UPDATE: BMS unwraps $14B deal for Karuna, adding a schizophrenia drug awaiting FDA OK

Christmas has come early for Karuna Therapeutics’ shareholders. Bristol Myers Squibb has unwrapped a $14 billion deal to acquire the biotech, which sits on the cusp of having the first schizophrenia treatment approved in years.

News of the deal dropped early Friday morning, with BMS offering $330 per share in cash, for an offer that has already received the blessing of both companies’ boards. The deal represents a 53% premium over the share price at close on December 21, Chief Financial Officer David Elkins said on a Friday morning conference call. The total purchase price reaches $14 billion, or $12.7 billion net of estimated cash acquired. BMS will fund the purchase mostly through new debt issuance. It is expected to close in the first half of 2024.

The star of the deal is KarXT, which was accepted for review by the FDA at the end of November with a decision date set for September 26, 2024. KarXT is a combination of xanomeline-trospium for adult patients with schizophrenia, but Karuna has also been testing it in Alzheimer's disease psychosis.  

CEO Chris Boerner, Ph.D., said the deal will mark BMS's return to neuropsychiatry and compliment existing anti-tau assets in Alzheimer's. With the initial indication under review, BMS will be primed to add more disease areas for KarXT down the line. 

"This will help us establish a footprint and Alzheimer's which will benefit us as we continue to develop our neurodegenerative pipeline," Boerner told investors on the call. 

The companies had been in conversation over a number of months, according to Boerner. BMS had been watching the data come in and was impressed with the potential of KarXT. 

"Obviously, it's an important asset and it's the first advance in many years in schizophrenia, but beyond that, we were very intrigued by the opportunity in Alzheimer's disease psychosis and potentially a broader set of neurologic indications given our earlier portfolio in neurodegenerative disease," the chief executive said.

Chief Medical Officer Samit Hirawat, M.D., said there could be further opportunities for KarXT in bipolar I disorder and Alzheimer's disease agitation. Another goal is to develop a long-acting injectable formulation to help administration and adherence with these patients. KarXT could also be combined with existing treatments due to its low rate of adverse events. Hirawat said the FDA is not expected to convene an advisory committee meeting to discuss any issues with KarXT's application. 

"We've certainly engaged deeply with the scientists at Karuna to really do the due diligence on efficacy, safety," Hirawat said. "Number one, they've pretty brilliantly combined xanomeline with trospium so that you can preserve the central nervous system agonism that you see with xanomeline or the M1 and M4 receptor agonist." The combination allows for the therapeutic effect without the safety issues that had been raised when xanomeline was tested alone years ago, he said. 

Analysts were keen on the deal, with William Blair's Matt Phipps, Ph.D., saying BMS is "making sure stockings are stuffed for Karuna." Phipps noted that BMS had previously mentioned a desire to re-establish a major presence in neuroscience at an R&D event held earlier this year.  

BMS needs to shore up its pipeline as exclusivity runs out on some of its major portfolio drugs. Striking on Karuna showed how serious executives—including Boerner, who just took the CEO role in November—are about preparing for long-term growth. 

"While we can debate whether the acquisition is overpaying for KarXT, the drug has shown strong efficacy across trials to date and should receive regulatory approval in the second half of 2024, adding another drug to the important new product portfolio," William Blair's Phipps wrote Friday morning. 

William Blair had previously predicted peak sales potential for KarXT of $7 billion, half of which is expected to come from the Alzheimer's psychosis indication which currently has no approved treatments. 

The Karuna buy "makes sense to us," according to Mizuho Securities. 

"We continue to favor Karuna, and within our biotech coverage, we see it as a high quality name, given the de-risked nature of KarXT, for which the existing phase 2 and phase 3 data suggest it to have best-in-class efficacy, but also best-in-class safety/tolerability, when compared to existing atypical antipsychotics for the treatment of schizophrenia," Mizuho's Graig Suvannavejh, Ph.D., wrote. 


Time for the groundwork

While the deal progresses, BMS and Karuna will work from their respective sides to support the launch of KarXT, explained Adam Lenkowsky, the pharma's chief commercialization officer. He noted 33,000 psychiatrists who treat schizophrenia patients. The companies plan to target private medical practices, community mental health centers and psychiatric institutions. Lenkowsky expects "to see rapid switching" to KarXT once it's available to patients. 

Karuna has already been planning for the launch and has begun crucial conversations with state and national payers, as the patient population is about 70% Medicaid and Medicare, Lenkowsky noted. That will take time to access. "We're going to begin doing the groundwork now so we're prepared to quickly build a neuroscience field for us post close," Lenkowsky said on the call. 

"Now, although we have some work to do, we are confident in our plans to launch KarXT in schizophrenia towards the end of 2024 and expand into additional indications," Lenkowsky said. "Based on the unmet need, as well as the very encouraging clinical data, KarXT represents a multi-billion dollar peak sales opportunity that should contribute meaningfully to our growth in the back end of the decade and into the 2030s, and will be an important product for patients and for our company."

The deal provides BMS with a near-term revenue boost, plus a pipeline of other neuropsychiatry assets in mood and anxiety disorders, Elkins said. Karuna has a number of therapies targeting the muscarinic pathway, a new class of medicines that aim to ease symptoms of mood disorders without the hallmark side effects such as weight gain and somnolence. 

“There are tremendous opportunities in neuroscience, and Karuna strengthens our position and accelerates the expansion and diversification of our portfolio in the space. We expect KarXT to enhance our growth through the late 2020s and into the next decade,” said Boerner in a statement.

He continued: “This transaction fits squarely within our business development priorities of pursuing assets that are strategically aligned, scientifically sound, financially attractive, and have the potential to address areas of significant unmet medical need. We look forward to welcoming the talented Karuna team to Bristol Myers Squibb.”

The deal is a big bite for BMS to take. Boerner said the New Jersey pharma may not be done—although further acquisitions may be a bit smaller. 

"Look, I think that we're not looking to do large transformative deals. We will be looking to do sort of bolt-on size deals that again, help us to continue to build out therapeutic areas that we're in or enhance those areas that are emerging," Boerner said.

But BMS is expected to be active with other types of deals, too. 

"We're going to continue to focus on other forms of engagement with the external environment, including partnerships, as we just announced with the SystImmune deal, but our commitment to business development as a priority for capital allocation hasn't changed," Boerner said.

The SystImmune partnership involves $800 million upfront for a phase 2 antibody-drug conjugate candidate for solid tumors, with up to $8.4 billion possible on the back end.

BMS is now the second major pharma company to strike a major neuroscience deal this month, with AbbVie snapping up direct rival Cerevel Therapeutics for $8.7 billion earlier in December. Cerevel also has a muscarinic M4 selective positive allosteric modulator in development in the same class as KarXT, although emraclidine is further behind in the development process. 

As for whether the FTC will intervene, as it has with several high-profile deals in the life sciences space, William Blair does not see any meaningful overlap in BMS and Karuna's portfolios that could raise a more in depth probe of the transaction. Mizuho similarly believes that the difference between BMS' neurodegeneration focus and Karuna's neuropsychiatry pipeline should ensure a smooth deal closure with less regulatory scrutiny. 

"Overall, we are very bullish on the prospects of KarXT, and also the potential of the muscarinic class of antipsychotics as a whole, which we view as potentially transformational and a game changer in the treatment paradigm in psychiatric diseases," Mizuho's Suvannavejh wrote. 

Editor's Note: This story was updated throughout at 10:13 a.m. ET on December 22, 2023, with details from the call and analyst commentary.