DoTW: The Valukas Report

Let's all take a step back this week and salute Anton Valukas, chairman of the Chicago law firm Jenner & Block. His work as the court-appointed examiner of the Lehman Bros. bankruptcy case is likely to make all financial and deal-making types stand up and take notice.

You probably know that Valukas this week released his account of the collapse, in which he accuses Lehman executives of hiding massive debt and bad investments in the run-up to its 2008 collapse that brought the financial system to a halt. Valukas writes that Lehman executives' "conduct ranged from serious but non‐culpable errors of business judgment to actionable balance sheet manipulation." He also blames the "investment bank business model, which rewarded excessive risk taking and leverage; and Government agencies, who by their own admission might better have anticipated or mitigated the outcome."

Twenty-one years ago the New York Times profiled Valukas, whom some then called "the Rudy Giuliani of the Midwest." (Link tip from LawShucks.)

What does this have to do with our little corner of the world? Nothing specifically -- at least not yet -- but it's a reminder of a few things. First, drug companies aren't immune to off-balance sheet creativity. Second, fascinating and complex deal structures -- which we admit we love to discuss over a snifter of brandy in front of a warm fire -- aren't necessarily good for patients or investors. When confronted by new math, it's worth asking what was wrong with the old math, anyway?

Finally, it's worth noting that some of biotech's historic deals went through Lehman's corridors, thanks to its former vice chairman Fred Frank. For example, Frank engineered the 1995 and 1999 extensions of the epic Roche-Genentech relationship. His ties to Genentech were so strong that, despite Lehman's descent into bankruptcy, he was pitching his services in 2008 to Genentech's special committee handling Roche's takeover bid. Frank reportedly wanted Genentech to push for something other than a full acquisition. Goldman Sachs eventually won the advisory job. (If you're curious, DOTW searched all nine volumes of the Valukas report and Frank, despite his lofty title of vice chairman, appears only once, in very passing fashion.)

Frank is now #2 at Peter J. Solomon's advisory firm, where he co-runs the firm's life-science practice. He was at CV Therapeutics' side when it fended off a hostile bid from Astellas Pharma and sold itself to Gilead Sciences for $1.4 billion.

We could dedicate several posts to Frank's work alone -- he was at Lehman for nearly 40 years -- but that wouldn't be fair to those in the trenches, cranking out the deals that we love much to dissect. We need to get back to the hot, steamy Valukas report, so without further ado we leave you with...



GlaxoSmithKline/Cellzome: Privately-held Cellzome this week announced a discovery tie-up with GlaxoSmithKline in inflammatory disease, its second collaboration with the Big Pharma in this area. The companies will use Cellzome's proprietary epigenetics-focused technology to identify small-molecule drug candidates in immuno-inflammatory disease. They'll work together until drug candidates are identified, at which point GSK will take over pre-clinical and later development and commercialization. The Big Pharma is forking out €33 million in upfront cash and equity (Cellzome's CEO Tim Edwards wouldn't provide a breakdown) and promises milestones worth over €475 million, of which 80 or 90% is pre-commercial, according to Edwards. Edwards told IN VIVO Blog that this latest deal isn’t option-based, but is instead a “full collaboration," albeit a very early-stage one. Cellzome has had a separate, option-based deal with GSK's Immuno-Inflammation Center of Excellence for Drug Discovery since 2008, however, around seven kinase inhibitors. To GSK's undoubted delight, Edwards describes collaborating with this small-unit CEDD -- which is once again the biotech’s partner -- as "like working with a far smaller company." GSK hasn't yet exercised options related to the earlier deal but has made four milestone payments. According to Edwards, GSK is about to consider whether to opt-in at the earlier of two entry points. -- Melanie Senior

AstraZeneca/Torrent: To extend its reach in emerging markets, AstraZeneca on March 11 signed an agreement with Torrent Pharmaceuticals for the rights to sell 18 undisclosed generic drugs in nine territories. Financial details of the agreement were not disclosed. Torrent, a top Indian generics maker, will supply the medicines to AZ, which will re-brand and market them alongside its existing portfolio. The companies, which have collaborated before on hypertension medicines, left open the door to expand the agreement into additional drugs or territories. The cardio- and CNS-focused Torrent boasts roughly $250 million in annual sales, of which 70% came from its domestic market. But it has been gradually building an overseas presence. The AZ hook-up should further support that effort. Generics currently comprise about two thirds of AZ's $4.3 billion emerging-markets business, but until now these have been AZ's own branded drugs that have lost patent protection -- so-called branded originals. The Torrent deal marks AZ's first foray into branded generics, an area competitors have long-since identified as an important space in territories the branded pharma industry used to lump together as "Rest of World." As one of an increasingly small handful of large pharmaceutical companies that would rather focus exclusively on high-margin, high-risk innovative biopharmaceutical products, AZ has some catching up to do if it wants to compete with the likes of GlaxoSmithKline and Sanofi-Aventis. Each of those companies has pursued an aggressive emerging markets business development strategy that includes a significant generics component. -- Christopher Morrison

Abbott Labs/Facet: Abbott Laboratories has agreed to pay $27-a-share, or about $722 million, for Facet Biotech, less than three months after the biotech thwarted a much stingier hostile offer from its development partner Biogen Idec by cutting a deal with two major shareholders. ( For a review of Facet/Biogen soap opera, take a look at our earlier coverage in Pink.) Announced late on March 9, the proposed buyout would cost Abbott $450 million net of Facet's generous cash position and give Abbott partial ownership of daclizumab, a promising anti-CD25 humanized antibody for multiple sclerosis, and volociximab, under development to treat solid tumors. Facet and Biogen Idec are taking daclizumab into two Phase III trials, the second of which will trigger a $30 million payment from Biogen. Facet also has two cancer treatments in Phase I, one partnered with Bristol-Myers Squibb, the other unpartnered. The boards of both companies have approved the deal; the next step requires Abbott to take the offer directly to Facet’s shareholders. The deal rewards Facet for showing patience in the face of Biogen's pursuit last fall. The big biotech, which originally struck a high-profile licensing deal with Facet's predecessor in 2005, had made an offer behind the scenes during the summer. But it went hostile in September, offering just $14.50-a-share. Facet shareholders dismissed Biogen's foray, even after it upped the offer to $17.50-a-share. -- Alex Lash

Sanofi-Aventis/Merck: Just how serious is Sanofi-Aventis about diversification? Serious enough to join former partner Merck in the area of animal health. Recall that last year, Sanofi announced an agreement to acquire Merck’s 50% interest in the companies’ animal health J/V, Merial, for $4 billion. The deal also included an option to form a new J/V that combines Merial with Schering-Plough’s Intervet, post the finalization of Merck’s "reverse merger" with that company. This week Sanofi said it would exercise its option, spending another $1 billion, to create an equally split J/V that is officially the top dog in the animal sector, a $19 billion market that’s estimated to grow an annual 5 percent until 2014. The deal could close by the end of 2010, but antitrust clearance will be a major hurdle. On a conference call, Sanofi and Merck execs declined to get specific about antitrust challenges or potential cost savings of the deal, with Sanofi CEO Chris Viehbacher citing only poultry vaccines as an example of overlap. Plenty of buyers might snap up vet assets if regulators require divestitures, including Eli Lilly's Elanco, Europe's Virbac, and the animal health units of Bayer and Novartis. The move continues Sanofi's aggressive diversification out of branded pharmaceuticals. In 2009, it purchased not only Merial, but also generics firms Medley Pharmaceuticals and Laboratorios Kendrick and the US OTC powerhouse Chattem Pharmaceuticals.--Ellen Foster Licking

Photo courtesy of Jenner & Block.