Just when you think a biotech bear market is about to descend, the bulls come rushing in.
News of a Greek default depressed markets yesterday and was only compounded by fears of a potential default by Puerto Rico. Many of the large fund systems that are invested in too-good-to-be-true Puerto Rican bonds are also invested in many household biotech and pharma companies. Add to the mix other headwinds coming out of both Europe (remember Lagarde just asked Yellen not to raise rates in a very public forum) and China’s market deterioration and consequent rate cut all indicate that we are in for some market turbulence. This would include a pullback in the biotech market.
Granted there are bubbles forming in subsectors of biotech, especially in the small cap space and among companies piling into immunotherapy. Remember, not all ride hailing apps are the next Uber, and not all immunotherapy companies are the next Celgene. But yesterday’s announcement by Celgene to invest $1 billion in Juno Therapeutics through a ten-year collaboration might just keep the biotech bull market running for a bit longer.
Celgene is simultaneously being criticized by some and lauded by others for its decision to lock up the technology at early stage immunotherapy company Juno Therapeutics, but the deal is in Celgene’s best interest. The one thing that we are certain of about CAR-T technologies are that they are very powerful in patients with blood cancers. Early results in very sick patients have been remarkable utilizing T-Cell therapy, virtually eradicating cancer cells throughout the body. Celgene’s franchise was built upon treatment of these types of diseases – it’s a space it knows extremely well. With several companies in the CAR-T space, including Kite Pharma and bluebird bio, any one of these companies could rise to threaten Celgene’s franchise, including Juno Therapeutics.
The transaction with Juno is a supercharged version of past Celgene transactions. Celgene’s dealmakers understand that a key to earlier stage companies is to keep smaller organizations intact in order to preserve dynamic culture. Rather than acquiring companies and potentially disrupting their discovery ecosystems, Celgene often makes investments in private or public companies through collaborations, thereby allowing teams to continue their work adequately resourced. This allows companies to continue fueling their business and R&D engines, while leveraging the support of Celgene to achieve strategic objectives. In exchange, Celgene receives the added benefit of maintaining its core focus and keeping its balance sheets as lean as is possible for a $90 billion market company.
For example, in 2013 many of the first companies to IPO in years were oncology companies seeded by Celgene. Epizyme, bluebird bio, and Agios Pharmaceuticals IPOed within weeks of each other and each had major collaborations with Celgene. By lending these companies its name and cash resources, banks and investors had a great deal more confidence entering into transactions with the Celgene targets. In turn, these IPOs helped to usher in the current IPO market after a severe drought caused by the Great Recession. Had Celgene simply acquired these companies outright, it would have caused delays in programs, distracted both Celgene and the target companies, and bogged down Celgene’s financials.
With respect to this deal’s structure, Celgene agreed to invest $1 billion into Juno primarily through the purchase of 9.1 million of its shares for $93 a share, almost double Juno’s closing price. Celgene will invest an additional $150 million in cash for other rights and access. Companies are willing to pay excessive premiums as a sign of confidence, and to help raise the value and profile of a company. They also prefer to ensure there is a material exchange of equity for cash consideration. While premiums of 30% to 50% or more are not unusual, this is still a very large transaction for an early stage company. Of course there are control considerations implicit in the deal with Celgene and there is the need for Juno shareholders to perceive this as a truly meaningful, if not transformative, deal.
There’s actually a lesson here for big pharma sitting on its cash hoards. Instead of just acquiring companies for their revenue, they may want to consider actually funding external science in a very meaningful way. This is especially because their internal R&D programs suffer from the malaise of big pharma bureaucracy. What’s more likely to happen is a feeding frenzy as companies rush to announce partnerships with the first CAR-T immunotherapy company they meet who will accept a term sheet.
Those shaking their heads at Celgene know that while Juno’s technology has shown incredible promise, there’s always the potential for a disproportionate amount of risk to reward in the biotech space. It could just be that immune oncology is just so competitive and Juno’s premise is so compelling that Celgene had to stake its claim here. Celgene is not known for being hostile in its business development pursuits, and the management and shareholders of a company like Juno would be unwilling to sell the company at $45 or even $85 a share given the valuations and stock price of many of its peers. Therefore, a frontloaded collaboration deal in a transformative area of oncology that Celgene knows very well shouldn’t be surprising. After all, wasn’t everyone expecting AstraZeneca to step in and acquire Juno outright a few weeks ago?
Keep in mind that Celgene not only had an exclusive deal with bluebird around its CAR-T prospects which it narrowed a great deal only a few weeks ago, but it still has a right of first refusal with Baylor College of Medicine’s cell therapy labs, where bluebird licensed its own technology from. By now Celgene has looked at hundreds of immune oncology plays from around the world, and it seems to have found what it wants in Juno, at least for now. With Celgene as its partner and financial backer, Juno has the freedom to operate unhindered. Now, after a spate of deals, it’s time for Juno’s management to focus on the clinic and perform with the assets and resources they have in hand.