Deal Watch: AbbVie Cancels Shire Buyout, Blaming U.S. Tax Policy Revisions

Actavis potentially bolsters its GI franchise by optioning rights to peptide ghrelin agonist relamorelin and also the opportunity to buy out Rhythm Health. Meanwhile, Celgene increases its stake in Sutro and Janssen joins the Ebola fight.

“The Pink Sheet” regularly presents commentary and perspective on key business deals. Here is a summary of the most noteworthy transactions that occurred between Oct. 18 and Oct. 24.

AbbVie/Shire

AbbVie Inc. CEO Richard Gonzalez boldly criticized the U.S. government’s corporate tax policy during a conference call Oct. 20 officially announcing the break-up of AbbVie’s planned $54 billion acquisition of Shire PLC. Tax policy changes announced by the U.S. Treasury in September, intended to curb the economic advantage of tax inversion through acquisition, were the reason AbbVie suddenly backed out of a deal that had seemed all but guaranteed.

“We are disappointed in Treasury’s unprecedented approach,” Gonzalez said. “It does nothing to solve a fundamental problem of the U.S. tax code, which makes American companies less competitive with their foreign competitors and discourages investment in the United States.”

Eli Lilly & Co. CEO John Leichleiter also discussed the need for U.S. tax reform during its Oct. 23 earnings call (Also see "Lilly’s Lechleiter ‘Cautiously Optimistic’ On U.S. Tax Reform" - Pink Sheet, 23 Oct, 2014.).

The U.S. government’s high corporate tax rate and other tax policies have spurred a flurry of deals in the pharmaceutical industry in the last two years as U.S. companies buy a foreign company and re-domicile in that firm’s friendlier corporate tax environment. But as drug makers like AbbVie and Pfizer Inc. have sought to re-domicile outside the U.S., the government has begun cracking down on inversion deals, which it says are fueled by tax avoidance (Also see "Inversion Crackdown: Does It Spell The End For Pfizer/AstraZeneca?" - Pink Sheet, 23 Sep, 2014.).

The tax changes were announced two months after AbbVie and Shire signed a merger agreement, but Treasury said the changes would be applicable to any deals that have not yet closed. It also warned that more changes would be coming and that they might be applied retroactively, increasing the amount of risk involved in doing such a deal.

“There continues to be an urgent need for a competitive U.S. tax code that allows foreign earnings to be used for investment in the U.S. without penalty,” Gonzalez said.

Being able to access cash held outside the U.S. is one of the motivations for companies to invert. The ability to use cash stockpiles held overseas to fund a deal, as AbbVie planned to do in buying Shire, usually is another driver behind a U.S.-based company’s decision to buy a foreign company and its ability to pay for it. As it stands, if companies want to invest foreign cash in the U.S., they have to repatriate and pay a high tax on it.

AbbVie’s Oct. 20 announcement was expected, but only after the company notified Shire that its board of directors was reconsidering the deal in light of the tax policy changes. The board then recommended that shareholders vote against it (Also see "Tax Reform Takes Its Toll: AbbVie Having Second Thoughts About Shire" - Pink Sheet, 15 Oct, 2014.).

The fact that the tax policy changes would implode a $54 billion deal the likes of AbbVie/Shire still surprised many pharma insiders, especially given how much AbbVie’s management had talked up the strategic rationale for the deal beyond the tax-inversion opportunity, namely the ability to diversify its portfolio beyond Humira (adalimumab) (Also see "AbbVie/Shire Merger To Create Rare Disease Business Unit Headed By Ornskov" - Pink Sheet, 18 Jul, 2014.).

AbbVie has paid Shire a $1.64 billion break-up fee (Also see "AbbVie CEO Pleads For U.S. Tax Reform In Eulogy For Shire Merger" - Pink Sheet, 21 Oct, 2014.). Simultaneously, AbbVie reported that its board authorized a new $5 billion stock-repurchase program and agreed to increase the company’s quarterly cash dividend by nearly 17%, all part of an effort to return cash to shareholders.

Actavis/Rhythm

Allergan PLC nabbed an option to acquire Rhythm Health and its gastrointestinal drug relamorelin, it announced Oct. 22. The U.K. firm agreed to pay $40 million up front for the peptide ghrelin agonist and gets the option to buy out Rhythm Health after further clinical trials for an undisclosed amount [See Deal].

Relamorelin already has been tested in Phase II in patients with diabetic gastroparesis and in patients with chronic constipation. Rhythm expects to initiate a Phase IIb trial in patients with diabetic gastroparesis that will report out in early 2015; Actavis will have the right to exercise its option at that time. The drug met its primary endpoints in the first two mid-stage trials, but did not hit statistical significance on some secondary endpoints. The drug likely will have to show further clarification in upcoming trials if Actavis is going to opt in.

Rhythm Health is a subsidiary of Rhythm Health Inc. The deal with Actavis does not include its other subsidiary, Rhythm Metabolic, which has an obesity candidate in development. The two drug candidates were spun out of Ipsen in 2010 [See Deal].

Actavis has been building out its core therapeutic areas through acquisition and in-licensing. Relamorelin will help fill out the company’s GI portfolio, which includes the chronic constipation drug Linzess (linaclotide) (Also see "Actavis Buys Durata In Bolt-On Deal, Leaves Room For Transformation" - Pink Sheet, 6 Oct, 2014.).

Celgene/Sutro

Celgene Corp. has come back to the table for more in its partnership with Sutro Biopharma Inc., this time picking up an option to acquire the San Francisco biotech outright on pre-specified terms. The companies announced the latest deal, which builds on a 2012 collaboration, on Oct. 23.

Celgene will pay $95 million up front, including an equity investment that will increase its ownership stake in Sutro to 15%. The two companies will be working together to develop novel antibody-drug conjugates and multispecific antibodies.

The focus is on developing targets in immuno-oncology using Sutro’s cell-free protein synthesis platform. The deal could be worth $500 million if all the programs are successful, according to Sutro, which is responsible for discovery and early preclinical development of the multispecific antibodies and ADCs. Celgene first partnered with the antibody developer in 2012 similarly to design and develop ADCs and bispecific antibodies for an undisclosed upfront payment (Also see "Celgene Dips Into The Antibody Well Once More, Partners With Sutro" - Pink Sheet, 18 Dec, 2012.).

Lexicon/Ipsen

France’s mid-sized pharmaceutical company Ipsen has strengthened one of its core business interests, the symptomatic treatment of carcinoid syndrome, by acquiring commercialization rights to Lexicon Pharmaceuticals Inc.’s lead product telotristat etiprate outside of the U.S., Canada and Japan [See Deal]. The product currently is in Phase III clinical trials.

Ipsen is making a $23 million upfront payment to Lexicon, and the Texas-based biotech could receive up to $145 million in additional clinical, regulatory and commercial milestones relating to telotristat, as well as royalties on net sales. In return, Ipsen obtains rights to market telotristat in its territories. Lexicon will continue to lead the ongoing global Phase III program with telotristat, which is expected to report out in 2015, and it will be responsible for registering the product in the U.S., Canada and Japan. The companies will collaborate on registering telotristat in Ipsen’s territories, with the French firm taking the lead.

Carcinoid syndrome is caused by neuroendocrine tumors secreting large amounts of serotonin and causing severe diarrhea, flushing and heart valve damage. Telotristat is an oral inhibitor of the serotonin synthesis enzyme tryptophan hydroxylase that does not cross the blood-brain barrier, Lexicon said in announcing the deal Oct. 22. The product lowers serotonin levels in the peripheral but not the central nervous system.

Ipsen already markets a somatostatin analog, Somatuline (lanreotide), for symptoms associated with neuroendocrine tumors, and a 120 mg depot injection has been evaluated for its antitumor efficacy and submitted in the U.S. and EU for the treatment of gastroenteropancreatic neuroendocrine tumors (GEP-NETS). Telotristat is being evaluated in Phase III trials in patients with carcinoid syndrome not adequately controlled with lanreotide or octreotide, and has orphan drug designation in the EU and U.S., and fast track status in the U.S.

Bavarian Nordic/Janssen

In a deal potentially worth more than $187 million, Danish vaccine developer Bavarian Nordic AS has entered a license and supply pact for its multivalent MVA-BN Filovirus vaccine candidate, designed to protect against the Zaire and Sudan strains of Ebola and the related condition Marburg disease, with Crucell Holland BV, one of the Janssen Pharmaceutical Cos. and a subsidiary of Johnson & Johnson[See Deal].

Under the deal, formally announced Oct. 22, Janssen is paying Bavarian Nordic $25 million up front for the vaccine. Bavarian Nordic stands to get up to $20 million in development and regulatory milestones along with royalties for commercial sales outside Africa. Janssen will fund all costs associated with developing and commercializing the vaccine, and pay $70.8 million up front for the production of more than 1 million doses of the vaccine, valued at $99.3 million. The remaining $28.5 million will be received pro rata with deliveries in 2015. J&J also paid around $43 million to buy a 6.4% stake in Bavarian Nordic through a private placing of shares in the Danish company.

A combination regimen of the MVA-BN vaccine with Janssen’s AdVac approach recently has demonstrated complete protection against Ebola in preclinical studies involving macaque monkeys. The combination vaccine regimen, which was discovered in a research program with the National Institutes of Health, will enter human trials early next year in Europe, the U.S. and Africa, where it will be tested for safety and immunogenicity. The vaccine involves one injection to prime the immune system and another to boost the response.