Celgene's $7 Billion Purchase Is Great For Drug Inventors. Is It Great For Celgene?
Last night, Celgene announced that it is buying Impact BioMedicines, a small biotech developing a drug to compete with the blockbuster blood cancer drug Jakafi, sold by Incyte and Novartis, in an announcement timed to coincide with the annual J.P. Morgan Health Care Conference, where Celgene, as it happens, always opens the show.
The initial report from the Wall Street Journal gave the $7 billion number, which was a shock for investors and sounded far too rich. But Celgene's press release put things in much more sane terms. The $7 billion, in proud J.P. Morgan tradition, is biobucks. Celgene's paying $1.1 billion upfront, and then $1.25 billion for regulatory approval. Then Impact's shareholders get more payments if sales pass $1 billion. If annual net sales total $5 billion – triple Jakafi's current global sales – these payments will total $4.5 billion. That's a better deal. It's also not enough to get investors excited. RBC Capital Markets analyst Brian Abraham basically summed up the reaction saying in a note to investors that the deal, "makes strategic sense, but we see a relatively modest 'Impact'."
The Impact deal is a window into two big potential shifts in the pharmaceutical industry. Good: there's increasing power for the people who invent drugs, compared to those who raise money for them, a tension that has existed since biotech's beginnings. Bad, at least for companies: innovation in the pharmaceutical industry is increasingly resulting in lots of me-too competition, and the resultant crowding of categories could make things tougher for big pharmaceutical firms like Celgene, Bristol-Myers Squibb, and Johnson & Johnson in the long run.
The good news first. The people who created blockbusters like Lipitor and Avastin didn't wield significant power, and many drug inventors end up being anonymous. But Impact's chief executive, John Hood, is one of the co-inventors of fedratinib. I first met Hood when he was chief scientific officer of a company called Samumed, where he invented molecules aimed at arthritis and other degenerative diseases. Hood showed me around their labs, and as we chatted he told me that he'd previously been at a company called TargeGen. I remembered that they had a type of drug called a JAK2 inhibitor (like Jakafi, get the name?) but that Sanofi had dropped it. Hood bristled. He still thought the drug had potential.
Last year, he rescued it, getting the drug back from Sanofi, founding Impact and raising $100 million to develop and then launch it. The drug had been sidelined because of a rare encephalopathy, but Hood said it's not clear if there is a link, that fedratinib works in patients who have failed Jakafi, and that it lacks side effects that Jakafi has. " The notion of bringing it back appeared daunting it was only after looking at the data that we did it," he told me last year. "We’ve got a drug that has tremendous benefit with minimal risk. It isn’t thrombocytopenic and it doesn’t create an infection risk. It’s the safest drug." He acknowledged that this still needed to be proved, but it explains the structure of deal: Impact and its backers actually think that fedratinib could actually overtake or replace Jakafi at some point in the future. If not, it will be a second-line option, and might never reach blockbuster status.
Why do investors want something better than that call option? They're worried about the eventual patent expiration for Revlimid, which is forecast to account for $8.1 billion of Celgene's $13 billion in annual sales for 2017. That's why the company's forecast this morning that it will grow its top line 12% next year isn't enough to calm its shareholders – even though Celgene shares got a painful reset last year when an experimental drug failed and the company cut guidance. What shareholders want is a deal that will ease that knot in their stomachs. Part of the reason this doesn't do that is precisely because it is a new drug in a category where there is already a decided winner.
This is a problem throughout the drug business right now. When something looks promising, companies flood the zone. The PD-1 cancer drugs from Merck and Bristol-Myers Squibb – that would be Keytruda and Opdivo – are expected to be big sellers. But does that leave room for the one from Roche, the one from AstraZeneca, the one from Regeneron? Last year, J&J discontinued its work in hepatitis C because the market was crowded by entrants from Gilead, Merck, and AbbVie. "The big issue to me is competition," says Murray Aitkin, Executive Director of the Iqvia Institute for Human Data Science, part of the large clinical research company. This doesn't just mean price competition, Aitkin points out. It means that there may not be enough volume to make the price matter in the first place.
Last week, Geoffrey Porges, an analyst at Leerink, coined a term for this phenomenon: "hyper-competition." And it is dragging on biotech shares. The rapid emergence of competition means that fewer and fewer drugs will get long lives where they enjoy a dominant sales position. Nine of ten new drugs approved in 2017, Porges argues, were in categories where there was already a dominant medicine. I think fedratinib could be more valuable than investors think. But it's also a reminder of exactly the problems drug companies face when launching new medicines right now. Celgene shares are down 2.2% in morning trading.