Bayer can pay more for cancer blockbuster partner

November 26, 2013

By Olaf Storbeck

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Bayer can pay more for Algeta. After a leak, the German pharma and plastics giant has admitted making a 336-crown-a-share, or 1.8 billion euro ($2.4 billion), takeover overture to its Norwegian partner. Shares in the smaller firm promptly rose above Bayer’s proposal. That looks appropriate: this opening gambit is not overly generous. Algeta’s flagship prostate cancer treatment, Xofigo, is promising. And the technology pioneered here could be used to treat other cancers.

The move is an obvious one: the duo has worked together since 2009 to develop Xofigo. This belongs to an innovative class of drugs known as “alpha-pharmaceuticals”, radioactive agents injected into the body to attack cancer locally.  It is just starting to take off, having recently received U.S. and European marketing authorisation.

The close relationship between the two sides makes a counterbidder unlikely: at present, Algeta and Bayer will share sales and profit on Xofigo equally in the United States, the biggest potential market. Elsewhere, Bayer will distribute the drug and pay royalties to Algeta. Nor is the acquirer likely to reap big cost savings. Algeta is a small, lean company that had just 105 employees at the end of last year.

Nonetheless, Bayer can probably be persuaded to pay a bit more. A 27 percent premium to the previous closing share price looks a bit skinny. Last year, healthcare deals carried an average 36 percent premium to the recent share price, Thomson Reuters data shows. And Bayer has an informational advantage, given its current partnership. So investors might demand a bigger sweetener to avoid the risk of being short-changed.

Of course, a lot depends on the potential of Xofigo. Bayer’s price implies the Leverkusen-based giant either expects peak annual sales of $1.5 to $1.7 billion or believes the drug’s life cycle will be longer than outsiders think, according to Deutsche Bank. That is above the $1.2 billion median forecast by analysts in a company poll. Still, optimists reckon sales could top $2 billion. And there is the hard-to-quantify – but perhaps very valuable opportunity – to develop other “alpha-pharmaceuticals” in Algeta’s pre-clinical pipeline.

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