DOTW Keeps Tabs As Tax Trimming Fuels Deals

As an industry, biopharma actually fares pretty well when it comes to taxes. Among profitable companies, biotech and pharma have some of the lowest effective U.S. tax rates compared to companies in other sectors. But that doesn’t mean they have stopped working to push their tax rates even lower.

Along with a recent ramp-up of the usual strategies, such as buying companies or assets based in low-tax locales or moving intellectual property there, the industry also is starting to take advantage of the newest twist on tax inversions – in which two companies in high tax locales, only one of them the U.S., merge and create a new company based in a low-tax country.

The specialty pharma consolidation frenzy is driven in part by tax benefits derived from buying companies in lower tax jurisdictions like Ireland. The spec pharma with the lowest tax rate wins – or at the very least earns the right to leverage all that cash on their books to gobble up higher tax rate competitors, thereby making higher margins on the same products.

Valeant is the obvious winner on this front; it will have an astonishing 2% tax rate in 2014, according to data from RBC Capital. But most recently, taxes were also a factor in the Actavis purchase of Forest Laboratories Inc. Actavis had already lowered its tax rate with the acquisition of Irish-headquartered company Warner Chilcott that completed last fall. Now Actavis can apply that reduced tax rate to a product portfolio that will encompass Forest. Prior to the deal announcement, RBC expected Forest would have a 24% effective tax rate in 2014 and that Actavis’ would be 17%.

And, of course, Perrigo is also a newly Irish company, with its purchase last year of the floundering Elan. But there aren’t a lot of direct routes left to Ireland. The largest independent, public Irish therapeutics company is drug delivery company Alkermes; it’s only one of six remaining that also include another drug delivery play Merrion Pharmaceuticals as well as antibody company Prothena, according to the Strategic Transactions database.

(In Ireland, all roads lead back to Elan. Alkermes garnered its Irish locale after a 2011 merger with the drug delivery unit of Elan, while Prothena is the 2012 spin-out of Elan’s drug discovery business. Merrion is also based on IP purchased from Elan.)

Most biopharmas count themselves lucky to have an effective tax rate in the teens – or even the low 20s. The big biotechs with the highest anticipated 2014 effective tax rates are Biogen Idec Inc. at 27% and Gilead Sciences Inc. at 25%, according to RBC. Between them they’ve had two of the most successful launches in recent years for Biogen’s Tecfidera (dimethyl fumarate) and Gilead’s Sovaldi (sofosbuvir).

Intellectual property for each of these products is domiciled in Ireland in an effort to curb tax expenditures. But that’s a long-term solution that could take years to work. Biogen had a 28.8% non-GAAP tax rate in the fourth quarter. Due to a larger percentage of its profits coming from the U.S. with the Tecfidera launch, the biotech expects the rate to remain at this level through 2014 but for it to subsequently decline in the following two years.

Alexion beefed up its Irish and Singapore operations last year and in January bought an Irish vialing facility for its Soliris (eculizumab). These efforts resulted in tax benefits that are expected to give it a 2014 non-GAAP tax rate of 11% to 12% (GAAP tax rate of 20% to 25%). That’s down from a whopping 51.9% effective tax rate in 2013, which translated into an income tax provision of $273 million. Alexion’s non-GAAP rate is expected to rise to 13% to 14% in 2015 and 16% to 18% in 2016 and beyond, since some benefits are only short-term tax credits.

The most creative tax tactic in the sector is the recent Endo-Paladin deal. The usual approach to tax inversion is for a U.S. company to become the subsidiary of a foreign company. The latest twist on this long-standing move, the third deal of its kind according to RBC, is exemplified by the Endo-Paladin merger, in which a U.S. and Canadian company are merging to form a new entity – in this case, an Irish company.

One risk of being overly imaginative with corporate tax strategy is always bad publicity, as it can trigger allegations of being a ‘tax avoider’ or, even worse, attract the tender attentions of the IRS. Those issues make it difficult for the big multinationals to be very aggressive on the tax front, although becoming enormous hasn't slowed Valeant’s efforts on this front.

The highest corporate income tax rate in the United States is around 40%, including federal, state and local taxes. But at $242 billion in 2012, corporate income taxes are a small percentage of U.S. federal receipts compared to the $1.1 trillion in individual income taxes and $845 billion in social insurance taxes during that year, according to a recent Government Accounting Office report. Since the 1980s, corporate taxes have ranged from roughly 6% to 15% of federal revenue.

Ireland isn’t the only useful tax locality – the top four are the UK, Ireland, the Netherlands and Switzerland, according to RBC. These countries had a 2013 corporate tax rate of 23%, 12.5%, 25%, and 18%, respectively, according to data from KPMG.

Ernst & Young’s Mitchell Cohen, the life sciences global tax leader at Ernst & Young, also includes Belgium (35%, with substantial patent and R&D related deductions and credits), Singapore (17%) and Puerto Rico (20% to 30%) among the ranks of countries with a significant life sciences presence that provide tax benefits.

Among profitable companies overall, the average effective tax rate is 26.6%, according to a current dataset from Aswath Damodaran, a professor of finance at the Stern School of Business at New York University. The profitable pharma companies in his dataset had a 22% average effective tax rate, while the money-making biotechs were at an average of 17.4% That puts both groups in the bottom one-third of corporate tax paying sectors.

And while DOTW can't promise that you'll personally enjoy an effective tax rate of 2% this season, we do want to send you off with this week's deal news. Please read on to discuva the latest, including a pair of preclinical deals and another two that were called off in this week's edition of. . . .

Celgene/Abide: Celgene likes to keep all its options open – to acquire companies, to acquire programs and to license programs. In its latest R&D deal with the preclinical Abide Therapeutics, disclosed on Feb. 28, it included an option to purchase its biotech partner as well as an option to license the rest-of-the-world rights on the first two programs to reach the clinic. Abide’s most advanced compound, AB101131, is expected to enter the clinic in 2015. The biotech expects to get three or four additional candidates into the clinic under the collaboration.  Its technology selectively targets serine hydrolases to develop new treatments for inflammation and immunological disorders. Founded in 2011, Abide was seeded by venture firm Cardinal Partners. Celgene and Cardinal Partners both participated in an undisclosed equity financing concurrent with the deal. Other terms of the deal, including the upfront, also remain undisclosed. Abide is headed by Alan Ezekowitz, an entrepreneur-in-residence at Cardinal Partners who became the biotech’s president, CEO and co-founder. Prior to that, he was at Merck Research Laboratories, the research division of Merck & Co. Inc., as SVP and franchise head of bone, respiratory, immunology and endocrine. Abide’s platform is based on work by Professors Ben Cravatt and Dale Boger of the Scripps Research Institute. The biotech secured its first big biopharma deal last May; it partnered with Ezekowitz’ former employer, Merck. In that deal, it garnered an undisclosed upfront and milestones of up to $430 million to discover, develop and commercialize small molecules against three novel targets to treat metabolic diseases with a focus on type II diabetes. In the last few years, Celgene has done at least three prior deals that included an option to purchase the company: an October 2013 deal with cancer and fibrotic disease company PharmAkea Therapeutics, a July 2013 partnership with toll-like receptor agonist developer VentiRx Pharmaceuticals, and an October 2012 deal with selective small molecule histone deacetylase (HDAC) inhibitor developer Acetylon Pharmaceuticals. - Stacy Lawrence

Roche/ Discuva: Roche and U.K. biotech Discuva are collaborating on the discovery and development of new antibiotics to treat multi-drug resistant gram-negative infections using Discuva’s Selective Antibiotic Target Identification technology platform. SATI uses next-generation sequencing and bioinformatics to identify bacterial targets and select from among them promising drug development candidates. The deal, announced on Feb. 28, fits well with Roche’s revamped research strategy in infectious diseases, a field its R&D organization exited more than 20 years ago, but recently has re-entered. The new, narrower focus is on multi-drug resistant, pathogen-specific, hospital-directed therapies, rather than broad spectrum antibiotics that were Roche’s original focus. Companion diagnostics, an area of strength due to Roche’s long experience in molecular diagnostics, will be important in identifying pathogens. In an October 2013 meeting in New York, Roche’s head of research and early-stage development John Reed outlined his organization’s priorities, noting that the antibiotics field is attractive now in part because “the animal models are good in the clinical context” and the regulatory path is clearer, particularly for safety requirements, thanks to recent FDA guidance.” Discuva will receive an upfront payment of $16 million, as well as research fees and payments on multiple programs of up to $175 million per product upon achievement of certain development, commercial and sales milestones. It will also receive potentially double-digit royalties on product sales. Discuva uses proprietary methods built from recent genomic discoveries to identify targets that affect bacterial growth and viability, as well as related genes potentially associated with development of downstream resistance. The problem of multi-drug resistance to gram-negative infections is growing but has not received as much attention as gram-positive infections. Gram negative pathogens addressed by Discuva include Pseudomonas aeruginosa, Acinetobacter baumannii, Klebsiella pneumonia, Escherichia coli, and Neisseria gonorrhoeae. The company was founded in early 2012, with backing from New Wave Ventures. New Wave’s co-founder Tim Bullock is chairman of Discuva’s board; the amount his firm contributed to the start-up is not public. David Williams is an entrepreneur who founded Sareum, a U.K. oncology biotech that went public on AIM, and previously worked at Millennium Pharmaceuticals, Acambis, and Medivir. - Wendy Diller

Merck/Ariad: The fate of Ariad Pharmaceuticals’ mTOR inhibitor ridaforolimus is uncertain now that pharma partner Merck & Co. has decided to return rights to the cancer drug. Ariad revealed in its year-end financial release Feb. 25 that Merck is terminating a licensing agreement for the development and commercialization of ridaforolimus effective in November. The move creates “a new clinical and business opportunity for Ariad,” the company said in a statement, but management didn’t even mention ridaforolimus during a same-day conference call. Ariad is focused on the re-launch of Iclusig (ponatinib), which re-entered the U.S. market in January for the treatment of leukemia after sales were temporarily halted last year due to safety concerns. The company is also running clinical trials to meet FDA’s post-marketing commitments for Iclusig and to expand its label to new indications. Merck’s decision to end the agreement shouldn’t surprise investors, especially now that the big pharma’s oncology focus has shifted to its PD-1 immunotherapy program. Ridaforolimus was rejected by FDA in 2012 as a maintenance treatment for sarcoma after it failed to demonstrate a benefit on survival in a Phase III trial and only a limited two-week progression-free survival advantage. Under the original 2007 collaboration between the two companies, Merck paid $75 million upfront for development and commercialization rights to ridaforolimus and agreed to pay up to $452 million in development milestones and $200 million in R&D payments; the deal was revised in 2010 to give Merck global rights rather than a U.S. profit split. Merck paid out some $222.5 million in upfront and milestone payments during the life of the deal, according to the Strategic Transactions database. - Jessica Merrill

Teva/Andromeda: In a case of a “No-Deal” possibly leading to another deal – Andromeda Biotech reacquired rights to type 1 diabetes candidate DiaPep277, along with equity, from fellow Israeli company Teva. To undo the firms’ 2007 partnership around the human heat shock protein 60 (Hsp-60)-derived peptide, Andromeda will pay Teva total consideration of approximately $72 million in future installments based upon revenues or proceeds payable to its shareholders.That unraveling of a deal on Feb. 24 was followed by media reports Feb. 26 that Clal Biotechnology, another Israeli company which owns 96% of Andromeda, was working on selling Andromeda and the DiaPep277 program to an undisclosed U.S. biopharma for a price that might number in the hundreds of millions of dollars. At press time, however, a second transaction could not be confirmed. Andromeda said it will continue a 475-patient confirmatory Phase III trial for the candidate. The 24-month, double-blind, placebo-controlled trial is being conducted at more than 100 locations in North America, Europe, Israel and Argentina. Patient recruitment was completed in September 2012 and the trial is expected to produce data by the end of this year. The trial is studying DiaPep277’s ability to preserve the patient’s insulin secretion by the pancreas, with a primary endpoint of maintenance of glycemic control. - Joseph Haas

Thanks to 401(K) 2013 from Flickr for the use of the image, which we find both alarming and strangely beautiful.

Deals Of The Week: Can Endo Succeed By Copying The Valeant Model?

Santa’s sleigh may be loaded to the brim with gifts come Christmas Eve but it was Deals of the Week that carried a heavy load during the final full business week before the Yuletide holiday. That’s roughly 20 business development transactions, and counting, for the week of Dec. 16-20 as this column went to press.

Below are some of the highlights, but let’s start with the latest stocking-stuffer at Endo Health Solutions, which has always relied on deal-making to fill its pipeline but may be poised to increase its prior business development pace since Rajiv De Silva signed on as CEO from perpetual deal-maker Valeant Pharmaceuticals in February. On Dec. 16, Endo agreed to acquire NuPathe and its recently approved sumatriptan patch, Zecuity, for $105 million upfront plus potential contingent payments pegged to future sales of the migraine product.

This closely followed the Nov. 5 $1.6 billion buyout of Canadian specialty pharma Paladin Labs, a move that would expand Endo’s international footprint to Canada, South Africa and Mexico, while providing tax advantages by allowing the suburban Philadelphia company to re-domicile in Ireland. It’s been a frenetic pace since De Silva took over and moved toward a Valeant-like pursuit of expansion via M&A activity.

While Wall Street did not rave about the NuPathe acquisition, perceiving it as mainly the acquisition of a single asset likely to post smallish sales but also enhance Endo’s pain product portfolio, analysts told Deals of the Week they approve of De Silva’s approach to re-making Endo.

“I actually like the strategy he’s pursuing,” said UBS Investment Research analyst Marc Goodman. “De Silva came in and said ‘we need to restructure this place first because our costs are out of whack with our revenues.’ That’s pretty much the same thing Valeant did a few years ago. The second thing he did was look at the assets and ask what they wanted to be in and what they didn’t. They decided to get rid of [urological services provider] HealthTronics, so that’s on the block. And it wouldn’t surprise me if in 2015 or afterward, once they fix [medical device unit] AMS that they sell AMS.”

Speaking to the Credit Suisse Healthcare Conference Nov. 12, De Silva said plans to divest HealthTronics, termed “not … a strategic fit with us anymore,” are making solid progress. “We have retained an investment bank and we are in the midst of doing management presentations and are optimistic about the level of interest that has been expressed so far,” the exec said. He didn’t address any plans to sell off AMS but said that apart from its women’s health offerings, the unit is showing quarter-to-quarter performance improvement, including year-to-date revenue growth compared with 2012.

The $105 price tag for NuPathe works out to about $2.85 per share. But if Zecuity, approved by FDA in January but not yet launched, meets certain sales thresholds, NuPathe investors stand to get additional payouts. They’ll get $2.15 per share if net sales of Zecuity top $100 million during any four-quarter period up to the ninth anniversary of the first commercial sale of the product. And they can obtain an additional $1 per share if the product reaches $300 million in sales during a four-quarter period during that same time span.

The only FDA-approved prescription patch for migraine, Zecuity is a disposable, single-use, battery-powered transdermal patch that delivers sumatriptan through the patient’s skin. Its approval was based on a Phase III program that tested nearly 10,000 units of the product in 793 patients.

While Goodman thinks Zecuity is unlikely to top the sales marks established under the deal’s contingent payment language, he believes the technology behind the patch product will make it hard to duplicate, frustrating attempts at generic competition and providing Endo with a “very long tail” of revenue (sumatriptan itself, developed and sold by GlaxoSmithKline, has been generic since 2008).

UBS initially will include annual sales of less than $100 million in its modeling for Endo, because of the highly genericized competition in migraine, the resulting pricing pressure and the possibility that doctors with patients who failed to obtain relief on an oral sumatriptan product might not be greatly inclined to try a sumatriptan patch in those very same patients. “I just wonder about the pecking order,” Goodman said.

Meanwhile, Morningstar analyst David Krempa sees the transaction as keeping with the tradition of bolt-on deals De Silva would have learned to value while serving as president and chief operating officer at Valeant.

“It’s a relatively small deal that basically fits in with the strategy they talked about, pursuing bolt-on deals similar to what we saw at Valeant, combined with the occasional mega-deal like we saw with Paladin,” Krempa noted. “Those are the kinds of deals that Valeant has had success with, ones in which it can acquire a product or asset and take out all the revenue without needing to add on any expenses. They don’t need the sales force that [NuPathe] has and so they add the new product onto their existing sales force’s portfolio and get all of the sales without taking on much of the expense that typically would go along with it.”

But Krempa shares Goodman’s concerns about the viability of the migraine space and pain therapy in general. Endo needs to seek out business areas offering “less pricing pressure and better organic growth prospects,” he said, citing dermatology, ophthalmology, branded generics and over-the-counter products as possible targets. The Paladin acquisition gives Endo entrée into some of those spaces, he added.

Meanwhile, plenty of other companies, including Valeant of course, were negotiating their own deals during the final shopping days before Christmas. Read on as we present a red-and-green tinged edition of ....

Valeant/Solta Medical: Serial buyer Valeant moved to expand its aesthetics business this week with the addition of Solta Medical, the makers of medical device systems for aesthetic applications. Valeant announced Dec. 16 it will acquire Solta for $250 million in the latest in a string of acquisitions by the Canadian firm in recent years, including several that have expanded the company’s portfolio in medical devices and dermatology. Solta will complement Valeant’s portfolio on both fronts by augmenting its offerings to dermatologists and plastic surgeons. Its 2012 revenues were $145 million, coming from products like Thermage CPT radiofrequency skin-tightening system, Fraxel skin repair system and the Clear + Brilliant laser skin-resurfacing system. Solta has made a number of major acquisitions in recent years, including Sound Surgical Technologies in February 2013, and the LipoSonix business from Medicis Pharmaceutical in 2011. Valeant ultimately acquired Medicis in 2012 for $2.6 billion, building significantly on its dermatology and aesthetic offerings at the time. - Jessica Merrill

Merck/GlaxoSmithKline: Merck announced Dec. 18 that it is teaming up its highly anticipated early-stage cancer compound, MRK-3475, with GlaxoSmithKline’s kidney cancer drug Votrient (pazopanib), which was approved in October 2009. The two pharmas will test the protein kinase inhibitor with the anti-PD-1 immunotherapy in a Phase I/II clinical trial that will evaluate the safety and efficacy of the combo in treatment-naive patients with advanced renal cell carcinoma, they said in a statement. Financial details of the collaboration were not disclosed. But the dollar amount attached to the deal is almost irrelevant; for Merck, the anti-PD-1 immunotherapy is one of its few programs to garner much enthusiasm of late – both inside and outside the company – as the New Jersey pharma struggles to move drugs through its pipeline successfully. Merck is relying heavily on the cancer immunotherapy – which has shown a lot of promise but is still very early – to deliver its first blockbuster in several years; and the company intends to partner, partner and partner some more. “We look forward to initiating further collaborations to investigate MK-3475 in combination with other anti-cancer agents across a range of tumor types,” said Iain Dukes, SVP of Licensing and External Scientific Affairs at Merck Research Laboratories. So expect to see plenty more of these little tie-ups in 2014 – but don’t hold your breath for any financial terms to be revealed. - Lisa LaMotta

Pfizer/Siemens: Pfizer and Siemens Healthcare Diagnostics have entered into a master collaboration agreement to design, develop and commercialize diagnostic tests for therapeutic products across Pfizer’s pipeline. Siemens is providing in vitro diagnostic tests that Pfizer can use in its clinical trials and potentially as companion diagnostics for Pfizer drugs. Terms were not disclosed, nor were development priorities, but Trevor Hawkins, SVP, strategy & innovations, diagnostics division of Siemens Healthcare, said the deal is open-ended and could be applied to Pfizer’s entire portfolio, from early-stage development to commercialized drugs. The partners already have two active programs, one of which requires Siemens to identify a marker for a compound and the other of which requires Siemens to develop a test for a biomarker that Pfizer has identified already. The partners have set up a joint governance committee, which is meeting weekly. Both companies have partnerships with others around companion diagnostics, but those are mostly one-offs; Siemens, for example, in June, entered into a global agreement with Janssen Pharmaceutica to create a companion diagnostic for an early-stage heart failure therapeutic. Pfizer has at least three companion diagnostic deals, including one with Qiagen, which it signed in 2011 to develop a molecular test for dacomitinib, then in Phase III for non-small cell lung cancer. And in 2012, it signed a deal with Roche Diagnostics Corp. to develop an immunohistochemistry companion test for Xalkori (crizotinib), also for NSCLC. Pfizer isn’t the first pharma to enter into a master agreement around companion diagnostics; Eli Lilly has one with Qiagen. As the deal’s reach shows, pharma’s inherent skepticism about the value of companion diagnostics is gone, although many uncertainties remain, both technical and commercial, about the field. - Wendy Diller

Bristol-Myers Squibb/AstraZeneca: AstraZeneca announced Dec. 19 that it will acquire the entirety of Bristol-Myers Squibb’s interests in their diabetes alliance, including drug assets, staff and infrastructure, paying $2.7 billion on deal completion, $1.4 billion in regulatory and commercial milestones, and royalties up to 2025. The deal ends a seven-year diabetes alliance between the two parties that culminated in the 2012 co-purchase of Amylin Pharmaceuticals for $7 billion. With the dissolution of the alliance, AstraZeneca gets all patents and global rights to DPP-4 inhibitor Onglyza (saxagliptin) in all combinations and formulations, SGLT4 inhibitor dapagliflozin (Forxiga in Europe), metreleptin (recombinant leptin) for treatment of lipodystrophy, and Amylin’s GLP-1 assets Bydureon (exenatide, weekly injection) and Byetta (exenatide, twice-daily injection). The transaction illustrates the divergence in strategy between the two companies, as AstraZeneca believes its geographic reach and its scale in diabetes assets, infrastructure and capabilities position it to succeed. Bristol, on the other hand, will use the breakup to accelerate its transformation into a sharply focused specialty care company and to re-allocate its resources toward its PD1 program and its immuno-oncology franchise, said CEO Lamberto Andreotti on a same-day business update call. AstraZeneca’s focus in 2014 will be on its upcoming launch of dapagliflozin in the U.S., on building the Bydureon brand, and on life-cycle management of Onglyza. - Mike Goodman

Bayer/Algeta: Everyone likes to see a billion-dollar acquisition or two quickening the markets a bit going into the annual industry festival that is the JPMorgan Healthcare Conference. Obligingly, Algeta and its partner Bayer are providing one; the biotech said on Dec. 19 that it has agreed to be acquired by the pharma for $2.9 billion. Algeta originally disclosed an offer from Bayer on Nov. 26. In the intervening weeks, it got the pharma to sweeten the pot a bit to NOK 362 per share from NOK 336. That increase raised the offer from the original price of about $2.65 billion. The price is a 37% premium to the closing price on Nov. 25, the day before it disclosed the original Bayer offer. The pair partnered on prostate cancer therapy Xofigo (radium-223 dichloride), which was approved and launched in the U.S. in May. It subsequently was approved in the EU in November. In a market crowded with new and expensive entrants, the therapeutic offers a new mechanism of action and is aimed specifically at the treatment of castration-resistant prostate cancer in patients with symptomatic bone metastases, a critically ill subset. In Xofigo’s first full quarter of sales, it had $17 million in revenue during the third quarter. Administration sites have to be licensed to sell the product because of its radioactivity; as of Oct. 18, Algeta said there were 626 facilities licensed to treat patients with Xofigo in the U.S. That number had progressed faster than expected. Algeta received €100 million ($137 million) in Xofigo milestones during the first three quarters of 2013. Half of this amount came due on the FDA submission for Xofigo, with the other half tied to the first sale of the product. Under the terms of the 2009 partnership, Bayer paid €42.5 million up front. Then in 2012, Algeta exercised its option to co-promote Xofigo in the U.S., which entitled it to a 50/50 split with Bayer of profits and commercialization costs. Bayer owns sole rights ex-U.S., paying Algeta a tiered double-digit royalty on product sales. Analysts estimate Xofigo will be a blockbuster. Bayer clearly was unwilling to share any upside with its biotech partner and, with enough cash, it didn’t have to. - Stacy Lawrence

Jazz/Gentium: Recently re-domiciled in Ireland, as Endo now is planning to do, Jazz Pharmaceuticals signed an agreement Dec. 19 to purchase Italy’s Gentium for $57 a share, a bid that would total out to about $1 billion. Key to the deal is Defitelio (defibrotide), approved by the EU this past October to treat veno-occlusive disease in adult and pediatric patients undergoing hematopoietic stem-cell transplantation. The sale is structured as a tender offer – both companies’ boards of directors have approved the transaction. Based on a single-stranded oligodioxyribonucleotide extracted from DNA in pig intestines, defibrotide had been filed for approval in the U.S. but Gentium withdrew its NDA in August 2011 after learning that FDA would refuse to file the application over questions of data quality and the conduct and monitoring of clinical trials. “Incorporating Gentium into Jazz Pharmaceuticals is a strong strategic fit, as Defitelio would diversify our development and commercial portfolio and complement our clinical experience in hematology/oncology and our expertise in reaching targeted physicians who treat serious medical conditions,” Jazz Chairman and CEO Bruce Cozadd said in a release. “Because Defitelio is already approved in the EU, the acquisition would add a new orphan product that has potential for short- and long-term revenue generation, high growth and expansion of our multinational commercial platform.” In a Dec. 20 note, Brean Capital analyst Gene Mack said the acquisition should be immediately accretive for Jazz, with defibrotide bringing in a projected $71 million in sales in 2014, crossing the $200 million annual sales threshold in 2018 and nearing $500 million in 2023. - Joseph Haas

Photo credit: Wikimedia Commons

Deals Of The Week Road-Tests Biopharma Options

More options are always better, right? Obviously, that’s a “yes” when it comes to building our dream Tesla Model S. But big biopharma is getting nowhere fast with deals that build in options to license drug candidates.

The number of option-to-license deals executed peaked at more than 30 in 2009, when biotech financing had dried up in the wake of the 2008 U.S. economic meltdown, and has declined every year since, according to data from Elsevier’s Strategic Transactions database. That’s only counting deals with an option-to-license as the main component. What has big biopharma accomplished with its slew of option deals in the last decade and a half? Not much, so far. Even though option-based partnerships can be cheap, they also rarely offer results.

Option-to-license deals, or option-alliances, are often a way of making a half-hearted bet on biotechs’ riskiest, early-stage candidates and technologies. For small biotechs, the extent to which they rely upon these deals can be a sign of their relative fiscal desperation. Option-alliances lock up biotech assets very early, with a high level of continued uncertainty (and development costs) for the biotech and a capped future potential upside.

For pharma, these deals are a bargain – pay a little upfront and part of early-stage R&D costs and then pick up rights to a candidate, or not, typically after clinical proof-of-concept data emerges. Biotechs are able to retain control of their assets for a while longer, potentially allowing them to move development forward faster.

We analyzed all R&D-based option-alliances with a disclosed potential value of $100 million or more. That’s almost 120 deals, some dating back as early as the late 90s. Many of the more recent ones remain active, of course; these deals typically extend over at least three or four years. Most of the remaining deals either expired or were terminated. We could only find seven of these $100M+ deals that actually resulted in option exercises, and some of those later blew up in the clinic.

GlaxoSmithKline is a nice case in point. It has been one of the most active R&D options dealmakers, with at least 18 of these deals, most of which were initiated from 2006 through 2009. A few of GSK’s option-alliances have resulted in abject disappointments – most prominently with Nabi Biopharmaceuticals for the smoking cessation product NicVax, which failed in Phase III. Last year, Nabi merged with Biota.

Others got shunted to the side due to changes in GSK priorities (a $1.5B bio-bucks deal w Targacept was terminated in 2011 as the pharma left neuroscience) or as biotechs became defunct (after a $1.2B bio-bucks deal in 2007, Epix Pharmaceuticals then slid out of existence in 2009). Several of GSK’s option-to-license deals were done under its Center of Excellence for External Drug Discovery (CEEDD), which silently sank under waves of corporate restructuring around 2010.

(GSK is undeterred from experimenting with its approach to external, early innovation. This week it picked the first set of winners from a discovery-stage academic competition. See below for further details.)

The pharma does have several ongoing option-alliances, including at least four with companies that recently IPO’d. One is an option to back-up compounds for Duchenne muscular dystrophy (DMD) from Prosensa; GSK is partnered with the biotech on lead compound drisapersen, which failed in Phase III testing to treat DMD in September. Optimists are hoping its exon skipping technology has progressed since the first iteration and are looking for an effective DMD treatment among Prosensa’s back-up compounds, some of which GSK can option. Prosensa is the worst-performing 2013 IPO, down 72%.

GSK also has an anti-inflammatory and HCV deal with microRNAi company Regulus Therapeutics, initiated in 2008 and expanded in 2010; an anti-cancer stem cell antibody deal with OncoMed Pharmaceuticals that was for four candidate originally from 2007, but was cut down to two candidates in 2011; and a discovery deal with Five Prime Therapeutics for skeletal muscle diseases and muscle wasting targets and candidates that was originated in 2010 and expanded in 2011.

GSK has exercised its options at least twice, but both times candidates were returned. In 2010, it optioned Anacor Pharmaceuticals’ Gram-negative infection treatment and then subsequently returned it a few years later. That same year, it optioned Traficet-EN (now vercirnon) from ChemoCentryx. This September, GSK returned rights to the candidate for all indications. The pharma retained CCX354 for rheumatoid arthritis, which it also optioned. It may still option a third candidate under the 2006 deal.

Despite keeping a lot of options open, no one’s going anywhere fast. But we’re keeping our eyes on the road, moving ahead to all the latest deals (including loads of academic and discovery partnerships) in this edition of…

Salix/Santarus: The union of Salix Pharmaceuticals with Santarus creates a billion-dollar gastrointestinal specialty pharma that holds U.S. rights to fast-growing diabetes drug Glumetza (metformin extended release). Salix agreed Nov. 7 to pay $32 per share in cash for San Diego-based Santarus, valuing the company at $2.6 billion; its combined annual revenues would be about $1.3 billion based on their most recent quarterly performances. Salix has relied heavily on Xifaxan (rifaximin) for traveler’s diarrhea caused by Escherichia coli infections and hepatic encephelopathy; it produced $514.5 million in 2012 revenues, about 70% of the company’s total product sales. But it says the conjoined entity will be more diversified, with no drug accounting for more than half its revenues. Glumetza, a drug Santarus shares with Depomed, has delivered $131.4 million in revenue to Santarus in the first nine months of 2013. The buyout price represents a 37.8% premium over Santarus’s Nov. 7 closing price of $23.22. Raleigh, N.C.-based Salix had about $817 million in cash at the end of the third quarter, but intends to finance the deal with $1.95 billion in debt and a $150 million revolving credit facility from Jefferies Finance, as well as nearly all of its cash on hand. - Paul Bonanos

Roche/Polyphor: Switzerland-based Roche signed an exclusive global licensing deal to develop and commercialize Swiss biotech Polyphor's investigational antibiotic POL7080 against certain hospital-acquired superbug infections known as Pseudomonas aeruginosa, signaling Roche’s first foray back into antimicrobial development for three decades. Roche will pay up to CHF 500 million ($548 million) for the experimental antibiotic, which has only just entered Phase II testing, the companies said Nov. 4. The world’s largest maker of cancer drugs, which is trying to diversify into other disease areas, will make an upfront payment of CHF 35 million and milestone payments of up to CHF 465 million to the Swiss biotech. Roche said POL7080 belongs to a new class of antibiotics that kills P. aeruginosa, a bacterium found in hospitals and resistant to many antibiotic treatments, by a novel mode of action. It’s the first of a number of novel antibiotic candidate drugs being assembled by research and early development group pRED, which is now under the new leadership of John Reed and focusing on three main areas of unmet medical need: Hepatitis B, Influenza and Antibiotics. The pact with Polyphor is the first demonstration that Roche is back in antibiotics. In contrast, other Big Pharma companies have cut back, including former field leader Pfizer, which closed its antibiotic R&D center in Connecticut in 2011, as well as Bristol-Myers Squibb and Eli Lilly. AstraZeneca, GSK, and Merck remain active in the space. Privately-owned Polyphor discovers and develops macrocycle drugs intended as a complement to classical small molecules and large biopharmaceuticals. Although Polyphor, whose main shareholders are private individuals, doesn’t have any products on the market, its pact with Roche is its sixth deal since 2008. Its three drug candidates developed using its protein epitope mimetics (PEM) drug discovery technology are POL7080; POL6326, a CXCR4 antagonist currently in Phase II and ear-marked for several indications; and POL6014, an elastase inhibitor that’s in pre-clinical studies. PEMs are “medium-sized…, fully synthetic cyclic peptide-like molecules that mimic the two most relevant secondary structure patterns involved in Protein-Protein Interactions (PPIs),” according to the company’s Web site. It adds that they are “among the most potent and selective molecules known to modulate PPIs, GPCRs with large ligand-binding domains, and enzymes.” - Sten Stovall

Endo/Paladin: Endo Health Solutions’ new CEO Rajiv De Silva is making good on following in the footsteps of his former employer Valeant by conducting rapid-fire M&A that adds to the specialty pharma’s business. The Pennsylvania company announced Nov. 5 that it will acquire Montreal-based Paladin. The Canadian spec pharma has over 60 marketed products and will give Endo a jumping off point for building its business in Canada, Mexico, and South Africa. The $1.6 billion deal will be an almost all-stock transaction, with Endo paying CAD$77 ($73.70) per share for all outstanding shares of Paladin, a premium of 20% to Paladin’s share price of $63.91 on Nov. 4, the day before the deal was made public. Paladin shareholders will receive 1.6331 shares of the new company in stock and CAD$1.16 in cash, as well as one share of Knight Therapeutics, a new company. Knight will be spun-out of Paladin and be formed around Impavido (miltefosine), a treatment for the parasitic disease leishmaniasis. Impavido received a positive opinion from an FDA advisory committee in mid-October and has a PDUFA date of Dec. 18. Following the deal, the new company will be re-domiciled in Ireland in an effort to take advantage of a more favorable tax rate. Currently, Endo has a tax rate in the high-20% to 30% range. The new company will have a tax rate closer to 20%. - Lisa LaMotta

Pfizer/Juvenile Diabetes Research Foundation: The Juvenile Diabetes Research Foundation (JDRF) said Nov. 4 it would partner with Pfizer’s Centers for Therapeutic Innovation (CTI) to co-fund up to four jointly selected projects in the fields of immune tolerance, diabetic nephropathy and beta cell health. This is JDRF’s first corporate partnership since it announced a collaboration last year with Novo Nordisk, which will run out of the pharma’s Type 1 Diabetes R&D Center in Seattle. JDRF is the largest charitable supporter of type 1 diabetes R&D; it is currently sponsoring about $530 million worth of research, with $110 million in support last year. Pfizer’s CTI was established in 2010 to help further translational science; it hopes to get its first compound into the clinic this year and to bring two candidates into the clinic every year starting in 2014. CTI works with a network of 24 academic and medical institutions. Financial details of the deal were undisclosed. - Stacy Lawrence

Eisai/Arena: Eisai doubled down on Arena’s weight loss drug Belviq (lorcaserin) by expanding its commercialization rights to most of the world from much of North and South America. That’s despite slow sales in the drug’s first full quarter on the market – only $5.4 million. Insurers have been slow to start to reimburse for Belviq and Vivus’ Qsymia (phentermine/topiramate ER). Under the expanded deal, Arena will receive a $60 million upfront payment and up to $176.5 million in regulatory and development milestones. That’s an increase of $123 million from the milestone amount remaining under the prior agreement. Arena will continue to sell Belviq to Eisai for the U.S. and other North and South American territories for a purchase price of 31.5% and 30.75% of Eisai’s net sales in those regions, respectively. For Europe, China and Japan, Arena will receive 27.5% of Eisai’s net sales, while for all other territories the rate is 30.75%. These rates can increase on a tiered basis. Arena also stands to receive a one-time purchase price adjustment of $1.56 billion based on sales in the territories covered by an agreement; that’s an increase of $185 million from the prior deal. Eisai has exclusive commercialization rights in all countries worldwide, excluding South Korea, Taiwan, Australia, Israel and New Zealand. The partners expect also to investigate Belviq as a smoking cessation treatment. - S.L.

GSK/Various Academic Researchers: With a view to front-loading its pipeline, GSK has selected eight winners in its first Discovery Fast Track competition, designed to translate academic research into starting points for new potential medicines. The contest attracted 142 entries across 17 therapeutic areas from 70 universities, academic research institutions, clinics and hospitals in the US and Canada. The program gives certain researchers the opportunity to partner with GSK and jump-start their research into a development program. The winning projects deal with important unmet medical needs, including antibiotics resistance, diseases of the developing world, and certain cancers. The selected scientists will collaborate with GSK’s Discovery Partnerships with Academia (DPAc) team, the sponsor of the competition, to quickly screen and identify novel compounds to test their hypotheses. If advanced chemical testing is successful, the winning investigators could be offered a DPAc partnership to further refine molecules and assess their potential as novel new medicines. GSK devised the contest as a potential engine for accelerating input into its translational research operation, hoping to entice the brightest minds across North America with the promise of lending its potential to their discovery-stage programs. GSK and the academic partner share the risk and reward of innovation, where the U.K. drug maker funds activities in the partner laboratories, and provides in-kind resources to progress a program from an idea to a candidate medicine. Work on the winning Discovery Fast Track projects will begin immediately and the first screens are expected to be completed in mid-2014. - S.S.

Johnson & Johnson/ Evotec: Johnson & Johnson and Evotec are looking broadly, beyond the current focus on beta amyloid and Tau protein-based mechanisms, to identify new targets for Alzheimer’s disease. Under a collaboration announced on Nov. 8, the companies will seek to identify drug targets that could lead to entirely new approaches to treatment using Evotec’s TargetAD database. At best, the drugs in clinical trials today, if successful, will have modest efficacy for treating symptoms of mild-to-moderate patients, and “delay Alzheimer’s symptoms by a few weeks,” said Evotec’s Werner Lanthaler in an interview. The Janssen-Evotec partnership is much more ambitious than current efforts, both in its approach to how it achieves its goals and the goals themselves, he added. The database is derived from analysis of dysregulated genes in high-quality, well-characterized human brain tissues representing all stages of disease progression, Evotec said. It was built off of tissue contributions from The Netherlands Brain Bank and is “systematized, unbiased, and comprehensive,” said Lanthaler, explaining that by being unbiased, it is agnostic to whether the approach is ultimately an antibody, small molecule, or other kind of compound.  No other companies currently have access to the database, and Lanthaler was cagey in stating whether they would or its use would be exclusive to J&J. But he did say that J&J was the first company Evotec approached when it decided to look for licensees, and it jumped on the opportunity – perhaps in part because the companies have had a previous successful relationship in other therapeutic areas. Janssen will reimburse up to $10 million of full-time employee-based research costs and make preclinical, clinical, regulatory and commercial payments, capped at between $125 million and $145 million per program. Evotec will also be entitled to royalties from sales from any products that emerge from the collaboration. The deal runs for three years, and, on J&J’s side, is being conducted through its California Innovation Center. - Wendy Diller

(Thanks to Teslamotors.com for use of this image of our new Tesla S -- are you paying attention Santa??)

Deals Of The Week's Dance Card is Full

Industry business-development executives rang in the start of what should be a most interesting New Year's (the score's been set for a while, but the performance is NOW: the biosimilars, patent cliffs, companion diagnostics, ongoing financing uncertainty and the big gorilla, health care reform) with half a dozen deals, including Forma's second big partnership in six months and a joint licensing agreement between Alnylam and Arrowhead. 


Also this week 2012 saw its first NO DEAL! as Astellas opted out of a worldwide development and commercialization agreement with Theravance over the latter's Vibativ (telavancin), a bacteriacide, once-daily injection. 


An as if to shock the troops to attention ASAP, Teva announced on New Year's Day an unexpected -- at least by most of industry -- management change, with Bristol Myers' newly resigned head of business development and strategy Jeremy Levin slated to succeed Shlomo Yanai as CEO in May, almost guaranteeing a higher biz dev profile for the global generics/specialty pharmaco.

By the end of the week the calendar new year seemed way back in the rear view as industry's own annual celebration loomed larger. And of course everyone's timing their news to next week -- deals, fundraising, and cocktails await. We'll see you in San Francisco. Meanwhile, it's ...



Forma/Boehringer Ingelheim: Cambridge, MA -based computational drug discovery platform developer Forma Therapeutics Inc. struck its second big partnership in just over six months on Jan. 5. Boehringer Ingelheim GMBH agreed to pay $65 million upfront, plus another $750 million in potential pre-commercial milestone payments, to discover oncology treatments that affect protein-protein interactions. The companies will select an unspecified number of targets jointly; a few have been determined already, but the remainder will be selected over the course of the four-year deal. In late June, Genentech Inc. and Forma agreed to discover cancer metabolism drugs in a deal of undisclosed size. Genentech received an option to acquire the program, which if exercised would return money to Forma’s venture investors. The BI deal also has “a return for our shareholders built in,” according to Forma CEO Steven Tregay, although there’s no buyout option this time. He declined to provide further details. Forma, which has additional platform discovery deals with Eisai, Cubist Pharmaceuticals Inc. and Novartis, has raised $33 million from Lilly Ventures, Bio*One Capital and the Novartis Option Fund in two venture rounds since 2008. It’s planning to develop drugs on its own as well, although Tregay said it’s still building a broad pipeline rather than concentrating on one or two candidates--Paul Bonanos.

Biogen/Isis: Isis Pharmaceuticals Inc. announced Jan. 4 that it garnered a deal with Biogen Idec for its antisense technology, adding to the list of large companies that have partnered with the biotech. Biogen and Isis have agreed to collaborate on the development of ISIS-SMN, a Phase I compound meant for the treatment of a rare genetic disorder called spinal muscular atrophy (SMA). Biogen will pay Isis $29 million upfront as well as $45 million in potential milestones for the option to license the compound after it has reached the proof of concept phase. Should Biogen choose to license the drug, it will assume full development and regulatory responsibilities. Isis will be eligible for another $225 million in milestone payments, along with double-digit royalties on sales, and also will retain some commercialization rights. Isis and Biogen may be the first companies to bring a treatment to market for SMA, but others are not far behind. Both Novartis and Roche have invested in preclinical treatments for the disorder. Roche agreed to pay as much as $490 million to PTC Therapeutics Inc. for the rights to its SMA program--Lisa Lamotta.

Alnylam/Arrowhead: With Alnylam Pharmaceuticals Inc. focusing mainly on internal pipeline efforts following the termination of collaborations with Roche and Novartis late in 2010, the pioneering RNA-interference company has licensed Arrowhead Research Corp.’s Dynamic Polyconjugate (DPC) technology to use toward developing an RNAi therapeutic. Terms were not disclosed for the deal, announced Jan. 5. Alnylam says it will deploy the DPC technology – a systemic small-interfering RNA delivery platform that enables efficient target gene silencing via polymer-based formulation chemistry – against an undisclosed target in its proprietary “5x15” pipeline, five assets it hopes to drive into advanced clinical development by the end of 2015. As part of the deal Arrowhead acquires a license to Alnylam’s intellectual property related to targeting the hepatitis B virus. Alnylam can receive milestones and royalties from Arrowhead on any product derived from its HBV RNAi intellectual property, while Arrowhead likewise can earn milestones and royalties from any marketed product resulting from Alnylam’s licensure of the DPC technology. Meanwhile, on Jan. 4, Alnylam announced it had achieved positive preliminary results from a Phase I trial of ALN-PCS, one of the 5x15 assets. In the study, ALN-PCS, which targets the PCSK9 gene to treat severe cholesterolemia, demonstrated statistically significant RNAi silencing of PCSK9, up to 66%, and reductions of more than 50% in LDL cholesterol levels in participants--Joseph Haas.

Ipsen/Oncodesign: Ipsen, the mid-sized French pharmaceutical company, is tapping the research of fellow French CRO and drug discovery firm, Oncodesign, to develop its new LRRK2 kinase inhibitors, which have potential to treat Parkinson's disease. The research collaboration could see Ipsen paying Oncodesign €115 million ($146 million) in research and opt-in fees, development milestones and sales royalties. The Ipsen deal is the first involving drug discovery with a major pharma company for Oncodesign, a private CRO set up in 1995 to provide preclinical oncology pharmacology services. Its investors include a trio of French venture capital firms: CIC-Vizille Capital Innovation, CDC Enterprises and Avenir Entreprises. At the same time, new Parkinson's disease therapies fit neatly into Ipsen's focus on neurology, one of four therapeutic areas the specialty pharma is now concentrating on. One of its major marketed products is the botulinum toxin product for dystonia, Dysport (botulinum toxin type A). Ipsen has landed two options to exclusively license worldwide development, manufacturing and commercialization rights to Oncodesign's LRRK2 inhibitor program when it successfully reaches clinical proof of concept. Oncodesign will receive a technology access fee, funding for the program's research and early development activities and upon exercise of the license options, opt-in fees and additional development, regulatory and commercial milestone payments potentially totaling €115 million for the development of molecules in two or more indications, and tiered royalties on net sales. Mutations in the LRRK2 gene, which produces a protein with multiple activities, including GTPase and kinase activities, have been linked to genetically inherited Parkinson's disease, and Oncodesign has developed a macrocyclisation process, Nanocyclix, which it says produces potent and selective kinase inhibitors.--John Davis

Ironwood/Bionomics: As it begins with various partners to traverse various global regulatory landscapes with its IBS/constipation compound linaclotide, Ironwood Pharmaceuticals Inc. has been on the prowl for earlier-stage assets to back-fill its pipeline. On Jan. 4, the company said it would pay $3 million upfront for worldwide development and commercialization rights to BNC210, a clinical-stage anti-anxiety program from Australia’s Bionomics Ltd. All told, the deal could be worth $345 million plus royalties for Bionomics, including the upfront and $10 million in payments expected in the next two years. The deal marks Ironwood’s third since last January, but the first that adds a clinical compound to its pipeline. Previous deals included a discovery alliance around Protagonist Therapeutics peptide technology and a delivery pact with Depomed Inc. BNC210 has completed two Phase Ib studies in a total of more than 80 healthy volunteers, and according to the company, acts by a novel (but undisclosed) mechanism of action that should avoid side effects common to anxiety medicines. It is Bionomics’ second most advanced project, behind the unpartnered Phase II oncology compound BNC105. Ironwood joins a stable of partners at Bionomics that includes Genmab AS and Merck Serono SA--Chris Morrison.

Endo/BioDelivery Sciences: Endo Pharmaceuticals, which has radically reshaped its product portfolio in recent years in order to diversify away from overdependence on the pain medication Lidoderm (lidocaine transdermal) is assuming worldwide exclusive licensing rights to BEMA Buprenorphine (bioerodible MucoAdhesive delivery system) from BioDelivery Sciences. The drug is a chronic opioid-based pain therapy that fits well with Endo’s pain medication franchise. Endo paid $30 million upfront, and has agreed to pay additional milestones totaling $150 million, plus tiered royalties ranging from the mid-to-upper teen percentages of net sales. The milestone breakdown is as follows: $95 million in potential pre-defined intellectual property, development and regulatory milestones, plus $55 million in commercial milestones. The BEMA delivery technology consists of a small, bioerodible, polymer-thin film, which is applied to the inner lining of the cheek. BEMA buprenorphine met primary endpoints in a Phase II trial in 2009 and is currently in Phase III trials, with potential to file in 2012. BioDelivery estimates its sales could reach $500 million--Wendy Diller

image courtesy flickr user EDubya/creative commons license

2011 M&A of the Year Nominee: Endo/AMS

It's time for the IN VIVO Blog's Fourth Annual Deal of the Year! competition. This year we're presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Endo’s $2.9 billion in cash acquisition of American Medical Systems Inc., in June 2011, throws the spotlight on the use of deal-making to go beyond the quick fix. In doing so, Endo had to overcome internal resistance, investor second-guessing, and industry's current preference, it seems, for high-stakes specialization over diversification.

But overcoming obstacles in order to exercise a grand ambition is not the chief reason Endo deserves the DOTY reward. No, the real draw here is management’s adamant vision in the face of a changing reality. Every good company constantly evolves, but only a few complete radical makeovers as rapidly as Endo has. Clearly, external drivers forced Endo’s hand: namely its over-reliance on one therapeutic area, and one medication, Lidoderm, in particular, the ever-riskier reliance on R&D innovation, and the long-term implications of health care reform.

Faced with similar problems, however, many companies, large and small, have huckered down and focused harder on innovation in their core expertise. Others have turned to in-licensing late-stage assets, withdrawing from the R&D-based business model. Endo has taken a third approach – not ditching pharma R&D completely, but moving beyond it to define its strategy not by therapeutic area, but by its customer base, that is, through a “continuum of care” approach that binds it closer to doctors and payers.

Endo was on the finals list for DOTY in 2010 for its HealthTronics acquisition—the first of its major diversification moves--but didn’t win; its return to the polls in 2011 is a testament to management’s perseverance and guts, this time, with a deal that follows similar reasoning on a larger scale and in doing so erases all doubts.

The deal in question thrusts Endo further into urological devices and services, a sector it had little presence in two years ago. Until 2008, Endo derived close to 90% of sales from its pain medication franchise, led by the best-selling topical pain drug Lidoderm. Urology now accounts for $1 billion of its sales, or more than a third of Endo’s total revenues; its key therapeutic areas have expanded to urology and oncology -- and not just drugs but devices and services as well. AMS complements other key acquisitions that Endo has made since ex-J&J executive David Holveck took over as CEO in April 2008: Indevus Pharmaceuticals (2009), HealthTronics, Qualitest (2010), and Penwest (2010).

As such, the company has built a presence in urology that “includes a broad network of partnerships and relationships with the overwhelming majority of US-based urologists,” CFO Alan Levin told analysts at a recent investor forum. The data generated by intensifying relationships is “critical to enhancing the organic growth potential of our urology franchise,” says Holveck. The company furthermore has identified potential cross selling opportunities for several of its product lines – a sticking point, until now, with Wall Street -- and a savvy way to gain more market data. A pilot program now getting underway, for example, trains AMS' men’s health division on selling the Fortesta gel, a newly launched topical testosterone replacement for hypogonadism, which Endo gained from the Indevus deal. The pharma urology reps are getting trained on AMS men’s and women’s health products. Other opportunities for selling synergies include Endocare cryoablation therapy, which came with the HealthTronics acquisition, and AMS’s GreenLight laser for benign prostatic hyperplasia.

If R&D-focused pharmacos are struggling to find the right value in innovation, Holveck says Endo has found the right mix through diversification, both within pharma and beyond it. “Understanding how the continuum of care is given and the products that interrelate with that care,” adds value to the urology practice, he says. And it also reduces event risk, which is implicit in the branded portfolio. Health care reform’s impact is a case in point. Endo estimates it will cut $40 million from the branded pharma business’ top line due to increased discounts to payers, particularly reflecting the higher Medicaid drug rebates. But it should also lead to higher sales on the generics side of the business. And, pointed out Levin, devices have not been greatly affected by health care reform proposals, aside from a 2.5% tax on US revenues, which takes effect in 2013.

For this opportunity, Endo has paid well – the multiple for AMS, itself a spin out from Pfizer, which private equity firm Warburg Pincus acquired in 1999 -- was approximately 14 times trailing EBITDA, the Qualitest multiple slightly less. The process wasn’t at all easy, as Endo’s management is first to admit, and the combination of devices and drugs still leaves Wall Street a bit queasy. But the stock has climbed nearly 50% since Holveck came to the company in April 2008, and although it's just treading water year to date 2011, that’s better than most of the industry. Just as important, Endo is poised to move swiftly in a rapidly changing health care environment.

Deals Of The Week: Moving On

Finally. The months of waiting are over. (No, we aren’t talking about the Phillies’ attempt to dominate in the National League (it's a long season); or, in the AL, the rise of the Cleveland Indians.) We are referring instead to the resolution of one of the major overhangs to the 2009 Merck/Schering Plough reverse merger: ownership of distribution rights to the juggernaut rheumatoid arthritis franchise Remicade/Simponi.

Just in time for the quarterly earnings show (it’s nice to have something positive to talk about, isn’t it?), Merck and J&J settled their ongoing dispute. The terms of the agreement require Merck to relinquish marketing rights in three territories comprising 30% of total Remicade/Simponi sales: Canada; Central and South America; and the Middle East, Africa, and APAC. The resolution, which also requires Merck to make a one-time $500 million payment to J&J, means the Whitehouse Station, NJ-based drug maker will forgo an estimated $900 million in ongoing sales in these regions. In territories where Merck retains marketing rights—EU, Turkey, and Russia—its profit share of the drug drops from 58% to 50% this July, instead of the more gradual decrease outlined under the original Schering/J&J alliance.

Analysts covering both Merck and J&J reacted positively to the news, albeit for different reasons. For Merck, the settlement takes off the table a bothersome question that has routinely cropped up on quarterly calls and lets Merck begin to spin a more positive story. Analysts anticipate that narrative to include a dividend hike to offset some of the recent negative clinical trials results and potentially, a spin-off of the consumer biz, which includes the Coppertone and Dr. Scholl’s brands. (Hey, it’s hip these days to copy BMS and shed business units outside the innovative core.)

For J&J, the 50/50 profit split in the territories retained by Merck is a bonus, and you can’t deny the allure of cold hard cash. Morgan Stanley analysts predict the resolution will be roughly 2 to 2.5% accretive to 2014 earnings per share. (Don't forget, though, about other tailwinds affecting J&J, including the dilution it took to acquire 100% of Crucell.)

With J&J and Merck moving on to more important matters (Merck: Pipeline! J&J: Quality Control and a Synthes acquisition(?)), it’s time for IN VIVO Blog to get going with another edition of…

Axcan Pharma/Mpex Pharmaceuticals: Privately-held specialty pharma Axcan will buy Mpex for an undisclosed amount, the firms announced April 14. The deal, which contains an unspecified upfront and milestone payments, gives Montreal-based Axcan full rights to Aeroquin, Mpex's lead product, a proprietary aerosol formulation of the antibiotic levofloxacin in Phase III trials for the treatment of pulmonary infections in patients with cystic fibrosis. It's one of several antimicrobials currently in the late-stage pipeline for CF patients; as a group, these anti-infectives have been the subject of recent regulatory debate over endpoints. The companies said Axcan would spin out all Mpex assets not associated with Aeroquin into a new company that will remain in San Diego, Mpex's hometown. Mpex's investors include Investor Growth Capital, which led the firm's $40 million Series D round in 2009, SV Life Sciences, RiverVest Venture Partners, and others. The deal comes two months after Axcan completed its $583 million takeover of Eurand, a Belgian specialty firm that last year celebrated the approval of its lead product, an enzyme replacement treatment of exocrine pancreatic insufficiency. -- Alex Lash

BiogenIdec/Amunix: Any doubts about Biogen’s ongoing commitment to the hemophilia space, look no further than this week’s research collaboration with Mountain View, Ca.-based start-up Amunix. Founded by serial entrepreneur William “Pim” Stemmer, Amunix uses its proprietary protein engineering technology to create longer-acting versions of clinically validated molecules. Biogen, of course, has been talking up its “focused diversification” strategy, bolting on capabilities in neurology outside its MS warhorses Tysabri and Avonex, even as it sheds its oncology assets. But Biogen’s nearest opportunity to diversify is via its recombinant protein therapies to treat hemophilia A and B, respectively in Phase II and III trials. Biogen’s molecules have significantly longer half-lives than competing marketed products and offer a significant dosing advantage over current standard-of-care that’s likely to be well received by patients, physicians, and payors. But that also means the big biotech must make sure its late-stage products aren’t obsolete when a new technology allows for the creation of even longer-acting molecules. Hence the tie-up with Amunix. No financial deets were disclosed, but the two firms are jointly conducting preclinical research, with Biogen paying an upfront plus R&D funding in exchange for clinical development, manufacturing, and commercialization rights of any therapeutic candidates. Amunix also stands to receive future milestones and royalty payments. -- EFL

Debiopharm Group/Aurigene Discovery Technology: A long-running research collaboration between the Lausanne, Switzerland-based developer Debiopharm and India’s Aurigene has yielded a promising approach to an undisclosed target in oncology. This week Debiopharm licensed worldwide development and commercialization rights to the lead compound, named Debio 1142, with plans to take it through clinical development and registration before outlicensing to an interested drug maker. Financial details were not disclosed, but Aurigene will receive milestone payments as the compound progresses. The stated plan is right in line with Debiopharm's usual business model. For example, it in-licensed oxaliplatin from Japan’s Nagoya City University, relicensing the product to Sanofi-Aventis for sale as Eloxatin. It’s also a variation on the European specialty pharma model that seems to be working well for Debiopharm. (See the April IN VIVO for more on various models in play.) -- John Davis

Daiichi/Pieris: Privately-held Pieris announced Tuesday, April 12 a two-target partnership with Tokyo-based Daiichi Sankyo. It is the latest in a string of alliances the German firm has inked to demonstrate the utility of its proprietary anticalin scaffolding technology. As part of the deal, Daiichi agreed to pay more than €7 million ($10 million) upfront for worldwide rights to two undisclosed targets, as well as dedicated research funding and milestones that could reach €200 million if both products reach the market. The Japanese pharma will also pay tiered “mid- to mid-high” single digit royalties on sales of any compounds that result. While the structure and limited scope of the Daiichi deal hews closely to Pieris' previous deals, the biotech’s CEO Stephen Yoder told “The Pink Sheet” DAILY that these alliances are designed to showcase the wide potential of the platform. Alliances are important, of course, but they don't provide Pieris' backers with an exit. Next-generation protein players such as Domantis, GlycArt, and GlycoFi were gobbled up during 2006 and 2007 thanks to a wave of biotech M&A as big drug firms attempted to strengthen their biologics capabilities. Since then, however, licensing deals have become the preferred transaction type, making an exit by acquisition more difficult. Since its inception in 2001, Pieris has raised €45 million in cash from a syndicate that includes OrbiMed Advisors, Novo Nordisk Biotech Fund, Global Life Science Ventures, Gilde Healthcare Partners, and Forbion Capital Partners. -- EFL

Endo/American Medical Systems: Valeant’s dogged pursuit of Cephalon is just one example of the anti-R&D movement at work within the biopharma industry. This week comes news of another deal exemplifying the trend: Endo’s $2.9 billion acquisition of urology device specialist American Medical Systems. The proposed deal represents a 34% premium over AMS' April 8 closing price, and it's three times the device maker’s 2010 sales of $538 million. Once dependent on Lidoderm (lidocaine 5% patch) for revenues, Endo has undergone a makeover under CEO David Holveck. Since he took the helm of Endo in 2008, the company has completed four acquisitions, all to position the company as a diversified healthcare solutions provider focused on pelvic disorders and pain: Qualitest Pharmaceuticals ($1.2 billion); Penwest Pharmaceuticals ($168 million); HealthTronics ($223 million); and Indevus Pharmaceuticals ($370 million). The acquisition of AMS is Endo's largest yet, and it substantially alters the company's portfolio and reinforces its commitment to devices, which sets Endo apart from other specialty players of a similar size who haven’t sought this kind of diversification. More and more, drug makers have been talking about moving into the device space as the traditional pharmaceutical R&D model has come under increasing pressure, in part because devices, at least historically, have shorter, less expensive product development time lines, as well as favorable pricing and reimbursement. The grass is always greener. -- Wendy Diller & Jessica Merrill

Takeda/Heptares: Takeda, which has targeted new central nervous system drugs as a core therapeutic research area, entered into a back-end loaded research collaboration April 11 with U.K. biotech Heptares Therapeutics to characterize a G-protein coupled receptor (GPCR) believed to play a role in CNS disorders. Takeda will pay $7.4 million in upfront cash and equity to Heptares, and milestone payments of up to $100 million, plus royalties on product sales. The tie-up is Takeda's second research collaboration in CNS this year. In March, the Japanese pharma agreed with New York-based Intra-Cellular Therapies to co-develop phosphodiesterase type 1 inhibitors for cognitive impairment associated with schizophrenia, in a $500 million-plus deal. In October 2010, Takeda signed a deal with Jupiter, Fla.-based Envoy Therapeutics to research new schizophrenia therapies. In the current two-year deal, Heptares' technology will be used to stabilize and characterize an unnamed GPCR thought to be important in CNS disorders but intractable to approaches to make it “druggable." Takeda researchers then will collaborate with Heptares researchers on generating leads, and the Japanese company will assume responsibility for preclinical and clinical development of any new drug candidates. The Takeda collaboration is Heptares’ second big pharma partnership, showing that its ability to go after difficult targets –- the so-called high hanging fruit –- is a strategy that can pay off. -- JD

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

2010 M&A DOTY Nominee: Endo/HealthTronics

It's time for the IN VIVO Blog's Third Annual Deal of the Year! competition. This year we're presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (four or five in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Endo Pharma CEO Dave Holveck has been emphatic about plans to diversify the company ever since taking the helm in 2008. But investors--and analysts--couldn't quite make the jump from pain to "pelvic health" defining the specialty pharma's May 2010 $258 million acquisition of HealthTronics, a provider of urological services and devices. Endo's share price barely budged after the deal was announced.

Still, this acquisition, which was the first of a 2010 Endo buying spree that eventually led to an uptick in the company's share price, illustrates how pharma needs to change given physician access grows tougher and differentiation may come by offering a continuum of products. It's for this reason Endo/Healthtronics merits a DOTY nod.

If investors failed to see the logic of HealthTronics, Endo's subsequent tie-ups, including a take-out of the generics firm Qualitest for $1.2 billion, were easier to parse, as was the August acquisition of drug deliver Penwest for $168 million. And Endo has been rewarded with a steadily rising share price: hovering in the low to mid-$20s for most of 2009 and the first half of 2010, the drug maker's stock was sitting pretty at $36-per-share by the close of business Dec. 8.

But there's also no denying the value HealthTronics has brought the spec pharma: about $185 million in annual revenues, and a new asset in a deal that is immediately accretive. Most importantly, it allows Endo to combine drugs, devices, and services in an area far less competitive than pain, providing the company new skill sets as health care reform and concerns about cost of treatment increasingly factor into strategic decision making.

This larger point eluded Wall Street, which tried to fit the acquisition in a framework solely related to advancing Endo's traditional drug business. Yes, the company has a drug for bladder cancer (Valstar), which its sales force details to urologists and a next generation drug, Urocidin, in Phase III. And yes, HealthTronics' strong ties to those physicians could result in a better understanding of this physician specialty's needs. But analysts saw the cross-selling opportunities for Endo's detail reps only as qualitative and indirect.

They failed to appreciate how HealthTronics provides a base that enables Endo to look for more acquisition opportunities that blend the various approaches to addressing urologists' needs. Specifically, Endo now has the option to get into the devices or auxiliary services if it believes these offerings represent the best proposition for patients, and therefore its business.

Down the road, this approach should enable Endo to provide a "care pathway" to physicians, which is an appealing concept for payors looking for “end-to-end” solutions and the ability to pay companies based on the best treatment outcomes for particular diseases. According to this strategy, a cancer patient ineligible for bladder removal could be given a generic drug infusion for chemotherapy followed by Valstar, and eventually Urocidin.

It's a concept other pharma companies are exploring – most rather timidly and as part of an effort to augment their flailing therapeutics sales, not as stand alone businesses. Sanofi’s forays in diabetes, especially its alliance with glucose monitoring company AgaMatrix, come to mind.

Endo’s need to change is particularly urgent. It is one of several well-capitalized small to mid-sized specialty pharma businesses that are ultimately fighting for their lives as they face an acute crisis: the drugs that underwrote their success are maturing and their model of in-licensing new drugs to augment their portfolio isn’t working as competition has increased for late-stage assets. Some companies in the space, such as Eurand and King, have been sold at less than optimal valuations.

But as Endo/HealthTronic shows there is a viable alternative, one that pushes specialty pharma out of its old comfort zone. Holveck, a former top executive at Johnson & Johnson, appears more comfortable than many pharma executives at mixing businesses, and some speculate he is modeling Endo for a sale to J&J. Whether Endo stays independent and grows, its valuation is on the rise.

Bright Idea courtesy of flickrer nhuisman, used with permission via a creative commons license.