Roche acquisition of Spark Therapeutics for $4.5bn in February 2019 is a day to remember for many biotech investors.
This was one of the blockbuster deals of 2019 that contributed to enormous excitement around gene therapy in 2019, 2020, and now. I actually had written this note in my older blog (in different language) at the time, but wanted to revisit given JPM 2021 season and its timeless lessons.
As a refresher, Spark Therapeutics (now part of Roche) is a gene therapy development specialist and at the time of acquisition, they were launching a product called Luxturna (for rare hereditary eye disease and it was a product that no investor cared about) and were focused on development of gene therapies for hemophilia A and B – truly at the cutting edge of innovation.
Spark was acquired by Roche for $114.50 per share – translating to a whopping 122% premium over close price on prior trading day. Some lucky person made 122% if they had bought it the day before, and some unfortunate soul lost 122% overnight if they shorted – another point here is that shorting innovation is riskier than it appears. And many of those at short-term hedge funds lost jobs because they could never recover from this so early in the year (it was in February).
This transaction has MANY lessons for investing in biotech actually and this theme is repeated over and over again – leading to many winners but much more losers in the investment community.
SO MANY INNOVATIVE COMPANIES ARE STILL TRADING AT SIGNIFICANT DISCOUNT TO ITS STRATEGIC VALUE
Value of innovation is hard to quantify, but 100%+ premium means that market price is stupid cheap. Spark transaction was announced when investors thought gene therapy companies are “over-valued” – gene therapy platform company values have only gone up since the transaction.
Strategic acquisition goes WAY beyond high premium – it means CEO is onboard for the innovation, it means there will be scarcity value going forward and strategic had to move quickly, and it means they couldn’t source the expertise internally.
We should always be watching the moves of strategic acquirers – they may not know the future, but they do shape the future of industry.
LARGE DIVERSIFIED PHARMAS WILL SPEND A LOT OF $$$ TO PROTECT THEIR HOME GROUND OR CORE THERAPEUTIC FRANCHISES
Roche could make significant investment in Spark because they are already a heavy weight in hemophilia and hematology globally. Roche owns Hemlibra, which is growing into a massive blockbuster drug, and stands to lose the most with advent of hemophilia A gene therapy, but more importantly, can just push out Spark’s hemophilia A gene therapy through its world-class commercial organization globally. Therefore, the math / financials make sense with enormous synergies – allowing them to write a significant check and make a sizable bet.
Roche also owns Lucentis and has strong ophthalmology franchise – wet AMD is also seeing innovation from gene therapy, and having Luxturna commercial expertise can help Roche with gene therapy approach in wet AMD treatment that would eventually replace injection-based anti-VEGF approach of today. At the same time, Spark had CNS development programs in early stage – allowing Roche to further enrich commercial, near-term pipeline, and early stage pipeline opportunities.
NEVER EVER SHORT CONSENSUS SHORTS EVEN THOUGH IT IS AN OBVIOUS SHORT
Spark was everyone’s favorite short idea. Luxturna has very rare prevalence pool and was always just intended as proof of concept. Hemophilia A/B development was lagging behind Biomarin (valrox) in hemophilia A and Uniqure in hemophilia B. Gene therapy is designed as a one-and-done therapy, and therefore first-to-market advantage is WAY more profound than other therapies. It was a short-idea that was simply too good to pass up – so many hedge funds shorted Spark, but it became a crowded trade. 16% of float was being shorted against the stock. The shorts lost 112% overnight on top of high borrow they had been paying for the short position.
This transaction reminded me of Bioverativ acquisition by Sanofi with 64% premium – Bioverativ was a much much bigger short than Spark – structurally Bioverativ business was crashing down because of heavy pricing headwind to hemophilia products and competition of hemlibra in inhibitor patients (hemlibra was an absolutely superior product so it was almost unethical to not switch to Hemlibra from Bioverativ products).
Bioverativ situation was just worse because it carried market capitalization of $12bn – more liquidity means bigger sizing in portfolio and many investors were fired because they couldn’t recover from the loss.
CONCLUSION
You can decide to not own innovation, but we must always remember that shorting innovation is a much more dangerous endeavor that it appears.
We must always watch what strategics are doing – there is no need to own stocks of large caps, but we should always listen to their webcasts to get a sense of what their leaders are thinking / guiding their investors.
What are your biggest take-out investments? Please comment below and share why you decided to invest!
