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Friday, September 25, 2009

Deals of the Week: Behold the Reimbursement Milestone

Much of the discussion at our recent Pharmaceutical Strategic Alliances meeting concerned the growing importance of factoring reimbursement hurdles into drug development decisions. It is becoming increasingly clear that if you haven't done so, your potential partner certainly will.

In fact we've heard of alliances in the works where haggling over how much of an approval milestone should be linked to reimbursement--and how achieving that reimbursement is defined--is a signficant part of deal negotiations. What ever happened to good old fashioned regulatory/approval milestones? From what we hear they're already a thing of the past.

Consider the discussion on Tuesday afternoon's panel about 'Reimbursable Innovation', where Genzyme EVP Peter Wirth noted that historically these issues haven’t been as important for his company as maybe they have been for others given patients' unquestioned need for the enzyme replacement therapies Genzyme markets. But as even Genzyme moves more into the mainstream, it's resulted in a new attitude at the Big Biotech. "We’re more aware of the need to demonstrate that there is a real benefit to the drugs we’re trying to develop," said Wirth.

So where therapeutic alternatives exist, Genzyme now does the financial modelling necessary to determine what an appropriate reimbursement would be and how the drug would be used for the benefit of patients; essentially Genzyme tries to duplicate the analysis done by the UK's NICE, whose CEO Andrew Dillon was also on the panel. "Not that we think it’s right, but we try to be pragmatic. If those criteria will be used to judge our drugs we should know going into the process" where we will stand, Wirth added. "We will quite deliberately gather the information that we think people like NICE will use in their decisions."

As such , reimbursement issues have killed deals, and in other cases changed what Genzyme and its ilk can afford to pay for a deal. Wirth said this isn't a frequent occurrance, but we bet that what isn't the norm now could be in the future, especially when comparative effectiveness really takes hold in the U.S.

David Mott, a self described "recently reformed drug developer" as CEO of MedImmune and now general partner at the VC New Enterprise Associates said that at MedImmune, "we changed our drug development path significantly, building [reimbursement concerns] into our target product profiles at the preclinical stage." By the time a molecule was going into Phase II the company was building in a pharmacoeconomic endpoint. Even good drugs would get killed: "If it’s another six weeks of survival it won’t be paid for and we kill the program," he said.

Now, wearing a VC hat, "just yesterday I was looking at a program and the key pushback was ‘is it innovative enough that it’ll be paid for in this day and age?'" he said.

So is there a silver lining? Mott may have pointed to one, if you call a re-emphasis on big advances and significant innovation (and the risk that comes with it) a good thing for the biotech sector.

After the genomics bubble burst, the way the biotech industry reacted to the punishment it received for risk was to go to incremental innovation. The companies that got started in 2002-2007 were relatively low innovation companies, he said, and for good reason: Big Pharma was trying to prepare for the 2012 patent cliff—and they were hungry for even incremental advances. What's more we had a public market that was more interested in less innovative and ostensibly relatively low-risk assets.

Today, there’s the near elimination of the IPO market, combined with what Mott reckoned was a significant improvement in later-stage Big Pharma pipelines. So biotechs "are now building what pharma’s going to need in five to seven years," he said, where pharma's early- or mid-stage pipeline looks thin. Taken together with the increased emphasis on reimbursement, "with our investments we’re really raising the innovation bar. It’s a triple whammy that’s hitting the pattern of investment in biotech."

So there you have it: higher reimbursement hurdles may translate into a renaissance in biotech innovation. Or at least a renaissance in the desire to invest in that innovation, if and when it comes along. While you're waiting for that, enjoy another installment of ...



Qiagen/DxS: With its $1.42 billion acquisition of Digene in mid-2007, Dutch sample prep and assay specialist Qiagen ratcheted up its visibility as a player in the battle for molecular diagnostics content. This week, it added DxS, a privately held UK-based provider of molecular tests including one for the mutant oncogene K-RAS, the companion diagnostic featured as of July on the labels of the EGF receptor targeting metastatic colon cancer drugs Vectibix and Erbitux. Qiagen is paying $95 million in cash for DxS, with the promise of an additional $35 million tied to commercial and other milestones. In addition to KRAS-related companion diagnostics collaborations with BMS (Erbitux) and Amgen (Vectibix), DxS has also been working with several other pharmas on EGFr mutation companion diagnostics – a potential $100 million market. Qiagen projects $30 million revenue from DxS products and $0.02 per share dilution in 2010, with the deal becoming accretive thereafter. With the addition of DxS, Qiagen overall will have upwards of 15 collaborations with pharma to market or develop companion diagnostics, according to the company. Although Qiagen has not made any major acquisitions post-Digene and the price of DxS is only a tenth of what it took to get Digene’s HPV test franchise, its entry into molecular diagnostics seems both deliberate and comprehensive, along the lines of Roche (which launched its bid for Ventana Medical Systems the same month Qiagen bought Digene) and potentially Novartis, which for the past year has been setting up a personalized medicine diagnostics unit. Genomic Health is an oft-talked about acquisition target, but appears too rich with a current market cap over $500 million, especially given the number of opportunities in the $100 million range. In addition to DxS, recall that Monogram Biosciences was taken out by Labcorp. in June for $107 million plus assumption of debt to obtain HER2 gene-expression tests as well as a companion diagnostic to Pfizer’s HIV drug Selzentry.--Mark Ratner

Leo Pharma/Warner Chilcott: On Wednesday Sept. 23, Leo Pharma announced—and closed—a roughly $1 billion cash deal with Warner Chilcott to regain U.S. licensing rights to psoriasis treatments Talconex, Talconex Scalp, and Dovonex, plus all partnered pipeline programs. For Leo, the deal marks a crucial step forward toward the company’s goal of building a meaningful U.S. commercial presence; for Warner Chilcott, meanwhile, the deal provides a sizeable chunk o’ change as it seeks to nail down funding for its $3.1 billion acquisition of Procter & Gamble’s pharma assets before the looming December 31 deadline for that deal. Moreover, the Leo/Warner transaction reinforces the notion that dermatology is no longer a therapeutic backwater when it comes to dealmaking. (Remember GSK and Stiefel Labs?) Derm’s renaissance is helped no doubt by its specialist focus as well as the diverse product offerings involved, ranging from OTC to prescription drugs. (Cuz, as we heard at this week’s PSA, diversity is a nice hedge these days.) When Warner announced the P&G deal in late August, many were surprised at the high price tag and the $4 billion financing from six banks. This deal with Leo gives Warner a quick way to pay down nearly a quarter of its debt, especially an expensive secured credit facility of $480 million that came due Sept. 23. (Coincidence?) If the deal gets Warner out of debt faster, the consultancy EP Vantage says it’s “reasonably priced” for Leo. Last year sales of Talconex, Talconex Scalp, and Dovonex pulled in $277 million, meaning the deal price is about 3.6 times those sales, which is consistent with the premium GSK paid for Stiefel. EP Vantage notes the deal could be considerably more expensive, however, if the acquired pipeline fails to pan out, given that Dovonex sales are forecasted to decline starting in 2012. FYI, this the second acquisition this month for privately-held Leo. On Sept. 2, the group acquired the derm assets of the biotech Peplin, an Aussie/California hybrid, for $287.5 million.—Ellen Foster Licking

Nektar/AstraZeneca: Nektar has chosen AstraZeneca to help develop and market its opioid-induced constipation drugs, the Phase II NKTR-118 and a combination follow-on project NKTR-119. The delivery specialist pockets $125 million up-front, significant pre-commercial milestones and double digit royalties. For Nektar the deal fulfills a promise made earlier this year to investors that the franchise would be partnered and moves it beyond Exubera, the inhaled insulin project eventually abandoned by Pfizer in 2007. OIC has proven a tricky area for companies—GSK and Adolor’s Entereg has made it to market but only for the smaller post-operative ileus market. Wyeth and Progenics sell Relistor for the condition, but only in seriously ill patients. Like Relistor, NKTR-118 combines an opioid antagonist with a ligand (in this case PEG) that keeps it from penetrating the blood-brain barrier. NKTR-119 will combine ‘118 with selected opioids.--CM

Pfizer-Wyeth/Boehringer Ingelheim: In order to satisfy anti-trust regulators' concerns, it turns out Pfizer has to jettison some of Wyeth's animal health assets. Step right up, Boehringer Ingelheim! The German Big-but-Private Pharma's Vetmedica division has snapped up a series of Wyeth's Fort Dodge Animal Health units and assets. The deal is contingent on the closing of Pfizer's acquisition of Wyeth (expected this year) and resembles in many ways the acquisition of Merck's half of its animal health JV, Merial, by partner Sanofi-Aventis. Financials for the Pfieth/Boehringer deal weren't disclosed, but Boehringer gets mainly cattle and companion animal assets. More importantly, Pfizer's big acquisition doesn't go to the dogs. (Sorry, it was either that or a "barking up the wrong tree" metaphor.)--CM

image from flickr user wallyg used under a creative commons license

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