Puma Biotech jumped nearly 300% in yesterday’s afterhours and trading today due to the announcement of their top line late stage breast cancer ExteNET Trial. Neratinib (drug PB272) hit the primary endpoint by showing a 33% improvement in disease free survival in women with early stage HER2- positive breast cancer. The market took this news extremely well as it is believed Puma is now ripe to be an M&A target. However, with such a rally in price, the potential acquisition may have already been priced in.
Women who have HER2-positive cancers are usually given trastuzumab (Roche’s Herceptin) along with chemo as part of their treatment. After the chemo is finished, Herceptin is continued to complete a year of treatment. Herceptin generates about $6 billion in sales. Neratinib, if approved, would be used as a second year of adjuvant therapy following Herceptin. Therefore, sales figures are expected to be lower.
What Prior Acquisitions Tell Us
Back in October 2008, Eli Lilly acquired ImClone for $6.5B. This purchase gave Lilly ImClone’s only product, the colon and head and neck cancer drug Erbitux, which had $1.3B in sales at the time of purchase. In addition, Lilly expanded its pipeline as ImClone was developing five new cancer medicines, three of which were on the verge of Phase III studies. Without including the acquired candidates, Lilly paid a 5x P/S ratio for ImClone.
More recently, Amgen struck a deal last summer to purchase Onyx for $10.4B. As part of the deal, Amgen received rights to Kyprolis, the multiple myeloma drug that was expected to reach roughly $2B in peak sales. Amgen also gained access to Onyx’s three oncology assets, including palbociclib, a breast cancer candidate. Similar to the above situation, the Onyx deal required a 5x peak sales multiple of Kyprolis.
Is Potential Acquisition Already Priced In?
Applying this same multiple to Puma and assuming Neratinib peak sales are $3B, Puma could warrant a valuation in the $15B range (more than double current price). However, this does not include some major hurdles that a potential acquirer may face with Puma.
Neratinib Licensing Amendment with Pfizer
Right before coming out with the top line data that caused the spike in Puma’s price, the company announced amendments to the Neratinib licensing agreement with Pfizer. Originally, Pfizer was responsible for all trial expenses. With the amendment, Puma would solely take on the extra $30M burden for expenses associated with ongoing legacy clinical trials. Also, Puma lowered the royalty terms it would pay Pfizer upon commercialization from 10-20% of net sales to “low to mid teens”.
Why would Pfizer agree to such terms right before the release of data that would add billions to Puma’s valuation? Will the full results, which will be presented at “future scientific meeting”, disappoint? Something doesn’t add up here.
The 5x P/S multiple used above assumes that Neratinib actually hits the market, which is still far from a given. Puma expects to file for FDA approval in 1H 2015 and as all biotech investors know, the FDA can make or break a company. With the largest hurdle still ahead, Puma still faces great risk.
In their latest financials, Puma had a cash balance of approximately $196M, which would be sufficient to fund operations well after the company files for FDA approval. As a result, financing risk is not a concern. Additionally, though Puma would make an ideal buyout target, the company does not necessarily need a partner immediately. This provides leverage during negotiations.
Puma CEO Alan Auerbach is no stranger to M&A deals as he sold his last company, Cougar Biotechnology to Johnson & Johnson for $1B back in 2009. This validates that Puma will also be on the M&A market. However, the valuation Puma receives is where the big question lies. Taking the current risks into consideration, Puma quadruple in price may have been an overreaction.