September 9, 2019

Breakingviews: Japan drug firm bets $3 bln on castoffs and hype

by Breakingviews.

Sumitomo Dainippon Pharma is betting $3 billion on castoffs and hype. The Japanese drugmaker’s growth has stalled and its pipeline is bare. So it’s paying a lofty price for pieces of Roivant Sciences, which has scooped up dozens of compounds from Big Pharma but has yet to produce a marketed drug. This dream-chasing is unlikely to have a happy ending.

A blockbuster treatment for schizophrenia is Sumitomo’s cash cow, but it will face generic competition in a few years. The company has struggled to develop or buy therapies to generate new revenue streams. The stock has lost nearly half its market value this year. In contrast, Roivant has potential, but needs cash. A deal ticks both firms’ boxes.

The details remain to be ironed out, but it revolves around Sumitomo buying just over 10% of Roivant, the umbrella organization founded by former hedge fund manager Vivek Ramaswamy. It will also get Roivant’s stakes in five of its subsidiaries, and the option to buy Roivant’s stakes in six more.

Ramaswamy’s idea of buying Big Pharma castoffs has promise. Drug companies discover or buy scores of developmental therapies but give their full backing to relatively few of them. It can take a dozen years to bring a drug from conception to market, providing lots of time for corporate strategy, employee turnover and investor fashion to change. As a result, Roivant has been able to license the rights to dozens of drugs on the cheap.

Is there a billion-dollar treatment or multiple small hits among them? That’s the hope Sumitomo is buying into. But in doing so it has cast aside some clear warning signs.

In recent years Ramaswamy has floated three firms at valuations far higher than what Roivant paid for the compounds in their portfolios. All have stumbled in the face of clinical failures and investor fears that any drugs they might bring to market may be mediocre sellers. The three firms – Urovant Sciences, Myovant Sciences and Axovant Gene Therapies – have lost about one-quarter, one-half and over 90% of their market capitalizations, respectively, since going public. That probably explains why Roivant postponed a planned fourth IPO this summer.

The lucrative deal with Sumitomo is just the treatment Roivant needs to keep its model ticking. It’s unlikely to fix what ails its Japanese partner.

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