By Sean Millar, Ben Preece, Moritz Ibe, and Junqi Wang (University of St Andrews) ; Sam Oberly, Julia Weinrod, Yuyu Huang, Talia Hovsepian, and Jenny Sun (Johns Hopkins University)
Photo: Louis Reed (Unsplash)
Overview of the deal
Target: Telavant Holdings
Total Transaction Size: $7.1 billion (plus a $150 million near-term milestone payment)
Closed date: 23rd October 2023
Target advisor: Freshfields Bruckhaus Deringer LLP
Acquirer advisor: Citi (Financial), Davis Polk & Wardwell LLP (Legal)
On Monday 23rd October, the Swiss healthcare company Roche announced a deal to acquire drug manufacturer Telavant holdings for $7.1 billion. The deal comes as Roche looks to bolster future earnings after a year of poor stock performance. Telavant, who was previously owned 75% by Roivant and 25% by Pfizer, produces drugs for patients that suffer from inflammatory and fibrotic diseases. Through this deal Roche gains rights access to all of these, including a ‘promising new therapy’ for patients with inflammatory bowel diseases, such as Chron’s disease. The drug is described to have ‘transformational potential’, and upon completion of this deal, Roche plans to bring the therapy (RVT-3101) to global Phase 3 trials, which marks a significant step in the drug’s development.
Roche Pharmaceuticals Chief Executive Teresa Graham said, “This is a $15 billion market just in the U.S., this molecule clearly has megablockbuster potential.” This move is the latest example of the renewed appetite that large pharmaceuticals have for acquisitions.
In the announcement, Roche also said it would obtain an option to collaborate with Pfizer on a new inflammatory bowel disease drug. The companies have said that completion of the deal is expected in the fourth quarter of this year or the first quarter of 2024.
“Based on the very promising data, we strongly believe in the first-in-class and best-in-disease potential of this late-stage antibody to treat people living with IBD, We are eager to develop this antibody further and bring it to market and patients in the US and Japan as soon as possible ” - Teresa Graham, CEO (Roche Pharmaceuticals)
Company Details (Acquirer - Roche Holding AG)
Roche is a global pharmaceutical and diagnostics company that conducts research, develops, and manufactures its products worldwide. The company's primary focus is on products in the therapeutic areas of oncology, neuroscience, infectious diseases, immunology, haemophilia, ophthalmology, dermatology, respiratory, anaemia, inflammatory and autoimmune, and transplantation. Additionally, Roche supplies diagnostic instruments and reagents. M&A has served as a key driver of growth for the company, enabling it to rapidly adopt new therapies and expand into new fields.
Founded in 1896, headquartered in Basel, Switzerland
CEO: Thomas Schinecker
Number of employees: 103,613
Market Cap: $216.5bn (as of 20/11/2023)
LTM Revenue: $71.4bn
LTM EBITDA: $26.0bn
LTM EV/Revenue: 3.4x
LTM EV/EBITDA: 9.2x
Recent Transactions: $310mn deal for partial rights to Alnylam’s zilebesiran therapeutic (Jul 2023); $680mn acquisition of Zion Pharma's ZN-A-1041 program (May 2023); $250mn acquisition of Good Therapeutics (Sept 2022)
Company Details (Target - Telavant Holdings)
Telavant is a company that was created by Roivant (NYST:ROIV) to develop therapies for inflammatory and fibrotic diseases. Specifically, Telavant is developing an Ulcerative Colitis and Crohn’s disease therapy, RVT-3101, for patients with an identifiable biomarker. Telavant is far along in the process of testing RVT-3101 and will be seeking approval from governing bodies pending a successful outcome in phase 3 of testing, which involves a large number of patients.
Founded in 2022, headquartered in Nyack, New York/United States
CEO: Frank Torti MD
Number of employees: 36
Projections and Assumptions
Post-acquisition, Roche plans accelerate the development of RVT-3101, Telavants’ Inflammatory Bowel Disease treatment, currently in Phase 2b (patient testing) of development. The initial results of the Phase 2b study have shown improved clinical remission and endoscopic improvement with no major safety issues. Roche has indicated a desire to enter global Phase 3 trials for RVT-3101 as soon as possible.
The deal diversifies Roche’s portfolio by entering into the rapidly-growing $20 billion field of treatment of gastrointestinal disease. This investment dilutes Roche’s holdings in oncology that have historically accounted for 40-60% of its revenue over the last five years. Revenue from Roche’s oncology drugs are expected to continue to fall as cheaper versions flood the market while Telavant’s RTV-3101 is projected to earn up to $3 billion in sales in 2032.
Additionally, the deal provides an opportunity for Roche to boost revenues generated in the US, which has made up a growing share of revenue across the last 10 years, and in Japan, where Roche’s share of revenue has roughly remained flat over the same period.
Furthermore, Roche also obtains an option to work with Pfizer on a new IBD drug as part of the deal.
On the morning the transaction was announced, shares in Roche were up 0.1%, while shares in Roivant gained 16.4%. For Roche, this acquisition seems to reflect progress towards a stable long term strategy thus the share price remained constant. Since Roivant’s business model revolves around large transactions, this sale is seen by investors as a major success, hence a large increase in stock price.
Going forward, Roche plans to work with regulatory officials on RVT-3101's approval process, enabling faster access for patients and improving the management of inflammatory bowel diseases. Operational synergies will be realized as Roche integrates Telavant's assets, further developing its global infrastructure to support the expansion of the new therapy.
In addition, the deal also provides Roche with an option for a global collaboration with Pfizer on a next-generation antibody currently in Phase 1.
The increasing pursuit for breakthroughs in immunology has resulted in enthusiasm among pharmaceutical giants due to a large number of patients with overactive immune systems. The deal has rewarded the Swiss pharma group with the key acquisition of a leading candidate whose medications specialize in targeting inflammatory and fibrotic disorders. The full rights to Telavant’s potential drug (RVT-3101), a promising treatment for inflammatory bowel disease (IBD) which affects more than 8 million people worldwide, remained the central part of the acquisition. Given the advantages and focuses of Telavant, it is widely presumed its latest innovation possesses potentials which will be a game-changer in treating IBD. Consequently, the initiation of the RVT-3101 reliability test, known as global phase 3, has been put on Roche’s agenda.
The strategic importance Roche emphasized on this acquisition can be illustrated with the $150 million imminent milestone payment on top of the $7.1 billion, revealing the company’s commitment to advancing treatment options for patients tormented by a range of debilitating conditions. Apart from the rights to develop and manufacture the drug, Roche will also acquire its sales rights in the US, a $15 billion market for IBD, as well as in Japan. A noticeable outcome is Pfizer will retain commercialization rights to the drug outside the US and Japan. Therefore, the acquisition not only strengthens Roche’s status in the field of IBD treatment, but also creates the opportunity for a partnership between the two conglomerates. This underlines shared interests and a collaborative effort for further enhancing the medical options available to individuals suffering from these chronic and difficult conditions.
Risks and Uncertainties
This deal is not without uncertainties. IBD has long lacked effective treatments because of its multifactorial pathologies. This complexity introduces uncertainty about whether RVT-3101 can provide transformative outcomes compared with current treatments— a crucial factor for gaining FDA and PMDA (Japan's FDA equivalent) stage-3 approval. This ambiguity could slow down market entry or even lead to phase-3 failures, potentially turning the costly acquisition into a waste. On top of that, if third-party manufacturers for RVT-3101 substance encounter quality control issues, there’s a threat of FDA rejection, a hurdle Eli Lilly recently faced with its Lebrikizumab. Any setbacks in the clinical phase could shake investor confidence, causing stock price volatility and threatening Roche’s cash supply.
Roche, under pressure to produce positive results from its clinical trials, is indeed feeling the heat. After several setbacks in getting approvals for its late-phase products and failure to upgrade its guidance in the Q3 earnings report, scepticism has arisen surrounding its R&D capacities, which will take time to resolve. There is also anticipation for Roche to take more significant steps to enhance its existing pipeline, a move that tests its executives’ strategic vision and capital allocation ability.
Beyond the clinical concerns, fierce competition in the TL1A-mediated drug market could drive up R&D costs for developing a differentiated product, potentially squeezing Roche's cash flow and profit margins.
Additionally, while focusing on the U.S. and Japanese markets reduces risks associated with regulatory and business practices in countries with less mature healthcare systems, there remains speculation about whether this deal is overpriced, given the geographic market limitations and the Swiss company’s limited experience in these regions. Besides, global economic and political shifts can impact government taxation and reimbursement strategies. This could influence the drug's adoption and profitability, particularly in hospitals located in low-income cities.
https://www.bloomberg.com/news/articles/2023-10-19/roche-sales-drop-as-new-drugs-don-t-make-up-for-covid-slump https://www.reuters.com/breakingviews/roches-7-bln-deal-is-pricey-partial-cure-2023-10-23/ https://www.ft.com/content/df20b1b7-6368-44bb-803d-b8602d575275 https://www.ft.com/content/99d8bdb4-b854-411f-b3b4-fcb6f94f8292