Friday, April 11, 2008

Deals of the Week: Billions!

Though we were treated to a few interesting deals, some of the week's news was kind of grim. Particularly so with the latest development in the ongoing inhaled insulin saga. Nektar and Pfizer said this week that there was an increased number of lung cancer cases in the Exubera arms of its clinical trials compared to placebo. The figures were small--6 patients on Exubera vs 1 placebo--but the news was enough to rattle investors in the remaining inhaled insulin player out there, Mannkind.

Meanwhile, GSK was rapped on the knuckles by FDA over some faulty Avandia record keeping. And we learned why Big Pharma management is hanging onto strategies left over from Nirvana's heyday.

At least for the first time in a while, the big industry news for the week involved some creative M&A, with Novartis and Takeda pulling the trigger on multi-billion dollar deals, and we're here to add our $0.02. Of course those of you who are all hopped up on cognition enhancers are excused from today's lesson--go figure out what's reflected in Dick Cheney's sunglasses; the rest of us slow witted folks will carry on to ...

Takeda/Millennium: $8.8 billion is a serious chunk of change for Takeda to pay for the one-time genomics pioneer and current Velcade-driven biotech, as we pointed out yesterday. But the $25/share offer, at lofty premium to Millennium's recent share price reflects the ongoing demand for new products by Big and mid-sized pharma in general and Takeda's drive to be a world-class oncology play in particular. We leave it to you, dear reader, to click here to read yesterday's more extensive summary (or, if you're reading this via our free email subscription, scroll down).

Novartis/Alcon/Nestle: The biggest deal of the year so far belongs to Novartis and Nestle. Unlike last year's big-bucks transactions (AstraZeneca's acquisition of MedImmune and Schering-Plough's acquisition of Organon) this deal isn’t about biologics or specialty medicine; nor, indeed, is it about pharma, as traditionally defined. It’s not an acquisition, either (yet). The $11 billion (half of which will come from cash, half from short-term debt) buys Novartis a non-controlling share in Alcon, no more. Or, should we say, no more for now: in an 18-month window a couple years down the road Novartis will have the option to buy (and Nestle will have the option to put) another 52% stake in the ophthalmology play at a predetermined price of $28 billion. The deal presents a very different solution to the industry’s growth issues then yesterday’s consolidation schemes. It’s about increasing exposure to consumer health care and private-pay markets in a high-growth, specialist area. Alcon, whose surgical and consumer health businesses make up over half of its $5.6 billion in annual revenues, reduces Novartis’ overall exposure to Medicare and payor-driven price pressure. Alcon represents a very new kind of pharma deal: with pharma re-defined to include consumer care and surgery as well as branded drugs; and, for the first few years at least, with the buyer remaining an arm’s length investor. But for Novartis’ own investors, there remains another question: if Novartis can’t – at least in the describable medium term – define how the two companies are going to add strategic value to each other, isn’t it in effect accumulating an investment portfolio that investors themselves might prefer to manage? (Excerpted from Melanie Senior's forthcoming IN VIVO article.)

Paion/Cenes: Yet another example of the woes that have befallen UK biotech, Germany's Paion AG has taken out the pain-focused Cenes Pharmaceuticals for a mere ₤10.9 million--incredibly a 32% premium to the firm's value at market close the day before the deal. Cenes is one of a handful of beleaguered UK biotechs that are either up for sale or in the process of getting dismantled and sold for parts. The company's lead project, M6G for post-operative pain, is in Phase III; a second project, CNS5161 for neuropathic and cancer-related pain, is in Phase II. Paion's recent past hasn't been trouble free--it's lead compound desmoteplase for stroke hit a snag in Phase III and US partner Forest abandoned ship last year--and analysts may be asking themselves what the addition of a few tough-to-license-been-around-the-block compounds will do for the German group's prospects, despite the low price. (Fun M6G Fact: the compound was once the subject of a Cenes/Elan 80%/20% JV, the structurally-creative and ultimately dismantled off-balance-sheet entities known inside the Irish drugmaker as "Green Rabbits.")

PDL BioPharma: Finally, chalk something up to activist shareholders after all. PDL BioPharma yesterday declared a $500 million special cash dividend--$4.25 per share--and said it would spin out its biotech R&D operations from the royalty stream from its antibody humanization IP. We noted the company's pyrrhic victory over vocal investors calling for the company's sale just last month when PDL took itself off the market and restructured--though it seems those investors that stuck around are seeing some cash for their efforts in the end. PDL says the newco will be capitalized with about $375 million, enough to run for roughly three years given existing cash burn. The antibody royalties--expected to be $240 to $260 million this year--may be monetized if not distributed to shareholders on an ongoing basis.

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