have a name. Along with his wife, he will be free to pursue research that spans insomnia, lupus and neurological diseases.
Johnson & Johnson will hold onto a 16% stake in the new firm, with an option to double that. The rest will be spun off later this year to existing Actelion shareholders, giving Dr. Clozel a 4.2% stake. J&J is expected to provide more detail on the portfolio in a prospectus for the new company in coming weeks.
“We know they know how to develop and market drugs,” said Daniel Koller, lead manager at BB Biotech AG (Schaffhausen, CHE), a longtime investor in Actelion. “These research-focused drug-discovery companies blossomed amid a wave of genetic-engineering advances in the 1970s and ‘80s. They tend to stay small and nimble, marketing only a few drugs they develop, or selling promising drugs to bigger companies,” he added.
Dr. Clozel and his team will keep the riskier portions of Actelion’s pipeline. The experimental treatments–drugs that are yet to go through the most exacting stages of clinical tests and regulatory scrutiny–will be spun off into a new Swiss biotech that Clozel will steer, says Bloomberg. The challenge ahead has the French scientist fired up.
“If we are not successful, I frankly think something is wrong,” Clozel told reporters. “We know the products, because we have discovered them.”
For his second fresh start, Clozel is walking away with a portfolio that includes experimental compounds for lupus, Fabry disease and insomnia. Actelion’s very profitable portfolio of drugs for pulmonary arterial hypertension, which have thus far funded the research into other medicines, will go to J&J.
The new company could be worth about $1 billion to $2 billion, Klara Fernandes, an analyst at Berenberg Bank, wrote in a note to clients. Its cash and more advanced drugs in development could be worth about 14 to 20 Swiss francs a share, based on back-of-the-envelope calculation, said Peter Welford, an analyst at Jefferies LLC.
The deal with the J&J gives Clozel about $1 billion to push the treatments, many of which are viewed by investors as long shots in terms of sales potential. Few of the products may endure, some investors have said.
“The entire pipeline is unremarkable at best,” said Ori Hershkovitz, founding partner and chief investment officer of Nexthera Capital LP, a New York-based healthcare hedge fund with about $250 million under management. “I can clearly see why J&J was ready to let it go.”
But that’s exactly what Roche thought two decades ago when the Clozels left. Their starting pipeline which grew into the Actelion of today was “unremarkable.”
Whether the spun-off pipeline from Actelion is or isn’t “remarkable,” misses the point.
The Clozel Newco will inherit the research and development team in Actelion’s headquarters city of Allschwil, just across the Rhine River from Roche. Even the pulmonary arterial hypertension (PAH) drugs that lured J&J were born in Roche’s labs. Keep in mind that when the latter declined to pursue discoveries made by the Doctors Clozel, the couple struck out on their own.
Now the couple will take a similar risk, with new untested drugs. Clozel argued in an interview in November that the insomnia drug, Dora, could turn out to be “the best sleep drug on earth.” There’s also a medicine for a stubborn form of hypertension that is undervalued, according to Bruno Bulic, an analyst at Helvea AG.
Clozel struck an upbeat note at a press conference last Thursday (March 2, 2017).
“We have been able to create the value from zero,” he said. “Now we have a company with 13 or 14 new products.”
J&J retains rights to ponesimod, an experimental drug in late-stage tests for multiple sclerosis, as well as a new antibiotic that’s also in the final stage of clinical trials. Therein lies one of the Clozels’ risks.
“All the important drugs are going to J&J,” said Sibylle Bischofberger, an analyst for Zuercher Kantonalbank in Zurich.
At the new company, only Dora has the potential to be a blockbuster, and there’s a high risk it could fail, Bischofberger said.
One thing Jean-Paul Clozel has done right is letting his researchers loose on a range of diseases instead of trying to be just a central nervous system specialist or only a heart-disease company, said John Rountree, managing partner at pharma consulting firm Novasecta Ltd. in London. With a broad remit, the new company will be able to try things and pursue what works, he said.
“J&J is getting in on the Actelion magic sauce, and if it doesn’t deliver, they haven’t lost much,” Rountree said. “If it delivers, they’ve got the upside.”
Despite questions about the pipeline’s prospects to be developed into one or several blockbuster, here’s why Clozel Newco has the “je ne sais quoi” to be successful.
- In 1997, the doctors Clozel quit their jobs at the Swiss drug giant to set up Actelion in a rented garage with two former Roche co-workers. “We had no money; we had no technology, no patents,” Jean-Paul said. The quartet planned to continue the work they had started at Roche, which had focused on the inner lining of blood vessels, or endothelium.
- The following year, Roche shut down its cardiovascular research program and agreed to license two of its shelved drugs–both of which had been discovered by the Clozels and their team–to Actelion. One of those drugs ended up working for patients with a rare condition known as pulmonary arterial hypertension, or PAH. Marketed as Tracleer, it pushed Actelion into profitability, and went on to become a global blockbuster. Actelion listed in 2000.
- Clozel struggled to repeat that success. In 2011, after a string of clinical-trial failures, Elliott Advisors, an activist fund, tried to replace management. Dr. Clozel convinced shareholders to stick with him. The next year, he struck gold again, notching a big clinical-trial success with its new PAH drug, Opsumit.
What does this go to prove? That the Clozels were just crazy lucky? Crazy like a pair of foxes. And they are poised to ring the cash register again by replicating the first model that has brought them riches and fame.
The Clozel Newco biotech–spun out around Actelion’s early-stage pipeline–has already been touted by one of Actelion’s executives as potentially being Johnson & Johnson’s answer to Genentech, according to FirstWord Pharma. A high benchmark to be sure.
By carving out Actelion’s discovery and early-stage R&D pipeline into a newly created company, this simultaneously provides Clozel continuation in the role of CEO and a tangible connection to the biotech he established 20 years ago.
In addition, Switzerland is now arguably the strongest biotechnology hub in the world, especially the Basel area where Roche and Novartis–the second and third-biggest pharmaceutical companies (after J&J and ahead of Bayer and Merck)–reside. Across the Rhine River is Allschwil, where the Clozel startup will be located. Having two pharma titans in your backyard redounds to the benefit of every startup and smaller player. And, oh I forgot, J&J–the world’s biggest pharma–is also your partner.
At last count there are 279 biotech companies in Switzerland, employing 15,000 people, according to Switzerland Global Enterprise. Top-class research institutions, leading SMEs (small to medium enterprises), and strong multinational corporations form a network that ensures healthy growth and that attracts researchers and capital from around the entire world.
Finally, Switzerland offers an outstanding framework for procuring capital. The SIX Swiss Exchange invests 40% of its traded capital in Life Sciences projects.
Getting a piece of Clozel Newco’s IPO won’t be easy. Pretty much all IPOs are impossible to buy into unless one has a large investment account with one of the underwriters. And I don’t mean $1,000. Still, investors would be well advised to try to get into this particular one, despite the odds against.
The Clozels have the recipe, talent and experience to succeed again; and from all appearances, the same desire they had 20 years ago in a rented garage.