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Novating Novartis

29 Jul 2015 By Neil Unmack

Biotech investors can be better at valuing and nurturing small drugs than Big Pharma. Recognising this, Novartis is spinning three drugs-in-development into a new entity backed by UK investors. With biotech markets hot, there’s room for copycat deals.

The deal outlined on July 29 sees Switzerland’s $275 billion market-cap pharma giant inject the drugs into a startup called Mereo, run by former Nomura employees, in exchange for an undisclosed chunk of equity. In the context of Novartis’ size, the financial impact is likely to be tiny. But it’s a neat way for Novartis to retain exposure to good drugs, while sating shareholder hunger for value accretion.

Investors have pushed pharmaceutical company valuations to a 26 percent premium to their five-year average. They like blockbusters best. They fear that smaller drugs, like treatments for brittle bone disease or hypogonadotropic hypogonadism involved here, can be a costly distraction.

Yet there’s an ample demand for neglected gems among biotech investors. The Nasdaq Biotechnology Index has almost doubled over the last two years. And the Novartis deal shows how quickly demand for biotech assets is growing in the UK. The chief investors in Mereo are UK investment stalwarts, including Neil Woodford and his old shop Invesco Perpetual. Analysts at Evaluate, the research house, reckon that private biotech capital raisings rose 71 percent last year to $430 million. Public listings jumped nearly tenfold to 408 million pounds ($574 million).

There’s a risk copycats may look daft if the drug exceeds expectations or the acquirer exits quickly. Axovant Sciences last month raised $2.8 billion by listing a drug it had bought from GlaxoSmithKline seven months earlier for $5 million. But Novartis is hanging onto future profit by keeping equity and royalty payments.

The last years have seen a wave of pharmaceutical dealmaking, such as 2014’s asset swap by Novartis and GlaxoSmithKline or this week’s $40.5 billion acquisition of Allergan’s genetics business by Teva. As Big Pharma restructures, foundations are built for many more smaller deals.


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