Apellis to be acquired by Biogen for 140% premium

On 31 March, Apellis Pharmaceuticals, a portfolio company of Arctic Aurora LifeScience, announced that it had agreed to be acquired by Biogen for an upfront cash consideration of USD 5.6 billion. This represents a 140% premium on the latest closing price.

We continue to identify M&A as an important trend and value driver for the biotechnology sector, and this announcement by Apellis is another good example of this. In a previous insight, we demonstrated how the market rewards clinical innovation. Apellis's case demonstrates what can happen when strategic buyers recognise long-term value in companies that are not currently appreciated by the market, and how this can generate alpha for fundamental investors.

Apellis is a commercial biotech company that markets two drug brands with the same active substance that target the complement system. This is part of our immune system that normally helps to mark and destroy pathogens. However, in autoimmune diseases, this system turns against the body and marks some of our own cells as foreign. This leads to the destruction of these cells and impaired function of the corresponding organs.

Apellis's Syfovre follows this principle and is marketed for geographic atrophy, an age-related autoimmune disease of the retina presenting with deteriorating vision and potential vision loss. Their other drug, Empaveli, was originally approved for a rare autoimmune blood disorder, and last year its use was extended to a group of rare autoimmune kidney diseases.

Apellis's stock price is based on quarterly Syfovre sales, which is their largest product. While this drug is growing, quarterly numbers have often been below consensus expectations, resulting in weak stock performance. At the same time, the market seemed to overlook Empaveli. Although it is a smaller product, it was recently approved for use in treating C3 glomerulopathy, a rare kidney disease where the market is likely to be larger than previously anticipated. This has likely caused a disconnect between the stock price and its value.

In Apellis's case, market participants were probably more focused on the short term, whereas Biogen recognised the underlying long-term potential, resulting in the substantial acquisition premium announced today.

This transaction is also a good fit for Biogen, a medium-sized biotech company in the midst of a turnaround. Their topline is plateauing as their multiple sclerosis franchise matures and loses patent protection. However, they have strong cash flows, enabling them to make acquisitions to replenish their pipeline and accelerate topline growth. The company already has capabilities in immunology, which it can strengthen through this acquisition.

The deal comprises a cash payment of $41 per share (upon closing) to Apellis shareholders, valuing Apellis at USD 5.6 billion. In addition, Apellis shareholders will be eligible for contingent value rights (CVRs) of up to $4 per share, payable upon certain commercial milestones for Syfovre.