Life often imitates art, as the saying goes.
In “This Is Spinal Tap,” the classic rock and roll mockumentary chronicling the eponymous band, guitarist Nigel Tufnel famously brags that his amplifiers, unlike conventional ones that max out at a volume of ten, were specially designed to go “one louder.”
“These go to eleven,” he deadpans.
IN VIVO Blog has learned that in the world of RNA interference (RNAi), a new company aims to make some noise of its own not by going louder, but longer, while at the same time circumventing the IP barriers to entry in the exciting field.
Dicerna Pharmaceuticals Inc. is based on technology called Dicer substrate small interfering RNAs developed by co-founders John Rossi, PhD, from the City of Hope National Medical Center’s Beckman Research Institute and Mark Behlke, MD, PhD, from Integrated DNA Technologies Inc. (IDT). Dicer substrate siRNAs differ from traditional siRNA employed by companies like Alnylam Pharmaceuticals and Merck & Co.’s Sirna Therapeutics in that they are slightly longer oligonucleotides—between 26 and 30 base pairs (bp) versus 21bp for standard siRNA—which then get trimmed down to size once inside the cell.
Dicerna is expected to announce its $13 million Series A, which will be led by Oxford Bioscience Partners, at some point in November.
Dicerna hopes that its longer molecules not only confer an IP workaround strategy in the hot area of RNA interference therapeutics, but also a pipeline of highly potent drug candidates that will pique the interest of quite a few Big Pharma that have been so far left out of the increasingly expensive but important RNAi arms race.
The seminal patent licensed by both Alnylam and Sirna named after RNAi pioneer Thomas Tuschl, PhD, only covers isolated double-stranded oligonucleotides from 19 bps up to 25 bps, Dicerna co-founder and chief executive James Jenson tells IN VIVO Blog. Tuschl’s landmark work in RNA interference was conducted in Drosophila, says Jenson. “Beyond 21mers the activity of siRNAs drops off in Drosophila, which is reflected in the Tuschl patent applications, and the literature at the time teaches that limitation. It’s where the streetlight was shining and where the research was focused,” he says.
The Rossi and Behlke IP, owned by City of Hope and IDT, allows an adjacent doorway into RNAi from an IP perspective, Jenson claims. What’s more, Rossi and colleagues somewhat surprisingly discovered, in mammalian cells longer double-stranded RNAs worked better than the 21mers thought to be optimal under Tuschl; 26-30mer oligos are “typically five to ten fold more potent,” says Jenson, perhaps resulting in a longer duration of action that has been demonstrated in vitro by Rossi, et al. “In a technology where adequate delivery has been a challenge, the increased potency could be important,” says Jenson. The researchers have been publishing their results with Dicer substrate siRNA since 2005 in journals such as Nature Biotechnology and Nucleic Acid Research.
The process of RNA interference begins when the Dicer enzyme cleaves double-stranded RNA into 21bp oligonucleotides, which are then incorporated into the so-called RNA-induced silencing complex (RISC); RISC then targets messenger RNA sequences determined by the siRNA sequence. Because one end of Dicerna’s 30bp Dicer-substrate siRNAs will be clipped by Dicer and removed to form the active 21mer, various targeting agents can be attached to the non-coding end of the molecule, says Jenson.
Jenson has been busy reaching out certain investors and potential partners since completing an agreement with City of Hope in late September on a license to the IP. He’s been joined by Dicerna chairman and co-founder Douglas Fambrough, PhD, a general partner at Oxford and a former director of, and early investor in, Sirna.
Dicerna's IP hasn’t gone completely unnoticed; in fact, Dicerna isn’t even the first company to license it. Nastech Pharmaceutical Co. gained a more limited license to the technology in late 2006; it holds exclusive rights to the Dicer-substrate technology for five undisclosed targets and broad, nonexclusive rights to siRNAs directed against all mammalian targets (subject to undisclosed limitations).
Fambrough says that Sirna held discussions to gain access to the technology as well, but “for whatever reason those talks never went anywhere. When we sold the company to Merck I was aware of the IP and Jim Jenson and I had been talking about doing something in RNAi for oncology, but we thought, why just go after oncology?”
Dicerna now has an exclusive license for all remaining rights on the Dicer-substrate IP, says Fambrough, and previous licensees won’t affect Dicerna’s plans or the value of the IP to potential acquirers, partners or investors, he maintains.
Nevertheless, it’s still early days. “Only recently have people woken up to this additional doorway into the RNAi space,” says Jenson. In part, he suggests, that’s because Alnylam and Sirna, the companies with access to the Tuschl IP, have done such a good job convincing the world that theirs is the only pathway. Those two firms have certainly been at the forefront of the field, consolidating IP early and almost exclusively garnering the attention of Big Pharma. And some observers feel the patent battles—which may heat up as product candidates inch toward the market—have barely begun.
Alnylam’s early deals gave a small handful of companies, led by Novartis, an early entry into the field. Merck broke new ground in RNAi dealmaking when it acquired Sirna in late 2006 for $1.1 billion. Most recently, Alnylam has upped the ante with a broad strategic alliance with Roche, whereby Roche has paid $331 million for a non-exclusive license to Alnylam’s platform and IP over several therapeutic areas.
Dicerna hasn't specified a therapeutic focus, reflecting perhaps the reality that the firm’s initial targets will likely be dictated by its future pharmaceutical partners as much as by any internal strategy. Those pharma alliances will almost certainly be struck with one eye on an M&A exit.
"Ultimately the technology belongs in a large pharmaceutical company, and we would like to partner early on in ways that do not jeopardize an eventual acquisition and in ways that aren’t overly dilutive,” says Jenson. “There are other approaches out there but few if any that will allow you to compete with Tuschl this way.”
The full text of this article will appear in the November issue of START-UP.
Wednesday, October 31, 2007
Life often imitates art, as the saying goes.
Turns out FDA’s ODAC committee had a point when it announced, in July, that it would wait for overall survival (OS) data from GPC Biotech’s prostate cancer drug satraplatin (Orplatna) before considering review. Topline OS data—released today, sooner than expected—was negative. It wasn’t as if the p value just missed, either: it was 0.8. Median survival in the placebo arm was if anything a little longer than that in the treatment arm.
At the time, there were cries of despair: refusing to consider interim data around progression-free survival marked the FDA’s new ultra-conservative stance, noted some analysts, as we reported here. This was the end of accelerated approval.
Now the story looks rather different. This time it’s only about GPC—and whether it has a future. The overall survival data, one analyst predicted to IN VIVO Blog in July, “will decide the fate of the company, not just satraplatin.” Indeed, the ODAC decision to hang approval on a single end-point, rather than consider interim progression-free survival data as well, turned it into a make or break event for the company.
So is this the end of GPC? It’s not clear yet—we’ll find out more on the conference call scheduled today at 12.30 GMT. GPC’s shares lost over 60% first thing this morning, to add to the hammering they took in the summer. As your blogger blogs, analysts are downgrading the stock to sell on questions around long-term viability. Management's credibility, already shaken by the events in July, will probably be in tatters.
Indeed, given strong interim data, the accelerated approval granted by FDA in April 2007 (hah! what use now) and GPC officers’ general confidence, some analysts before today felt that the chances of good overall survival data were reasonable. For them it was a question of re-adjusting their time-lines for approval and questioning whether GPC could afford to maintain its full clinical program for satraplatin.
Today’s release looks more like a nail in the coffin for satraplatin. When GPC withdrew its NDA following the ODAC decision, it didn’t expect overall survival data to be available until 2008; a spokeswoman told us in July that top line data would take six months to collect. Yet sooner than that, GPC is announcing a “re-evaluation of the development plan”, the negative impact on satraplatin’s EU review led by partner Pharmion, and an almost valedictory 'thank you' to those taking part in the blighted trial.
Even if GPC could afford to continue developing the drug in other indications, would it (or a potential acquiror) want to? The drug's patent life is relatively short--to 2015 with extensions, according to one London-based analyst. As for potential acquisition, the shareholder suit filed against GPC in July--accusing the company of using "improper methods" to measure satraplatin's effectiveness--pretty much guards against that.
So to the lessons (yes, always a lesson or two): partner your drug before Phase III (look, after all, at the value of proof-of-concept stage deals!). Hedge your bets. Don’t get too excited about your wonder-drug’s approvability, even if the need is unmet. Diversify--not so much as to lose the plot, but enough to avoid this sort of thing. And, ok, this time FDA looks justified in having asked for overall survival data as proof that the drug does indeed have some beneficial effect. But that still doesn’t mean the agency’s any better disposed towards cancer drugs developed by small biotechs. In fact, the satraplatin saga is only likely to have made FDA warier still of early approval based on interim analyses.
UPDATE: There wasn't a lot of new information on the conference call. GPC CEO Bernd Seizinger, MD, PhD, noted that while there are upwards of 20 subgroups of patients still to be analyzed, he didn't want to raise anyone's hopes that a subgroup analysis could trump today's bad news in any way. He also flagged up GPC's November 8th third quarter results as a time when the company would be more prepared to discuss its strategies with regards to sataplatin as well as its corporate future.
GPC still considers satraplatin an asset of value--a "Phase II asset," Seizinger said. Finally, he noted, this is "certainly not the end of GPC biotech. We have a strong cash position and an excellent team , and we still have important assets in the company." The market may be disagreeing. The stock is down about 62%, valuing the company dangerously close to its cash position, which was €93.1 million ($134 million) as of the end of June 2007.
Tuesday, October 30, 2007
Its fun to play Monday morning quarterback.
That is essentially what Roger Longman asked me to do at this year's Pharmaceutical Strategic Alliances conference: look at some of the biggest (and a few small but still interesting) deals in the biopharma sector over the past 18 months through the prism of changes taking place in Washington DC.
The big one, obviously, is the new FDA drug safety law. As you've figured out by now, we think this means big changes in what it takes to bring a product to market and to sell it successully.
But there's a lot else going on too: Medicare Part D is having an impact, and the Medicare agency is starting to assert itself. And then there is a growing sense that line-extensions don't fit well with regulators, payors or politicians.
So there is a lot to think about.
If you weren't at PSA, shame on you! But if you want you can still hear our take on some of these big deals. Click here. It's free.
And by all means, let us know what you think. The regulatory landscape is changing rapidly, and we certainly don't have all the answers. What are your perspectives?
Monday, October 29, 2007
In his talk introducing the top-10 most licensable oncology drugs at the Therapeutic Alliances conference last Friday, Ben Bonifant of Campbell Alliance asked an intriguing question. If you’ve got an oncology product in Phase I, should you license it out – or spend the extra money to get phase II data?
Well, it depends (good consultant that he is, Bonifant qualifies all over the place). But basically the analysis, based on data Campbell consultants analyzed from Windhover’s Strategic Transactions Database, ain’t all that complicated. If you’re confident that you’ll get even reasonably good Phase II results, and can sign a middle-of-the road deal, wait to do the deal till you’ve got the data.
Here’s the argument. Take a multi-indication Phase I oncology product. You could sell rights to your candidate today, netting an NPV, Bonifant posits, of about $50 million. Or you could invest an additional $30 million or so in order to get Phase II data.
The decision depends on your answers to two additional questions. First, what’s the chance you’ll get positive Phase II data? Second, will that positive data generate a high-, medium-, or low-value deal?
Congratulations to the Red Sox and their fans, victorious in a 4-0 rout of the Rockies in the WS. Some of us were hoping for a little suspense, but oh well ... other news from the weekend that was, below.
- JP Garnier, one foot out the door at GSK, taking one for the (management) team, sort of. Check out the Times (London).
- The New York Times takes a look at which presidential candidates are drawing donations from the health care industry. Bucking recent trends, Democrats are outpacing Republicans.
- Pharmagossip knows what AZ's David Brennan is wearing this Hallowe'en ...
- Bayer-Schering's Betaseron ... double the dose shows no improvement over single dose and Teva's Copaxone.
- The Wall Street Journal ($$) asks whether Biogen Idec's pipeline is going to deliver the growth that a Big Pharma acquirer would need. Want to change your vote now?
(Photo by Jeff Gross/Getty Images)
Friday, October 26, 2007
We at IN VIVO Blog recognize that it's practically impossible to keep up with the deal flow in biopharma, let alone remember the specifics. (Hey, it's hard for us and we do this for a living.) So we've decided to start posting a weekly column highlighting interesting and potentially important deals that you may have missed as you ponder weightier questions such as: To buy or not to buy Biogen Idec? Look for this every Friday. Aspire to be a part of it. Dare to dream.
- BMS/Pharmacopeia (10/15): BMS is at it again. Pharma's champion externalizer has out-licensed its selective androgen receptor modulator (SARM) program, to New Jersey-based Pharmacopeia. The deal is further proof that BMS believes in monetizing programs that don't fit its therapeutic focus in oncology and immunology. Unlike past deals with AstraZeneca for dapagliflozen and saxagliptin and Pfizer for apixaban, where there was big money on the table, the dollar amount for this deal was zero. Pharmacopeia bartered up to three years of its medicinal chemical expertise applied to one BMS discovery program in exchange for the rights to the SARM--a savvy move by the biotech and perhaps a first (let us know otherwise). BMS retains a right of first negotiation. Here's a link to the Pharmacopeia webcast announcement. Note: we are not calendar challenged--but we liked this deal and since Deals of the Week! didn't exist last week, we figured we'd include it here.
- Lilly/MacroGenics (10/18): Two anti-diabetes antibody deals of note: Lilly continues to solidify its stance in both the diabetes and biologics market with this deal for MacroGenics' late stage anti-CD3 antibody, teplizumab. Though the ultimate deal value could go north of $1 billion, it's back-end loaded; it cost Lilly just $41 million to get exclusive rights to the drug. The Baltimore Sun has the news. Bonus: GSK/Tolerx (10/23): GSK inked this deal with MacroGenics' competitor Tolerx just days later for the biotech's anti-CD3 mAB otelixizumab. For biologics-poor GSK, this deal looks like another toe-dip in the large molecule waters. Last December, the pharma bought next-generation antibody player Domantis and inked an expensive deal with Genmab for rights to its late-stage Humax-CD20 antibody.
- Janssen/Galapagos (10/24): Another back-ended loaded deal--the upfront was just 15 million euros though the deal value could eventually reach one billion euros. This time Janssen Pharmaceutica, a division of J&J, brokered a deal with Belgian-based Galapagos for small-molecule drugs to treat rheumatoid arthritis. Here's the link to Fierce Biotech's coverage.
- Inverness/Alere (10/24): Point-of-care diagnostic player Inverness has acquisition frenzy. On Wednesday the company announced it was buying another company, Alere Medical for $302 million. This move illustrates Inverness' continuiing diversification beyond cardiovascular diagnostics. You see, Alere isn't the typical acquisition fodder of a Dx company. The Nevada-outfit is really a device play with a nifty remote-monitoring system for patients with chronic diseases such as congestive heart failure.
- Wright Medical Group/Metasurg (10/22): Wright is paying $2.5 million upfront plus potential earn-outs based on sales for Metasurg's BIO-ARCH subtalar implant, which is used in surgical treatment of flatfoot deformity. This small bone deal is, well, small, but we flag it up as part of a trend: small bone is an unconsolidated, underserved segment of orthopedics that is beginning to show signs of life, consolidation-wise. Don't be caught flat-footed, readers. (Sorry.)
If you’re into gene therapy, China’s the place to be. While this area remains, in the Western markets, a future promise (albeit one looking likelier to deliver than it ever has, as we reported in START-UP), in China’s it’s happening today. The only two firms with commercial gene therapy products are Chinese; both have had their drugs on the market for several years with, so far, no sinister effects—at least, none we’ve heard about.
Small wonder, then, perhaps, that Genzyme—one of the few larger players to have stuck doggedly with gene therapy where others fled—yesterday announced a tie-up with one of these Chinese pioneers, Sunway Biotech Co., to develop and commercialize Genzyme’s Phase II drug Ad2/HIF-1a, an engineered form of the HIF-1a gene designed to promote the growth of new blood vessels in patients with peripheral arterial disease.
Sunway will design, fund and run Phase I and Phase II trials in China in limb ischemia; the partners will share Phase III costs and eventual commercialization rights. There aren’t any disclosed financials, but it’s got to be good for privately-owned Sunway, which has been selling its own adenoviral-based head and neck cancer therapy H101 for two years. It gets Genzyme’s product manufacturing process (so that it can produce the drug in its Shanghai facility), a latish-stage CV product, and the kudos of a deal with an established Western player.
For Genzyme, the deal isn’t just about tapping the experience of a player who, for whatever reasons—let’s not get into Chinese regulatory standards--has been among the first to sell a gene therapy drug. It’s not just about getting a foot into the one market where Genzyme knows this particular drug has a fair chance of getting past the regulators.
No, this is about getting into China full stop. “Our work with Sunway represents one of many ways we hope to participate in the dynamic Chinese biotech industry and contribute to its growth,” confirms Genzyme EVP Duke Collier.
Now granted, for all the excitement over China, it’s not all good. US-based Introgen claims, for instance, that SiBiono, the other firm with a marketed gene therapy in China, copied its own lead candidate Advexin, which has been crawling towards US submission for the last few years. Gendicine, which uses an adenovirus to deliver the p53 tumor suppressor gene, does indeed look mighty similar to Advexin.
So sure, China’s not so hot on IP enforcement; the Asian dragon gave just a “diplomatic nod” towards patent rules when it the joined the WTO in 2001, according to one executive. And its bribery and corruption record isn’t squeaky clean either (whose is?); the fact that penalty includes the death sentence---a former top regulator was sentenced and executed earlier this year--doesn’t exactly make the picture any less sordid.
But the end market in China, comprising 1.3 billion people (and growing), is simply too big to miss out on—for gene therapy just like any other area of medicine. So is the prospect of a budding Chinese biotech industry. That’s why most Big Pharma have operations there—not just manufacturing or clinical trial centers, but increasingly, R&D. It's also why Genzyme wants in.
And in partnering with Sunway, Genzyme's taking in the early lesson from these forays: getting in with the locals. “If you don't have the right relationships [with locals] it's difficult to do anything," says Lee Babiss, head of pharma research at Roche. Roche claims the crown for establishing the first wholly-owned R&D center in China almost four years ago--an investment that, as well as giving it access to Chinese scientists, has brought Roche an influential 'in' with local lawyers, government officials and ministers in charge of steering the sector’s growth and upholding standards.
Tellingly, Introgen isn’t bothering to litigate against SiBiono (it has got enough on its plate); instead, “we’re in discussions with more mature pharmaceutical marketers in China,” says CEO David Nance. Expect more Chinese players to feature in our dealmaking databases, and not just in gene therapy deals.
Thursday, October 25, 2007
To no one’s surprise, sales of Amgen’s flagship anemia product darbepoetin (Aranesp) dropped sharply in the third quarter, 23% worldwide, and 36% in the US. Given the tough new restrictions put on coverage of Aranesp and J&J’s epoetin brand Procrit in the key Medicare market, a big hit was inevitable.
Still, it is worth looking at the full impact of the Centers for Medicare & Medicaid Services coverage decision on Amgen’s third quarter results. (If you haven’t been following this, you can catch up by clicking here.)
Given the tight coverage policy, it is no surprise that EPO use is way down in the Medicare market directly controlled by CMS.
But the coverage policy is casting a much bigger shadow than that.
First, there is a spillover effect into the private insurance market for chemotherapy patients. Amgen EVP-commercial operations George Morrow reported that use of EPO in chemotherapy induced anemia patients is down 30%-40%--even though no private payors have adopted payment policies that are as restrictive as CMS’.
“Clinics and hospitals are struggling with 2-tier medical practice,” Morrow explained. “They do not want to treat all of their patients to the lowest common denominator—and here I am talking about the NCD with a hemoglobin of 10. On the other hand, they find it ethically discomforting and administratively burdensome, to implement one treatment protocol for Medicare patients in another widely diverging protocol for all other patients.”
Morrow is optimistic that the picture will brighten over time. “We are also seeing a steady increase in the adoption of differential treatment protocols, by largely more sophisticated clinics and hospitals, as oncologists reluctantly adapt themselves to the new reimbursement environment.”
There is another possibility: that private payors will begin to move more in line with CMS’ restrictions. That is the usual pattern: CMS leads and private payors follow.
The spillover from the coverage policy doesn’t stop there. Amgen is also seeing an impact on use of EPO in myelodysplastic syndrome, even though the company successfully persuaded CMS not to put new restrictions on that indication. “Even though reimbursement remains in place, physicians have reduced utilization,” Morrow reported.
It doesn’t stop there. “We are seeing some modest spillover of the ESA reimbursement concerns for colony stimulating factors or CSF. In other words, there is a generalized fear of not getting reimbursed leading to more cautious utilization.” That was a factor in holding back growth of pegfilgrastim (Neulasta), Morrow said. Sales were up 8% for the quarter, but underlying demand was flat.
“We are actively investigating and addressing any clinical or reimbursement issues that are inappropriately impacting Neulasta utilization,” Morrow said.
That impact comes on top of the effect Amgen already acknowledged from a loss of promotional support for the brand while the sales force addressed the concerns about EPO.
Amgen is still hoping it can find a way to force CMS to reconsider its position on EPO, but it acknowledges that to be a long shot. “As physician groups continue their dialogue with CMS, we hope a compromise can be reached that gives doctors sufficient latitude to make the best decisions, consistent with their understanding of the available science and their own clinical experience, while also meeting important CMS objectives,” Amgen CEO Kevin Sharer said.
Asked what kind of “compromise” he envisions, Sharer replied. “Its hard to say. Our financial plan is to manage the company on the assumption that the NCD will stand.”
That seems like a safe assumption. A Reuters interview with CMS Chief Medical Officer Barry Straube suggests that the agency isn’t going to budge any time soon.
J&J sure seems to be moving on. Amgen acknowledged during the call that reimbursement wasn’t the only issue affecting Aranesp this quarter: the product also lost market share against Procrit—a development that would have dominated the discussion of Amgen’s prospects a year ago when Aranesp was relentlessly taking over the market Procrit used to own.
Amgen CFO Bob Bradway explained that the share loss came in Public Health Service hospitals, “where our competitor offers some very steep discounts, discounts that we felt that we weren't going to match.”
Amgen isn’t happy that J&J is recapturing share in the EPO market, but there may be some comfort to the company in being able to talk about those issues. After a year dominated by regulatory and reimbursement issues for its flagship franchise, a year where the company was forced to consider what else it might turn to besides EPO, Amgen surely longs for the days when it only had to worry about the competition.
(Apologies to Bo Diddley and George Thorogood and The Destroyers)
This chart, also from our latest IN VIVO, shows how the "wannabes" stack up to biologics "haves" such as Roche and Lilly. We even have a score-card where we rate the pharmas, but you have to be a subscriber--or buy the article--to see that one.
Wednesday, October 24, 2007
The real story emerging from this year's Transcatheter Cardiovascular Therapeutics (TCT) meeting in Washington, DC, is not the news per se regarding specific clinical trial results or new device technologies. Instead, it is the story behind the story that is making news.
Monday, October 22, 2007
The unlikely pipeline star? The neuromuscular blockade reversal agent sugammadex, a product used post-surgery to counter the effects of neuromuscular blocking agents in anesthesia. The buzz started earlier this year with the publication of an article in Anesthesia & Analgesia suggesting that it would revolutionize anesthesia care. And it continued with the release of data at this week’s American Society of Anesthesiologists meeting. (You can bet no one sleeps through the plenary sessions at that one.) [ed. note: hey-o!]
Credit Suisse’s Catherine Arnold, for one, liked what she saw. “Sugammadex continues to impress,” she wrote in an October 16 note reiterating her “outperform” rating on Schering.
“We continue to feel that this is an exciting product that could revolutionize the practice of anesthesia,” Arnold writes.
“It has clinical advantages: providing faster, more consistent reversal of neuromuscular blockade induced by a variety of agents and no anticholinergic side effects as compared to the current reversal agents. Further, it has a pharmacoeconomic advantage: allowing patients to be transferred out of theSounds like a great opportunity. So how big will it be? Arnold estimates it will reach sales of $700 million in 2015.
operating room or recovery room more quickly post-op… We continue to feel that investors are under-appreciating sugammadex’s potential.”
Huh? All this buzz over a product that won’t reach a billion dollars in revenues eight years from now? Has Wall Street lost its mind?
We don’t think so. Instead, sugammadex is exactly the type of mini-buster Big Pharma is going to have to rely on in the future as the entire industry adjusts to the post-blockbuster world. There haven’t been a whole lot of products bigger than $700 million at peak coming out of Big Pharma in recent years—and the new FDA drug safety law means there will be even fewer. (Why? Start here.)
Given that reality, submarkets that pharma has bypassed for the past decade are starting to look more attractive. That is a key part of sugammadex’ appeal: it will be sold exclusively to hospitals. That has not been a major focus for most of Big Pharma, but Arnold notes that it has a big virtue—it can be served with a relatively small commercial infrastructure. (For good measure, Arnold observes, Schering isn’t the biggest of Big Pharmas either, so $700 million goes farther. She points out that it takes only $16 million in net income to add a penny to SGP’s EPS.)
For years that has been a big reason most Big Pharma’s stayed out of the hospital sector. Hospital payments are essentially capitated by the Medicare Part A program, making it extremely difficult to launch premium priced products. That’s why sugammadex’ pharmacoeconomic data will be so critical. If Schering can show it saves hospitals money, uptake will be simple. But if sugammadex costs too much upfront, or puts hospitals at risk of losing money on routine surgical procedures, no amount of superior clinical data will help it.
For more than a decade, most companies have preferred pricing flexibility over demonstrating pharmacoeconomic advantages. But now they don’t really have a choice, not now that the government and its private plan surrogates are starting to exert more influence over outpatient drugs through Medicare Part D.
It is no longer a question of whether to operate in a government influenced market, but instead a question of which one: the “old” Medicare, administered directly by the feds; or “new” Medicare, run by private intermediaries. There are plenty of reasons to choose one market over the other, and Big Pharma in particular has lots of reasons to prefer the Part D system which at least fragments the market to ensure there are no make-or-break coverage decisions coming out of Washington.
But why choose? Uncle Sam’s money is paying the bills both ways, so the smart play is to dip into both streams.
It would be wrong for us not to mention the Red Sox in this space, the Boston nine having completed their three-game comback victory over the Tribe last night (sorry, Steve). There are a few contributors to this page that despite seeming to be upstanding citizens in most other respects actually cheer for the Sox. Probably some of you dear readers too. So there you have it. Congratulations.
- Cancer rates may be declining in the US, says the American Cancer Society, but as the New York Times reports, rates of certain cancers are increasing. Why?
- The Times laments the loss of Cambridge Antibody Technology, the name anyway, in the wake of AstraZeneca's MedImmune integration.
- Kirin Brewery has settled on the terms of its offer for a stake in Japanese drug company Kyowa Hakko Kogyo. Kirin aims to take a nearly 28% stake in KHK in a deal valued at roughly $2.6 billion.
- Two days left to guess which big biotech will be the next pharma takeout target. Check out our poll in the upper-left hand corner of the blog.
Friday, October 19, 2007
(With apologies to Joseph Heller.)
… We will courtmartial you if you turn our deal down, even though it would raise a lot of questions and be a terrible black eye for Colonel
Cathcart Kindler winced at the words “black eye” and, without any apparent premeditation, hurled his slender onyx-and-ivory cigarette holder Exubera inhaler down viciously on the wooden surface of his desk. “ Jesus Christ Hank McKinnel!” he shouted unexpectedly. “I hate this goddam cigarette holder Exubera inhaler!” The cigarette holder Exubera inhaler bounced off the desk to the wall, ricocheted across the window sill to the floor and came to a stop almost where he was standing. Colonel Cathcart Kindler stared down at it with an irascible scowl. “I wonder if it’s really doing me any good.”
“It’s a feather in your cap with
General Peckem Pfizer’s ego, but a black eye for you with General Scheisskopf the investors,” Colonel Korn informed him with a mischievous look of innocence.
“Well, which one am I supposed to please?”
“How can I please them both? They hate each other. How am I ever going to get a feather in my cap from
General Scheisskopf the investors without getting a black eye from General Peckem Pfizer’s ego?”
March Biogen. That’s the only way to please him Pfizer’s ego. March Biogen. March Biogen.”
Thursday, October 18, 2007
Pfizer CEO Jeff Kindler must have been gritting his teeth as he read out loud the costs of the now-terminated Exubera inhaled insulin product.
Pfizer announced pre-tax charges of $2.8 billion related to the Exubera exit, with approximately $1.1 billion of intangible assets, $661 million of inventory, $454 million of fixed assets and $584 million of other exit costs.
That's a lot of zeros. Exubera, along with the now defunct cholesterylester transfer protein (CETP) agent torcetrapib, were supposed to lead Pfizer into an new age of blockbuster products. Now both programs are in rubble.
There has been a lot of buzz about the titanic failure of Exubera to meet expectations, but seeing the numbers in black and white is, nonetheless, staggering.
Less than two years ago, in January 2006, Pfizer paid Sanofi-Aventis a king's ransom--$1.3 billion--for the full rights to Exubera. Then the company brilliantly navigated the product, which had respiratory safety concerns that stalled its development for years, through an FDA advisory committee and US approval by focusing on a comprehensive risk management plan.
At one point, the drug was projected to be a $2 billion-a-year franchise. In the third quarter, Exubera generated $7 million in revenue. Pfizer took one last shot at jump starting the launch by unveiling a national direct-to-consumer ad campaign earlier this year, but that was throwing good money after bad.
Exubera may have failed for any number of reasons: patients were overly concerned about respiratory side effects; the failure of a primary care sales & marketing effort to make a mark in a specialty pharmaceutical category; or it was simply a bad product for the subset of Type 2 diabetic patients it was trying to serve. And it may have been all of those things together.
In the end though, it looks like Sanofi-Aventis pulled a fast one on Pfizer, Gordon Gecko-style (you have to have seen the movie "Wall Street" to understand this reference), giving up its right to a potential blockbuster only if Pfizer paid a huge premium for the French company's troubles. Someone's laughing all the way to the bank. However, that hit may be a tad easier to take if Pfizer chooses to make a significant run at taking a stake in the French drug maker, as rumor would have it.
For Kindler, this hardly seems like a fair shake for his first year as CEO. Will investors view him as a stoic leader making tough decisions to clean up someone else's mess? They may. However, this could be the last time Kindler gets the benefit of the doubt.
Biosimilars may have won a regulatory pathway in Europe, but they’re having a tough time getting to patients. Last week Spain became the second of Europe’s big five markets, after France, to announce this year that biologic drugs cannot automatically be substituted. Italy is expected to announce a similar decision before year-end.
In many European countries, pharmacists are required—sometimes incented—to dispense a cheaper generic equivalent of whatever brand a doctor has prescribed, if one is available. The rulings in Spain and France mean that this principle won’t hold for biologic drugs—a category for which substitution rules have not, until the advent of biosimilars, been needed at all.
It’s a blow for biosimilar firms, banking on their products’ lower price and perceived equivalence to reference biologicals in order to gain market share.
Doctors will henceforth have to specify which precise brand they want to dispense; if they don’t, “pharmacists will have to check back with the doctor,” according to Thomas Bols, Chair of EuropaBio’s Biosimilar Working Group and Director, Government Affairs, Amgen.
Now granted, for most biologicals we’re talking hospital docs, working in a specialized setting. But the situation still sounds somewhat complex, particularly given biosimilar firms’ apparent victory when Sandoz’s EPO was granted the same international non-proprietary (INN) name as its reference drug, J&J’s Eprex. (Both are epoetin alfa, and you can read more here.)
Same non-proprietary name, same drug, right? Wrong. Bols admits that this particular INN decision from the World Health Organization (in charge of INN naming), came as a surprise to the innovator lobby. But, he adds, any lingering questions over the appropriateness and enforceability of INN rules “only emphasize the need for good rules on automatic substitution.”
For him, a good rule is what’s emerged in France and Spain, as well as in the Netherlands and some Nordic countries: placing the onus on doctors to explicitly prescribe the generic. That means docs need to understand both sides’ arguments. Fine for the innovators—marketing is a big part of what they do. Not so fine for generics firms, for which marketing falls outside of their strategic and financial scope.
Now granted, in countries like Germany, doctors too are incented by budgetary restrictions to prescribe cheap drugs where possible. Similar cost-pressures apply in hospitals. But all doctors also hear innovator lobbyists emphasizing that “approval [of biosimilars] is based on a limited safety package,” as Bols clarified to IN VIVO Blog, and that there are “important therapeutic differences” between biosimilars and innovator drugs. What doctor is going to prescribe a biosimilar for which there’s little or no on-market experience, rather than a branded drug, in particular for chronic conditions?
The European Generics Association, representing biosimilar firms, calls all this scare tactics. According to Suzette Kox, the EGA’s Senior Director of Scientific Affairs, the Spanish decision “won’t impact [doctors’] prescription of biosimilar medicines” but “raises concerns because it is based on perceptions created by certain interested parties, and on a lack of scientific information and knowledge.” She argues, as EGA has all along, that manufacturing changes to any reference drug—a new plant, a new cell line or whatever—introduce variability within innovator products that’s analogous to that between an innovator drug and a biosimilar, yet all batches of innovator drugs like Eprex are assumed to be interchangeable. “The same scientific approach should apply to biosimilar medicines,” she asserts, “as there is no fundamental difference between biosimilar and their respective reference products.”
Some docs will believe that; some, too, might read the EMEA guidelines which state that trials of biosimilar medicines are required to demonstrate that there are “no meaningful differences between the biosimilar and the biological reference medicine in terms of safety or efficacy” before approval is granted.
The fact is that no-one really knows just how similar biosimilars are to reference drugs, and they won’t know until such products have had several years’ worth of market exposure. That’s why the question of how often and how widely these drugs should be prescribed is being passed like a hot potato: EMEA left the substitution decision up to member states, and governments have now passed it on to doctors.
That’s not, fundamentally, a bad situation: why shouldn’t prescribers decide? Brand-specific prescribing also makes pharmacovigilance easier; indeed, this is a key argument that innovators put forward in favor of the approach.
Once such pharmacovigilance data is available, splattered all over the web and in cost-conscious health ministries’ hands, it’s possible—granted no nasty surprises--that some of these rulings on non-substitution may be reversed. (And maybe by then the US will pass biosimilars legislation, too.)
In the meantime, though, biosimilars will be treated with caution--short of any radical new government cost-cutting measures that speak louder to docs’ pockets than clinical scare stories do to their scientific judgment.
Novartis posted its third quarter results this morning and missed its profit guidance. Genericization, delays to Galvus, and the withdrawal of Zelnorm all contributed to a 12% decline in earnings. And so out comes the axe. Oddly enough, the press release was titled "Novartis delivers record earnings in first nine months of 2007 thanks to strong operational performance and divestment gains." Is it time to revive IN VIVO Blog's 'press release of the week' feature?
This unit will unify and expand the expertise within Novartis by bringing together the key elements necessary for fast and high-quality R&D activities and to help attract top talent. Biologics comprise 25% of the pre-clinical research pipeline at Novartis and are increasingly a priority in R&D activities.
Nevertheless, can the decision be seen in the broader context of the general shrinkage of Big Pharma sales forces, thanks to a variety of factors including but not limited to the rise of biologics and a shift toward specialist medicines? Which brings us back to the pharma/consumer reshuffle; both execs' backgrounds are more grounded in consumer marketing than pharmaceuticals. To say the least appointing Jimenez to the pharma post goes against the grain of the specialist marketing trend.
Wednesday, October 17, 2007
Last week, IN VIVO Blog broke the news that Biogen Idec had hired bankers to explore a sale.
Now, we know that companies, like people, don’t always act in their economic best interests. And there are plenty of revenue-desperate Big Pharmas (much speculation surrounds Pfizer, as the Wall Street Journal notes here and here) who might let desperation get the better of common sense. One banker peripherally involved in the transaction noted that there was “so much panic [among Big Pharma] about generating revenues they’ll rationalize as much as they need to about cost-cutting to justify the price. If I was at Biogen, I’d be out looking for a job right now.”
But let’s be clear: buying Biogen at this price doesn’t make sense. First, by contract Genentech/Roche will soon be upping their share of Rituxan revenues (from 60% US and greater ex-US to 70% US). And then there’s Elan’s change-in-control option on jointly marketed Tysabri – which could soon be providing a quarter of Biogen’s revenues (or more: it’s likely that Tysabri sales are already beginning to cannibalize sales from Biogen’s other MS drug, Avonex).
It’s possible, perhaps, that Elan and Biogen have reached some sort of understanding over Tysabri. But unless that understanding is worth a ton of money to Elan (which an acquirer would end up paying for), we think it would be hugely stupid for Elan to leave Tysabri in any Biogen-acquiror’s hands without extracting a huge fee (the huge fee they didn’t get when, in 2000, they signed the original deal with Biogen) and probably a far better ex-US royalty rate (we think they now get about 13%).
And Elan would have no trouble – zero – raising the money to buy out Tysabri: investors (who could smell high-profit re-sale to any number of large companies) would jam Elan’s offices with their checkbooks. Imagine what product-poor Novartis would pay for a drug to spearhead its efforts in developing an MS portfolio? “For Elan, this is the best thing since sliced bread,” says a banker. In any event, Elan’s hired Lehman Brothers to advise on the issue – and we’re pretty sure Lehman agrees with us.
So are there non-crazy reasons to buy Biogen at something north of $90/share? If you were intent on stretching a point, you could argue that senior management could use the necessity of making such a big bet pay off to bomb a primary-care mindset into the new world of specialty-care product development and marketing. And a small-molecule Big Pharma could suddenly acquire the rare soup-to-nuts biologics capabilities required to make a go of large molecules. For an in-depth discussion, see this October IN VIVO story.
But there are certainly more sensible compromises an acquirer should make if indeed biologics is the primary goal. For a lot less money, an acquirer could buy PDL, Genmab, MicroMet, Seattle Genetics, Human Genome Sciences or Xoma, each of which would bring some of the requisite capabilities. Certainly there’s plenty of hair on each of these companies—none of them have ever marketed a biological, so they lack proven development and regulatory expertise. None of them are free from management challenges. And they don’t all have the manufacturing capacity some buyers might want. But each of them has far more freedom than virtually any Big Pharma to operate within the IP constraints of the antibody world; they all have at least some of the expertise needed…and the rest can probably be acquired piecemeal.
But we don’t think a biologics business is the goal. The goal is revenues. And what Icahn hopes is that growth-starved, cash-rich Pharmas will be willing to pay an exorbitant exchange rate to trade balance sheet dollars for sales.
Incidentally, while Genzyme stock is up about 20% thanks to the Icahn put-them-in-play treatment, we’re also leery of a sale. To our eyes, Biogen CEO Jim Mullen looks pretty eager to cash out. Our bet is that Henri Termeer, Genzyme’s boss, probably wants to stay right where he is – the grand old man of biotech – and that he’d put up a significant fight to stay independent.
UPDATE: Be sure to vote in our highly unscientific poll on the top-left of the IN VIVO Blog. Who do you think Pfizer and its ilk will take out next?
UPDATE II: Poll is closed. Big winner? Biogen Idec, with more than 50% of the vote!
Amgen Inc.’s uphill climb to reverse restrictive coverage policies for darbepoetin (Aranesp) just got a little steeper.
The Centers for Medicare & Medicaid Services’ position that it will not pay for use of Aranesp or Johnson & Johnson’s competing EPO brand epoetin (Procrit) in patients with hemoglobin levels above 10 g/dL “is generally consistent with the available data and the published scientific literature.” So says the Food & Drug Administration in a letter sent to two prominent House Democrats: Oversight and Government Reform Committee Chairman Henry Waxman (D-Calif.) and Ways & Means/Health Subcommittee Chairman Pete Stark (D-Calif.).
The letter, signed by acting Assistant Commissioner for Legislation Stephen Mason, gives CMS a vote of support the agency desperately wanted. It looks like CMS is making its position stick—and that is a development that should matter to companies across the industry, not just Amgen and J&J. (Why? We have written extensively about that in The RPM Report—including this article just going to press. Not a subscriber? Click here to register for a free trial and check out our coverage.)
FDA’s letter ends any lingering hopes for a quick reversal of the coverage policy, despite an all-out campaign by Amgen and J&J to enlist support in Congress. Amgen seemed to have gained a lot of traction on Capitol Hill, especially in the Senate, where a non-binding resolution urging CMS to reconsider the policy passed at the start of September, and where many Hill watchers expected a binding resolution to be included in a Medicare bill this year.
But one of the critical arguments underpinning the Senate legislation has been the contention that CMS’ policy is consistent with the FDA approved directions for use for EPO. As currently written, FDA’s label says EPO should be used to maintain hemoglobin levels at the lowest level sufficient to avoid the need for transfusions, and not be used once hemoglobin rises above 12 g/dL. Amgen, J&J, and a whole bunch of oncologists think that means CMS’ policy—refusing to pay for use above 10—is inconsistent with the labeling.
CMS has stuck by its position despite the political pressure. But no one knew for sure what FDA thought or what it would say when it finalizes new labeling for the drugs to reflect advice from two advisory committees convened in May and September. (Here is our recap of the situation, including a nifty picture of Commissioner von Eschenbach holding the PDR.)
So Waxman and Stark asked. FDA still hasn’t finalized the labeling, but it did answer the critical question. “The current labeling advises that the hemoglobin not exceed 12 g/dL,” Mason wrote. “FDA considers this to be an upper safety limit for ESA dosing, not a target for therapy. FDA is aware that there has been some confusion about the dosing recommendations in the current approved labeling and will work to clarify that confusion as we complete labeling changes that we are currently discussing with Amgen.” (Amgen is the license holder for both Aranesp and Procrit, so J&J is not directly involved in the labeling discussions.)
“Transfusions are not normally given to patients whose hemoglobin is 10 g/dL or higher,” FDA said. So I guess we know what the new labeling will say--not that it matters anymore, since FDA's letter of support is far more important to the future of the anemia therapies than anything the labeling ultimately says.
Oh, and FDA didn’t stop there. “There is no evidence that ESAs result in improved survival, tumor control, health-related quality of life at any hemoglobin level in cancer patients undergoing chemotherapy,” the agency wrote. “ESAs were approved based on their effectiveness in reducing the need for red blood cell transfusions.”
Don’t expect Amgen to take that answer lying down. But the company has an even tougher road ahead if it hopes to change CMS' mind.
Tuesday, October 16, 2007
Do you want to know how big the drug pricing issue will be for the rest of this year and into 2008?
Just watch the headlines and level of outrage over the next few days in twelve congressional districts following yesterday's release of Chairman Henry Waxman’s House Oversight and Government Reform Committee report on Part D prices.
Waxman rounded up a dozen representatives to sign onto the report, “Private Medicare Drug Plans: High Expenses and Low Rebates Increase the Costs of Medicare Drug Coverage” (see table). The 12 Democrats cover a geographical region from Maryland to Minnesota and Iowa, Tennessee to Vermont.
If the report can break through and dominate local news in those reasons, expect Waxman to move forward with an effort to bring the drug pricing and Part D programs back into the political spotlight, with a hearing or further request for information from Part D plans. Waxman’s oversight committee staff extracted the pricing information for the October 15 study from private plans by threatening to subpoena the information last spring. A hearing on the report was scheduled for Thursday, October 11 but was postponed.
Dennis Kucinich, one of the Part D report co-sponsors and a politician with national recognition as one of the pack of presidential candidates chasing Senators Clinton and Obama and former Senator Edwards, headlined the release of the report: “Private Medicare Drug Insurers Are Driving Costs Through The Roof.”
The biggest political vulnerabilities for the Part D plans are charges that the administrative cost of the private system is exceeding a government-administered program and that the plans are not offering seniors savings on drug costs during the coverage gap (donut hole).
Using private data and bidding information provided by 12 large Part D companies (representing 318 drug and Medicare Advantage plans), Waxman calculated that each Medicare beneficiary pays $180 a year to cover overhead and profits to administer the program: $107 for administration; $30 for sales and marketing; $43 for profits. Spread over the entire Part D beneficiary population of 24.1 million, that creates an administrative cost estimate of $4.3 billion.
The donut hole pricing may be especially timely as a political issue as the fall season marks the point at which many beneficiaries move out of the federal subsidized drug costs and into the 100% patient-pay coverage gap. The report notes that the Medicare Modernization Act called for beneficiaries to get the plans discounted prices for drugs in the coverage gap.
“Despite the requirements of the law,” the Waxman report charges, eleven of the 12 insurers which provided information to Waxman “will not pass the drug rebates they receive in 2007 through to beneficiaries in the form of lower prices at the pharmacy counter.”
Waxman estimates that the rebates on donut hole out-of-pocket expenditures by beneficiaries will contribute $1 billion in profits to the plans. The report notes that plans say that the rebate dollars are used to reduce premiums, but the report notes that several plans “conceded” that they retain a portion of rebate payments as profits.The full report can be found here.
Monday, October 15, 2007
How do you crack down on compounding labs without adversely affecting your key customers? That is the tricky question Genentech is grappling with as it tries to shut off the primary source of supply for bevacizumab (Avastin), for ophthalmologic use against neovascular macular degeneration.
An October 11 letter from Genentech to “retinal community” members makes the compounding pharmacies the clear target. “As of November 30, 2007, Genentech will no longer allow compounding pharmacies to purchase this product directly from wholesale distributors,” the company declared.
In response to questions about potential limitations on supply to hospital pharmacies, the company emphasizes that is not taking any action to limit that source of supply. A Genentech spokesperson says there will be no allocations to hospital pharmacies to try to restrict spillage from the use of VEGF in oncology to the ophthalmic markets.
If ophthalmologists want to get Avastin from hospital pharmacies, that route will remain open, a company spokesperson explains.
That makes the October 11 announcement appear to be a surgical strike by Genentech against one class of trade – a class that the company argues has raised quality control issues. Genentech points out that it has the Food & Drug Administration on its side in questioning use of compounded Avastin: a December 4, 2006 warning letter from the agency to the New England Compounding Center; and FDA inspection observations at Genentech which note continued off-label ocular use of Avastin.
But is Genentech really restricting this fight to compounders? By cutting off the supply of the inexpensive ($17 - $50 per shot) Avastin, the company will be moving more of the ophthalmologists to the $1,950 per moth (ranibizumab) Lucentis.
Genentech is shifting a large inventory risk to its customers: the wholesalers and ophthalmologists. The firm says it is not changing payment terms from its current 85-day dating for the product. It could have extended the payment terms to soften the blow of forcing more doctors to the higher-priced version of anti-VEGF treatment. The higher priced product also puts the eye doctors in the uncomfortable position of trying to collect average co-pays in the $400 per month range.
The tough approach to its customers is exacerbated by the context of the extended argument that the company has been having with segments of the ophthalmologic community over the potential for Avastin and the effort from the specialty community to support a comparative trial of Avastin and Lucentis. Genentech has helped to make that trial difficult for the eye doctors and the government to undertake. In the fight, the company has created bad feelings among a number of opinion leaders in the small customer class of ophthalmologists.
The move against compounders also shifts liability risks as well as carrying costs. One close observer of the field says Genentech is making this move to isolate the company from liability and make ophthalmologists fully liable for any adverse events that could arise from using Avastin in the eye.
The observer notes that there is an ongoing study of Medicare macular degeneration claims at Duke (the AWARE study under Scott Cousins) to try to pick up the frequency of untoward events from excessive anti-VEGF from injection in the eye. The study uses date from the Chronic Condition Warehouse database, managed by a Medicare contractor, the Iowa Foundation for Medical Care (IFMC), a Medicare contractor. Genentech claims that Lucentis has been designed as an antibody fragment to bind more specifically in the eye and avoid appearing systematically.
If Genentech can shift Avastin ophthalmic sales to Lucentis, the investment community will be impressed, but the cost might be forcing more financial and liability risk on its customer base.
But what else happened this weekend?
- A team of scientists at Stanford University and elsewhere have published preliminary bu promising results of a new Alzheimer's diagnostic. The New York Times reports on the Nature Medicine article. Satoris is the company that aims to commercialize the test.
- News out of ECTRIMS in Prague: Bayer and Genzyme's good-news-bad-news Phase II results for Campath in multiple sclerosis. A Phase III is in progress.
- Reformulation specialist Orexo is buying Swedish R&D co Biolipox for SEK 856 million ($133 million). "The acquisition will create an innovative specialty pharma company [there's that term again!] with a broad product pipeline, global partnerships with major financial potential, and established sales channels" says a statement.
- Second prize, two weeks in Philadelphia! Glaxo considers CEO-also-rans for its board, says the Financial Times.
- The FT also interviews Sanofi-Aventis CEO Gerard Le Fur. What do we learn? Well lets just say there's a lot of color. For starters, Le Fur doesn't smoke marijuana. He prefers the Continental two-kiss to the Anglo one-smooch. And he's a rugby guy, so he probably had a very bad weekend!
Thursday, October 11, 2007
At VC meetings like Atlas’s St. Tropez shindig (about which you can read more here and here), the heroes are the guys who have most recently sold their companies for big bucks. In St. Tropez, that guy was John Mendlein, of Adnexus.
Scientist/Lawyer Mendlein had followed the now well-worn path of filing for an IPO while simultaneously pursuing the opportunity that ultimately led him to embrace Bristol-Myers Squibb’s $415 million-plus marriage proposal.
No real difficulty to that decision—an IPO at maybe $200-250 million pre-money; an acquisition for twice that amount.
We’re told there was plenty of appetite for the IPO—Mendlein had done what every biotech CEO should do, but doesn’t, in spending plenty of time telling the Adnexus story to the usual crew of IPO buyers (for more, see here and, more in-depthly, here), giving them the reverse valuation argument they like (here’s terminal value X and why you, Mr. Investor, should be willing to pay NPV value of Y at our IPO).
But since there was such interest in the IPO, shouldn’t Mendlein’s choice between going public and selling out have been a little bit more difficult: given the possibility of that kind of purchase price, shouldn’t investors competing for those shares – not just with each other, but with Pharma -- have been willing to pay a higher price at the IPO?
At the Atlas meeting, your blogger showed a slide (available in this presentation) indicating the gap between how IPO buyers value private companies and how Big Pharma does, thus defining the arbitrage opportunity for investors. But according to an investor panel at the meeting, there is a fundamental-as-gravity law that dictates the minimum size of that gap, underpinned by at least four basic facts.
First, Big Pharma has a much lower cost of capital than any investment fund—practically a zero cost of capital given their cash flow and virtually unleveraged balance sheet, noted one investor. Second, any biotech will need its investors to pony up additional cash to get the job done—which means, uggh, dilution. Third, drug companies can recoup cost synergies because they can fire redundant workers; investors can’t because, theoretically, the only workers in the company are those necessary to get the job done. And finally, drug companies can sign CDAs with biotechs they’re interested in acquiring, collecting a ton of crucial investment information unavailable to fund managers.
We can’t find much wrong with the first three reasons, though we’d contend that pharma’s cost of capital is rising as it sends more of its cash back to investors in the form of share repurchases and dividends. But yes, it’s still lots lower.
But the biggest issue is the information asymmetry between a strategic buyer and a financial one. And that, we’d contend, is often less significant than it appears. Certain acquisitions are simply predictable—like Adnexus’s--based on the obvious needs of the buyers (very little large-molecule discovery) and the advantages of the seller (large-molecule discovery; the ability to move into desirable IP space with improved fast-follower products).
We won’t speculate here on who we think might be equally likely purchases…
…OK, yes we will. Maybe Ablynx, which just filed for an IPO on Eurolist—one of the usual messages signaling a for-sale sign. And its deal with Boehringer Ingelheim, which has plenty of bioprocessing but precious little discovery certainly offers an idea of who might be in on the auction (GlaxoSmithKline also has a stake in the company, via its VC arm SR One, and might want to pin its biologics hopes on more than simply the Domantis platform). And then on the public side, ImClone, which has a couple of underutilized manufacturing plants, a pipeline beyond Erbitux, for which natural acquirer Bristol is paying 39% royalties. The fact that Jeremy Levin just jumped from his senior biz dev job at Novartis to an even more senior and more-than-biz-dev job at Bristol indicates at least to us that Bristol, already one of the more innovative strategic thinkers in the industry, might be thinking more aggressively about its large-molecule options.
Granted we could easily be wrong on both of these – but the logic is reasonable and more importantly based on completely public information.
And similarly we’re willing to stand out on a limb and say what we think won’t happen – again based on public info. We stand in as much awe of Carl Icahn’s money-making ability as anyone, but we just don’t see how Biogen Idec—in which he took a stake earlier this year, sending the stock price spiraling upwards—can be affordably acquired at anything like the price it’s trading at. We’ve heard the rumor that it’s engaged Goldman Sachs to investigate “strategic alternatives,” but since any acquirer would have to share Rituxan with Genentech and since Elan has a change-in-control right to buy Tysabri, it’s not likely a drug company looking for biologics would long consider Biogen, particularly at a likely takeover price of $30 billion.
So…yes, there should be a difference between IPO valuations and average acquisition prices of private biotechs (or more generally, between what investors might see as the intrinsic value of biotech shares and their strategic value to buyers). But the difference has been shrinking: IPO pre-money market caps are up this year because investors are finally understanding the arbitrage opportunity. That’s good news for biotechs—because as IPO valuations increase, M&A prices – the competition for IPOs – creep up, too, giving more headroom for IPO prices, which pushes up M&A prices….
Vive la difference!