BioPharm Executive: Bubble, Billions, or Both?

Published: Feb 29, 2012

Bubble, Billions, or Both?

Another month, another batch of big hepatitis C news. Is all the furious dealmaking in the space indicative of biotech's own mini-bubble? Or is it a matter of assets finally maturing to a point that they can realistically address a huge, and previously underserved, opportunity?

It all began quietly enough, with Roche announcing last October that it would buy Anadys and its phase 2b hepatitis C drug setrobuvir for $230 million. This was a relatively cheap acquisition of an asset with a potential role in a future combo therapy. Despite some encouraging clinical results, it had been languishing unnoticed by investors. But if Wall Street wasn't paying attention, pharma companies most definitely were. And shortly after the deal, things went hyberbolic.

In November, Gilead Sciences announced its massive $11 billion cash acquisition of Pharmasset , already a darling in the hep C space, for an 89% premium over its then-current stock price. (Whether that deal looks smart or not was very much in flux this month--see Bench to Clinic). Earlier this month Bristol-Myers Squibb completed its acquisition of Inhibitex and INX-189, a potent NS5B Nucleotide drug. While that deal carried a mere $2.5 billion price tag, it came at an even richer 163% premium.

And, of course, investors were breathlessly wondering if other companies working in the space -- Idenix , Achillion Pharmaceuticals, and others--might also fetch huge bids. (Intermune sold global rights to its hepatitis C drug danoprevir to Roche for $175 million in cash in early October--timing that may now have management kicking itself.) Idenix--the more promising looking acquisition candidate--had something of a lid on it until recently because FDA had placed a clinical hold on its drug IDX184, but the stock soared after it was partially lifted in January. After more data, the rest of that hold was lifted earlier this month.

Of course, calling bubbles wherever there's a bit of froth has become a popular business. After all, who in the post-financial crisis world doesn't want to say they saw the crash coming? In this case, some have been using the B word about the hep C space at least as early as last June--spurred at the time, apparently, by the $60 million upfront payment Vertex doled out to Alios BioPharma for rights to preclinical candidates. Sounds like small potatoes now. Just this month, Novartis upped its hep C game by partnering with Enanta (see Golden Handshakes), also for a preclinical candidate. Carrying a $34 million upfront payment, that deal is predictably back-end loaded, worth up to $440 million plus tiered royalties for the company.

(It's not all that surprising, by the way, that companies are looking at preclinical candidates, because most of these drugs are intended to be part of a combination regimen--which makes the phase 2 strategy critical and something the deep pocketed partner wants to be a part of.)

So will this bubble pop? Some analysts are suggesting the annual market for hep C treatments could shoot to $20 billion or even much higher...which if true certainly justifies some lofty price tags. But it's a difficult market to tap. If you just multiple 170 million people affected worldwide by a $50,000 price tag, you get, like, a lot of zeroes. But most of those folks are outside of the lucrative U.S. and European markets. Even the millions of infected folks in the West often don't know they have the illness, and not all are going to sign on for an expensive cure to a slow-moving illness. (And can governments and insurers afford it?) Yet there are some very concentrated areas of hep C infection--Japan, Egypt, parts of Italy--that drugmakers can focus on in addition to traditional Western markets. That's a job for a big company and a very clever marketer that can raise awareness of an often stealthy illness. Seems like there's little doubt that the winning few drugs will justify even the price Gilead paid for Pharmasset. But it's also inevitable that some companies are going to pay far too much for assets that never find a market.

-Karl Thiel

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