AbbVie and Bristol Myers Squibb each capped last year with multibillion-dollar acquisitions of companies developing new drugs for psychiatric conditions. But they weren’t the only interested buyers, according to recently disclosed deal details, suggesting to some analysts that more tie-ups could transpire.
While many larger pharmaceutical firms have either dismissed or deprioritized research into diseases of the brain, scientific breakthroughs are luring some back and others to invest more meaningfully. Amgen, AbbVie and Pfizer all bought into a group of fast-acting migraine medications that now generate hundreds of millions of dollars in annual sales. And on a smaller scale, the biotechnology companies GW Pharmaceuticals and Zogenix were snapped up for their promising new epilepsy therapies.
Now, with the proposed buyouts of Karuna Therapeutics and Cerevel Therapeutics, neuropsychiatry appears to be in the spotlight.
“Honestly, I think the last big thing that investors were waiting to see was M&A in psychiatry,” Paul Matteis, an analyst at the investment bank Stifel, said in an interview.
On Dec. 22, Bristol Myers said it would purchase Karuna for $14 billion. The Boston-based biotech was built around an experimental drug called “KarXT,” a component of which Eli Lilly tried to develop in the 1990s but ultimately gave up on. Clinical trials have since found treatment with KarXT significantly reduces schizophrenia symptoms.
Bristol Myers’ announcement came less than three weeks after Cerevel, which is working on a rival therapy to Karuna’s, agreed to sell to AbbVie for just shy of $9 billion.
Karuna recounted the lead up to its agreement in documents filed with the Securities and Exchange Commission on Jan. 22. The documents show Karuna had, for several months, been in discussions with another large multinational pharmaceutical company about an acquisition. That company, labeled as “Party A,” made an initial buyout offer in October that was at a “significant premium” to Karuna’s then share price.
While Party A conducted due diligence research on Karuna, Bristol Myers made contact and, on Dec. 12, company CEO Christopher Boerner proposed a deal with better terms than Party A. Karuna pushed both for “best and final bids,” and Bristol Myers’ revised offer of $333 per share beat out Party A’s.
In its own documents, Cerevel said that after receiving a buyout proposal from AbbVie, it floated the idea of a sale to Pfizer. The pharmaceutical giant had spun Cerevel out of its own labs in 2018, so bringing that research back in house may have seemed like a logical move. Pfizer turned down the opportunity, though, as it wanted to see data from a key study of Cerevel’s KarXT competitor, named emraclidine, before considering an all-out acquisition.
Undeterred, Cerevel contacted three other companies about a potential buyout, one of which put in an offer. That proposal didn’t beat out the $45-per-share bid AbbVie ultimately made.
Michael Yee, an analyst at Jefferies, wrote in a Jan. 6 note to clients that it’s possible Bristol Myers or Johnson & Johnson could have been the other bidder for Cerevel.
Given its later purchase of Karuna, Bristol Myers was clearly interested in so-called muscarinic receptor agonist drugs like KarXT and emraclidine. And J&J executives said in early December that schizophrenia, Alzheimer's disease and depression were on the company’s radar for business development.
It's therefore “not unlikely that they explored [Cerevel] for strategic optionality,” Yee wrote.
Bankers for Karuna, meanwhile, mentioned the biotech to two other large pharma companies after Karuna had received Bristol Myers’ first proposal, but neither chose to pursue a deal.
Should the acquisitions close, Bristol Myers and AbbVie would take leading positions in a class of drugs Wall Street has pegged as very lucrative. The team at Stifel estimates a $10 billion opportunity in schizophrenia alone for medicines targeting muscarinic receptors, a family of proteins that control the release of a neurotransmitter vital to brain function.
“There has been this debate on: How big is a novel schizophrenia drug?,” Matteis said. “Our view is the muscarinic drugs — the fact they're just such a completely different mechanism and the majority of schizophrenia patients aren't well controlled, that can lead these to being a really big class.”
As such, Matteis thinks it’s “definitely possible” three other companies advancing muscarinic receptor drugs — Neurocrine Biosciences, Neumora Therapeutics and privately held MapLight Therapeutics — could become more attractive to dealmakers. He noted, however, that those programs have a “considerably higher risk profile,” given they’re earlier along in testing and so don’t have as much validating data.
While Cerevel expects results from an important mid-stage study of its medicine later this year, Karuna has already submitted KarXT to the Food and Drug Administration for approval. A decision from the agency should come by Sept. 26.
Matteis, who has a “buy” rating on Karuna stock, believes KarXT will secure approval and has high hopes for its commercial launch. He pointed to the lead Karuna holds over its competitors, as well as the demand for additional kinds of schizophrenia treatments. Notably, patients with schizophrenia frequently switch medications because of side effects or because the drugs aren’t adequately controlling their disease.
“I think you're gonna get a massive bolus of early adopters,” Matteis said. “And I think Bristol [Myers] just has to not mess it up.”