BioPharm Executive: Who's Got It Wrong? Big Pharma? Biotech? Or Just Investors?

Published: Jun 25, 2015

Who's Got It Wrong? Big Pharma? Biotech? Or Just Investors?
June 24, 2015
By Karl Thiel for

Axovant Sciences Ltd. , a Bermuda-based company helmed by a 29-year old former hedge fund manager, just made history: A $315 million IPO, reportedly the largest debut ever for a pre-commercial biotech. Even after dropping precipitously from its initial post-IPO high, the company is still valued at about $1.5 billion. What's driving that valuation? A drug called RVT-101, being developed for Alzheimer's disease.

We know how large and underserved the Alzheimer's market is, so perhaps that's understandable—at least until you look at the details. The only clinical data supporting RVT-101 shows that, while it didn't improve cognition on its own, it had a modest benefit when combined with donepezil—yet still not as much as idalopirdine, a drug in the same class being developed by Lundbeck Inc. and Otsuka Pharmaceutical. In fact, Axovant has nothing—no other assets to speak of—except this drug and the same package of clinical data that caused GlaxoSmithKline to scrap the program years ago. Axovant acquired the drug from GSK for $5 million just a few months ago, in December 2014. Based on its market cap, it has multiplied the value of this investment some 300-fold in about six months for an annualized gain of....hmm...about 59,800%.

There's probably a good litmus test to be found in one's reaction to this news. Is your first thought: a) How could Glaxo give away a potentially valuable asset for so little? or is it b) How can investors be so stupid?

Before you answer, recognize that RVT-101 isn't an isolated example. GlaxoSmithKline also returned all rights to drisapersen, the experimental antisense treatment for Duchenne muscular dystrophy, back to ProSensa in January 2014—and a few months later BioMarin Pharmaceutical Inc. stepped in and acquired ProSensa for $840 million in cash and potential milestones, all aimed at gaining control of this drug. Then there's Biogen, Inc., which paid $675 million to snap up pain drugs from Convergence Pharmaceuticals. A few years prior, GSK spun off Convergence, happy to take an 18% equity stake after VCs invested $45.5 million in the company.

Glaxo also pulled out of a development deal with Amicus Therapeutics, Inc. on migalastat, a treatment for Fabry disease, back in November 2013—only to see Amicus shoot up more than six-fold in value in the wake of phase III results on the drug.

What you have here is a clash of views. One could pretty fairly argue that the story of RVT-101 is evidence of a biotech bubble, or at least a lot of froth around the margins. But you can also argue that GSK is out of step with the rest of the industry and that its chief executive, Sir Andrew Witty, is continuing to whittle the organization down to something that can't compete.

GSK's sales are lower now than when Witty took over in 2008. Some of that is unfortunate timing—most other old guard pharma companies have also seen sales stagnate over this period. But it has also significantly underperformed its peers. And on top of this lackluster performance, GSK has been distracted by other events, including two major bribery scandals in the past few years. Yet more than anything, it's Witty's strategic direction that seems questionable.

Last year's asset swap deal gives Novartis AG —a company that, incidentally, has made canny decisions and seen its revenue continue to grow over the past several years—GSK's cancer business. Witty, meanwhile, has decided to pursue a "higher volume" business in vaccines and consumer health.

That's a 180 degree turn from where the rest of the industry is going.

In an evolving relationship, big pharma is essentially outsourcing more and more R&D to biotech as they cut their own budgets. Whether or not that's a good idea remains to be seen—as time goes on, more industry voices are calling on companies to re-commit to internal R&D. But implicit in this approach is that industry continues to take risks—it just lets biotech shoulder some of the early, make-or-break decisions, with pharma paying up later for the successes. The money and work get shifted around, but the approach remains essentially the same.

GSK, on the other hand, seems intent on de-risking its strategy by giving up on some of the most promising areas of R&D. While the subsequent value the market has placed on some former GSK assets might be evidence of froth and investor naiveté, it's also clear that GSK lacks a commitment to riskier innovation that has fueled some stunning successes over the past few years.

It's not surprising that more sharks are circling GSK in recent months—Johnson & Johnson , Roche , Pfizer Inc. , and AstraZeneca PLC , among others, have all been mentioned as potential acquirers. Witty, meanwhile, remains committed to his approach, arguing that chasing higher and higher-priced innovation is unsustainable over the long term.

So who is making a mistake here? It may be everyone: GSK's de-risked approach to business may have it undervaluing assets that are being overvalued in the hands of biotech. Unfortunately, investors may be paying the price on both sides of the transaction.

-Karl Thiel

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