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.

Biotech, at its core, means burning tons of cash on R&D for years in pursuit of a wildly uncertain and highly regulated outcome. Failure isn't just likely, but near-certain. Fun!

The big inducement to do or invest in something that crazy is the possibility of an outsize return. Those have been rare in a year where health care is underperforming every other Nasdaq index by more than 10 percent. But investors got a welcome reminder on Tuesday of how well things can go, as Celator became a surprising biotech unicorn.

Just a few months ago, the company was cash-poor and ignored, worth less than $2 a share. But in March it reported unexpectedly strong results for its lead medicine, Vyxeos, for a form of leukemia. And on Tuesday it announced it was being acquired by Jazz Pharmaceuticals for $30.25 a share, or about $1.5 billion, a nearly 100 percent premium.

Bucking a trend of regulatory and scientific failures and lower valuations has its rewards; Celator shares are now up 1609 percent year-to-date. The best performer of 2016 on the Nasdaq Biotech Index (NBI), Inovio, is up a paltry 68.1 percent. As ugly as things have looked in biotech this year, it's still possible to hit the jackpot. 

Near Zero to Hero
Celator became the rarest of biotech beasts in 2016: a happy surprise.
Source: Bloomberg

Celator is not the sexiest company out there. It's not modifying the body's immune cells to track down and kill cancer. It optimizes the current standard therapy for a particularly deadly form of leukemia and delivers it more effectively. But it works. The drug reduced the risk death by 31 percent in its Phase 3 trial, compared to the chemotherapy as normally administered in a population of older and very sick patients. 

The Jazz deal, coming before Celator even submitted its treatment to the FDA for approval, may have averted an eventual cash crunch. A secondary offering shortly after announcing the positive trial results in March helped bring Celator's cash stockpile to $67 million from $23.2 million at the end of 2015. But building a commercial organization and actually launching Vyxeos might have exhausted that money pile. 

Cash Burn
Celator's potential cash troubles were averted by a share sale after positive news on its lead drug. But actually launching it would have been very pricey.
Source: Bloomberg

As for Jazz, the company makes more than 70 percent of its revenue from the narcolepsy drug Xyrem, which is facing challenges to its patents. Jazz needs to find other revenue sources, and Celator has said Vyxeos sales could peak as high as $780 million in an optimistic scenario, which includes extension to patients beyond the one the company studied in its phase 3 trial. 

Biotech investors hope a wave of deals might perk up the market. The NBI has risen more than 10 percent since Pfizer announced its purchase of dermatology drugmaker Anacor on May 16th. But the index is still way down for the year, and questions about the future of drug pricing may continue to weigh on sentiment and most biotech stocks through the U.S. presidential election and beyond. 

NB-Cry
Health care, due in large part to biotech, is underperforming every other Nasdaq index by a large margin.
Source: Bloomberg

Celator's success is a reminder that it's possible to break through the doldrums, and spectacularly. That suggests it's worth it for companies and investors to continue to take shots. 

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:
Mark Gongloff at mgongloff1@bloomberg.net