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What Novartis Bought in AveXis

Motley Fool Staff, The Motley Fool

Last week, Novartis (NYSE: NVS) paid up almost $10 billion for AveXis -- an 88% premium over the gene therapy company's previous close. In this segment from Industry Focus: Healthcare, host Michael Douglass and Motley Fool contributor Shannon Jones explain why Novartis is so interested in this company and why this acquisition is so exciting.

Find out what AveXis is working on and how the company could potentially cure SMA outright, why AveXis' therapy would be so vastly superior to the current standard of care for SMA, and how Novartis has been signaling their commitment to producing gene therapies in a major way. Also, they talk about what this acquisition and acquisitions like it say about shifting trends in healthcare mergers and acquisitions today.

A full transcript follows the video.

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This video was recorded on April 11, 2018.

Michael Douglass: Let's turn to our second big story, which is a big buyout. If we sound like broken records, it's because every week there seems to be some kind of big buyout going on, if not in healthcare then in some other sector. On Monday, just two days ago, from recording, at least, Novartis announced that they were going to pay $218 per share for AveXis, for a total cost of $9.8 billion. That's an 88% premium over the previous closing price on April 6th, which is a pretty good return. Congratulations, AveXis shareholders! You have had a very, very good few days.

Shannon Jones: Yeah, absolutely. I must say, Novartis has been impressing me as of late. I'm normally not too bullish on big biopharma, but Novartis is actually making some really interesting, novel plays. They're not sitting on the sidelines, they're not going after me-too indications. They're going after some really novel things, and AveXis proves that. For listeners who are not as familiar, AveXis is a gene therapy company, could have the first gene therapy for SMA. For those Biogen investors out there, you'll recognize SMA as being spinal muscular atrophy, a rare neuromuscular disorder caused by a genetic defect in a particular gene, specifically the SM1 gene. AveXis here is hoping to make a play in a space that is still a huge unmet need, despite the fact that Biogen has the only approved drug for SMA right now.

Douglass: The thing with Spinraza is that it arrests, or appears to, at least, arrest, or delay, slow down, effects. The idea here of this gene therapy is that the potential -- of course, let's be clear here, it's only potential right now. We do not have Phase III data, which as we just discussed, is kind of important. But, the potential to possibly create a fix. If you can fix the gene, the genetic defect, then potentially you could see spinal muscular atrophy defeated. Perhaps. Again, we're speculating here. But, if that's how this drug ends up functioning, then you could see that unmet need basically be entirely met, at least for everyone who can pay.

Jones: And to that point, when you think about gene therapy, this could be a literal one-and-done therapy. Spinraza right now requires what's called a front-loaded dosing strategy, where you give more doses up front, and then you have to give ongoing maintenance doses. This could be a huge game changer, if approved, as a one-and-done fix-it therapy for these critically ill patients.

Douglass: One of the things that's interesting about spinal muscular atrophy is that Spinraza costs, well, a lot. $750,000 for that first year of treatment, and about $375,000, a comparative bargain, for years after. And it generated almost a billion dollars in 2017, just under $900 million. So, with that in mind, there are plenty of reasons to think that insurers might be willing to pay a good deal more for a one-and-done drug. So, there's a lot of opportunity here if the drug succeeds.

Now, one thing we should point out is, fellow Gilead shareholders are probably remembering, this sounds a little bit like what happened with hepatitis C. And to some extent, yes, that is what could happen. So, what we could see here is, this drug burns hot in its first few years as it basically helps all the current patients -- again, if it succeeds -- and then probably tails off a little bit after that because it'll be just helping new patients as they are born and identified with SMA. So, that means we'll probably hit peak sales early and then taper off some and plateau for a long time period, because it's curing the disease. That's great. That's a great outcome. And if Wall Street analysts aren't thrilled with the growth curves there, tough. It's a win-win for everyone. And if it ends up panning out that way, there's every reason to think that Novartis is going to be well compensated for this long-term.

Jones: Absolutely. And I would even add to that, even beyond their lead candidate, which right now is AVX-101, Novartis is really inheriting a platform, a gene therapy platform. Novartis has already said they are committed to developing gene therapy drugs in neuroscience and ophthalmology. This could be exactly what they need to really springboard that growth long-term.

Douglass: And to that point, this isn't Novartis' first acquisition in this space. They licensed Spark Therapeutics' Luxturna, which is for an inherited form of blindness, just a few months ago. So, this is their second big play in this space. Novartis is signaling that they are definitely going to be playing heavily here, perhaps over the long term. And one of the questions for Novartis shareholders to ask themselves is, is AveXis' platform plus the Spark Therapeutics drug enough? Or is Novartis going to need to build out some more expertise and some more pipeline and perhaps a couple of more platforms? And that's an open question. It's something we'll just kind of have to watch for.

Let's talk a little bit about what this means for broader M&A.

Jones: I think what you're starting to see is a trend of a lot of these large biopharma companies no longer just looking at these individual pipeline candidates and saying, "I want to buy this asset." They're actually now beginning to look beyond that. Does this company bring manufacturing expertise or manufacturing capability that goes beyond that? Is there a platform that we can now launch more drugs off of? So, I think you'll probably start to see this more. We know that Gilead purchased Kite in 2017. Kite Pharma was, for the longest time, way behind Juno, but I think the reason why Gilead went after Kite, obviously there were some safety issues, but it was the fact that Kite had the manufacturing capabilities already in place. I think that'll be an important trend to watch as you're looking to see who could get picked up next.

Douglass: And it's this idea of plug and play, again. To some extent, these big biotechs and big biopharmas that are looking to either plug a hole in their platforms or in their pipelines or find something accretive and work with it. They're thinking not just about upfront costs, but they're also thinking about what those knock-on effects are. The FDA has certainly been sending plenty of drugs back to the drawing board for manufacturing issues. Well, if someone has already cleared those issues out, that's another potential problem that's just gone. You've paid up a little bit to de-risk that, but just like we pay for home insurance, there's a real reason to do so. The way I likened this to Shannon when we were chatting about it yesterday was, I bought a shed, and I'm assembling it this weekend. And by that what I mean is, I'm paying somebody else to assemble it, because I'm just not very good at building things, so it just makes sense in that case for me to pay up a little bit to de-risk that particular part of my yard. So, I'm very excited about that.

Michael Douglass owns shares of Gilead Sciences. Shannon Jones owns shares of Spark Therapeutics. The Motley Fool owns shares of and recommends Gilead Sciences. The Motley Fool has the following options: short May 2018 $85 calls on Gilead Sciences. The Motley Fool recommends Biogen. The Motley Fool has a disclosure policy.