Friday, October 24, 2008

DotW: Credit Crunch

After weeks of extraordinary effort by the world’s governments and central banks, it looked on Monday as if the glacial flow of credit had finally begun to thaw. But a rash of negative earnings reports--many from our own industry--sent the Dow crashing more than 500 points on Wednesday and it's been a wild ride ever since.

It's enough to drive a person to drugs. Too bad a growing percentage of people appear worried that they can't afford the "better living through chemistry" habit. According to a recent report by IMS Health, the number of prescriptions dispensed in the US through August of this year was lower than in the first eight months of last year.

The news is probably cold-comfort to folks at Merck and Schering Plough, where unwritten Vytorin scrips are the primary problems these days. Both reported lackluster earnings numbers this quarter, as did GSK, and Pfizer. Millions of unfilled Lipitor scrips aren't really to blame for Pfizer's troubles, of course. And despite its efforts to capsize (er, we mean right-size) itself and boost growth without an acquisition, rumors again swirl that gobbling up Bayer Pharma is the company's last best hope. Hope that $0.32 dividend they issued yesterday assuages some angry investors.

BMS was one of the few to escape the earnings storm, but it, too, had its own share of troubles. The company took a $224 million charge because of investments tied to auction-rate securities that have dogged the company since earlier this year. Wyeth also revealed it wasn't immune to the crazy world of mortgage-backed securities: the pharma took a $68 million pre-tax charge because it held Lehman Brothers and Washington Mutual corporate debt. (Oops!)

It's still mission critical at many biotechs, too. This week Maxygen announced it was examining strategic options, AdventRx reported the resignation of its CEO and a reduction in headcount to conserve cash, while Xoma joined the wave of companies pursuing alternate financing deals. Meanwhile Phenomix (see below), which filed its S-1 back in January, finally came to its senses and pulled its IPO, citing--guess what?--market conditions.

Clinically, the news was pretty grim too. The FDA delayed or denied the approval of at least four drugs this week, including Forest's milnacipran and Pfizer's Fablyn. And all those Big Pharma piling into biologics because of their theoretical safety and easier path to market might want to stop and read a new report published in JAMA, which shows these large molecules aren't really any safer in the long-run than their small molecule cousins. Off-target effects may not scupper the drugs, but on-target side-effects are certainly something to worry about.

Depressed or in need more fiber in your daily deal-making diet? We prescribe this highly effecitve placebo:
Myriad Genetics/Myriad Pharmaceuticals: Myriad Genetics announced the long-expected spin-off of its drug-development business this week. During a call detailing the impending split, Peter Meldrum, Myriad Genetics' CEO, noted that the company was fortunate to have over $400 million in cash--a cool $100 million of which came courtesy of Danish drugmaker H. Lundbeck in a licensing deal for the now defunct Flurizan. According to Meldrum the cash enables Myriad Genetics to "spin off the pharmaceutical business, provide them with enough cash for them to move forward and achieve their goals, and yet retain a substantial cash position back at the parent company." Once the spin-off is complete, the companies will operate as entirely independent entities, with no collaborative agreements or arrangements between them. (So much for an amicable drug/companion diagnostic tie-up.) Myriad Genetics's testing biz reaped over $200 million in sales last year thanks to the growing popularity of diagnostics such as BRACAnalysis for hereditary breast and ovarian cancer and Colaris for hereditary nonpolyposis colon and endometrial cancer. Increasingly the company was appealing to two very different sets of investors--those appreciative of steady profits and lower risk were drawn to its diagnostic capabilities while more traditional biotech investors favored the drug development abilities. Despite tough financial times, "The Pink Sheet" Daily reports that the diagnostics entity expects to ramp up its deal-making activity. The same should also be true for the pharma co. Because of the increased transparency in terms of ownership rights, it will be easier for Myriad Pharmaceuticals to partner--or sell--its pipeline of infectious disease and oncology products. (CNS has apparently gone by the wayside, a victim of the recent Flurizan failure.)

Novartis/Nektar: Nektar announced this week that it had sold it pulmonary business assets to Novartis for $115 million. As part of the deal, Novartis also obtains 140 Nektar personnel, certain intellectual property and manufacturing methods, as well as capital equipment and manufacturing facility lease obligations. The two companies first teamed up on Tobramycin (Tobi) inhaled powder back in 2002 when they were known as Inhale Therapeutics and Chiron. As our colleagues at "The Pink Sheet" Daily write, the transaction reflects a year-long attempt to transform from a drug delivery play into a drug development provider after the stunning failure of Exubera showcased that convenient delivery doesn't necessarily translate into success in the marketplace. Back in February the company cut 150 staffers and announced the resignation of one of its stars, Hoyoung Huh, PhD, who left the company to take the CEO position at the PARP-focused biotech BiPar Sciences. The move allows Nektar to tighten its belt; in a same day investor call, CEO Howard Robin noted off-loading the Tobi program will save about $45 million in P&L expenses and cut its cash burn by roughly $30 million. "This transaction is a perfect example of our ability to monetize assets that have little future value to Nektar, but could be potentially valuable to other companies," he said. Unlike many of its biotech brethren, Nektar certainly isn't hurting for cash; it should end 2008 with about $440 million on-hand to build its drug biz.

Lilly/Amylin: With $125 million in cash up-front, this LAR supply agreement is one of the biggest deals of the week. The question is, how big a deal is it for the future of the exenatide franchise? Lilly and Amylin, of course, already share the GLP-1 anti-diabetic Byetta and rights to the eagerly awaited once-weekly formulation. In that sense, this is no big deal: Lilly’s up-front payment reflects its share of the capital investment made by Amylin in the LAR commercial facility. The agreement also includes a commitment by Lilly to reimburse Amylin “for its share of the more than $500 million capital investment in the facility through the cost of goods sold” for LAR. In other words, Amylin gets $125 million now, and the rest when--or is it if?--LAR comes to market. Both companies describe the arrangement as an expected evolution in their alliance, so no big deal. Investors, though, see it as a vote of confidence by Lilly in the future of LAR. Given the safety issues in the class and Lilly’s work on its own GLP project, that is a very big deal indeed. There is another vote of confidence here as well: In addition to the up-front cash, Lilly and Amylin signed a separate $165 million loan agreement. The terms aren’t overly generous (Amylin can’t access the capital until December 1 2009, and interest will be at LIBOR plus 5.25%). But in this financial climate, the implication that Lilly stands behind Amylin’s credit worthiness may be a very big deal indeed--Michael McCaughan.

Forest/Phenomix: It was a good news bad news kind of week for Phenomix. The company officially called off its public offering on Thursday and got back to the business of spinning its story. And part of that tale is a collaboration with Forest worth $75 million up-front and up to $265 million in additional milestones for the biotech's Phase III DPP-IV inhibitor dutogliptin. Getting any deal for this 5th in class molecule is an accomplishment given the general lack of interest in primary care drugs by Big Pharma these days. But Forest clearly paid close to top-of-the line for the privilege even though the molecule doesn't appear to be that differentiated clinically from the already approved Januvia (Merck) and potentially soon-to-be-approved saxagliptin (Bristol-Myers Squibb) and alogliptin (Takeda). (Novartis is resubmitting its version, Galvus, in 2009.) Indeed, the deal price says quite a bit about Forest's desperate need for late stage pipeline. On Monday the company reported that the FDA had missed the user fee date of its fibromyalgia drug milnacipran. Reporting earnings the very next day, the company avowed to put its $2.6 billion war chest to use shoring up a pipeline that faces heavy generic competition in the coming years. In an interview, CEO Laura Shawver noted that Phenomix has been in discussion with Forest for at least a couple of years. One reason Forest rose to the level of partner-of-choice (other than willingness to pay top dollar) is their impressive success marketing drugs in highly competitive fields--on Tuesday's earnings call, for instance, Forest noted progress getting Bystolic off the ground in a crowded beta-blocker market. Still Phenomix is carrying a good deal of risk despite the generous up-front. The two companies will jointly develop and commercialize dutogliptin in the US, while Phenomix retains development rights outside North America (In Canada and Medico, Forest has exclusive rights). That means Phenomix is still paying quite a bit--pivotal trials for a diabetes drug ain't cheap or fast--before it's likely to see a pay-off in the marketplace.

GSK/Vitae: It seems that pharma’s flight from some of the better-served areas of primary care medicine has caught up with another biotech firm. This time it’s Vitae Pharmaceuticals, which is reaquiring full rights to its renin inhibitor program from GSK. GSK originally licensed the renin program from Vitae in 2005 (we wrote about Vitae’s strategy at the time, here) and Vitae intends to advance it to the clinic now on its own. Despite the promise of renin as a target in hypertension GSK may have decided that the area is relatively well-served with existing (and often generic) beta blockers and ace inhibitors (like Coreg CR?) and certainly wasn't heartened by the mediocre commercial performance of Novartis' renin inhibitor, Tekturna. Oddly enough on the day Vitae announced GSK’s renin decision, the Big Pharma spent $170 million acquiring the rights to the OTC brand Biotine, a line of dry-mouth products including gels and mouthwashes. Vitae’s best bet—if it can’t find another Big Pharma partner—would probably be to pursue renin inhibition in a small, specialist market. The program continues in hypertension, diabetic retinopathy, CHF, and related cardiovascular indicatios, according to the company’s press release.

GSK/Exelixis: It's the end of an era--or error--depending on your viewpoint. And, no, we aren't talking about the demise of the Red Sox Sunday night. On Thursday, Exelixis and GSK announced that their 6 year collaboration had come to a natural end in a positively chipper press release touting the biotech's retention of rights to a promising Met, RET, and VEGF2 inhibitor called XL184. And really from Exelixis's view there probably are a number of reasons to celebrate. The collaboration provided the South San Francisco-based biotech with much needed cash--about $260 million according to CEO George Scangos--at a critical time in its history. But it had outlived its usefulness, keeping valuable products that could have been partnered elsewhere for significant cash in limbo while GSK took its time deciding which products to bring in-house. It also made it tough to talk to investors, who questioned the depth of the biotech's wholly-owned pipeline. “Now we can say ‘Here’s our pipeline. If you invest in us, this is what you are investing in,” says Scangos. He notes that Exelixis now has sole rights to 9 compounds that are currently in the clinic with real human data. “It’s as good a pipeline as any out there and it's ours,” he says. “This is a great event for us.” But maybe not such a great deal for GSK, which has taken the option-type deal to new heights in relationships with Theravance, Cellzome, AFFiRiS, and Targacept among others. Sure, GSK can afford to plunk down several hundred million for essentially one product--for now.

(Image courtesy of Flickr user Anders B via a creative commons license.)

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