The author is a Reuters Breakingviews columnist. The opinions expressed are her own.

By Aimee Donnellan

DUBLIN, Nov 5 (Reuters Breakingviews) - Novo Nordisk NOVOb.CO has an edge in its battle with Pfizer PFE.N. On Tuesday, the Danish drugmaker upped its bid for biotech Metsera MTSR.O to $10 billion to fend off its U.S. rival. Novo’s bulky obesity franchise stateside will help it bring weight loss medications to market faster than its U.S. peer, helping justify a 159% premium. Its biggest risk is that U.S. trustbusters block the deal, but even here Novo CEO Mike Doustdar has a partial hedge.

Novo Nordisk’s new bid is generous on two fronts. It offered to pay $62.20 per share in cash up front, up from its previous $56.50 offering. It also raised the payment it will make when Metsera reaches certain regulatory milestones, a so-called contingent value right $(CVR)$, to $24, up from $21.25. This tops a revised bid from Pfizer of $70, which also includes a CVR of $10. Given the near $2 billion gulf between the value of the bids, it’s little wonder why Metsera’s board declared Novo Nordisk’s offer 「superior」 but gave Pfizer until Thursday to come back again.

The maths suggest Pfizer CEO Albert Bourla should back off. If he were to match Novo Nordisk’s offer, which values Metsera at $9.5 billion including cash, he can only expect a 6.4% return on invested capital in 2030, the year that Metsera is first expected to make an operating profit, as per Visible Alpha data. That's far below the sector's cost of capital, which is probably around 8%. The Danish group, on the other hand, stands a better chance of making a decent return. Given the scale of its existing obesity franchise, it can probably usher some of Metsera’s drugs to market ahead of schedule, bringing forward revenue. If the biotech’s remedies came to market one year earlier, operating profit would reach $847 million in 2030, using Visible Alpha estimates, implying a near 9% return on capital.

Pfizer argues that Novo Nordisk's bid may stifle competition, because it, along with Eli Lilly LLY.N, is already a key player in the obesity market. The Danish group's solution is an unusual structure in which it pays a cash component upfront in exchange for non-voting shares equivalent to 50% of Metsera's equity capital, and only takes full control of the group once the deal has been approved by regulators. That reduces the risk for Metsera shareholders of a deal falling through. But in that scenario, Novo Nordisk would be stuck with a non-voting minority stake in a company.

Yet Novo Nordisk's deal also offers a shield. First, its preference shares would be paid out first in any sale ahead of Metsera's other shareholders, according to a source with knowledge of their structure, reducing the potential loss. And since Metsera will need money to fund drug development, it will be incentivised to find a fresh backer if Novo Nordisk is blocked from buying it. The turmoil might also mean that Metsera's drugs come to market more slowly, which would allow Novo Nordisk's current obesity business to face less competition for longer.

As it stands, sales from Wegovy, the Danish group's blockbuster weight loss jab, are expected to peak in 2029 at $16.8 billion, and decline swiftly after that, as per Visible Alpha. Winning a biotech with promising treatments could protect its advantage, but even if that attempt comes unstuck, it may end up with weaker rivals. It's a risky plan B, but still gives Doustdar a credible edge in the bidding war.

Follow Aimee Donnellan on LinkedIn.

CONTEXT NEWS

Novo Nordisk increased its bid for U.S. biotech Metsera to $10 billion, according to a statement from the U.S. drugmaker on November 4.

According to a statement from Metsera, Pfizer also bumped its offer to $8.1 billion from its original $7.3 billion.

Novo launched its unsolicited bid for Metsera on October 30, following the U.S. biotech's September agreement with Pfizer. The Danish group is offering $62.20 a share in cash upfront, as well as a contingent value right that pays out $24 per share if Metsera hits certain development milestones.

Metsera shares were trading at $73.18 on November 4.

(Editing by Neil Unmack; Production by Shrabani Chakraborty, Pranav Kiran)

((For previous columns by the author, Reuters customers can click on DONNELLAN/Aimee.Donnellan@thomsonreuters.com))