Friday, September 19, 2008

DotW: Bail Out

In a tumultous week that began with the bankruptcy of Lehman Brothers and the sale of Merrill Lynch, we end with the possible acquisition of yet another storied bank--Morgan Stanley--and the federal bail-out of insurance giant AIG. Investors are still scrambling to make sense of the news, but it should be clear that no entity--not even the supposedly safe port in the storm that we call pharma--is too big to fail.

Our industry weathered its own stormy seas this week. Schering-Plough, Memory Pharma, and Merck's Banyu site announced job cuts, a not too surprising defensive move given the difficulties all three companies have faced in recent months. Meanwhile, investors continue to bail on Ranbaxy after the U.S. banned dozens of its drugs, a move that could jeopardize revenues in one of its major markets and roil its impending acquisition by Daiichi-Sankyo. (The Japanese firm remains committed to the deal according to this report.) And Neose looks to be giving up the ghost after years struggling to find a niche. This week the company announced the sale of essentially all of its assets to partners Novo Nordisk and BioGeneriX in all-cash transactions worth roughly $43 million.

It's also just about time for ImClone's mysterious and apparently generous buyer (some would say overly so) to reveal itself. The question is: will this suitor still be as eager to spend on the company given the credit crunch and turbulent market? Or will it prove true that Icahn bailed on the one solid offer he was likely to get for his company? (News this week from London suggests that spurned BMS may be rethinking its offer.)

There were some silver linings amidst the dark clouds, however. Amgen announced positive news this week about its fully human monoclonal antibody denosumab at the American Society of Bone Mineral Research (held inexplicably in Montreal). In a trial of nearly 8000 post-menopausal women, twice yearly treatment with the drug reduced the risk of new vertebral fractures by 68% relative to those given the placebo. J&J also released positive news about its Phase III antibody for psoriasis, which could challenge Wyeth/Amgen's top-selling Enbrel. And ex-MedImmune CEO and wunderkind David Mott is sitting pretty in new digs at NEA's offices, where he'll look for specialty pharma and biotech outfits in which to invest.

In need of some comfort food? The intrepid IN VIVO Blog team is here to bail you out with a run-down of the week's news. Yes, it's time for another edition of....

Bayer/Direvo: Bayer's €210 million cash acquisition of German biotech Direvo is the latest in a long line of takeouts of biologics platforms--which as we point out here are much more likely to consistently provide VC backers with solid exits. Direvo, a protein engineering company that has for the past couple years been focused on modifying proteases and antibodies for therapeutic and industrial applications, had raised about €30 million in venture capital since 2000. Bayer is snapping up the therapeutics side of the business, while existing and new backers are spinning out the industrial applications of the platform into a newco with €8 million in Series A funding. Bayer's bounty includes Direvo's two early stage projects (hyperglycosylated Factor VIII and Factor IX for hemophilia A and B respectively) as well as inherited protease deals with Pfizer and MedImmune. The German conglomerate will maintain Direvo's Cologne site which will be integrated into Bayer-Schering's global drug discovery unit.

BTG/Protherics: When's a $400 million takeover not a $400 million takeover? When the currency isn't cash. BTG, a surprise suitor for compatriot Protherics, offered about ₤218 million ($397mm, a solid 45% premium to an already rumor-inflated share price) in stock for the biotech company, though trading after the announcement shaved more than 15% from BTG's value yesterday. (It has rebounded a smidgen today.) Ownership will be split roughly 58%/42% BTG/Protherics--see our Pink Sheet Daily coverage for the math. Protherics told the market earlier this summer that it was entertaining offers, and its partner AstraZeneca--the two companies are co-developing Cytofab, a Phase II polyclonal antibody to treat sepsis--was understandably analysts' favorite to pony up some cash. Not that we can't see BTG's logic. The IP licensor has been trying since at least 2002 to morph into a later-stage development company on the back of its Varisolve varicose vein treatment, which has struggled to reach the marketplace. For now, BTG rakes in significant revenues from others' products, including Campath and BeneFIX. Adding Protherics' marketed products to the mix jumpstarts that effort.(It will re-acquire US marketing rights to its snake venom antidote and digitoxin overdose antidote in 2010.) And bulking up should result in cost savings (including reducing the two firms combined R&D spend and operating costs to the tune of about ₤20mm total per year), better liquidity for investors (BTG predicts the combined entity could find itself in the FTSE 250 index) and a strong cash pile (just under ₤95mm) that can be used to establish a US commercial presence and add new products. The combination creates an unlikely UK biotech "champion" for a nation that prides itself in pulling for the underdog.

Valeant/Coria: Just a few weeks ago, Valeant licensed its first-in-class Phase III epilepsy drug retigabine to GSK in a co-commercialization deal worth $125 million up-front and more than $500 million in potential milestones. Now Valeant is shoring up its dermatology pipeline with a deal of its own. On Wednesday the company announced it was purchasing Coria Laboratories, a division of the privately held specialty pharma DFB Pharmaceuticals, for $95 million. The deal gives Valeant a number of already marketed products, including several acne medications, the CeraVe skin care line, and a cream for hand dermatitis called Tetrix that is expected to launch later this year. H. Paul Dorman, DFB's CEO, called the merger "an exciting milestone in the evolution of Coria". We wouldn't go that far, but we do agree that the combination of cash-rish Valeant with product-rich Coria results in a far stronger dermatological specialty pharma.

Biovail/Prestwick/Ovation: This transaction--or more accurately, series of transactions--wins IN VIVO Blog's award for deal of the week masquerading as a baseball trade (we have many awards). On Wednesday, the Canadian pharma Biovail acquired privately held Prestwick Pharmaceuticals for, nominally, $100 million (but hold on -- the shareholders got more, but it's complicated). The deal gives Biovail rights to Prestwick's Xenazine, which recently became the first drug approved in the US for Huntington's Disease. Biovail won't get the whole caboodle for such a small sum: Deerfield, Illionois-based Ovation Pharmaceuticals purchased US rights to the drug for an additional $50 million in a separate transaction -- with that cash getting distributed to Prestwick's shareholders, not to Biovail. Biovail, which lacks a US sales force, had no desire to market the drug in the states at this time. But it will market Xenazine in Canada, where it has been approved for at least a decade. In addition, the deal gives Biovail the option to co-promote the dopamine depleter in the US in the future, as well as the right to jointly develop Xenazine and follow-on products in other indications. Earlier this year, Biovail undertook a strategic review of its options with the help of Morgan Stanley. The purchase of Prestwick seems to mark a turning point for Biovail away from the drug delivery and reformulation technology it has focused on for the past two decades to a more product development centered approach. For 5-year-old Prestwick, meanwhile, the deals mean that its backers, which include Sofinnova, Atlas Venture, and Vivo Ventures, got their money out, with a small profit. The returns weren't exactly those VCs want to see ($110 million in, over three rounds; $150 million out in the two transactions), but it's better than the current average. As we noted in this recent START-UP feature, returns from M&A exits are trending downward, and more often than not, acquisitions result in limited exits or write-offs for their private investors.

Tethys Bioscience/Lipomics: The closely held Tethys Bioscience, chose the June ADA meeting for its big reveal, announcing the launch of its PreDx diabetes risk test, which calculates via a complicated algorithm a person's risk of developing diabetes based on a series of protein biomarkers. Unlike many new diagnostic companies, which have focused on cancer and other specialty markets, Tethys is determined to play in the primary care space and has plans to develop tests that predict a person's likelihood of developing a range of chronic diseases, from osteoporosis to a major cardiac event. It's captain, Mickey Urdea, is no stranger to the vagaries of the diagnostic business thanks to his years at Chiron, where he developed the hugely successful viral load testing franchise. But to be profitable, Tethys faces several hurdles. First, it must convince doctors and payers of the utility of the merits of its PreDx diagnostic, which at $775 a pop is far more expensive than the already widely used fasting glucose test. In addition, the firm, which has already raised more than $50 million from its venture backers, will need to develop and launch new tests in quick succession. The company took its first steps toward that end this week, announcing a tie-up with privately held Lipomics Technologies, another privately-held, Northern California-based diagnostic player. "We believe that the best solutions for predicting and thereby preventing a range of chronic conditions will come from the thoughtful integration of multiple types of biomarkers," said Urdea in a press release announcing the deal. Lipomics co-founder and CSO Steve Watkins will remain with his team as CTO of the newly bulked up Tethys.

Astellas/Maxygen: Quite a week for protein engineering companies. This week's late breaker is courtesy of Astellas Pharma, which said this morning it had bought worldwide rights to MAXY-4, Maxygen's preclinical autoimmune and transplant rejection program. Maxygen will receive $10 million up-front and the companies will co-develop the next generation CTLA4-Ig protein for rheumatoid arthritis and other autoimmune diseases while Astellas will pursue transplant rejection on its own. Maxygen has opt-in rights to co-promote in North America any autoimmune products and will receive tiered, double-digit royalties on non-co-promoted products. Astellas will chip in an additional $10 million in preclinical development costs after which the companies will split the tab.

Merck/SurModics: Merck & Co. has decided to end its R&D/licensing deal with SurModics, triggering a $9 million payment to the Minnesota drug and device coatings company and a 23% drop in the firm's shares. The companies were careful to point out that there were no safety concerns associated with SurModics' I-vation drug delivery platform or the specific back-of-the-eye program under development. Merck paid $20 million up-front to access I-vation just last year.

(Photo courtesty of flickr user amirjina via a creative commons license.)

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