Friday, February 25, 2011

Deals Of The Week Goes To The Oscars

It's that time of year. The science of bracketology has yet to enliven talk around the water cooler, the official start to the 2011 baseball season is still a month away (no, spring training doesn't count), and all the backchecks, forechecks, and stick-checks are about as meaningless as the top shelf or the five hole. (Yes, this blogger admits she's a philistine.)

Which leaves us with Oscar drama. The Black Swan or The King's Speech? Sorry, not The Social Network. An Oscar nod to a film about a 26-year-old and a company that stands to raise a gazillion dollar IPO is a little like giving a 40-something president in his first term the Nobel Peace Prize. (Oh, wait a minute.)

Far from Hollywood's glitterati, there's been plenty of drama in the biotech industry this week and a couple of Oscar- (er, Roger?) worthy performances. Roche's Genentech continues to challenge FDA, trying to position itself as David against a regulatory Goliath in the ongoing brouhaha surrounding Avastin's use in breast cancer and the FDA Oncology Drugs Advisory Committee's decision to rescind accelerated approval.

On Feb. 24 Genentech said a hearing to review the decision will go forward, but within ODAC itself. That's not what the drugmaker wanted; it was pressing for "an objective advisory committee with substantial breast cancer expertise," arguing that the recent ODAC session was underpowered in this indication. But FDA will use its ODAC to make the decision, with Commissioner Margaret Hamburg's designee Karen Midthun arguing the rules don't allow FDA to substitute a different advisory committee. (Recall Avastin use in this indication was shot down 12-1 in the December meeting.)

Moreover, FDA won't be adding additional consultants to the current ODAC panel, arguing that the controversial nature of Avastin's breast cancer approval makes it difficult to find additional unbiased panelists. "We must face the reality that many experts in this area have already expressed a view on this issue and/or might be considered as having conflicts of interest because of their association with one of the parties to the hearing or competitors to Genentech," said Midthun.

To add to the excitement, the biopharma community won't just be watching, it will actually be in town when the ODAC convenes. The meeting coincides with BIO's national wheeling and dealing event in DC in late June. No word on whether FDA will roll out a red carpet in advance of the event, but we're guessing it's not in the regulatory body's budget.

Other biopharma events worth a call-out this week? For best stoic performance, the leading candidate has to be David Bredt, Eli Lilly's beleaguered head of neuroscience, who unexpectedly resigned this week. And for best comedy of errors, in a sequel to the Bad News Bears, Johnson & Johnson is clearly the leading nominee. The big pharma continues to hamstring its own R&D advances with manufacturing slip-ups. This week came news of problems with its Simponi injector and a recall of more than 660,000 Sudafed packages due to a 'not'-ty typo in the label that reminds consumers the following: "do not not divide, crush, chew, or dissolve the tablet." That's got to be a nomination for worst proofreading in a major consumer product label, not to mention an affrontery to the King's English.

We don't have the envelope yet, but odds are the winner for most insightful deal analysis is going to be...

Gilead Sciences/Calistoga: For the DOTW Oscar for best performance in a competitive space, with a nod to a separate category -- risk-sharing -- look no further than this week's tie-up between Gilead and privately-held Calistoga. Gilead announced February 25 it would pay $375 million in upfront cash, plus another $225 million in potential milestones, to take out Calistoga, one of the most closely watched entities in the PI3K inhibitor space. The on-the-table dollars represent a 4.6x increase over the $81 million the four-year-old start-up has raised from its venture investors, which include Frazier Healthcare, Alta Partners, and Three Arch. It's also one of the richest deals yet in the PI3K space, an arena big pharmas are eager to enter because the signaling pathway involved is implicated not only in oncology, but also inflammatory disease, cardiovascular disorders, and neuro-degenerative conditions. The acquisition gives Gilead a Phase II asset and a basket of interesting, highly specific but early-stage PI3K blockers. It also deepens the big biotech's commitment to oncology, building on its 2010 acquisition of CGI Pharmaceuticals and that firm's kinase discovery engine. Gilead's decision to make Calistoga its base of oncology expertise via the creation of a stand-alone Seattle division is probably smart but could be tricky to execute. Recall Gilead's commercial strength remains squarely in the anti-infective space and the strategy to acquire oncology capabilities is one other biotechs have tried and failed to replicate in the past. Biogen (via the Idec merger), for example, never grew into the dominant oncology player it planned to be and has since jettisoned that half of its business, betting that focus not diversification will be the greatest path to shareholder value. The onus on Gilead is to ensure the Calistoga team, especially its R&D and early clinical development execs, stay on board; the earn-out structure may help in that regard. -- EFL

TiGenix/Cellerix: Belgium-based regenerative medicine player TiGenix and Spanish cell therapy firm Cellerix propose to combine forces via a share exchange to create “a new European leader in cell therapy." The enlarged company will have two marketed products in Europe (including the first ever cell-therapy product to be approved by the European Medicines Agency, TiGenix’s ChondroCelect), two stem cell platforms (TiGenix’s allogeneic one, and Cellerix’s autologous one), and at least 33 million in cash that will last two years minimum. Indeed, both sides have concurrently secured additional financing from their shareholders, signaling investors’ general support for the deal. TiGenix has secured €10 million of a planned public rights offering, while Cellerix’s investors have committed the final €18 million of a €28 million round that began in late 2009. The hope is the newly enlarged group will provide investors a better shot at getting a return. Since its inception Cellerix has raised about €60 million as one of Spain’s first biotechs, and this deal values the Barcelona-based group at about the same. In the short term, the combined group may be better placed to lock in an interested big pharma partner. Importantly, Cellerix’s platform, based on expanded adult stem cells extracted from adipose tissue, creates off-the-shelf products that are less complex and expensive to create and administer than TiGenix’s ChondroCelect, which requires harvesting a patient’s own cells. Signs that big pharma is no longer running away from cell therapies? Think Cephalon’s December 2010 deal with Australia’s Mesoblast, GlaxoSmithKline’s toe-dipping with Harvard Stem Cell Institute, and Sanofi-Aventis’ tie-up with the Salk Institute. -- Melanie Senior

Forest Labs/Clinical Data: Much of the buzz around this week’s merger agreement between Forest and Clinical Data was around valuation. Forest is paying $30 per share, or $1.2 billion, plus up to $6 per share in contingent milestones to get ClinData’s antidepressant vilazodone, which was approved in January in the US for major depressive disorder. The price was less than ClinData’s prior Friday closing price o
f $33.90 and only a 6.6% premium over the volume-weighted average trading price since the vilazodone approval. But there’s considerable risk attached to vilazodone; hence the contingent payout to shareholders, which begins to kick in at $1 per share if trailing four-quarter sales exceed $800 million within five years. The drug label looks “clinically undifferentiated to us,” Leerink Swann noted, adding that the lack of an active comparator in trials “makes it difficult to tease out any meaningful benefits.” That said, it also believes Forest can get solid formulary coverage for the drug based on its track record with payors with its existing medicines -- Celexa and Lexapro -- and the strength of the new brand in a category that’s become genericized. (Lexapro, for example, goes generic next year. ) Vilazodone’s development is a true success story for ClinData, which got the drug via its 2005 acquisition of Genaissance Pharmaceuticals for $55 million, and ultimately for the Genaissance team, which had licensed vilazodone from Merck KGAA in one of its early pharmacogenetics programs. But like Vanda and its schizophrenia drug iloperidone, ClinData did not fully execute on the original premise for the development of vilazodone: i.e. its initial evaluation using pharmacogenetics would lead to a drug approval in parallel with a biomarker that would direct the drug to an enriched patient population for which it would show a more favorable risk/benefit profile. Indeed, for psychiatric drugs, that kind of targeting still seems a long way off. -- Mark Ratner

Kyowa Hakko/ProStrakan Group: Best foreign drama has to be the evolving Prostrakan/Kyowa Hakko tie-up. Three months after putting itself up for sale, U.K.-based specialty pharma ProStrakan might be teaming up with Japan's Kyowa Hakko Kirin. The 130 pence-per-share deal, announced Feb. 21, values the company at about £292 m
illion ($475 million). If finalized, ProStrakan would provide Kyowa a commercial presence and regulatory expertise in Europe and the U.S. that would be useful as it looks to commercialize its pipeline assets outside of Japan. The two companies are already familiar biz cronies: Kyowa is a licensee for two of ProStrakan's products in Japan and other Asian countries. The price represents a 41% premium to ProStrakan's share price one day before its offer period began in November 2010, and it's supported by more than 47% of the specialty pharma's shareholders. But most analysts believe it undervalues the U.K. group. ProStrakan suffered a series of regulatory and manufacturing setbacks in 2010, sending its shares to an all-time low of barely 40 pence in September. That led to an unsolicited offer from privately held pan-European Norgine (which, when rejected, went on to buy a 12.6% shareholding), and, subsequently, ProStrakan's decision to put itself up for sale. The logic behind the move: fix ProStrakan's internal commercial and regulatory issues and then secure a reasonable sale price. The first has happened, but the second hasn't, according to some. "A fair price would have been 160 pence per share," Nomura Code analyst Samir Devani told sister publication "The Pink Sheet" DAILY. The current deal values ProStrakan at about 2.7 times revenues, less than the 3.5 times revenues paid by Meda for U.S.-based specialty pharma Alavan Pharmaceuticals in August 2010, and well below the (admittedly punchy) 4.5 times revenues paid by Biovitrum for orphan-diseases focused, pan-European player Swedish Orphan in November 2009. -- Melanie Senior

Roche/Transgene: And finally, the DOTW Oscar for best performance in the face of adversity goes to Transgene, which this week announced its big pharma partner Roche was pulling out of a collaboration to develop the smaller company's TG4001, a Phase 2b therapeutic vaccine for lesions caused by Human Papilloma Virus infection. The good news (also known as the spin): Roche's decision won't have a significant impact on Transgene's financial situation, at least in the short term. Also, the termination won't slow down the ongoing Phase IIb trial, which is structured to test the vaccine in over 200 patients. Transgene already has 195 patients enrolled in its mid-stage study, and anticipates interim data by the end of the year or early in 2012. In addition, Transgene "regains full and unencumbered development and commercialization rights to the product" according to the press release announcing the news. That means when the licensing deal officially concludes this summer, Transgene can look for another deep-pocketed partner to help prepare a registrational trial. Will another pharma bite? Specialty products and especially vaccines are all the rage these days, and Trangene emphasized in its press release that the "no deal" was the result of a strategic decision by Roche, and "is not data driven." The question is who might have greater strategic interest in HPV than the Swiss pharma, which via its diagnostic business is developing its cobas HPV test to individually detect HPV-16 and HPV-18, the two HPV genotypes causing 70% of cervical cancer cases. (Interestingly, the Swiss pharma published new positive data about the test this week in the American Journal Of Clinical Pathology.) -- EFL

Wednesday, February 23, 2011

The Japanese Love Scotland. Could That Seal A Higher Deal For ProStrakan?

The little party assembling around Scotland-based spec pharma ProStrakan just got a bit more lively. The company's got one leg in the bed with Kyowa Hakko Kirin, as we reported here, even though the Japanese firm's cash offer for the group, at 130p per share, was generally seen as rather stingy.

But the deal isn't sealed: conditions of the offer, which has been agreed only by 47% or so of ProStrakan's (jaded) shareholders, are voided if a counterbid worth 140p or more materializes. The consensus yesterday was that a counterbid was unlikely; after all, ProStrakan has been up for sale since November 2010, having seen two major regulatory snafus and a manufacturing problem in the U.S, and booted out its CEO in September. This was a company unashamedly on the block. If no one else had bid by now, why would they start?

Well in fact someone had bid before now: private Norgine. The quiet, pan-European specialty pharma firm, registered in Holland, on the prowl for some more products. It had offered ProStrakan £1 per share, but that offer (after consideration) was rejected. In fact, it was this that prompted ProStrakan to put itself publicly up for sale, to try to garner a better deal. Meanwhile Norgine decided to somewhat sneakily buy Sanofi's stake in ProStrakan, notching up a 13% holding at 95p. That purchase has already made the company a tidy windfall, if not brought it any products.

It now seems Norgine wants some more of that, thank you: the company this week increased its holding to 14.4%, buying shares at 129p and 129.75p. Why? If it's about an opportunitistic investment, it's unlikely to make money coming in at this level.

More likely, perhaps, is that Norgine is mopping up whatever shares it can at today's price, ahead of making a counter-bid for the group -- which would have to be priced at 140p at least, to invalidate the Kyowa deal.

If that is the plan, it won't be a friendly deal: unlike Kyowa, for whom ProStrakan will provide a first foothold in Europe, Norgine already has a European infrastructure. The company apparently doesn't want activities in the U.S, either. So it would,we speculate, be a slash-and-burn job.

Kyowa, in contrast, has said it will maintain ProStrakan's management and staff. The deal is, arguably, far more valuable to the Japanese group, which is seeking a commercial outlet for its pipeline products in the West, and which already markets ProStrakan's Abstral and Sancuso in Japan and some Asian markets.

So Norgine, if it's going to gatecrash this party, will need to entertain the notion of a higher bid from Kyowa (which according to ProStrakan acting-CEO Peter Allen was the one to initially suggest the 130p per share price, so it probably didn't have to negotiate too hard first time around). All the more reason for Norgine to mop up shares now -- a move that "has all the hallmarks of a company about to go hostile," according to Singer Capital Markets analyst Shawn Manning.

But a Norgine counterbid, were it to be made (and few analysts, even now, are saying it's likely) would come up against not only Kyowa's funding muscle (the company had sales of $5 billion in 2010, versus Norgine's $400 million) but also another, softer factor, according to Manning: the Japanese's love for Scotland and all things Scottish. Whether it's the whisky, the bagpipes or the Highlands, who knows. It could even be the Japanese-corporate-style dedication to the job that ProStrakan employees allegedly show (since there are few other biopharma employers in the Galashiels area).

Tartan and shortcake, then, may yet seal for ProStrakan's patient shareholders a rather more valuable exit than a good chunk of them appeared resigned to on Feb. 21.

image by flikrer BoSoxBrent used under a creative commons license

Friday, February 18, 2011

Deals of the Week's Dead Presidents Edition

As many Americans prepare for their three-day weekend celebrating the birthdays of two great Presidents, Deals of the Week cynically notes that a lot of Americans don’t really love their Presidents until after they’re dead – specifically, the ones whose visages have been enshrined on legal tender. Little Walter sang an amusing blues number about a nation’s love for currency and the commanders-in-chief who adorn it, conveniently glossing over the presence of several non-Presidents, including Alexander Hamilton and Benjamin Franklin, on commonly circulated bills.

It takes far more than even a rarely-seen Salmon P. Chase to get a pharma deal done, but sometimes it also takes more than mere dollars – or euros, pounds, or whatever you like – to keep everyone satisfied. Witness Sanofi-Aventis SA’s bid for Genzyme Corp., a once-hostile overture sweetened with contingent value rights, or CVRs – in this case, options for further payments based on regulatory and manufacturing milestones on Genzyme drugs – that could account for nearly a sixth of the deal’s value. The CVRs primarily relate to pipeline considerations, and a new study shows just how crucial they are to Sanofi and its peers.

According to a report issued Thursday by Bernstein Research’s Tim Anderson, Sanofi’s pipeline was expected to contribute less than 3% of its overall revenues by 2015, the smallest share among nine Big Pharmas studied – at least, prior to the Genzyme deal, which includes a potential blockbuster in multiple sclerosis. Bristol-Myers Squibb, by contrast, can expect nearly 18% to come from its pipeline by 2015, thanks to R&D spending approaching $4 billion annually in the coming years as well as a relatively small revenue base, according to Bernstein’s report. Meanwhile, Eli Lilly & Co. is expected to be among the biggest R&D spenders relative to revenue, though it can expect the fewest returns in total Benjamins from drugs currently in its pipeline, and only a middle-of-the-pack performance as a percentage of overall 2015 sales.

Where do exciting pipeline drugs come from when they're not homegrown? Why of course, it's...

: Preliminary conversations between Sanofi and Genzyme last summer gave way to a publicly announced bid to shareholders in August, then a hostile overture in October, protracted negotiations in the following months, and finally a deal in February. The French pharma will pay $74 per share for Cambridge, Mass.-based Genzyme, along with CVRs entitling each shareholder to payouts based on drug development milestones for pipeline drug Lemtrada (alemtuzumab) for multiple sclerosis and production volumes for approved orphan drugs Cerezyme (imiglucerase) and Fabrazyme (agalsidase). While the $74 per share bid exceeded Sanofi’s rejected bid by $5, the CVRs are thought to have been the key to completing the deal, potentially adding $14 per share – $13 from Lemtrada milestones – to its value. Sanofi, whose massive diabetes franchise is balanced by diverse offerings including vaccines and soon-to-be-off-patent anticoagulant Lovenox (enoxaparin), gets Genzyme’s expertise in rare diseases, as well as its manufacturing capabilities. Though some believe it may have overpaid, the aggressive milestone timeline will bear out the deal’s true value – suggesting that the real work, including a potentially tricky integration process, is yet to be done. – P.B.

: In one of the richest oncology deals in the past few years, Japan’s second-largest pharma placed a big bet on AVEO Pharmaceuticals Inc.’s most advanced compound, the Phase III drug tivozanib. Astellas Pharma Inc. paid $125 million up front, while committing to a milestone schedule that could add more than $1.3 billion to the deal, to license tivozanib worldwide, save for Asian territories already licensed to Kyowa Hakko Kirin under an existing agreement. The deal includes $575 million for clinical and regulatory milestones and $780 million in commercial payments, and covers all indications of the drug, currently farthest along in studies for renal cell carcinoma. The two companies will split profits 50/50 in North America and Europe, where they will also share development costs and sales forces, although Astellas is expected to lead commercialization in Europe while AVEO does so domestically. Phase III results are due in mid-2011 for tivozanib, a blocker of vascular endothelial growth factor (VEGF), although an NDA isn’t expected until 2012, pending a favorable clinical outcome. The agreement extends Astellas’ ongoing commitment to oncology beyond its $4 billion acquisition of OSI Pharmaceuticals last year. P.B.

- About two years ago, AdventRx Pharmaceuticals had placed its lead clinical programs on hold and cut staff twice, to a headcount of five. Now, the San Diego-based firm has an FDA action date for its lead program, chemotherapy drug Exelbine (vinorelbine injectable emulsion), and is acquiring privately held SynthRx in an all-stock deal to move into the sickle cell disease (SCD) space. AdventRx, focused on a growth-by-acquisition strategy, will acquire Texas-based SynthRx through an equity deal in which more than 75% of merger consideration is based on NDA acceptance and approval of SynthRx’s lead program and more than 95% is based on milestone achievement. In exchange for an upfront consideration giving SynthRx’s shareholders a 4% interest in AdventRx, SynthRx becomes a wholly owned subsidiary of AdventRx, giving the latter firm ownership of the Phase III poloxamer 188 program. Initially advanced into Phase III in myocardial infarction by CytRx, 188 is a purified form of a rheologic and antithrombotic agent to be studied first in pediatric SCD and thought to have potential in other illnesses involving microvascular flow abnormalities, such as heart attack, stroke and hemorrhagic shock. During an investor call Feb. 14, CEO Brian Culley explained that if every milestone in the deal is paid out fully, SynthRx shareholders would end up with a 40% stake in AdventRx. “If the NDA is accepted and approved, [that is] something I think we would be happy to make these equity payments for,” he added. Joseph Haas

Bayer/Philogen: The crumbling of one European deal led to the cancellation of a potential bellwether IPO. Swiss-Italian biotech Philogen SpA might be searching for an aspirin after its oncology deal with Bayer AG came apart, prompting Philogen to cancel its anticipated IPO. Bayer abruptly walked away from its licensing arrangement for Philogen’s L19 therapies, vascular-targeting immunocytokine drugs that are being investigated for several different cancers. The two companies’ association dates to 1999, when Schering AG took an option on Philogen’s research into antibodies that inhibit angiogenesis, leading to a formal worldwide license in 2003. Despite the extended relationship, Bayer gave no specific reason for unraveling the deal. Philogen, which says it has six clinical antibodies targeting cancer as well as a rheumatoid arthritis drug and a preclinical ophthalmology program for age-related macular degeneration, was expected to list on the Milan exchange February 18, but instead scuttled what was expected to be Europe’s first IPO of 2011. In the offering, thought to be a signal of a warming climate for biotech listings, Philogen had anticipated raising as much as €65.3 million ($89.3 million) by floating 23% of its shares. The failed listing is Philogen’s second IPO cancellation; it withdrew a planned offering in 2008 as well, citing unfavorable market conditions. – P.B.

Mt. Rushmore image courtesy of Flickr user dclamster, used under Creative Commons license.

Thursday, February 17, 2011

"We ARE Creating Shareholder Value," Argues Actelion's Clozel

Actelion's CEO Jean-Paul Clozel clashed entertainingly with one of the Swiss biotech's biggest (and newest) shareholders during the company's full-year results announcement Feb. 17.

The clash came despite Actelion's management unashamedly using the event to reassure investors that the company DOES have their interests at heart, that it IS creating optimal long-term value and that"to consider a sale at this time [in the company's evolution] would be the worst time imaginable" for existing shareholders.

The context: a Feb. 3 letter from Elliott Advisors, a hedge fund that only months before had become among the largest shareholders. The letter called for Clozel's resignation, accused management of stifling several alleged take-over approaches, thereby denying investors the chance to cash in, and claimed poor corporate governance (CEO on the board; board Chairman a supporter of CEO).

Actelion, we felt, fended off the letter rather well. (It also retorted that "there have been no offers for the company".) But it is surely no coincidence that the company chose today to declare its first ever dividend, the first of regular payouts to its shareholders? And that each member of the management team presaged his talk with a quick big picture sketch to drive home the "we're committed to unlocking shareholder value" message?

"I feel I'm a little closer to my shareholders as a result of this dividend distribution," said Clozel. "It's a way for us to share with our long-term investors what we have been able to build up." CFO Andrew Oakley seemed to suggest it was entirely normal for Actelion to pay a dividend given the company's strong profitability, commercial muscle and its healthy pipeline. "It's a logical step for the company."

This is a company staunchly defending its independence. Fighting off the sharks. It's a company arguing that it has gone through the start-up and build-up phases of a biotech's evolution and is now entering the 'leverage' stage, when it has its pipeline, its infrastructure, its buildings (including a spanking new five-storey steel business center, opened in Dec. 2010), and is now waiting for the rewards to pour in.

As such, to sell out now would "deprive all the employees and loyal shareholders the possibility of sharing in the rewards" that they're due, said Clozel, "for the benefit of a few people wanting to make a quick profit."

This dig at the hedge funds was picked up by a member of Elliott Advisors in the audience -- which is when the real fun began (fun that Actelion management had wanted to avoid, by allegedly barring some hedge funds from the presentation). "We're here for the long-term," the Elliott representative claimed, so don't accuse us of looking for quick gains. After pointing out that there weren't many shareholders in the room (it was an analyst and media event, mind you), he went on to ask about the company's processes for receiving and reviewing takeover approaches (read our letter, said Clozel), about how the company dealt with conflicts of interest generated by Clozel's being on the board (it's very useful and important that management is represented on the board, he said) and the company justified building such an expensive building...when pharma is facing severe regulatory challenges and when shareholders are being asked to finance hundreds of millions in R&D that have led to failures?"

This was getting funny: Clozel, who's built up Europe's most profitable and successful biotech company, was being saddled with all of Big Pharma's productivity woes. And being asked to justify his new business center (it came in "within budget" and "before it went up, Otto [Schwarz, BD and Operations] had been sitting in a container since 2008").

There was more entertainment to come. Did the audience like the building, Clozel asked. (We weren't there, but we gather hands were raised). Who didn't like it? Well, this Elliott guy, surprise surprise. Who was then, in the grand finale to this extraordinary -- public -- exchange between CEO and shareholder, accused of being "the son of Prince Charles." An allusion, we hasten to add, to that British royal family member's well-known disregard for modern architecture.

What about the numbers? Ah, the numbers. Revenues up 13% in local currencies, EBIT up 19% in local currencies, lots about managing the cost base, lots about how wonderfully the shares have done over the long-term...and plenty of reminders about the CHF 800 million share buy-back program, initiated in Nov. 2010.

image by flickr user USFWS Pacific used under a creative commons license.

M&A Predictions! Fortune Tellers -- They Are Not

Even though the New Year has come and gone, analysts are still making their predictions about what 2011 will bring for the pharma and biotech industries. (Admittedly, it is still early enough to do so, but March would have been pushing it.)

The latest endeavor to predict the future comes from the fine analysts at Morningstar, who released their “2011 M&A Outlook for Healthcare” report this week. The report includes some sound, albeit a little obvious, deductions on what will be moving M&A in 2011 – a move into emerging markets, slowing R&D productivity, and (cue ominous music) the upcoming patent cliff.

Morningstar experts expect further consolidation in Big Pharma; and say Eli Lilly & Co., as well as Bristol-Myers Squibb will be ripe for the picking as the patents on their lead drugs reach their expiration date – but, honestly, who would buy them?

Merck & Co. (Schering-Plough), Pfizer Inc. (Wyeth), Roche (Genentech), and Novartis (Alcon)have all made major acquisitions in the past two years that have added significantly to their debt situations and are unlikely to dump the burden of a major restructuring on top of the issues they’ve already had to bear while trying to make these puzzle pieces fit.

Morningstar analyst Damien Conover suggests Abbott Laboratories could handle acquiring either Lilly or Bristol. He also thinks Sanofi-Aventis and GlaxoSmithKline could benefit from an acquisition of Bristol as well. This sounds all well and good, but Glaxo has made it pretty clear that it is not interested in any large acquisitions and Sanofi has its hands full already with that little Genzyme deal it has been drawing out for months. And let’s be honest, if the past has taught us anything, it’s that bigger is not always better.

So moving on to more realistic prospects for mash-ups in 2011 – let’s take a look at what biotechs Morningstar thinks will offer the best bang for the buck.

They list Biogen-Idec, Seattle Genetics, Human Genome Sciences, Dendreon, and Actelion as their top five take-out targets this year. The reasoning is complex but the basic insight is that these companies have strong pipelines or technology in really HOT therapeutic areas like neurology, orphan drugs, and cancer. Yet, Biogen, Celgene, Gilead, and Merck KGaA will offer an acquirer the most immediate and gratifying (think mid-to single-digit billions) boost to earnings – something every Big Pharma could use right now. These companies also have the nice bonus of having a lot of cash on hand and fairly low burn rates.

While all of these companies have their positives and negatives, it’s important to keep in mind that just because they can be acquired doesn’t mean that they will be. Take the #1 takeout target this year for example, Biogen; it’s been on Morningstar’s take-out list for three years now despite plenty attempts by billionaire shareholder Carl Icahn to get the company on the market.

That said; Morningstar hasn’t done abysmally in its predictions over the last two years. Three companies from the 2009 list were acquired – Trubion, CV Therapeutics, and Medarex, but none of these companies were in the top 15 that year. Another seven got picked up from its 2010 list – Crucell, ZymoGenetics, Talecris, King Pharmaceuticals, OSI Pharmaceuticals, Biovail and Genzyme – with three of these companies being in their top 15 picks.

So what do you think – will this be Biogen’s year to find a suitor or will the Massachusetts biotech continue to dance alone?

Image from flickr user What Makes The Pie Shops Tick? used under a creative commons license

Look! Up In The Sky! It's Financings of the Fortnight!

It's a bird (yum!), it's a plane... no, sorry kitty, it was the year's first blast of biopharma IPO activity that we spied in the winter sky this past fortnight. As in 2010, there were several underpowered liftoffs, a couple failures to launch, and, if you'll pardon our mixed multimedia metaphor, very little catnip for public investors.

The first debut, Pacira Pharmaceuticals, went public just as our previous thrilling FOTF episode was going to press. The 2007 spin-out of SkyePharma PLC’s injectables business grossed $42 million by selling 6 million shares at $7, half the price of the low end of its anticipated $14 to $16 range. Since then, Endocyte and AcelRx Pharmaceuticals have also reached public orbit but, as with Pacira, only by bending to public market pressure and selling more shares at a lower price than they hoped for.

Other biopharmas couldn't get out at all. Clarus Therapeutics, a developer of reformulated oral testosterone replacement therapy, postponed its IPO on February 11; it hoped to sell 5 million shares between $11 and $13. And Italian antibody producer Philogen canceled its second attempt to list on the Milan stock exchange after partner Bayer HealthCare Pharmaceuticals terminated a license agreement for Philogen’s two Phase II cancer candidates, radretumab and darleukin.

It's worth noting that beyond biopharma, sequencing firm Fluidigm and diagnostic maker BG Medicine went public, as did Israeli company RedHill BioPharma on the Tel Aviv Stock Exchange, though its 51.6 million shekels ($13.6 million) raised were barely a blip. (Still, it's always fun to say, "That's a lot of shekels!")

Haircuts or not, companies at least are raising money. But what about investors? We've been following post-IPO stock performance, but it doesn't tell us much about the recent debuts. So now that the year's first IPO fusillade is over and no life-science debuts are pending, let's take a different measure. Of the 16 US biopharma companies to go public since the window re-opened in late 2009 (excluding PE-backed Talecris Biotherapeutics Holdings and biofuels company Amyris), the average step-up, defined as pre-IPO valuation divided by the private money raised, for the group is 1.65x. But that figure includes the outlier Cumberland Pharmaceuticals, which privately raised $16 million but had a pre-money IPO value of $291 million. That specialty pharma ended up with an IPO step-up of 12.5x, way above the mean. Remove Cumberland, and the average for the current class drops to 1.54x.

How does that compare to acquisitions? We found 21 biopharma acquisitions in the same period of time for which we could obtain venture data. Two were outliers: Marcadia Biotech, which raised $15 million from VCs and sold to Roche for $292 million in December; and AkaRx, which raised $11 million in venture and sold to Eisai for $255 million in late 2009. The rest of the group produced a step-up of 2x, slightly better than the IPO group.

Now, we fully realize that the IPO isn't an exit, it's -- let's say it together -- just another round of financing. So those IPO step-ups are strictly theoretical. That's why we'll keep monitoring post-IPO stock performance. By the time the lock-up ends, a new public company's stock price these days has often given its venture holders heartburn to go along with their haircuts. As of last week, the 15 biopharmas in the class of 2009-2011 had seen their post-IPO share prices fall an average of 5%. (Only four days public, AcelRx isn't included, but as of this writing it's lost 20% of its IPO price.)

At a time when markets are buoyant -- heck, even the Nasdaq biotech index is up 16% since the Jan. 1, 2010 -- the cumulative loss for the recent biopharma IPO class is disheartening. As Atlas Venture partner Bruce Booth tweeted this week, "It's tough out there."

Well then. So who’s on deck? Supernus Pharmaceuticals is a spin-out of Shire Laboratories’ drug reformulations unit with two extended-release versions of generic epilepsy medications in Phase III. Ambit Biosciences, a cancer company that has partnered with Astellas on its Phase II kinase inhibitor for relapsed/refractory acute myeloid leukemia, also submitted an S-1 in December. Other companies that filed in 2010 include Cutanea Life Sciences and Horizon Pharma.

Ready for liftoff? Remember, folks, in space no one can hear you scream, especially when you're reading...

Conatus Pharmaceuticals: Liver disease specialist Conatus announced a $20 million Series B round that remains open to additional investors. First-time backer AgeChem Venture Fund of Montreal joined Conatus’ existing investors, Aberdare Ventures, Advent Venture Fund, Bay City Capital, Gilde Healthcare Partners and Roche Venture Fund. The round builds upon the startup’s $27.5 million Series A from 2007. Formed by former executives at Idun Pharmaceuticals after Pfizer acquired that startup in 2005, Conatus’ funding needs increased last summer, when it bought at fire-sale prices Idun’s assets, which the Big Pharma left idle as a result of its reorganization. Nonetheless, Conatus says most of the new money is intended to support ongoing trials on CTS-1027, a Phase II hepatitis C therapy it licensed from Roche in late 2006. The former Idun pipeline includes emricasan, a Phase II candidate that was also investigated for hepatitis C, and other drugs designed to inhibit caspases, proteins that induce apoptosis. In conjunction with the new preferred stock round, Conatus also converted promissory bridge notes issued in the interim between rounds into Series B stock. AgeChem, which typically invests in therapeutics targeting disorders related to aging, took a Conatus board seat. -- Paul Bonanos

Optimer Pharmaceuticals: How's this for a movie tagline: "In a world of drugs versus bugs, the drug side just got richer." Optimer netted $73 million in a follow-on public offering that closed February 16, and it'll put at least part of the cash toward the launch of fidaxomicin. The narrow-spectrum antibiotic is aimed at Clostridium difficile, a gram-positive bacterium that infects the gut and causes severe diarrhea. Often acquired in hospitals and nursing facilities, C. diff infection often occurs after other antibiotics have been administered, upsetting the naturally occurring flora in the intestine. Optimer officials said recently fidaxomicin is expected to improve on the observed relapse rate of 20% to 30% in patients treated with standards of care vancomycin or metranidazole. With a priority review underway and a PDUFA date of May 30, Optimer could be looking at a roll-out of fidaxomicin in the second half of the year. In the secondary offering Optimer sold 6.9 million shares at $11.25 each, 10.5% below the closing price of its stock on February 10, the day it announced the offering. The cash raise, with Jefferies & Co. as lead underwriter, adds to the $68 million upfront Optimer is receiving from Astellas Pharma Europe for development and commercial rights to fidaxomicin in Europe and selected countries in the Middle East, Africa and Eastern Europe. Optimer retains rights in the US and Asia. Oh, and in the movie, we recommend that Jean Reno plays C. difficile. -- Alex Lash and P.B.

e-Therapeutics: The publicly traded British drug discovery firm netted £16.6 million ($26.7 million) on Feb. 15 in a placing with new and existing investors, including Invesco Asset Management, Gartmore Investment and Octopus Investments. The funds will be used to move e-Therapeutics's first potential products into clinical trials. In the placement one of the company's long-term investors, the UK hedge fund RAB Capital PLC, sold most but not all of its shares at a profit, CEO Malcolm Young told our "Pink Sheet" colleagues. The firm, which went public in 2007, placed 67.7 million shares at 26 pence each, a 2% premium to the closing price of 25.5p one day earlier. e-Therapeutics uses real experimental data to develop network analytics and identify a set of protein interactions thought to produce a beneficial effect. Compounds are then evaluated to see if they can produce that particular set of effects. It is a complex and laborious process of analysis, and not a simulation exercise or in-silico computer-added drug design, Young said. Compounds can also be evaluated for effects on healthy cells, so reducing the likelihood of side-effects. As an example, e-Therapeutics started to look for substances that would turn off the protection against apoptosis that cancer cells appear to have. Its researchers identified the regulatory proteins and promoters, then found a molecule that inhibited their protective effects. This compound, ETS2101, is expected to enter clinical trials later this year. The firm's advisor Panmure Gordon said that although Invesco will now hold 47.7% of e-Therapeutics, it does not intend to run the company or make an offer for the remaining shares, which under UK law would normally be required of investors that acquire 30% or more of a company. Instead, Invesco has obtained a waiver from the UK's Takeover Panel. -- John Davis

Versartis/Diartis: Versartis' $21 million Series B round and spin-out of its lead drug into a new company made for a lot of moving parts, but well worth tracking for at least two reasons. First, Versartis is in the middle of an asset-financing experiment that could point the way for other venture investors. The motto of this new movement could be, "Buyers want drugs, not companies." To that end, Versartis was initially a one-compound company funded by Index Ventures, the European firm out in front on asset-centric financing. But with a long-acting version of Type 2 diabetes drug exenatide on board, Versartis had the option to bring in two more compounds from Amunix, the extended-release technology firm that supplies Versartis' pipeline. With a second compound -- a human growth hormone treatment for kids -- in-house and ready for the clinic, Versartis' backers decided to spin the diabetes drug into Diartis and keep each entity focused on one drug. Theoretically, the separate structures will make each more attractive to potential buyers. Index and Amunix are clear that Diartis will be for sale once Phase 1b data is in hand, perhaps next summer. To push the HGH product forward, Amunix and Index rounded up new investors New Leaf Venture Partners and Advent Venture Partners for Versartis' Series B. Amunix is now the largest Versartis shareholder, according to Amunix co-founder Willem "Pim" Stemmer. -- A.L. and Chris Morrison

Amanda Micklus crunched numbers and wrote this week's intro. Thanks, Amanda.

Photo of LOLFOTFcat courtesy of flickr user LOLren

Wednesday, February 16, 2011

Sanofi/Genzyme: The Hard Work Begins

It's official. The months of haggling and well-timed media leaks are finally over. But that doesn't mean there aren't a number of unanswered questions tied to Sanofi's $20.1 billion purchase of Genzyme.

In their conference calls with investors and the press, Messrs. Viehbacher and Termeer played chums, outlining the merits of a Sanofi/Genzyme tie-up in the broadest of terms, while still managing to stay mum on specifics. But even with the complete disclosure on the proposed CVR payments, the question ahead of the deal is still the central question today: why is Genzyme, at $74-a- share, a good deal for Sanofi shareholders?

Put another way: does the scarcity factor associated with Genzyme's big biotech status justify its premium price tag, in the same way that oenophiles will pay $5000 to quaff a rare vintage? (Or is this acquisition destined to be tarred with the same problems AstraZeneca has endured in trying to bolt on MedImmune?)

At the deal's current price, Sanofi claims the Genzyme acquisition will be accretive, and possibly by 2012. As their CFO Jerome Contamine put it to investors on the call announcing the deal, "We can tell, as early as today, that this transaction will be accretive to our business earnings, the earning per share, as early as one year after closing; and that it will be accretive by €0.75 to €1 per share by year 2013." Moreover, Contamine also promised the return on capital will be in excess of Sanofi's average cost of capital by year two.

Problem is, it's very hard to confirm such a statement independently without knowing how Sanofi internally defines its cost of capital. (And surprise, surprise, when analysts pushed Sanofi management on the question, they didn't exactly answer, instead noting that "we adjust our cost of capital to each and every investment.") And the company wasn't exactly forthcoming about the synergies it sees post-close either. In the Q&A with investors, Contamine demurred, eventually saying that based on Sanofi's assumptions it anticipates generating "north of $600 million in synergies." But apparently uncertainties, which include an announced performance program for Genzyme employees mean "the accretion more meaningful because it includes everything."

Why does this matter? For starters, because Viehbacher has been vocal in his criticism of blockbuster M&A and the return it provides shareholders. Add in his own admission at the JP Morgan Healthcare Conference that "with cheap debt, you can make almost any transaction look accretive," and it's hard not to be a wee bit skeptical of how such a fully loaded deal is beneficial to Sanofi shareholders.

That's not to say Viehbacher didn't put on a good show -- or that he failed to sell his logic to some portion of Sanofi's shareholders. Sanofi's shares, which are listed on the Paris exchange, closed up 3.5% on February 16, ending the day at €51.55. But that positive reaction could also be relief that the months long back-and-forth has come to an end, and that Viehbacher did what he said he would do, which was close the deal. There's also the possibility that Sanofi investors were simply glad the deal didn't cost them any more than $74 a share upfront; recall that at times over the past few months industry wags have speculated the final deal price could cross the $75-a-share threshold.

But will said investors be so happy if Cerezyme and Fabrazyme sales fail to rebound to their pre- 2009 -2010 levels? The $1 per share contingent value right tied to the continued resolution of manufacturing issues Sanofi won't have to pay will be cold comfort in that scenario; after all, it leaves considerable room for looming competitors to take advantage of what Viehbacher called Genzyme's "gold-standard" brand.

During his call with investors Viehbacher emphasized the diligence Sanofi has done on this front. "We have been out there in the marketplace all along the year, really making sure that the Genzyme brand was not really suffering too much because of production difficulties," he said.

But it's hard not to see the brand as somewhat tarnished either. Some 6000 Gaucher patients are currently being treated for their disease and Genzyme still commands the lion's share of the market, with 4700 getting its enzyme replacement Cerezyme. But the manufacturing snafus have allowed competitors like Shire's Vpriiv to come on strong, with some 1300 patients now being treated by non-Genzyme alternatives. That proportion could grow, especially since patients haven't really had the full option to jump to Vpriiv because of that medicine's supply constraints.

Keep in mind, too, that as early as next week US patients could have yet another therapeutic option--and one that's significantly cheaper than Cerezyme. Pfizer/Protalix's taliglucerase could get a positive nod from regulators on February 25; given the medicine is manufactured using a plant-cell based technology that is more cost-effective than the process Genzyme uses to make Cerezyme, it's widely expected that Pfizer and Protalix will market the medicine at a significant discount, potentially more than the 15% price cut Shire is already offering on Vpriiv.

Even with ongoing improvements in its manufacturing, Genzyme has missed (admittedly only slightly) its pre-released revenue guidance for the Gaucher drug. As Chris Raymond, an analyst with Baird, outlined in a note to investors, fourth quarter Cerezyme sales fell short by $2 million, with the final tally for the drug coming in at just $222 million. Calling the information "surprising", Raymond asked "how does one miss a pre-released number?"

Admittedly a small discrepancy, this failure shows the crack team at Genzyme still has work to do to get its flagship rare disease franchise back on track. And given the deal's price tag, that means Sanofi has a lot of its own work to do as well.

Versartis: So Cutting Edge

Early Wednesday, Versartis said it had raised a $21 million B round and, at the same time, spun out its lead molecule, an extended-release version of the type-2 diabetes drug exenatide, into a new company. Dig a little deeper, and you'll find the deal encompasses two cutting-edge trends in biotech financing.

First, Index Ventures, the firm that backed Versartis' Series A in 2009, is also investing in the new company, Diartis. It would love to match what it did with PanGenetics: create companies around single molecules with a leaner, cleaner path to exit. With PanGenetics, Index successfully sold one compound but saw the second fail in 2010. Last year, Index funded Mind-NRG, essentially one person and one asset, with an initial tranche of €1.5 million. This asset-financing vision is one Index has embraced, with other VCs cautiously following, as more traditional venture strategies are buffeted by continuing financial pressures and rare exit opportunities.

Second, the carve-out of Diartis from Versartis creates a second investment for Amunix, the platform company behind each firm's extended-release technology. The technology is the pegylation-like XTEN, which Amunix co-founder Willem "Pim" Stemmer wants to apply to a whole host of proteins. He says the firm is focused on a list of "20 to 30," some already commercial like exenatide, some "fallen angels" that failed in the clinic, and some addressing new targets. The idea is to get them ready for clinic, then either sell them directly or create new, Versartis-like companies around them.

It's a platform-only model, once dismissed as unworkable by investors who didn't see enough value creation to build a viable exit. But it's gaining traction. As this blog first reported last month, yeast-based antibody company Adimab is licensing its technology to newcos that will do the drug-development dirty work. First up is Arsanis, in Vienna, Austria.

We have a lot more on the deal in the next Pink Sheet Daily, including more thoughts from Stemmer -- who's been named a recipient of the 2011 Draper Prize, the nation's most prestigious engineering award -- and Index partner Kevin Johnson -- no, not that Kevin Johnson! -- plus a comparison of the Diartis GLP-1 diabetes molecule to other next-generation diabetes treatments. -- Alex Lash and Chris Morrison

Photo courtesy of flickerer LollyKnit.

Going Early Into Humans Doesn't Always Work

It all looked so good in theory. When UK biotech Renovo started out in 1999, hunting for treatments to prevent scarring, the idea was to test the company's drugs in humans very early on, allowing more informed decisions as to whether to proceed with expensive Phase III trials.

Back then, this wasn't called translational medicine, it was called experimental medicine. And this, Renovo's founder and CEO Prof. Mark Ferguson told START-UP back then, was Renovo's hallmark.

Pity it didn't pay off: Renovo on Feb. 11 announced that Phase III trials of its lead scar reduction treatment, Juvista (human TGF-beta3) had definitively failed. Failed on its primary endpoint (assessment of the scars by independent experts) and on its secondary endpoint (assessment by the patients themselves).

It's more bad news for UK biotech, as if we needed any, after Antisoma's latest crash-and-burn. Juvista is dead, so is the company, says one analyst. Bye-bye to the £100 million odd that Renovo had raised since inception (a figure that excludes the $75 million in up-front cash that Shire paid in 2007 for marketing rights to Juvista). Let's just hope e-therapeutics, with its contrasting in silico approach to quantifying the likelihood of successful drug discovery, lives up to e-xpectations.

U.K. biotech lamenting aside, there's more so say about Juvista. This was a compound that, in Phase II 'within-patient' trials (that's to say, among healthy volunteers who had two cuts made, one on each arm, with one receiving placebo treatment and the other Juvista) had shown outstanding results. Thus apart from being "shocking", both to Ferguson and the small posse of perplexed analysts following the beleaguered stock, the Phase III failure in scar revision surgery calls into question Renovo's entire portfolio. "The other products they have for scar revision are all being developed using this control system," says Samir Devani at Nomura Code in London. The problem is that the Phase II model doesn't appear to be representative of clinical situations.

That's hardly groundbreaking news on a sector level: if good Phase IIIs always followed good Phase IIs, Big Pharma wouldn't be buying toothpaste and cough-medicine businesses and biotech wouldn't have lost most of its investors. But in the case of a treatment like Juvista, applied intra-dermally to scars, one might have expected Phase III results to more closely replicate Phase II -- particularly since some of the outstanding Phase II results were in the exact same indication as the Phase III studies, so it wasn't just about the Phase III scars being larger, and not a result of a planned incision.

What went wrong, then? Several analysts on the call announcing the news sounded desperate to identify some data collection mishap that would explain the results so as to make their bullish predictions look less...well, wrong. But Ferguson didn't mince his words: "This was not a near miss, it was a clear failure." He's adamant that there were no technical or executional problems with the trials, either, which involved 350 patients worldwide.

The company now is trying figure out why in some patients, the half of the scar treated with placebo seemed to heal better than the Juvista-treated half. Ferguson doesn't think the treatment's making it worse (how could it?!) but that there's unexplained variation in the scar "where we wouldn't expect any."

That's science for you. Unpredictable. As for Renovo's future: perhaps predictably short. The company is 'considering all options', including winding the company up and returning (some of) the £44 million cash to shareholders.

Tuesday, February 15, 2011

Sanofi/Genzyme: The End Is Nigh !?!

The blogosphere erupted Tuesday afternoon with the news that – finally! finally! – Sanofi Aventis and Genzyme appear to have reached rapprochement -- and it's only going to cost the French pharma $19.2 billion upfront.

“This is a happy end with a deal that is good for both companies,” Genzyme shareholder Lionel Melka, co-manager of Bernheim, Dreyfus and Co.’s Diva Synergy Fund, told IN VIVO Blog on February 15.

But just how good a deal is it for Sanofi shareholders at $74-a-share?

That’s just one of the many questions swirling ahead of any official disclosure of the acquisition, details of which are expected to be announced in concert with Genzyme’s quarterly earnings call February 16.

Oh, we know that Genzyme provides Sanofi with access to a basket of lucrative marketed products, but these assets are also mature and facing competition from upstarts who have capitalized on the big biotech’s manufacturing missteps. At this undeniably rich price tag, how easy will it be for Sanofi to extract full value from the deal? Given the months of bitter back-and-forth, can the French pharma integrate Genzyme and retain important people like COO David Meeker and Senior VP, Quality, Ron Branning, who are essential to helping Sanofi make the big biotech a successful US subsidiary?

There’s no question this is a good deal for Termeer, who saw his company’s share price slide from a high in August 2008 of $83.25 to around $48 in the wake of 2009 manufacturing difficulties that sent sales of top drugs Cerezyme and Fabrazyme tumbling and, ultimately, resulted in a consent decree. Were the deal not to transpire, it’s highly likely he would have been forced out by activist shareholders like Icahn Partners. Now he can face shareholders with a straight face and tell them he restored a good chunk of the stock's value as a result of this transaction, thereby justifying what’s likely to be a handsome exit package.

But Sanofi shareholders may not be so happy; reports in recent weeks indicate some were less than enthusiastic about the possibility of a sweetened offer, believing the initial $69-a-share tender provided fair value. Viehbacher seemed to be trying to allay their concerns as recently as a month ago when he addressed the biopharma community at the annual J.P. Morgan Healthcare conference. “We will only do a deal if both Genzyme shareholders and Sanofi shareholders feel there is value for both,” he said.

Interestingly, in that same address, Viehbacher also noted during that break-out session that M&A hasn’t generated value for big pharma shareholders, in part because in an era of “cheap debt” it’s not hard to make any deal look accretive to earnings. “We’ve tried to be much more disciplined and we start to evaluate these deals not just on the basis of accretion,” he said.

Those comments may or may not come back to haunt him. In the interim, the onus is on Viehbacher to provide in specific detail an answer to a question Sanofi shareholders are almost sure to ask: how will the nearly $20 billion acquisition of Genzyme position Sanofi, a company trying even now to scale a significant patent cliff, for future growth?

Undoubtedly, Genzyme’s expertise in rare diseases, an area that has become au courant for big pharma, will come up. “As somebody said to me this morning, actually, we’re all ultimately going to be in rare diseases,” Viehbacher told JPMers. “As we develop biomarkers and narrow the population and the price per patient goes up, this is probably a model that we are actually going to see outside of the classic orphan drug business.”

Far be it from IN VIVO Blog to argue with the estimable Viehbacher on that point. However, does expertise in rare disease require spending $20 billion? Can't a company as externally focused as Sanofi claims to be obtain the skills via some other route? Indeed, as GSK’s initiatives in the rare disease space show, another alternative to a costly and time consuming acquisition is an alliance-driven model, where partnerships provide access to products that are now in vogue in part because they are largely protected from health care reform and generic competition, and, as such, have high pricing power.

Let's assume it's better to acquire than ally. Aren't there potentially cheaper acquisition candidates for the plucking? (Alexion and BioMarin are just two possibilities that come to mind.) Viewed alongside the proposed take out of Genzyme, Shire's 2005 acquisition of Transkaryotic Therapies for $1.57 billion and a 31% premium looks like a veritable bargain. And maybe that's the rub; late to the rare disease party, Sanofi has little choice but to overpay to get access to these niche-y products.

Of course there's another reason for Sanofi’s interest in Genzyme: accessing its biologics manufacturing facilities. Every big pharma is amassing greater biologics capabilities, lured by the specialty nature of the products. But building plants is not only expensive – it takes time. (Look how long Genzyme’s been building its Framingham site.) “By acquiring Genzyme, Sanofi gets the manufacturing capability right away,” says Salveen Richter, an analyst with Collins Stewart. “They probably believe they can use their fill/finish and manufacturing expertise to ameliorate the current manufacturing issues at Allston,” the Genzyme manufacturing site currently operating under a consent decree.

Based on Richter’s sum-of-the-parts analysis, which values Genzyme between $72 and $84 a share, she believes the sweetened offer is a fair deal for both sides. In all likelihood, it will be months before that assessment can be made -- and the answer will hinge mightily on how Sanofi manages the integration of Genzyme. Viehbacher and his team would do well to look at recent past history – AstraZeneca/MedImmune, Roche/Genentech, Takeda/Millennium Pharmaceuticals – for some pointers.

-- Ellen Licking and Joseph Haas

Image courtesy of flickrer jasongrahamhowell used with permission through a creative commons license.