Why would Novartis buy a $2.6B radiotherapy maker? Its neuroendocrine franchise, analyst says

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Novartis is said to be eyeing Advanced Accelerator Applications, now valued at $2.6 billion, as a bolt-on buyout target.

Megamerger deal speculation has swirled around Novartis as the Swiss drugmaker eyes its operations—particularly Alcon—for cash-generating sales or spinoffs. But all along, CEO Joe Jimenez has been pledging bolt-on deals instead, and the latest buzz says he has one on tap.

That would be Advanced Accelerator Applications, a maker of radioactive tracers used in diagnostic scans, Bloomberg reports. But the target’s real attraction might be its pipeline. Its lead candidate is an actual cancer therapeutic in a field Novartis already knows: neuroendocrine tumors (NETs).

The in-development med, Lutathera, is at the regulatory filing stage, and it would come with two marketed NET diagnostic agents, NetSpot and Somakit. It’s a radiotherapy based on the rare earth metal leutetium, which is now used primarily as a catalyst for cracking hydrocarbons in oil refineries, according to the Royal Society of Chemistry.

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"We believe a Novartis acquisition of AAAP for Lutathera in neuroendocrine tumors would be highly synergistic with [its] existing franchise, including Sandostatin and Afinitor, making a potential deal very logical,” Canaccord Genuity analyst John Newman said in a Thursday morning note to investors.

With its $16 billion deal for GlaxoSmithKline’s oncology assets in 2015, Novartis beefed up its cancer portfolio, and the recent approval of its CAR-T drug Kymriah gave it another boost. It moved into the CDK 4/6 cancer therapy market with Kisqali earlier this year, and it’s also been racking up new indications for Afinitor, including nods in gastrointestinal and lung NETs last February.

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Right now, AAA’s products are marketed mostly in Europe, with NetSpot its only U.S.-approved agent. Presumably, Novartis would use its expertise at advancing products through the FDA to bring AAA’s meds to the U.S., all while reaping sales in AAA’s established markets. The Big Pharma is adept at winning initial approvals in small patient populations and then expanding into follow-up indications that add significantly to sales prospects.

AAA, which went public in 2015, saw its American depositary receipts surge on the M&A reports, hitting a valuation of $2.6 billion on Thursday morning, Bloomberg says.

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Whether Novartis moves forward with a deal remains to be seen; the company has been actively scouting for deals for some time, and various potential buys have been buzzed about over the past couple of years. One of those was Amneal, a generics maker said to be a Novartis target late last year; it’s now reportedly in the sights of Impax Laboratories, the generics maker that recently brought in Actavis/Allergan vet Paul Bisaro as CEO.

But AAA does look like the sort of deal that Big Pharmas have been shopping lately: companies with current revenue streams and late-stage pipeline meds. And if Newman is correct, AAA’s top med could be a boost for Novartis sales for years. "We see very long-duration revenues for Lutathera due to the extremely high barrier for generics, limited supply of leutetium and very high efficacy benefit over current therapies,” he wrote. 

Just what Novartis plans to do going forward is up in the air, however; Jimenez recently announced his departure, planning to hand the reins to current R&D chief Vas Narasimhan in February.