Biotech investors have been faced with a historic correction for the sector, a historic pace of interest rate increases, a historic ruling on regulating drug prices, and generally sour sentiment. Shareholders of Myovant Sciences (MYOV) can now add a family feud to the list.
The drug developer, which focuses on women's and men's health, turned down a $2.5 billion acquisition offer from Sumitovant Biopharma. According to SEC filings, the Japanese pharma owned roughly 52.3% of the outstanding common shares of Myovant Sciences at the end of June 2022.
On the one hand, rebuffing your largest shareholder's acquisition offer probably isn't easy, but it appears to be the correct move in this case. The $2.5 billion takeover bid almost certainly undervalues the existing product portfolio of Myovant Sciences, let alone the potential of the pipeline.
On the other hand, investors probably shouldn't expect Sumitovant Biopharma to pull off an acquisition at a higher price. They can blame a strong U.S. dollar for what might become a gut-wrenching roller coaster ride, although there is one potential exit that would be acceptable to all.
Just Beginning to Hit Its Stride
Myovant Sciences is developing drug candidates for treating uterine fibroids, pain associated with endometriosis, and prostate cancer. Many utilize the same active pharmaceutical ingredient (API) called relugolix. The molecule helps to regulate hormones in the body.
Relugolix is the only API in Orgovyx, which earned FDA approval in December 2020 as a treatment for prostate cancer. The molecule is one of a trio of APIs in Myfembree, which earned its first FDA approval in May 2021 as a treatment for uterine fibroids. Myfembree earned its second approval in August 2022 and could earn a third in January 2023.
The drug compound was promising enough to attract Pfizer in December 2020. The pharma titan showered Myovant Sciences with an upfront cash payment of $650 million and promised up to $3.8 billion in future milestone payments, while the pair will equally share in profits and certain expenses related to relugolix.
The relationship has been valuable. Myovant Sciences earned $105 million in revenue related to milestone payments from Pfizer in fiscal 2022, or the 12-month period ended March 2022. That exceeded the $94.3 million generated from net product sales during the period, which wouldn't have been possible without co-promotion from the one of the world's largest drug developers.
Wall Street expects revenue to continue climbing. The business reported $59 million in total revenue during fiscal 2021 before jumping to $231 million in fiscal 2022. Analysts are penciling in nearly $518 million in fiscal 2023 revenue and $594 million in fiscal 2024 sales. While there is a lot of variance in analyst projections, the trend is positive.
That brief dive into the details makes it clear why Sumitovant Biopharma would want to acquire the remaining half of Myovant Sciences it doesn't own. But investors may not want to get too carried away expecting a greatly increased acquisition offer.
A Strong Dollar Gives and Takes Away
Sumitovant Biopharma is a subsidiary of Sumitomo Pharma, which itself is only valued at roughly $2.8 billion. That means half of its market valuation could be chalked up to its stake in Myovant Sciences. That also suggests increasing the takeover offer much above $2.5 billion will be difficult or impossible.
Investors have probably heard that the U.S. dollar is soaring in value relative to most global currencies. That's because the Federal Reserve is raising interest rates much faster and higher than other countries, which sometimes don't have the ability to raise interest rates at the same pace. That makes the dollar more valuable in comparison.
A strong U.S. dollar may have played a role in Sumitomo's interest in owning the remaining half of Myovant Sciences. The Japanese yen has been among the biggest currency losers this year, having lost about 20% of its value against the greenback since the start of 2022.
Owning an up-and-coming drug developer that does business in U.S. dollars would be quite valuable for the Japanese pharma in the years ahead. Making the math work is another story. This likely played a role in Sumitomo's relatively low offer, which marked a premium over recent average closes of only 40% or so. A drug developer of Myovant Sciences' caliber might be expected to grab an 80% premium or higher, although the company lacks a robust development pipeline after relugolix.
Myovant Sciences made the right move to reject the $2.5 billion bid from its majority shareholder. The problem is Sumitomo may not be able to make an offer that's acceptable to the board of directors. Meanwhile, the list of potential suitors may be limited. Not many established drug developers have commercial infrastructure built for women's health that would be very helpful for ramping sales of Orgovyx and Myfembree.
Pfizer is the most obvious potential bidder. The pharma giant has been wisely plowing its pandemic cash flows into various growth initiatives, so buying Myovant Sciences outright could save it over $3 billion in future milestone payouts. That includes a potential $100 million payout if Myfembree earns another FDA approval in January 2023.
If Pfizer decides to mediate the family feud between Myovant Sciences and Sumitomo Pharma, then it could be a win-win-win situation. The women's health drug developer could earn an acceptable buyout premium, Sumitomo Pharma could be granted a graceful exit at an acceptable premium, and the pharma titan would simplify its milestone payout accounting.
For now, investors cannot bank on a rescue from Pfizer, but may want to brace for a roller coaster ride as the details get sorted out.
