Rich Synageva M&A premium epitomizes appetite for orphan drugs
By Olivia Oran (Reuters) - The hefty premium Alexion Pharmaceuticals Inc has agreed to pay to acquire Synageva BioPharma Corp highlights how the popularity of so-called orphan drug makers is leading to valuations many investors now deem frothy. Alexion shares fell as much as 10 percent on Wednesday on investor concerns the $8.4 billion cash and stock deal overvalued Synageva, whose drug for a rare and potentially fatal condition that causes a build-up of fat in the blood and liver awaits regulatory approval. Alexion offered Synageva nearly a 140 percent premium, versus an average takeover premium of 41 percent for biotechnology companies so far this year, according to Thomson Reuters data. Other recent big deals involving orphan drug makers that focus on rare diseases include Teva Pharmaceutical Industries Ltd's $3.5 billion purchase of Auspex Pharmaceuticals announced in March and Shire Plc's acquisition of NPS Pharmaceuticals for $5.2 billion in January. Reuters also reported last week that Pfizer Inc had made a preliminary offer for rare-disease drug maker Swedish Orphan Biovitrium AB. Orphan drug companies are seen as attractive because they can typically charge higher prices for their drugs, which serve small patient populations. The U.S. Food and Drug Administration's approval process for these drugs is also often quicker - around 10 months versus at least 1 year for non-orphan drugs. This is because these drugs treat serious or life threatening diseases when other treatment options may not exist. "Rare-disease companies are profitable businesses and the cost to market a product is pretty low, which makes them attractive targets," said Lisa Bayko, an analyst with JMP Securities. "The drugs seem to sell themselves to some degree." In turn, major drug companies such as Pfizer, Celgene Corp and Novartis AG are investing heavily in orphan drugs. While rare diseases were historically ignored by large pharmaceutical companies in favor of those with larger patient populations such as cardiac disease and diabetes, orphan made up almost half of the 41 new drugs approved by the FDA last year. Sales of orphan drugs are expected to grow at an annual rate of almost 11 percent per year through 2020, compared with 4 percent for drugs treating larger populations, according to a recent report from research firm EvaluatePharma. However, some experts argue that orphan drug companies do not necessarily make for the best investments, because they are overvalued by the market and may carry R&D risk. "When you have large pharmaceutical companies that aren't already in the orphan sector paying large premiums, it enters into really risky territory," said Steve Brozak, president of WBB Securities LLC. "It's going to be problematic for companies and investors that don't understand all the processes of manufacturing, development and patient advocacy." U.S. pharmaceutical merger activity has topped $107.3 billion so far this year, more than double the volume a year ago. (This story has been corrected to fix spelling of analyst's name to Liisa Bayko from Lisa Bayko in seventh paragraph) (Reporting by Olivia Oran in New York; Editing by Greg Roumeliotis and Steve Orlofsky)
