Deficit reduction/reconciliation may be the real thorn in the biopharma industry’s side right now, but if you were a CEO of a major pharmaco or biotech this week – or, for that matter, an employee, individual investor, or anyone associated with any of the above -- you couldn’t help but worry about the stock market.
Standard & Poor’s announcement late on Friday August 5 that it is downgrading the U.S. credit ranking a notch (from AAA to AA+), may not substantially push up the government’s borrowing costs. Combined with weeks of political haggling over federal government debt, the news subsequently led to a week of wild volatility.
As it is, the week ended with the Dow Jones effectively flat, providing a little respite, but not before sending tremors through much of America, anywhere much of America was vacationing. One only had to look at the chaotic destructive mobs in Britain to get a sense of how bad things in our part of the industrial world could get.
Overall, the DRG index, which tracks pharmaceutical stocks, was down 1.7% for the week--not bad, given the alternative scenarios, and not far off the S&P 500 and the Dow. Traditionally a defensive sector, pharma has behaved much like the rest of the stock market in the past two years, however – and it got sideswiped as much as (or more) than other more cyclical sectors in last week’s rout.
That’s for a variety of reasons, including profit taking from an earlier run up, and worries that coming U.S. budget cuts will dig further into pharma’s pockets. The concern exists regardless of whether the Congressional Joint Committee comes up with nearly $1.2 trillion in proposed budget reductions by November 23, or, if it does not, automatic mandatory across the board cuts go into effect.
In reality, as Sanford Bernstein points out in an August 8 report, there is currently “no clarity on what is going to happen to drug spending,” following Congress’ deficit reduction deal, and “neither side of the political spectrum has yet credibly advocated anything that looks terrible for the drug industry.” Likewise, ISI Group, in presentations to investors, ran through different scenarios, without coming out in favor of one over the others, noting that areas most likely up for grabs could be Medicare Part D (likely to hit pharma more), Medicare Part B (the expensive biotech infused drugs), and/ or Medicare/Medicaid dual-eligibles. But there's a caveat: everything's on the table.
By week’s end, investors in pharma could take a breath, as stocks such as Bristol-Myers Squibb, Eli Lilly & Co., and Pfizer closed the week roughly where they started. Biotech stocks have been a different matter, trading near their year-to-date lows, hammered down by a mix of macroeconomic trends and industry specifics. ISI’s technical analysts believe a little more downside is to come. Dendreon’s surprise setbacks, which the high-profile company announced last week, were still reverberating through the sector, even as the wave of macro-trend jitters hit.
Whatever one thinks of Dendreon’s missteps, its predicament and the market reaction to it serve as a reminder of just how high-pressure the current environment is for launches.
Biopharma has had what is perhaps the industry’s best spate of new drug approvals in years – but many of those drugs, while addressing unmet medical needs, are high priced and complex to administer and launch.
The industry has seen some almost certain wins: Bristol’s Yervoy (ipilimumab) for metastatic melanoma and Vertex Incivek (telaprevir) for chronic hepatitis C, have so far both exceeded analysts’ expectations, with sales in the second quarter of $95 million and $75 million, respectively. Some others, while in their early days, look to be on target, such as Merck's Victrelis, and Johnson & Johnson’s Zytiga while the jury is out on Benlysta, the lupus drug from Human Genome Sciences and GlaxoSmithKline, and Endo Pharmaceutical’s Fortesta.
How these downstream events will affect upstream dealmaking remains to be seen. Obviously, slower launch trajectories, tougher reimbursement hurdles and political uncertainties weigh into companies’ business development strategies. But let’s not forget that the successful launches of today were built on deals struck several years ago, notably Bristol’s link up with, then acquisition of Medarex in 2009, GSK’s deal with HGSI, and J&J’s acquisition of Cougar Biotechnology in 2009.
And while this week has been quiet on the deal front, some ongoing relationships produced news: Abbott Laboratories and Biogen announced impressive top-line Phase IIb efficacy results of their drug daclizumab for multiple sclerosis, GSK and Xenoport, and Takeda Pharmaceuticals paid biotech Affymax Inc. a $10 million milestone upon the submission of an NDA for the companies’ erythropoietin stimulating agent peginesatide.
Which is why, even in a week of stock market jitters, deficit inundation, and vacations, deal details deserve our attention:
Array/Genentech: Boulder, Colo.-based Array Biopharma already has a long history with Genentech, with oncology partnerships dating back to 2004. On Aug. 8, the two companies forged a new agreement around Array’s pre-clinical compound ARRY-575 that yields Array $28 million in up-front cash, plus potential milestone payments of $685 million and double-digit sales royalties, if the drug is approved and marketed. ARRY-575 inhibits the checkpoint kinase 1, or ChK-1, which is thought to prevent tumor cells from repairing DNA damaged by chemotherapy drugs, and thus enhance the performance of those drugs. Genentech already has its own ChK-1 inhibitor, the Phase I candidate GDC-0245; it may advance one or both drugs through the clinic. Array had been preparing to file an IND and begin a Phase I trial for ’575, but will now leave those steps to Genentech, which will foot the bill for all further development of the drug. Array said it had pursued a partnership since January, and had multiple suitors negotiating for rights to ’575.– Paul Bonanos
Vectura/Sandoz: U.K. biotech Vectura Group set up two additional partnerships for its asthma/chronic obstructive pulmonary disorder candidate VR-315 this month, one of them with Sandoz, which in-licensed EU rights to the compound in 2006, expanded its rights later that year to include the U.S., and then returned the U.S. rights to Vectura in 2010. On Aug. 3, Vectura announced a new partnership for U.S. co-development and commercialization rights with the “U.S. division of an undisclosed leading international pharmaceutical company.” Unlike its previous deal with Sandoz, which including a co-commercialization option, Vectura will not be involved in marketing VR-315, thought to be a generic version of GSK blockbuster Advair (fluticasone and formeterol), but will receive $10 million upfront, $35 million in development milestones and undisclosed royalties on sales.
Sandoz, which has retained its EU rights to VR-315, then obtained rest-of-world development and marketing rights to the candidate on Aug. 5. Under this arrangement, Vectura could receive $8 million in milestones and advance pre-launch royalties, of which 2.5 million is expected by Sept. 30, 2011, along with royalties on net sales. Vectura estimates asthma/ COPD is the largest and fastest-growing segment in the respiratory therapy sector, with annual sales exceeding $11 billion worldwide, including $2.5 billion outside the U.S. and EU.—Joseph Haas
AMAG/MSMB: AMAG Pharmaceuticals Inc. told shareholders earlier this week that its Board unanimously voted against the hostile bid offered by one of its hedge fund investors, citing the inferiority of the deal to its prior merger plans. MSMB Capital Management LLC, which has a 5% stake in the Massachusetts-based maker of anemia drug Feraheme (ferumoxytol), made an unsolicited offer on Aug. 2 to acquire AMAG for $18 per share, or approximately $381 million. The takeover offer was an effort to oust current management and block the recently proposed all-stock merger between AMAG and Allos.
The companies believe the merger could help each company overcome the fallout from what many perceive to be disappointing launches of their first products, AMAG's Feraheme and Allos' oncology drug Folotyn. AMAG and Allos told shareholders that the combined company would be able to capitalize on overlapping sales teams and produce cost synergies. Yet, investors have not taken kindly to the deal; AMAG’s stock has lost 22% of its value since the merger announcement, and 47% of its worth over the last year. Allos’ stock has dropped 60% since August 2010—Lisa LaMotta