BREAKINGVIEWS-Blackstone pushes pharma investors their cash fix

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

By Robert Cyran

NEW YORK, Feb 13 (Reuters Breakingviews) - Novartis NOVN.S and its corporate predecessors have developed drugs for over a century. But on Tuesday, it bought Blackstone-backed Anthos Therapeutics in a deal worth up to $3.1 billion. Oddly enough, the Swiss firm is re-acquiring control of a blood clot treatment that it had previously owned. The reason comes down to a mismatch between the pharmaceutical business model and investors’ expectations for centenarian giants.

Drug companies must constantly add new therapies as old ones age out of patent protection, subjecting them to cut-price competition. There are three main ways to do so: develop compounds in the lab, license them, or acquire them.

Developing a drug is incredibly costly. Big pharma companies spent about $2.3 billion on average per therapy in 2023, according to Deloitte. To shareholders expecting a mature firm to prioritize returning cashflow to them, this research expense is anathema. Nearly two years ago, Sanofi SASY.PA vaporized about $20 billion of its market value simply by promising to ramp up clinical spending.

Enter Blackstone BX.N and its Life Sciences unit. It offers a way to share the risk of busted research and turn regular spending into periodic acquisition expenses. Novartis licensed the rights to an antibody for treating stroke to a company controlled by the buyout shop in 2019. The Swiss received a minority stake. Blackstone initially injected $250 million and guided development. After trials showed the drug was effective and appeared safer than traditional anticoagulants, Novartis agreed to pay up to take everything back.

It's not just big pharma that can use the assist. Investors in the independent biotechnology firms developing novel treatments are more tolerant of risk, but the growing cost of trials can require extremely dilutive equity raises. In 2020 Blackstone invested $2 billion into Alnylam Pharmaceuticals ALNY.O, valued at $13 billion at the time, to help it fund trials without issuing too many new shares. More recently, it injected cash into Moderna MRNA.O to fund flu vaccines.

This service comes with a hefty price tag. Blackstone’s internal rate of return in its Life Sciences business is 19%, according to filings, far higher than the 4% return Deloitte estimates Big Pharma notches from research and development.

There are limits. Blackstone’s unit has only $12 billion of assets under management. Significant expansion, or competition from rivals, would probably lower returns. And drug development is inherently uncertain and subject to political risk. But helping big pharma give its investors their cash fix is a nice sideline.

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CONTEXT NEWS

Novartis said on February 11 it had agreed to buy Anthos Therapeutics for up to $3.1 billion. Blackstone Life Sciences owns a majority of Anthos.

Blackstone and Novartis co-founded Anthos in 2019. Blackstone Life Sciences contributed $250 million, and Novartis licensed rights to abelacimab, a therapy for the treatment and prevention of blood clots, to Anthos. Novartis retained a minority interest in Anthos.