Friday, May 22, 2009

DotW: Damned If You Do, Damned If You Don't

Alliances are a necessary evil.

Despite all the verbiage around the softer virtues of collaboration, the fact is that most companies would just prefer to be left alone. Doing the tango, as the Argentian exhibitors at BIO demonstrated, takes too much work. And frankly costs too much.

Thus this week: Onyx is now suing its partner Bayer for double-crossing it on a next-generation Nexavar (see Ed Silverman's Pink Sheet Daily analysis). Naturally, Bayer would love to find a compound of its own that’s as good as Nexavar and which doesn’t cost it a profit-share. For its part, Onyx says the follow-own is a close chemical brother to Nexavar, discovered as part of the collaboration (well – legally, that is: anything discovered in the field by either company before January 31, 2000 counts as part of the collaboration).

Think about the big acquisitions – most of them are transformations of alliances that looked more expensive than they were worth. Pfizer’s acquisitions of Warner-Lambert and Pharmacia were most fundamentally about the larger company getting 100% of the jointly promoted products (respectively: Lipitor and the Cox-2 franchise, including the star player Celebrex). By our reckoning, Roche’s acquisition of Genentech was fundamentally a response to that extraordinarily successful alliance’s costs – in duplicate infrastructure, royalties, joint decision-making.

And to our minds, the most interesting alliances of the last few months aren’t really alliances but tactics to pool resources without having to actually do all that much ongoing collaboration. The GlaxoSmithKline/Pfizer joint venture in HIV creates an independent company which starts out buying its research from its parents – but can go its own way later. Meanwhile, the Purdue/Mundipharma/Infinity deal seems to be as much an anti-collaboration as an alliance: the funders (Mundipharma and Purdue) basically don’t interfere in any way with Infinity’s research or development or, for that matter, the registration process.

Even most of the option deals we’ve seen recently (and which will be the subject of an in-depth analysis from Ellen Licking in the coming issue of Start-Up) are anti-alliance alliances – the small company does a bunch of work independently; the big company then decides whether there’s enough evidence to buy the thing. Novartis just made that logic explicit – see below in our write-up of its re-arrangement with Elixir.

Novartis announced another variation of the non-alliance alliance this week in its re-structuring of its respiratory collaboration with Schering-Plough. Which is probably a good deal to start with in this week’s edition of ...

Novartis/Schering-Plough: Why share two pies, when you can have one each? Especially when each gets to eat the one it prefers. Novartis and Schering-Plough this week undid two previous co-development and co-commercialization deals around two respiratory combination drugs, each agreeing to instead take full rights to one.

In what’s essentially an un-deal, Novartis gets exclusive worldwide rights to develop and market QMF 149, a fixed-combination of its own indacaterol (a long-acting beta-2 adrenergic agonist) with Schering-Plough’s inhaled corticosteroid mometasone (un-doing this 2006 deal). Schering-Plough, meanwhile, gets similarly full rights to a combination of mometasone with Novartis’ formoterol, another long-acting beta-2 adrenergic agonist (un-doing this 2003 deal).

It’s certainly neat—no money changed hands according to Novartis’ CEO and Chairman Dan Vasella, who added that “we wanted to complete that disentanglement.” Indeed, history has shown that co-developments, co-promotes, co-anything is generally more complicated and likely to end in tears than a pure-play effort—particularly perhaps in this case with newly-enlarged Schering-Plough (though the parties had been discussing this divorce well before the Merck merger was announced, according to Vasella).

Behind what looks like a tidy sharing of the booty, we’re sure there’s some small print (or an awfully complicated equation around the sales-based royalty-sharing arrangement on the compounds). But by and large, it appears that Schering-Plough was happy to accept a later-stage compound (Phase III completed) with less risk and cost to come, in exchange for granting Novartis a combo that’s still in Phase II, but which uses Schering-Plough’s Twisthaler device.

Novartis is taking on more cost, then, but reckons it’s worth it to build up its own respiratory franchise around indacaterol (currently under review as a standalone, and a component of other development combos including one with a compound from UK biotech Vectura)—and to avoid the tangles of co-development and co-commercialization. – Melanie Senior

Shionogi-Sciele/Victory Pharma: And you thought the Chinese were financing the US economy. The Japanese have spent more than $18 billion buying US and European biopharmaceutical companies since 2007. And if you figure CV Therapeutics wouldn’t be part of Gilead had not Astellas launched its hostile bid, well, add another $1.4 billion to the total. Now some more deals – Takeda’s acquisition of IDM (see below) and Sciele’s $150 million acquisition of Victory Pharma, bankrolled by Sciele’s still brand-new owner, Shionogi. Essex Woodlands and Ampersand had committed $45 million to the company back in March – which means that, at least for Essex (Ampersand had been in the company longer, through an acquisition), its IRR on the deal has got to be pretty impressive (and its limiteds pretty happy with the new fund). Indeed, Essex is one of those venture funds sitting pretty right now -- $900 million in a new fund, mostly raised pre-crash, and half a dozen exits over the past year or so (most recently from Dow Pharma for Valeant’s $285 million plus earnouts and – ok, sort of an exit – its $100 million option-to-sell Ception to Cephalon). Essex has been focused on growth companies (revenue generating and close to, or at, profitability, like Victory). But with all that cash, a plethora of cheap deals, and most of the early-stage venture guys sitting on their hands, Essex is probably going to move further upstream and start bankrolling some of those discovery guys.

GSK/Oxford BioTherapeutics: Bankrolling discovery is exactly what GSK has been doing with its seemingly neverending string of option-alliance deals. But this one announced early in the week by Oxford BioTherapeutics has a bit of a twist: GSK will be doing some of the early stage work itself, generating antibodies to oncology targets provided by OBT. GSK will also get an exclusive option to license a monoclonal antibody that OBT will develop through to clinical proof-of-concept. OBT got an undisclosed up-front payment and will receive clinical, regulatory and commercial milestones plus a double-digit royalty on any sales for products OBT took to POC, and single-digit royalties on GSK mabs against OBT targets. If GSK opts out of any programs, OBT has the option to pick them up. OBT's target expertise comes from its Oxford Genome Anatomy Project database, which it calls the world's largest cancer protein database. OBT has one other antibody discovery deal, with Amgen, signed back in 2007 when OBT was still Oxford Genome Sciences.

Takeda/IDM Pharma: It's roughly a week until ASCO and--here's a surprise--cancer immunotherapy is back in the news. But even though Dendreon's positive Provenge results prove naysayers wrong (for now--the drug still isn't approved) Big Pharma is still in "show me the data'' mode when it comes to this novel form of therapy. The upshot? Companies can find partners--or even buyers--but those deals aren't likely to happen until there's been a major de-risking of the compound. That was the case this week for IDM Pharma.

On May 18, Takeda announced it would acquire the immunotherapy developer for $75 million. The Big Pharma waited until the biotech's novel therapeutic for osteosarcoma, Mepact, was approved by European regulators. That Takeda held off until there was regulatory approval shows that you can teach an old pharma new tricks. Recall that last year Takeda bet $50 million on a partnership with Cell Genesys for its GVAX vaccine for prostate cancer. Let's just say things didn't exactly work out as planned; by year's end the two parties had called off the realtionship, thanks to the failure of GVAX.

For IDM Pharma, the news couldn't have come at a better time. About a week ago, the struggling biotech disclosed first-quarter earnings, noting cash and cash equivalents of $7.4 million as of March 31, down from $12.8 million at the end of last year. To survive, IDM shut down all development programs except Mepact and slashed staff headcount from 80 to 15.

Cancer vaccine makers probably shouldn't expect partners to come courting just because the field's seen one small-ish deal. While Takeda's interest in Mepact was great, IDM's other products, which include a dendritic cell-based melanoma vaccine called Uvidem, were less appealing because of their risky profile, according to the deal's orchestrator, Anna Protopapas, SVP corporate development at Takeda's Millennium Pharmaceuticals unit.

Interestingly, this is the first deal Protopapas and her team have announced since Takeda purchased Millennium for nearly $9 billion one year ago. Thus far, the aim to run Millennium as a stand-alone biotech seems to be working. We aren't exactly sure if Millennium is the Takeda oncology company or simply a Takeda oncology company, however. A closer look at the Mepact arrangement has Takeda Cambridge, the drug firm's European outpost, handling the immunotherapy's commercialization, not Millennium--which also happens to be in Cambridge--Ellen Licking.

Novartis/Elixir Pharmaceuticals: Another week, another option based deal. On Tuesday, Elixir announced that it had granted Novartis the option to acquire the biotech in a deal worth more than $500 million. The acquisition is dependent on Elixir's ability to move it's preclinical oral diabetes drug--a ghrelin antagonist--through successful Phase IIa trials. The announcement was actually just one of two made by Elixir: in addition to Novartis staking a claim on the company, the Novartis/MPM side-fund, which was created in 2007 as an attempt to more closely align Novartis' corporate venture and business development efforts, participated in the biotech's $12 million Series D.

This is actually the second option style deal Elixir has done with Novartis. Back in 2007, Novartis/MPM invested in the biotech, with Novartis taking an option on a different program--a ghrelin agonist. As part of the agreement announced earlier in the week, the two companies have terminated their earlier pact, and all rights to the oral ghrelin agonist compound revert to Elixir.

The equity financing, plus the non-dilutive funding from the option (believed to be nominal--we couldn't identify the actual amount Novartis paid on top of the financing to acquire the company though we tried), put Elixir in a far more secure cash position. According to Elixir's CEO, Paul "Kip" Martha, the company was one of many in the industry operating with less than six months worth of cash. "This is a dramatic turn-around for us," he said in an interview with IN VIVO Blog.

This is the third option-style deal Novartis has done since the start of 2009 and its structure recalls almost exactly the March deal brokered for the rights to acquire Proteon, which is developing a recombinant human elastase designed to improve the outcome of arteriovenous fistula procedures in patients with end-stage renal disease. It used to be hammering out the terms for these kinds of arrangements was tough--traditional VCs and biotech CEOs worried that the option might cap a company's upside. That's less of a concern these days when cash is a biotech’s most important resource; thus, CEOs have accepted the hard reality that non-dilutive funding now and the greater certainty of a deep-pocketed partner or buyer in the future outweigh the potential reduction in overall deal economics necessitated by option arrangements.

Finally this tie-up highlights a potential advantage of the option structure--keeping a Big Pharma engaged and potentially deepening the relationship. In 2007, Novartis's option was much more limited--it was strictly a licensing deal. This latest announcement suggests Novartis is impressed enough with Elixir’s pipeline that it sees value in owning the company outright--Ellen Licking.

Johnson & Johnson/Cougar Biotechnology: Finally, we should note that this has been -- on the investment front -- a relatively good week for biotech. We haven't seen this many acquisitions for a while. And thus, last night, J&J provided us with a pleasant send-off for the Memorial Day Weekend: its $870 million acquisition of Cougar (for more in-depth comments, see this post from earlier today).

Image from Flickr user Mike "Dakinewavamon" Kline used under a creative commons license.

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