Health

Max Nisen is a Bloomberg Gadfly columnist covering biotech, pharma and health care. He previously wrote about management and corporate strategy for Quartz and Business Insider.

Avalanche Biotechnologies' all-stock deal to buy private French rival Annapurna, worth about $110.85 million, combines a nicely alliterative but somewhat ominous set of names. The Annapurna peaks in the Himalayas are some of the most difficult and deadly to climb in the world, and they are rather prone to avalanches.

This combined business faces a steep ascent. Both firms focus on gene therapies, treatments that can switch out faulty genes for healthy ones, which may be able to cure some diseases. This move, which replenishes Avalanche's pipeline after the high-profile failure of one of its drugs, creates a risky company a long way from an approved treatment. Avalanche can look forward to years of heavy research spending in a market that's been remarkably unkind to exactly this kind of biotech.

Avalanche's shares were down more than 14 percent on Monday. 

Avalanche is a prime example of how poorly things can go in gene therapy. The company went public at $17 a share in June 2014, raising $117 million. By December, its shares approached $60, and the company was able to raise $162 million in a secondary offering. It was riding a promising genetic treatment for macular degeneration given weight by a $640 million deal with biotech giant Regeneron. 

Then shares plunged on mixed data for the drug in June, and they dropped even further in August on the news that it was ditching a planned clinical trial. Shares are now down more than 90 percent from their peak.  

Down the Mountain
After struggles with its lead drug, Avalanche's stock price plunged.
Source: Bloomberg

Buying Annapurna adds gene therapy programs in Friedrich’s ataxia, hereditary angioedema, severe allergies and alpha1-antitrypsin deficiency to Avalanche's vision treatments. Diversifying the pipeline isn't the worst idea. 

But those are extremely early programs and far from clinical trials. Three of them were licensed from researchers at Cornell University's medical school less than a month ago. The transition from proof of concept to actual treatment is rocky for any drug and far more so in gene therapy.

Avalanche had $258 million in cash on hand at the end of December, which it says should be enough to fund operations for three years. But these new treatments are significantly further than that from market. There isn't going to be a $150 million secondary offering available to the firm any time soon. Moreover, Avalanche is significantly diluting its current shareholders. Under the deal, Avalanche will issue 17.6 million new shares for Annapurna's investors, giving them a 37.5 percent stake in the company. That's a lot to give up on a very long-term bet. 

Even comparative success stories in gene therapy are having a particularly hard time. The entire biotech industry is facing a reset in valuations and an onslaught of negative sentiment

For example, Bluebird Bio, which is developing gene therapy for deadly blood diseases, had been an industry darling. It rode positive early data to a high of nearly $200 a share from its 2013 IPO price of $17. But after disclosing that one of its lead treatments doesn't work as well in a subset of patients, the stock has plunged more than 70 percent from its heights last summer.

Darling No More
Bluebird Bio's efforts to get a gene therapy to market have not been as smooth as investors had hoped.
Source: Bloomberg

Bluebird's stock continues to languish despite the fact that its lead treatment appears to be effective in some cases and is most likely one of the closest gene therapies to market in the U.S. But the early hype around the company's drug created an environment in which anything other than perfection is seen as a failure. Bluebird is doing its best to change that narrative, to make it clear to investors that developing gene therapies is a long and iterative process. It has not had much luck. Avalanche is starting from a much tougher spot. 

Avalanche's deal is a bid to recapture its glory days, when the company was worth more than $1 billion and even the most distant of gene therapies excited investors. It has picked an awfully lean time to ask some very jaded investors for a second chance. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Max Nisen in New York at mnisen@bloomberg.net

To contact the editor responsible for this story:
Daniel Niemi at dniemi1@bloomberg.net