Wednesday, October 29, 2008

Forest Bucks the Trend With Diabetes Deal

Its not often that you see a deal that runs exactly contrary to what looks like an industry-wide trend. But Forest’s $340 mil. deal with Phenomix fits that bill.

Big Pharma business development executives around the industry are saying the same thing: evolving regulatory requirements make type 2 diabetes medicines a far less attractive investment opportunity than they once were.

The assumption is that new drugs—especially ones in established classes—will need expensive outcomes studies, potentially before approval, and may even face a de facto comparative efficacy standard to reach the market.

And the data so far in 2008 show an unmistakable trend: deals are still happening, but at very low valuations. (You can read more in The RPM Report. Non-subscribers can sign up here for a free trial and read the analysis right away.)

Clearly, commercial companies have taken money off the table when it comes to diabetes deals.

Well, not so fast.

With one stroke of the pen, Forest increased the up-front dollars spent on diabetes projects across the industry so far in 2008 by a factor of 10: $75 million versus $7 million so far this year. And it did so by acquiring exactly the type of compound—a late entrant in an existing class of oral antidiabetics—where the perceived regulatory risk is highest. Specifically, the deal gives Forest rights to Phenomix’ Phase II DPP-4 inhibitor dutogliptin. (You can read all about the deal itself in “The Pink Sheet” DAILY.)

In fact, here as how Lilly SVP-corporate strategy & policy Gino Santini summarized the climate for drug development in type 2 diabetes during FDC-Windhover’s Pharmaceutical Strategic Alliances conference: “Being the fourth or fifth projected DPP-4 is not as attractive as it would have been probably several months ago.”

To be fair, dutogliptin could be the second entrant in the DPP-4 class, but only if Takeda’s alogliptin and Bristol/AZ’s saxagliptin stay stuck at FDA—and Novartis is unable to revive its DPP-4 vildagliptin. And even if dutogliptin ends up as the second entrant, even the best case scenario would have it entering five years behind Merck’s sitagliptin (Januvia).

So what does Forest know that no one else does?

One possibility is that the company just hasn’t been paying attention. Certainly, the perception of some biz dev execs is that companies that aren’t in the diabetes class don’t fully understand the evolving regulatory climate.

But that doesn’t seem likely in this case. After all, Forest does have products in other categories—like cardiovascular medicines and depression—where it has ample opportunities to learn first-hand the realities of dealing with today’s FDA. Indeed, the company’s quarterly call included discussion of a missed user fee deadline for the pending fibromyalgia therapy milnaciprin, as well as discussion of expectations for regulatory requirements in other classes.

And we were struck in particular by Forest Chief Operating Officer Larry Olanoff’s response to a question about whether FDA would ask for comparative data to support approval of the COPD therapy aclidinium.

“The FDA by law, is not supposed to be comparing one product to another, in terms of making their determination of approval,” Olanoff noted. That said, “we have what we believe to be a very well tolerated product and the data thus far is not revealing any safety signals so having another even if you wanted to take a hard-nosed view and having an adequate efficacy picture is one that the agency would be I think compelled to review it and consider for approval.”

But he didn’t stop there. “Going beyond that, though, we would never launch a product if we didn't think it had clear commercial value and ability to compete.”

Another questioner asked specifically about Forest’s plans for the antipsychotic drug cariprazine, in light of FDA’s recent rejection of Vanda’s iloperidone. “I think it is clear the division wanted an active comparator,” the questioner said.

“You make a good point,” CFO Frank Perier replied. “I don't know if it is that is the only reason the drug wasn't approved. I can't comment further on that. What I can tell you is that having active comparators in a program like this is always a good consideration just for purposes of coming in with some competitive data, so it is a serious consideration for us in terms of design of our programs both in Phase II and potentially in later phases.”

Clearly, Forest has been paying attention. So why go after a DPP-4 inhibitor in this climate?

The answer, most likely, is that Forest is just sticking to what has worked in the past: making me too drugs pay off at a rate that Big Pharma doesn’t see or can’t deliver on. Its not like there weren’t other companies that looked better prepared to sell Celexa or Lexapro—it is just that Forest saw (and delivered on) a larger opening for a late entrant in the SSRI class than other companies did.

Forest also persevered on the beta blocker nebivolol (Bystolic), the 20th entrant in that class and a product with a long marketing history overseas. Bystolic isn’t setting any records: Quarterly sales were $14.2 million in its third quarter on the market. But then again, it is already tracking ahead of Novartis’ first-in-class renin inhibitor Tekturna (which rang up $40 million in sales globally during its sixth full quarter on the market.)

Given Forest’s track record, we’re not going to bet against it making dutogliptin pay off.

But we also believe the Big Pharma execs who no longer see the same value in projects like dutogliptin that they might have five years ago.

So it really comes down to different expectations. Forest is clearly happy to take on opportunities that simply no longer interest the Lillys of the world. Which only begs the question: where will Big Pharma find the diabetes projects that do meet its business case demands?

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