Deals Of The Week Ponders The Darkening Days

The Festival of Lights officially began Wednesday night, and the halls of malls across the country have been swathed in equal parts blue and white and green and red for weeks in an effort to sway consumers to what used to be our national past time. But Adam Sandler aside, there's a pall in the air. The Senate's show down on tax reform. The bleak employment picture. The deepening conflict between North and South Korea. LeBron's return to Cleveland. No wonder President Obama made an unannounced visit to Afghanistan--at least there's some hope he can escape the relentless 24-hour news cycle.

To quote old Will "What freezings have I felt, what dark days seen. What old December's bareness everywhere."

In biopharma land, many are also channeling Richard III--or maybe Ethan Allan Hawley. It's hardly surprising. Words describing the IPO probably shouldn't be printed here (we are a family publication after all), and restructurings continue apace as firms accept it may be better to do less with less. The latest high flier to reach this conclusion: Exelixis, which used its annual R&D to announce a massive restructuring and a doubling down on its small molecule cancer med, XL-184.

If any company is eager to see the backside of 2010, it's got to be Exelixis. There's no denying it's been a turbulent year for the biotech, which saw the abrupt departure of long-time CEO George Scangos and the end to a key development agreement with long-time partner Bristol-Myers Squibb for XL184.

The good news: XL184, in Phase III trials after having reported "unprecedented results" at a recent cancer meeting, is now wholly owned by Exelixis. The bad news, of course, is that the drug is wholly owned by Exelixis, meaning it is picking up full development costs for the program.

Given the need to shoulder those expenses--especially in settings like prostate cancer, where the drug will go up against Amgen's newly approved Xgeva, Exelixis's decision to downsize and halt internal development of all non-partnered programs is imminently sensible. But that's likely cold comfort for the 40% of staff being laid off starting this month. Indeed, come some time in 2011, headcount at the firm will fall to around 240 from 670 the year before--and future cuts could trim employee numbers even further to just 140 personnel.

It's another reminder that as much as we like to talk about broad portfolios and multiple shots on goal, many biotechs--even very well capitalized ones like Exelixis (or Biogen for that matter)-- are ultimately forced to double-down on their best shot at commercial success. Yep, the more things change... (Kind of like the continuing Genzyme/Sanofi saga.)

In December's darkened days, are you tempted to snuggle into your pjs--and eat hot soup? Reading once, reading twice, reading chicken soup with rice...

GE Healthcare/Janssen: GE and specialist drug developer Janssen are joining forces to develop a biomarker signature for detecting Alzheimer’s disease prior to the onset of clinical symptoms. The research collaboration will draw upon the resources of GE’s Medical Diagnostics division, which has an amyloid PET imaging agent, Flutemetamol, in Phase III, and Janssen’s neurology-related clinical, biomarker, and informatics expertise. At first blush, the arrangement may not seem remarkable for DOTW, but it is indicative of GE’s gravitation towards IVD businesses. (Remember, in early 2007, GE bid for Abbott’s immunoassay, clinical chemistry, hematology, and point-of-care businesses, but the deal fell apart.) For the most part, both before and after the Abbott near-miss, GE has focused on the development of new imaging agents, owing to its acquisition of Amersham--and that firm's contrast agent and medical isotopes business--in late 2003. While this isn't a division that historically has made acquisitions, recent signs suggest change could be afoot. In October 2010, GE paid just over a half-billion dollars for molecular oncology testing services provider Clarient (4), its first major external investment for molecular diagnostic content. “We are clearly seeing personalized medicine gaining in importance, and GE Healthcare is in a great position, with the diagnostics solutions we have in vivo,” says current president and CEO of Medical Diagnostics, Pascale Witz. Clarient “can be an engine to develop new tests that could come from a different horizon, from GE Healthcare, or other research institutions or companies,” she adds. The arrangement with Janssen aligns with that goal. – Mark Ratner

Axcan/Eurand: The board of Belgium-based specialty pharma company Eurand and its majority shareholder have approved the sale of the company to Axcan Holdings for $583 million in cash, the companies announced on Dec. 1. At $12 a share, the offer is a 9% premium to Eurand's closing share price as of Nov. 30 and gives Eurand a market cap of roughly $574 million. That figure seems low compared to analysts' estimates of Eurand's value, but the deal appears likely to succeed since key shareholders Warburg Pincus, (which owns roughly 55% of the company's equity) and Eurand Chairman and CEO Gearoid Faherty (who owns another 3.7%) have already agreed to the terms. Eurand belongs to a cadre of small to mid-cap European specialty pharma companies that have struggled to transform their business models in the face of increased competition for assets and a difficult pricing environment. Eurand has adapted better than some of its peers, capitalizing on the success of its lead product, Zenpep (delayed release pancrelipase), which is an improved form of an enzyme replacement therapy for treatment of exocrine pancreatic insufficiency, or EPI. Axcan, a Canadian firm taken private by TPG Capital in 2007, competes in this so-called PEP market, but has been stymied by new regulatory requirements and two complete response letters for its version, called Ultrase (also known as Viokase). That's important because Axcan has become increasingly dependent on Ultrase/Viokase sales, with the drugs contributing 19% of Axcan's total revenues for the fiscal year ending September 2009.--Wendy Diller

GlaxoSmithKline/Theravance: GlaxoSmithKline hitched its wagon even tighter to long-time partner Theravance this week, increasing its stake in the company to 19% via a $129.4 million investment. The move isn't terribly surprising, coming after the companies announced positive Phase II data on their partnered asset Relovair in September. The once-daily, long-acting beta2 agonist/corticosteroid combination is in Phase III development to replace GSK's blockbuster Advair and the increased investment suggests GSK is confident in the companies' respiratory collaboration. GSK and Theravance have been allies in the respiratory space since 2002 thanks to an early-stage LABA deal. In 2004, that arrangement morphed into a broader strategic alliance in which GSK paid $129 million upfront and increased its stake in Theravance from 6% to 19% in exchange for an exclusive option to license new medicines from all of the company's development programs through 2007. Theravance took advantage of the IPO window that same year and over time, through public offerings, GSK's stake was reduced to around 12.8% of Theravance's capital stock. With the latest private placement, GSK will purchase 5.75 million shares of Theravance common stock at $22.50 per share. For Theravance, the deal extends the biopharma's cash runway and could see the company beyond the Phase III Relovair data release, expected in mid- to late-2011. CEO Rick Winningham told sister publication "The Pink Sheet" DAILY the investment should give Theravance enough cash to run the company out two years beyond the Phase III data release.--Jessica Merrill

Merck/SmartCells: In the wake of Phenomix's flame-out, VCs are understandably gun shy about investing in diabetes players. And yet this is clearly an area of interest to big pharma acquirers, who see the explosion in obesity and Type 2 diabetes as one way to fatten the bottom line. The latest proof that big pharma is on the prowl for diabetes assets? Merck's take-out Dec. 2 of privately-held SmartCells for an undisclosed upfront plus development and regulatory milestones that could drive the deal price above $500 million. (What? At this point in the year, an earn-out heavy deal can't still be surprising?) The acquisition gives Merck access to a preclinical insulin technology called SmartInsulin, a once-daily insulin injection for the treatment of type 1 and type 2 diabetes that is meant to automatically adjust to fluctuating levels of blood glucose. In doing so, the medicine presumably overcomes some of the stigmas associated with insulin therapy--the potential risks of either hyper- or hypoglycemia and the frequent daily monitoring required to maintain appropriate blood glucose levels. In its seven-year lifespan, SmartCells (read this Start-Up profile for more) has raised less than $20 million, relying heavily on grants from the Juvenile Diabetes Research Association, National Institutes of Health, and angels. (Hint: without traditional VCs in the picture, the company's founders seem likely to make a pretty penny even if the upfront is in the tens of millions.) The acquisition moves Merck into a new area of research since it doesn't currently offer insulin therapy. While some have speculated Merck is interested in building smart insulin for the Type 1 market, Merck's interest is likely in solidifying its stance in the all important (and much bigger) Type 2 population. This is an arena where Merck already has significant share of voice thanks to its juggernaut DPP IV inhibitor Januvia, and SmartCells' insulin seems uniquely positioned to take on long acting insulins like Sanofi's Lantus or Novo's late stage Degludec. Being preclinical, the company will have to show the compound has the commercial chops to survive the rise of long-acting GLP-1s, another reason an earn-out deal was a smart move on the part of the Merckies.--EL

Image courtesy of flickrer marcusjroberts via a creative commons license.

The Muddy Waters of IVD

Ron Zwanziger, CEO of Inverness Medical Innovations, must be one helluva juggler. The company announced its twelfth acquisition in as many months. This time the Waltham, MA-based diagnostic player is spending $1.18 billion in cash and stock to bring health management company, Matria Healthcare, into its ever-widening fold. (For a more in-depth look at the Inverness strategy, check out this piece from colleague Tom Salemi.)

Matria is a leading provider of disease management services, especially strong in women's health and oncology. Inverness's acquisition is a big bet--$900 million to acquire the company and the assumption of Matria's $280 million debt--in the importance of building a diagnostics empire that directly touches patients not just in the doctor's office, but also in their homes. The ultimate goal: a range of services from tests that assess risk and help diagnose disease to home monitoring systems that keep a particular scourge, be it congestive heart failure or cancer, under control.

At first blush, the marriage of point-of-care diagnostics with health management services seems odd. It's certainly not one the Street understands. (The market reacted negatively to the news sending the stock down $4.26--about 8%--to $47.97.)

But there is a certain logic to the idea. Importantly, both health management and the diagnostic business are driven by the same underlying principle: companies that succeed in these spaces provide products for which payers will reimburse, which in turn means offering tests or services that improve an individual's health while simultaneously lowering health care costs.

Even more broadly, Inverness’ acquisitiveness is another illustration of the blurring of the lines between previously distinct sectors including the traditional IVD space, home healthcare services, benefits plans, even DTC.

The Matria acquisition comes just months after Inverness ponied up more than half a billion dollars to buy two other leading health management outfits. In October, Zwanziger's team bought Alere, which develops home monitoring systems for patients with chronic diseases, for $302 million; in November, the company bought New Jersey-based ParadigmHealth, which offers disease management services for patients with complex health problems, for $230 million.

In a conference call, Zwanziger reported that pro forma revenues from these three companies will bring in roughly $500 million, giving Inverness a dominant position in the estimated $1.8 billion health monitoring market.

Certainly the purchase price of Matria dwarfs the previous two buy-outs and is second only to its spring acquisition of BioSite. In part, the size of the deal reflects the breadth of Matria's offerings. (Services to more than 1000 employers and managed care organizations, increasing the number of patients under active management from 100,000 to over 1,000,000 according to Inverness's Ron Garety, former Alere CEO.)

There was also, apparently, some competition. "We had to move quickly," confirmed Zwanziger on the conference call. "There were other interested parties."

But Inverness's decision, while rapid, was far from hasty. According to Zwanziger, the point-of-care diagnostic company had been interested in Matria for quite some time. Such a prolonged time, in fact, that as the company sketched out its long-term strategy, they had already penciled in the Matria name.

"It's a transformative acquisition," says Garety, who will be busy integrating Alere, ParadigmHealth, and Matria into Inverness in the coming months. That's because this isn't just about adding patients to Inverness's nascent management system. It's about connecting fragmented and disparate players in the health care delivery system to offer better care for lower cost. Or as Zwanziger told a packed house at JP Morgan a few weeks ago: "Extending diagnostic testing from disease identification to risk assessment to patient management greatly extends our business potential."

To help accomplish this, Inverness also announced its intention to form a joint venture with as yet unnamed financial backers around this bulked up health management business. This JV, seems to be primarily a strategy to reduce the capital risk associated with the move into health management.

But it could also give the company a much needed capital infusion at a time when the public equity and debt markets are--to say it politely--a little uncertain. In addition, noted Zwanziger, "The [JV would provide] strong liquidity to allow us to take advantage of all the opportunities out there."

(Translation: despite the spate of acquisitions, Inverness ain't done buying yet. )

Wall Street's lack of support doesn't appear to phase Zwanziger. "As we integrate our diagnostic products into the health management side, the value of Inverness will only go up," he predicts.

It's the same sort of mantra you'll hear when you listen to execs at GE Healthcare, Siemens, or even Royal Philips Electronics, which late in December expanded into the patient monitoring business with its $4.9 billion acquisition of Respironics. (For those who haven't been following, IVD has suddenly become fashionable again in our price-pressured health care environment. Here's IN VIVO's primer from our 2007 trends story.)

Like Inverness, these companies have also been gobbling up smaller entities as they create end-to-end solutions in the health care testing market. One can hardly blame the analysts for seeming a bit confused by Inverness's move into health management (or Siemens' advance into IVD or even pharmacy benefits manager Medco's forays in personalized medicine and disease management, for that matter).

Each acquisition seems to stretch the definition of what it means to be a diagnostic company. With all these companies newly under the Inverness banner--including BioSite, Paradigm, Alere, Diamics, HemoSense, BBI Holdings, Pan Bio and Matria --there's no easy way to label the company anymore. Is it a point-of-care diagnostic company that also develops home monitoring devices? Is it a rapid IVD company that happens to have a service arm for monitoring patients?

The diagnostic waters have gotten very muddy. Perhaps clarity will come with additional acquisitions. Given Zwanziger's track record in 2007, it's likely we won't have to wait very long.

"The Mighty Mekong River" by Flickr user Cap'n Surly used under a creative commons license.

GE's Abbott Indigestion

Now that GE has pulled out of its proposed $8.13 billion all-cash deal for Abbott Diagnostics (ADD) and Abbott’s point-of-care testing business, will anyone else step up to the plate?

Perhaps the logical suitor is P&G, because from what we hear, only the makers of Pepto-Bismol could have treated the massive indigestion the parties were experiencing.

We believe the explanation that it fell apart because of the complexities involved in prying them—ADD, specifically—out of Abbott.

Some analysts have suggested that compliance issues and issues over the transfer of licenses also helped scotch the deal. But while there were literally thousands of transition services agreements that the parties were going to have to enter into, in the end, it appears that the degree to which ADD is integrated into the rest of Abbott, and how difficult it would therefore be to deliver it to a company that perhaps has a different culture, very much surprised both sides. And that pain was going to persist over a protracted integration period—“a lot longer than three years,” according to one insider.

What’s puzzling is that this would not be the first time such a diagnostics business was sold lock-stock-and-barrel to a health care generalist (Siemens, for example, managed to buy Bayer Diagnostics and immunoassay player Diagnostic Products last year). Nor is GE inexperienced at handling such moves (there's too many potential links to choose from for this one to even begin to know where to start).

So we have to ask: Were the cultures an obviously terrible mix? That’s very possible, and yes, it'd be interesting to contemplate what those differences may say about each company. We’ve also heard that the first marching order for Abbott now will be to improve the level of service to its diagnostics customers, which of course suggests GE may have uncovered something specifically troubling during its preparations.

In any event, the take-home is it’s unlikely that Abbott will be looking for another buyer for those businesses. And with the exception of Roche, which unlike Abbott, views diagnostics as intimately connected with its drug development ambitions and personalized medicine, there aren’t really any very large in vitro diagnostics (IVD) players left from whom GE could wring out efficiencies, exploit scale, and improve productivity in the IVD market the way it expected to with Abbott.

It may continue pursuing smaller, more targeted acquisitions in IVD and, like Abbott, certainly in molecular diagnostics. And with some of the premiums companies offered recently to companies with molecular content, like Biosite (63%, measured from the time of Beckman-Coulter’s initial offer for it before Inverness finally landed it), TriPath (58%, from Becton Dickinson), and Ventana (43% at the time of Roche’s recent hostile tender offer of $75 per share), an exit via acquisition is nearly impossible for those companies to resist at today’s prices, leading to a wave of consolidation that might only pick up more steam, now.