Vanda/Novartis: ... And the Circle of Life is Complete

The surprise approval of iloperidone (Fanapt) earned back in May by Vanda Pharmaceuticals had a lot of people (OK maybe just us?) scratching their heads to come up with comparable instances of molecules that were dumped by pharma and eventually made it to market. Like our lion king friends here, they also had to crane their necks to see where Vanda's stock price went.

Sure there are some ex-pharma molecules that wind up getting on the market (you helped us come up with half a dozen or so), but there aren't a lot. And that's a fact that biotechs eager to in-license discarded pharma assets needed to reckon with.

Vanda's unlikely success with iloperidone continues. Last night the biotech announced it was selling US/Canadian development and commercialization rights to Fanapt back to Novartis, for $200 million, plus milestones and royalties. It's the circle of life!

Novartis is now responsible for the drug's development in the US and Canada, "including the development and commercialization of a long-acting injectable (or depot) formulation of Fanapt," says the release. Vanda keeps rights to both formulations outside of those territories and will pay Novartis a royalty, though Novartis has an option to negotiate for those rights. Vanda investors like the deal--the company's stock is up again (this time only 35% or so).

As a reminder, here's the molecule's long and colorful business development history: In January 1997, Hoechst licensed the drug to now-tiny Titan Pharmaceuticals. Titan turned around later that year and licensed the drug to Novartis. Novartis and Titan ran into trouble in Phase III when the drug was shown to cause QT prolongation; Vanda took on development of the drug in 2004, and received the Not Approvable letter from FDA last July. The FDA's 180-degree shift to APPROVED came in May 2009.

Has Novartis pulled off the old don't-want-it-oh-wait-actually-we-do-want-it before? Yes, with Speedel Group's Tekturna renin inhibitor for hypertension. That deal was a little bit more straightforward, and certainly designed with the claw-back in mind (Novartis eventually bought out Speedel for nearly $900 million, so it was more expensive too).

Iloperidone may not be the kind of asset that pushes Novartis to snap up all of Vanda in the same way. But after this drug's twists and turns, you'd be crazy to rule it out.

PSA: Faster Than a Speeding NYC Cab, More Powerful than a Corporate Venture Fund

We got those kozmik post-Pharmaceutical Strategic Alliances blues again, mama, moving from our jam-packed coffee-and-schmooze-fueled confab in a charming old jewel of a Broadway theater near Times Square to the air-conditioned, seventh-floor hum of an office park in suburban Washington.

A bit of a letdown, really, though we acknowledge New York couldn't have handled PSA and the U.N. General Assembly all at once. We had to get out of town, fast.

So fast, in fact, that IN VIVO Blog is just now sorting through our copious notes on the second half of the conference. We've got plenty to pass along so, unlike our old pal Moammar Khaddafi, we'll get right to the point, and we promise you won't need simultaneous translation.

* The big takeaway from Wednesday's corporate venture panel was that CV funds have grabbed a more prominent role as the recession wears on. (What? It's over?)

Moderator and top Leerink Swann i-banker Tony Gibney noted that startups with corporate venture backers were more likely to get higher returns from M&A exits, especially if they had two or more corporates as investors. (Our colleague Ellen Licking had the lowdown in May's Start-Up.)

The one traditional VC on the panel was quick to give his corporate peers props: "We've definitely pulled back," said Jamie Topper of Frazier Healthcare Ventures in Seattle. "The financial risks have been very high lately, and the corporates have filled the gap and served the industry well."

Johnson & Johnson Development Corp. VP Asish Xavier said in the last 18 months his fund has even "played nice" and bailed out funds in its syndicate that haven't been able to pay their pro-ratas. Gibney said the corporate venture stance has quickly gone from "last passive one in" to aggressively forming companies and leading rounds.

Merck Serono sent Vincent Aurentz to talk up its new $54 million fund, launched in March. The fund bucks the general practice of keeping a firewall between the venture team and corporate R&D. Merck Serono is out to sniff out early-stage research for license or acquisition, said Aurentz: "We compare it to how much we would spend if we were to do this with internal research."

With one investment on its ledger so far, it's hard to say if the different approach will hamstring its efforts to woo startups into its portfolio, but other panelists took pains to emphasize the importance of keeping venture and corporate sides separate. Lauren Silverman of the Novartis Option Fund called her fund's firewall "strict," while Michael Diem of GlaxoSmithKline's SR One called his "serious." Asish Xavier said JJDC has a full-time employee to make sure the only information about its portfolio companies it passes along to J&J is already in the public domain.

* The final panel Wednesday discussed Big Pharma's sudden willingness to outlicense molecules that would otherwise sit on the shelf. Pfizer's Michael Clark, pinch-hitting for outlicensing chief David Rosen who was doing his civic duty as juror, noted the Esperion and RaQualia deals under its belt and promised that we'll see "a few more" deals by end of year. Eli Lilly's Gino Santini sang the praises of Lilly's Chorus project, the quasi-external development group that's supposed to move molecules to proof-of-concept faster than Lilly's main R&D organization. The goal, said Santini, is to have 50% of Lilly's pipeline eventually moving through Chorus.

But making Chorus bigger would ruin its nimbleness, so Lilly has a solution: Clone it. Santini didn't say when, but Chorus II and III are slated for "India and Indy." Hell, while you're at it, why not Indio? Or Indiahoma? OK? OK!

There are more juicy nuggets from PSA, but unless we cloned ourselves we'll miss the Nationals' 100th loss, not to mention the half-smokes and Gifford's double-dip. Check back with us tomorrow.

Has PE-Backed Pharma R&D Risk Hedging Fizzled?

This morning we learned that former AstraZeneca CFO and current Goldman Sachs partner Jon Symonds (right) is leaving that bank to join Novartis as CFO-designate. Symonds will take the financial reins at the Swiss pharma next April, when current CFO Raymond Breu retires. Novartis' release is here.

Before joining Goldman in 2007, Symonds had been CFO at AZ for more than eight years and departed not long after AZ's acquisition of MedImmune. At the time it was considered tough luck for AZ, where Symonds had been passed over for the CEO role in favor of David Brennan. The FT said at the time:

His resignation was a blow to the company, because Mr Symonds was respected in the financial community for driving down costs – helping to maintain earnings at a time of setbacks in the company’s pipeline of new drugs – and for communicating effectively with investors.

In the two years since then the word on the street was that Symonds was working on an oft-discussed but rarely implemented model in which a private equity player would take a big financing role in a Big Pharma's development program--something they've done in small and mid-sized companies. Like TPG/Lilly/NovaQuest's Alzheimer's asset financing arrangement (one of our Deals of the Year! candidates), only on a grander scale.

Symonds was supposedly putting together a pool of PE capital for developing Phase I and II Big Pharma (and maybe other) compounds, which could be pulled together. The structure would have addressed one of the big problems for PE players--can you access enough projects to effectively hedge the intrinsic risk of drug development? (Let's face it--not every compound that Big Pharma is willing to part with is going to be a winner, right? There are only so many ... iloperidones?)

There's a fundamental tug of war here: Pharma co's, despite their recent rhetorical embrace of all things out-partnering, don't like giving up control of multiple assets en masse--Pfizer's recent HIV deal with GSK notwithstanding. For PE backers, though, the more the merrier.

Symonds--and others have hinted to us about these kinds of funds too--was allegedly going to pull something like this together, according to remarks he made at last year's FT Pharma conference, essentially creating a new hybrid model of R&D.

Only it hasn't happened.

So what might have impeded, if not specifically the Goldman project, then the model more generally? Why hasn't private equity found a way to play nice with Big Pharma, in an everybody-plays-everybody-wins kind of way? We noted in our January 2009 look back at last year in IN VIVO that this kind of risk mitigation might lose its sheen because a lot of people who are supposed to be the experts in this kind of thing are bankrupt, unemployed--or begging the taxpayers for assistance.

Or perhaps the sticking point has been the Big Pharmas themselves. Haggling over valuations and downstream rights and clawbacks has to be expected, and maybe for now these issues are insurmountable. Or maybe the deal is still in the works, but delayed. And for Symonds, the opportunity to become Novartis CFO doesn't come around every day. Banking is so ...well, passe.

According to the FT's description of Symonds' strengths, above, Novartis watchers have fiscal discipline and good communication to look forward to. Should we also be expecting some innovative or experimental R&D financing strategies?

Vanda's Iloperidone: Not Something You See Every Day

The recently and some-say miraculously approved iloperidone (Fanapt) from Vanda Pharmaceuticals is certainly a rare bird. (Full coverage of the approval in today's Pink Sheet ($), here.)

Rare in that, in just nine months, it went from not-approvable to FDA-approved.

But also rare because it is one of only a handful of unapproved assets out-licensed to a small biotech by a Big Pharma and which eventually found its way to the market. (This phenomenon was pointed out to us by eagle-eyed IVB reader and COO of Versant's EuroVentures incubator Tom Woiwode. In fact, iloperidone was out-licensed by TWO pharmas, but we'll get to that in a minute.)

In any case, we agree: despite the interest among VCs in backing ex-Big Pharma assets and spin-outs, and Big Pharma's seemingly increased willingness to part with shelved assets, few have so far meandered their way to market a la iloperidone.

Of the ones that have there have been some doozies, though.

Cubist has built its anti-infectives business on the back of the success of Eli Lilly's unwanted antibiotic daptomycin (now sold as Cubicin), for example. Actelion's bosentan (Tracleer)--a blockbuster on the market to treat pulmonary arterial hypertension--began life at Roche. And Novartis' first-in-class renin inhibitor aliskiren (Tekturna) was championed by Speedel Group founder Alice Huxley. The drug's clinical successes led Novartis to pick up its option to market the drug and eventually to buy Speedel in July 2008 in a deal valued at nearly $900 million.

Surely we're missing some, so please let us know in the comments. But we think the point remains: few drug candidates, once abandoned by their original Big Pharma developers, go on to reach the market. At least so far.

There have however been other pharma-to-biotech success stories (or qualified successes, like Adolor/GSK's alvimopan (Entereg) which was originally developed by Lilly). Some deals involved geographically restrained smaller pharmas without the urge or wherewithal to compete in every market. For example Cephalon licensed modafinil in 1993 from French pharma Groupe Lafon and wound up acquiring the pharma in 2001 on the back of Provigil's success. And after all, a drug doesn't need to be approved to spark a solid return for a biotech in-licensor.

Just ask Vicuron's investors. That company's pipeline included the antibiotic dalbavancin and the anti-fungal anidulafungin, the delayed promise of which helped spur Pfizer to buy the biotech in 2005 for a whopping $1.9 billion. Anidulafungin had been licensed by Lilly (Lilly again!) to Versicor, one of Vicuron's predecessor companies, in 1999. Pfizer eventually launched anidulafungin in 2006 under the Eraxis brand -- but the acquisition was a bust for the Big Pharma. Eraxis sales in 2008 were microscopic. Dalbavancin, which originated in a unit of Hoechst Marion Roussel and was spun off into Vicuron's other predecessor company, Biosearch Italia, remains disappointingly unapproved.

Domain Associates has made a business out of in-licensing development assets from pharma (usually Japanese companies), creating companies around them, developing the assets further -- and then selling them to Big or Mid-Sized Pharma pre-approval (as it did, for example, with Peninsula, Cabrellis and NovaCardia).

But back to iloperidone, and what a long strange trip its been. In fact two separate pharmas have out-licensed the compound. In January 1997, Hoechst licensed the drug to now-tiny Titan Pharmaceuticals. (Titan, still kicking around and trading as a penny stock, was up an insane 1500% on the approval news.) Titan turned around later that year and licensed the drug to Novartis. Novartis and Titan ran into trouble in Phase III when the drug was shown to cause QT prolongation; Vanda took on development of the drug in 2004, and received the Not Approvable letter from FDA last July.

There are a few other ex-Pharma assets coming up to their days of regulatory reckoning before too long. Cadence's Acetavance (from BMS), Movetis's prucalopride (from J&J), and Basilea/J&J's (those lovebirds!) ceftobiprole (originally from Roche) are all before or about to be before FDA and/or EMEA. VCs remain eager to back in-licensing based companies--Versant, for example, is involved in Cadence, Flexion (a POC play modeled on Lilly's Chorus division), and Synosia (CNS assets from Roche and others).

The dearth of Big-Pharma-to-Biotech asset successes may be a reflection of smart moves by pharma pipeline pruners or just the difficulty of drug development no matter a drug's provenance. But with Big Pharmas like Pfizer making for the past couple years an ever-bigger deal about its spin-off and out-partnering activities, nine months on from the iloperidone Not-Approvable, perhaps we're on the brink of something different.

Fanapt may be an outlier, for several reasons. But it may also be a reason for biotechs to be hopeful.

Dodo image from flickr user kevinzim used under a creative commons license

Deals of the Week: 44

Much ink has been spilt this week here and elsewhere about what the election of Barack Obama as 44th POTUS and the continued ascendence of the Democratic party might mean for the health care world.

Who's going to lead FDA, CMS and HHS? What does the potential shuffling of committee leadership mean for industry? Will FDA staffers get paid this week?

We don't expect positions like FDA commish are too high up Obama's priorities list, but we'll have more to say on appointments and other political topics next week.

Meanwhile some of industry's biggest players continued to cut the fat this week. GSK reduced its commercial infrastructure by 1800, which meant the dismissal of 1000 US sales reps. Apparently also lost in the shuffle: Philadelphia as a GSK HQ, which the fine WSJ Health Blog says is a victory for firm's Glaxo Wellcome camp, since GSK will maintain the ex-GW base in RTP North Carolina as its US headquarters. (We remind you that Philly has had its share of victories this fall.)

Also this week Pfizer and Sanofi followed Merck in eliminating obesity R&D around the cannabinoid type-1 receptor. Perhaps they got around to reading the article referenced here?

Obesity R&D got you down? Never fear, there's always Slim Fast--some pharma might think the consumer medicine route a better bet anyway. And besides, the dealmakers extraordinaire below never have to go on a diet. They won North Carolina, Virginia, and Ohio. They are forming formidable transition teams to tackle industry's problems. They have accepted the congratulations of world leaders and will grace the covers of tomorrow's papers. They have all been promised new puppies and indeed they share the honor of being elected to the highest office in the blog-land (for a one-week term), for they are:


Genzyme/Osiris: Genzyme has always been pretty clear on its strategy. Having diversified away from dependence on Cerezyme largely thanks to a series of acquisitions (GelTex, Biomatrix, and Sangstat, among others), the company seems pretty comfortable about forecasting earnings through 2011 (for an in-depth strategic review, see this IN VIVO story). And so it’s now embarked on a new series of deals to continue growth into 2012 and beyond (big deals with Isis, PTC and Ceregene). And Genzyme figures that the current environment – with biotech stock prices at rock bottom and with their managers and investors increasingly anxious for new sources of non-dilutive funding -- will encourage companies to be a lot more willing to encumber their prize assets with major partnerships. Such deals are, from a discounted cash flow point of view, a lot cheaper than acquisitions since, even though Genzyme has to share the ultimate proceeds, the expense money comes out more slowly, with risks adjusted by milestone success. Thus Genzyme’s latest deal, with Osiris on the Phase III anti-inflammatory stem cell treatments Prochymal and Chondrogen: $75 million right away, $55 million in July ’09, $600 million in regulatory milestones (if Genzyme goes ahead with both products) and $650 million in sales milestones (likewise for both products). A lot of money, sure, particularly since Genzyme gets commercial rights only outside the US and Canada. But Osiris still has to finish paying for all ongoing trials (three Phase III programs, plus a number of Phase II studies) plus any new trials (through Phase II) that it starts for new indications (of which there are lots – the products are being studied in graft vs. host; Crohn’s; COPD, osteoarthritis – a flock of inflammatory conditions). Indeed, Genzyme had a lot of leverage in this deal: Osiris had about $11 million in cash at the end of September but an annual burn close to $80 million. Luckily it had a patient majority owner in Swiss investor Peter Friedli, who’d given the company access to another $30 million in a credit facility – but the fact is Osiris needed a deal. An acquisition would have looked cheap (before the deal, Osiris was trading at around $360 million); better to take the Genzyme money, even if it meant closing out some global-rights-demanding acquirors going forward. We think that’s a decision a lot of other biotechs are going to make – granted they get the opportunity to do so.--Roger Longman

Onyx/BTG: Not so long after swallowing Protherics in a stock deal then valued just shy of $400 million, it seems BTG is busy making good on its promise to decide what it will keep in-house and what parts of the companies' combined portfolio is slated for outlicensing. (A weak sterling and decline in BTG's shares have conspired to significantly reduce the value of the Protherics acquisition.) Today the British firm said it was outlicensing to Onyx Pharmaceuticals its preclinical BGC 945, a thymidylate synthase (TS) inhibitor BTG has thus-far developed with the compound's discoverer, The Institute of Cancer Research. BTG gets $13 million up-front to add to its already large cash-pile and stands to see up to $72 million in development milestones and $235 million in future commercial milestones, plus an undisclosed royalty. The ICR sees about 10% of all payments to BTG. Onyx adds to its oncology portfolio the promptly renamed compound (now ONX 0801), which is in the same class as well known drugs like 5-fluorouracil. Onxy notes in its own release that due to 0801's selective tumor cell-specific uptake by the alpha-folate receptor the compound may surpass the efficacy of available compounds. The alpha-folate receptor is overexpressed in a number of tumor types with significant unmet needs, including ovarian cancer, lung cancer, breast cancer, and colorectal cancer, says the company. [UPDATE: we're told that the decision to out-license 945 was made pre-Protherics acquisition and has been underway for some time.]

Replidyne/Cardiovascular Systems: The only response we've received to the post below about this reverse merger goes like this: "Why? Because devices rule and biotech drools, baby!" Better than nothing, we suppose.

Pfizer/WuXi: WuXi PharmaTech, China’s top CRO, announced today that it has signed a new three-year deal with Pfizer to develop in vitro ADME screening assays on compounds it synthesizes for the Big Pharma. This is not the first time the two companies have paired up: beyond these ADME assays, Pfizer has already outsourced certain synthetic chemistry and parallel medicinal chemistry services to WuXi. "A high quality and flexible Asia R&D partnership network is critical to Pfizer's emerging market and Asia strategy. We want to build strong relationship with leading Contract Research Organizations such as WuXi PharmaTech to tap into the scientific talents and R&D capabilities in Asia," commented Dr. Steve Yang, VP and Head of Asia R&D at Pfizer, in a press release. But this WuXi collaboration and a sales-and-marketing agreement with China-based specialty pharma NovaMed Pharmaceuticals announced this summer amount to little more than baby steps for a company Pfizer’s size. Accessing the growing middle classes in both India and China has never been more important to Big Pharmas trying to maintain their top-line growth thanks to late stage product failures and an increasingly difficult regulatory and reimbursement climate. But unlike AstraZeneca, GlaxoSmithKline, Novartis and Roche, which are aggressively building China-based R&D organizations, Pfizer has been slower to elucidate its strategy in this hot market. With more than 80 partnerships, WuXi continues to dominate as one of the leading CROs in China and beyond thanks to its acquisition of AppTec earlier this year. As biopharma companies continue to cut the fat out of their R&D budgets, interest in WuXi seems likely only to grow—Ellen Licking

WaPo image via the Newseum.

Out-Partnering II: Self-Interested Sharing

In our last out-partnering post, we suggested the possibility that out-partnering could spur a wholesale change in business model, using Pfizer and the potential virtues of spin-outs as Exhibit A.

Today we turn to out-partnering as biotechs are learning to do it…and as, we (humbly) suggest, Big Pharma should too.

Take Alnylam, a biotech more than usually cognizant of the diminishing value of its core technology.

Alnylam’s strategy is to do everything it can to more durably asset-ize its RNAi platform’s temporary tech value. In terms of dealmaking, that’s largely meant selling the platform for cash (viz deals with Novartis and Roche) while RNAi technology is still rare. (In other words, before companies like Dicerna and maybe MDRNA catch up and dilute Alnylam's partnering value).

But more recently Alnylam's been selling the platform for money and potential products – the point of its Takeda deal (see our discussion here). Along with $100 million up-front and $50 million in near-term fees, Alnylam gets a reciprocal first right of negotiation on any project Takeda decides to shop in the US and more importantly, opt-in rights for 50/50 co-dev/co-commercialization deals in the US on up to four Takeda programs of its choosing (exercisable all the way through the start of Phase III).

Despite its sparse infrastructure, negative cash flow and infinite PE multiple – all hallmarks of biotech -- Alnylam is in fact acting kind of like a Big Pharma – providing value to its partner in return for downstream commercial rights.

Which leads to this question: why isn’t Merck doing the exact same thing with the RNAi platform it got from Sirna? Merck certainly knows it can’t possibly exploit all that technology itself, as does Alnylam, but it isn’t pursuing the logical next step, selling it to another company in return for downstream rights.

There are probably a thousand practical reasons for not doing it. Among them: Merck isn’t set up to do it; it's expensive; and technology isn’t really packageable. But the real reason is strategic habit. Drug companies do not share, even when it’s against their interests not to. Drug companies still believe that owning a broad swathe of discovery-stage territory confers on them some temporal or intellectual advantage, despite the fact that 99% of discovery programs will fail. Which means that if you’ve got the chance to let someone else farm some of that territory, you should.

If we were Emperor of Pharma (or if we were merely responsive to shareholders’ growing concerns that we were maximizing their research investment – or at least making it repay its cost of capital, which it most probably isn’t) we’d get cracking on figuring out which companies might, in exchange for downstream product rights or perhaps some other valuable trinket, be interested in playing with our discovery toolkit. Might not be too radical, for example, for GlaxoSmithKline to maybe open up a sirtuin target or two to Pfizer (whom we understand though cannot confirm made a last-minute bid for Sirtris). Or maybe Bristol-Myers Squibb could more profitably exploit its adnectin platform, acquired with Adnexus, by letting someone else take a crack at it.

Keeping their new technologies to themselves, GSK, Bristol and Merck aren’t going to get a dime back on these early-stage investments for years – in the best case. Maybe never. Seems to us the more sensible approach would be to structure some out-partnering deals that increase the likelihood that something will come out of these technologies, and, as Alnylam has done, secure a share of any lucky results.

image from flickr user furiousgeorge81 used under a creative commons license.

Nothing to Lose but Your Chains: Out-Partnering Part I

Lots of interest in out-partnering these days from Big Pharma – out-licensing, spin-offs, project financing (see in particular this IN VIVO analysis of Pfizer’s out-partnering strategy).

But let’s eliminate a myth now. Out-partnering won’t raise lots of money for Big Pharma, even by selling tail-end products. Lilly’s entire out-licensing program –the industry’s most lucrative because it is the only one to exploit tail-end drugs- raised about $1 billion over 7-8 years. Now, that’s hardly chump change. But it doesn’t really move the needle when a moderate annual Big Pharma R&D budget is pushing $3 billion.

So if companies are going to get into serious out-partnering, the other reasons ought to be pretty compelling.

They are. Out-partnering frees up scarce resources to put behind other projects by off-loading some expenses. It can force companies to do some salutary comparisons between internal and external projects (would your same-mechanism Phase II program fetch the price your competitor just paid for Way-Cool Biotech’s?)

But we’re going to talk, here and in a post for tomorrow, about other reasons to out-partner. Starting with a relatively dramatic rationale: using out-partnering to remake the business model.

As some smart types from Boston Consulting Group write in the current IN VIVO: “The decline of pharma’s traditional model isn’t imminent; in fact it already happened.”

The consultants go on to tick-off depressing metrics like total shareholder returns. Pharma's return is down 0.3% annually since 2000. Compare that to, say, the exciting auto components sector – up 6.5% over the same period. They argue that drug companies, to get back on any kind of growth track, need to respond with more than the current set of stock tactical answers (portfolio rationalizations, sales-force restructurings, productivity enhancements, pipeline accelerations, more aggressive dealmaking, and especially big M&A).

So how to do this? The consultants propose a fairly intensive internal process, which seems OK to us. But, closet revolutionaries that we are, we’d suggest an alternative route: out-partnering force majeure.

Take the out-licensing of tail-end products. Comparatively small potatoes, as we noted. But let’s say Pfizer were to re-define tail products, taking all primary-care products whose patents were expiring in four years or less (among them, Lipitor, Detrol and Viagra) and spin them out into a public company – call it Pflipitor.

Start financially. Our bet is that investors would be very interested in such a company – something that looks a bit like Forest Labs – minimal R&D expense, intense commercial focus, primary care without the Big R risk, aggressive late-stage in-licensing. And while Pfizer would lose the cash flow, it would have, in its Pflipitor shareholdings, a nice bank account to dip into when needed. And just maybe those Pflipitor shares would actually gain in value over time.

And to be clear: Pfizer shareholders already know the company can’t possibly fill the revenue hole the company has dug for itself (that dead elephant in Pfizer’s boardroom – as well as the boardrooms of plenty of its competitors – is the reason Pfizer’s PE sits below sea level). Spinning out the tail products makes filling that hole somebody else’s problem, and that somebody else will be far more capable, structurally and our guess is strategically, of solving it.

Meanwhile, Pfizer can focus on actually growing a much smaller company. If you remove those four "tail" products, it’s possible to grow at double-digit rates.

And not just because Pfizer's base is smaller. Pflipitor would take with it a whole lot of Pfizer’s overinfrastructured commercial organization, allowing Pfizer to more rapidly switch over to the flexible, partly outsourced, specialty-intensive sales model it theoretically wants to embrace.

There would be other big changes. Pfizer would no longer have the cash flow to support the enormous R&D organization it now carries around like the chains on Marley’s ghost, making it far more pressing to strip out programs that can’t prove substantial advantages over outside, in-licensable competitors. Instead, like a biotech, Pfizer would have to sell equity – pieces of its share of Pflipitor, perhaps – to finance R&D…further incentivizing its R&D execs to cast a cold eye on internal research programs.

Yes, we know: this sounds a bit like throwing the kid into the deep end to teach him to swim. But the drug industry already knows how to swim, we believe. The problem is it's trying to swim while loaded down with chains. Either we’ve got to cut them or get out of the pool altogether.

Image from flickr user foxypar4 used under a creative commons license.

Stromedix Gets $25 Million in Fibrosis Fight

When Michael Gilman, PhD, left his post as EVP of research at Biogen Idec Inc. in late 2005, his goal was to start afresh. He quickly hooked up with Atlas Venture and Frazier Health Care Ventures, the latter through a friend and venture partner at Frazier, Michael Gallatin, PhD. Two years later he was in the thick of his first start-up experience with a Phase I-ready monoclonal antibody to treat fibrosis.

Today that company, Stromedix Inc., announced it has raised $25 million in a Series B led by New Leaf Venture Partners, with participation from Bessemer Venture Partners, Red Abbey Venture Partners, and A-rounders Atlas and Frazier. Stromedix has already begun Phase I studies with its monoclonal antibody, licensed from an unexpected source, Biogen Idec. The Mab targets integrin alpha-v-beta-6, a cell-surface adhesion molecule and activator of transforming growth factor beta, itself a popular target in a variety of indications including fibrosis and oncology. According to Gilman, TGFb is “necessary and sufficient” in the fibrotic process.

Gilman took a few minutes to explain to us how Stromedix got from A to B, and to talk about why fibrosis has received scant industry attention despite its prevalence and well-understood pathways and potential blockbuster markets.

Fibrosis occurs when the body’s typically well-choreographed response to injury either goes haywire or cycles at low levels for long enough that scar tissue accumulates in the affected organs. Function is generally lost, eventually organs fail. “It’s a condition that has been fundamentally missed by the industry. There are no approved antifibrotic drugs and very few in development” despite the condition’s well understood biology, says Gilman.

The reason? Nobody has figured out how to successfully design and run a clinical plan for an antifibrotic drug. “There’s a generalized anxiety about how hard that clinical path is,” says Gilman.

And that, in a nutshell, is Stromedix’s proposition. Gilman, co-founder Gallatin and their small team reckon they have figured out how to do the right clinical experiment to determine that the biology that has been laid out preclinically actually holds up in humans.

So far researchers have stumbled for three fundamental reasons. First, in most instances fibrosis develops slowly, over a long period of time, making clinical study unwieldy. Second, by the time many patients present with disease they’re too far gone for a therapeutic intervention to make much of a difference. Finally fibrosis is a tissue level phenomenon, says Gilman. “There is nothing in the blood you can measure, so you need tissue from patients, and that means biopsies,” he says.

Stromedix believes the population in which to secure proof-of-concept for STX-100 is transplant patients. “You need patients who you can get early, perhaps even in advance of fibrosis, who develop disease quickly, and patients from whom you can get tissue,” he explains. A transplanted kidney, for example, goes in clean—no fibrosis—but is quickly subject to all kinds of drug- and immune system-induced injury, and so it develops fibrosis quickly; transplanted organs are also routinely biopsied. “It’s the perfect setting to test an anti-fibrotic drug,” says Gilman.

There was just one problem: Gilman and Gallatin didn’t have an anti-fibrotic drug.

But Gilman did know of a program inside Biogen that might fit the bill. Unfortunately, it was off limits because the Big Biotech was actively developing the compound for , idiopathic pulmonary fibrosis (IPF). But Biogen doesn’t have a pulmonary business and the thought of spending big on a non-core asset likely didn’t sit well. About eight months after Stromedix was began drug-hunting, Biogen shelved the program—despite its strong preclinical data--as part of a portfolio re-organization. “I called my friends over at Biogen and said ‘why don’t you let us have it?’” said Gilman.

In March 2007, Stromedix raised $4.4 million from Atlas and Frazier and finalized the STX-100 license two months later. The Mab arrived with a complete preclinical tox package, manufactured clinical material, and an IND on file at FDA. “The program came out very nicely baked,” says Gilman. “And within 90 days we were in front of the FDA with a new clinical plan in renal transplant.” Stromedix filed a new IND in October and in early 2008 started a Phase I in healthy volunteers, which should wrap toward the end of the year.

STX-100 is a poster-drug for the out-licensing movement. Biogen Idec had to take it into a much bigger market—IPF, which some analysts predict could be worth upwards of $6.5 billion (with a B) per year—in order to see enough of a return on its investment.

The economics are completely different for a small firm like Stromedix, which can monetize its investment with a well-run proof-of-concept trial in a small indication that might not even be the final clinical destination for the product.

Of course Biogen stands to gain as well—the company owns an undisclosed stake in Stromedix. Although it has no specific rights to the project down the road, Gilman acknowledges his former employer is well-placed should it decide to license the project back after POC. Provided it stays focused, today’s B round should see Stromedix through that proof-of-concept in renal transplant, which should read out in 2010.

Gilman is positively evangelical about putting Big Biotech and Big Pharma assets into the hands of small, focused firms with incentivized management. But whether or not Stromedix pursues further in-licensing opportunities is uncertain. At the moment the company is a clean, capital-efficient play on a well-regarded program that is perfectly situated on the verge of a valuation inflection point, says Gilman. In other words, given proof-of-concept success, why complicate the prospects of a takeover?

(A full version of this article will run in the May issue of START-UP)


image of fibrotic lung via Wikimedia Commons.

Big Pharma Outlicensing: Bad News for Biotech’s POC Model?

You would have thought Big Pharma's increasing willingness to outlicense would be good news for the industry. VCs love getting their hands on pre-baked assets; fully-formed spin-outs are even better—especially as these days, strings are a rarity.

But why is BP outlicensing? Not out of the kindness of their hearts, certainly. And not because it’s easy (getting GI-focused Albireo out of AstraZeneca took months). They’re doing it because cost-cutting and R&D prioritization demands it.

Plus, according to commentators at Windhover's Pharmaceutical Strategic Outlook conference in New York last week, Big Pharma’s various R&D experiments (translational medicine, productivity metrics, the externalization splurge) have led to a glut of Phase II programs. They can’t afford to take all of them through expensive late-stage trials--which is why Jim Cornelius, Bristol’s CEO, confirmed last week during PSO: “There will be more [risk-sharing, late-stage] deals like that between BMS and AstraZeneca” in January 2007.

Even size-obsessed, merger-maniac Pfizer has started to (at least) talk about outlicensing—a subject that was previously as good as taboo. “We have headcount for it,” admitted Barbara Dalton, head of Pfizer's Strategic Investment Group, to the PSO audience. “There will be spin outs in future,” she promised.

So here’s the thing, though: if Big Pharma is going to want to shed some risk and responsibility on its development programs, what of the growing numbers of biotechs seeking to bake assets as far as proof-of-concept (Phase II) and then license them—for enough reward, in theory, to justify avoiding Phase III risk and cost?

They're driven--justifiably, one would think--by rising Phase II deal values (see chart below). The question is how long that trend will last (and how valuable are these deals to biotech anyway, which we’ll address in another post)? So far, Big Pharma’s woes have benefited biotechs, driving up deal financials, improving biotech’s leverage, and allowing them to hang on to more value.


But the point of the POC lot is that they don’t, for the most part, want to take on later-stage responsibility (co-promotes and the like). Now sure, the right Phase II programs will always be in demand, as Steven Lee, CEO of POC-focused Summit PLC, was quick to point out during a panel discussing the virtues of POC versus the fully-integrated model. And there’s still virtue in this kind of low-risk strategy, he argued, particularly in Europe. Flexion’s COO Neil Bodick concurred: there’s value in sticking to one’s knitting; the “fully integrated model is doing to de-construct,” he predicted. For Bodick, “there are opportunities to be competitive in different [incomplete] segments of drug discovery and development.” (For more about Flexion, and about Bodick’s Lilly heritage, click here.)

That’s a neat argument, and probably a valid one in theory. (Some of us—the disaggregation-ists--feel it’s particularly relevant to Big Pharma, even though as we suggested here, they don’t seem to agree.) In practice, though, the POC model has yet to prove itself. Even Lilly’s six-year old Chorus experiment—the in-house inspiration for Flexion which likewise aims to get compounds to POC cheaper and faster than anyone else—“there’s no data yet” on whether the model leads to a better downstream success rate (or simply nastier surprises for later), acknowledged Bodick.

Meantime, fully integrated biotech (“FIPCO”) advocates such as Rigel’s Jim Gower or NicOx’s Michele Garufi are still out in force, despite skyrocketing regulatory risk. How else has biotech ever created significant value, they ask? The trend towards more specialist drugs, requiring small sales forces, makes going-it-alone plausible.

Sure, “you have to be a bit crazy” to undertake multi-thousand patient trials and build a sales force, acknowledged Gower. But with a broad portfolio, a handful of existing partnerships, and, most importantly, investors’ green light to take a punt on the lead program, there’s no reason to hand over the jewels. Especially if the value and number of Big Pharma deals do indeed lose their luster.

Biovitrum Sheds PC Assets

Remember Biovitrum? That Swedish biotech spun out of Pharmacia in 2001, hailed as a key driver of Europe's burgeoning biotech sector? With revenues of nearly $200 million and a market cap of about $500 million, Biovitrum is a meaty player, at least by Europe's standards.

But it hasn't exactly blown us away with news and dynamism. Since its much-anticipated (but delayed) IPO on the Stockholm exchange in September 2006, it raised only a cautious secondary offering, apparently because of market volatility. Since then, shares have gone in one direction only--downwards. Almost 35% downwards.

Perhaps Biovitrum got a bit comfortable, basking in the $120 million or so annual revenues it receives from Wyeth around hemophilia treatment ReFacto--a legacy of the Pharmacia deal.

Either way, re-invigoration is at hand. CEO Martin Nicklasson, PhD, who joined in May 2007 from his position as EVP and Head of Global Marketing at AstraZeneca, announced his "way forward" for the company this week in London, following a similar session in Sweden.

In a sentence: Biovitrum will scrap its primary care metabolic disease pipeline, re-focus its R&D on specialist programs, build out its commercial presence beyond the Nordic area to Europe through acquiring tail-end assets, and make more of its biotech capabilities.

No surprises there: the world and his dog are going specialist. Most would agree that it makes more sense for Biovitrum to build out a hemophilia franchise around ReFacto--as it's doing--rather than pour millions into small molecule obesity or diabetes. Primary care is expensive (as well as being fraught with failure and highly unfashionable), and Biovitrum, as that rare beast a profitable biotech, wants to stick to the "earn before you burn" mantra.

All sound a bit specialty-pharma-like to you? Consider this: all four of the specialist programs in Biovitrum's clinical pipeline are in-licensed. Exinalda and Kiobrina, both human recombinant bile salt-stimulated lipases, came via the 2005 acquisition of compatriot Arexis. Anti-Rh (D), allegedly the first ever recombinant polyclonal antibody to enter clinical trials (it's in Phase I for prevention of hemolytic disease and for the treatment of red-blood-cell disorder thrombocytopenic purpura) is the fruit of a February 2006 deal with Symphogen. Factor IXFc (longer-acting recombinant Factor IX) came through an earlier 2006 deal with Syntonix (part of Biogen Idec since January....and yes, Biovitrum's deal is secure in the event of another change of control.... )

So does this mean that Biovitrum, born out of Big Pharma and with an above average 350 R&D headcount, faces similar productivity issues to Big Pharma? "It's a debate you can have," acknowledged Nicklasson. But at least the company knows how to in-license.

Can it get any value from out-licensing, though? Consider the clinical assets on the block: a 5HT2a agonist in glaucoma (Phase II recruitment delayed), an A2A agonist in neuropathic pain (Phase II), and a 5-HT6 receptor inhibitor in Phase I obesity trials. Behind those in pre-clinical: a delayed DPP-IV inhibitor in diabetes, and a fat-fighting leptin mimetic.

Roll-up, roll up, supporters of vintage primary-care small molecules.

Talking of Sons-of-Drugs…

Just when we thought that drug companies had given up on some of their more blatant life-cycle management tricks, snubbed by stingy payors who now know their left-handed from their right-handed isomers, out come Sanofi-Aventis and UCB with news of US approval for their new anti-histamine Xyzal. The Wall Street Journal’s Health Blog was quick to make the link—which the companies’ press release somehow omitted—and proclaim Xyzal as son-of-Zyrtec, which, incidentally, will lose patent protection in September.

Not much new drug company behavior there, then. But WSJ’s timely outing of Son-of-Zyrtec reminded IN VIVO Blog of another, somewhat more unusual Son-of-Drug story that you might just have missed.

Remember Lilly’s problematic Xigris, whose market performance has been as disappointing as the pre-launch anticipation was sizzling? In case you don’t: Xigris came to market in 2001, the first ever treatment for severe sepsis, after years of top-notch protein science and engineering inside Lilly, with many hearts and minds at stake.

Xigris is a case study of, simplistically, how too much innovation can backfire (just as too little can, also). Particularly since Lilly appears (with that wonderful thing called hindsight) to have launched the drug in too broad a population, which led to the brand image being tarnished by cases of serious bleeding. Lilly ain’t giving up on Xigris—there's too much money under the bridge for that. It's busy seeking biomarkers to find out which patients can benefit most. “We’re in invest mode” on Xigris, sum up Lilly executives.

But—and here, belatedly, is the point—Lilly was (after some persuading) quite happy to part with son-of-Xigris, theoretically a better-designed molecule, for not very much money and no claw-back to speak of. The Big Pharma last month quietly licensed the Phase I candidate to a relatively unknown Canadian biotech called Cardiome. Unknown, perhaps, except for the fact that Cardiome's CMO is Chuck Fisher, the man behind Xigris’ development and approval at Lilly.

The deal is somewhat personal, in other words. It's Fisher’s chance to make good what, to put it frankly, went bad within Lilly. He had a job persuading his own board to agree to the deal, even though Cardiome paid just $20 million up front and up to $40 million in milestones (which don’t start until 2009) for all possible indications (and there could be dozens). It’s a risky, if relatively cheap, bet for Cardiome: the drug’s father has proved an expensive failure, and although Cardiome is testing Son-of-Xigris for cardiogenic shock in the first instance, that's still a tricky indication with no pre-clinical models.

Still, if Son-of-Xigris does make it to market one day, in anything, it will be interesting to compare its development and approval path within a small, focused biotech with that of its father, who was brought up in Big Pharma: nature vs nurture. As we’ll suggest in the next issue of IN VIVO, the Xigris family of drugs may just be better suited to biotech. Certainly Fisher reckons he can do a better job marketing Xigris’ offspring than Lilly could.