The IN VIVO Blog Podcast: PSO Panel on Health Care Reform, Part 2

Not for long!

The IVB Podcast is back with Part 2 of our PSO panel with The RPM Report's Ramsey Baghdadi, Arthur D Little managing director John Brennan, Rock Creek Policy Group principal Ian Spatz, and Foley Hoag partner Paul Kim. If you missed Part I, you can find it here.

Just click the button below to get started. And don't forget, you can access the podcast via iTunes also.


Bonus IVB Milestone info: you're reading our 1,000th post. Thanks for reading (and listening).

The IN VIVO Blog Podcast: PSO Panel on Health Care Reform, Part 1

As promised we've got more podcast love for you this week, and you're in for a special treat. A delicious morsel of health care reform chatter served up courtesy of Ramsey Baghdadi's panel at our recent Pharmaceutical Strategic Outlook conference in New York.

Joining Ramsey for the April 14 discussion were Arthur D Little managing director John Brennan, Rock Creek Policy Group principal Ian Spatz, and Foley Hoag partner Paul Kim. Today you're getting Part 1 of the discussion, Part 2 is queued up for next week, swine flu permitting.

Just click the button below to get started. And don't forget, you can access the podcast via iTunes also.

PSO: Highlights from Day 1

Greetings from New York, where our Pharmaceutical Strategic Outlook conference is in full swing. Here are a few of the highlights so far:

• Merck's Chief Strategy Officer Merv Turner. Entertaining (as always) in his discussion of the key metric at Merck: ITPS (it's the pipeline, stupid). Our Pink Sheet Daily coverage of that Big Pharma M&A panel focuses on Merck's commitment to continued business development activity despite the Schering-Plough acquisition--think Cardiome alliance. You can find it here. Noteworthy also was that much of the discussion diverted to the growing importance of China in the health care universe (in part since Turner had just returned from his latest scouting trip there). Our favorite part of the panel, though, was when Credit Suisse analyst Catherine Arnold pointed out during a discussion of the merits of Big Pharma diversification that Pfizer, as a result of the Wyeth acquisition, could now diversify into follow-on biologics. "I'd advise against it," joked Turner, who is the architect behind Merck's own FOBs strategy. (He also gave a cheer when a majority of our high-caliber audience, in an interactive voting session, chose FOBs as one of the most sensible routes out of the fug for Big Pharma.)


• David Mott. We'll let Reuters do the heavy lifting here, but suffice to say that the panel on running stand-alone biotechs within pharma drew a lot of interest. And not just because the ex-MedImmune CEO recalled an interesting conversation with Roche's Franz Humer that in retrospect could raise eyebrows. See the Reuters story here. We also sense some degree of tension in the Millennium-Takeda tie-up (or stand-off, perhaps?). But what do we know?


• Health Care Reform panel. What did we learn? Don't be afraid of comparative effectiveness--embrace it! Unless of course it becomes part of FDA's decision-making process. (After all, you want to make drugs that are better than those of your rivals, right?) And the exclusivity period for FOBs might matter less than people think--instead of focusing on how much exclusivity will be in the bill that gets through Congress, said the panelists, how about thinking a little about what actually happens when that exclusivity expires.

Today's panels feature activist shareholdes, heads of pharma discovery (reminding us why pharm still does discovery), and the future of primary care. We'll try to tweet a bit more today too, so look for us on Twitter: @invivoblogchris and @invivoblogellen.

Why Investors Don’t Like Biotech Alliances

We all know that the public markets are not funding biotech. Add up all the dollars invested in biotech IPOs and follow-ons over the last three years ($16.2 billion) and it doesn’t equal even half of what VCs and other private-equity players have put into the industry ($33.3 billion).

But alliance dollars continue to climb.

And yet investors don’t seem to like them very much.

Since November 2007, there have been nine deals by public biotech companies with upfront payments (equity and cash) of greater than $20 million – to us a reasonable proxy for a biggish deal. Among them: Isis Pharmaceuticals’ mipomersen deal with Genzyme ($325 million upfront); Merck’s with GTx on its Phase II SARM and two backups ($70 million upfront); and Sanofi Aventis’ multi-antibody arrangement with Regeneron ($85 million upfront).

And yet, with all this mostly undilutive capital flowing in, the market’s reaction has been distinctly negative. The median share price among these nine biotechs is down 15% from the day the deal was signed.

The entire decline can’t be blamed on the deals. Dynavax signed a deal with Merck on its Heplisav hepatitis B vaccine, getting $35 million in upfront monies. Since then the stock is down 59% -- though that decline was almost entirely due to the fact that the company had to halt its Heplisav trial for safety reasons.

And to be fair, equities in general have hardly been popular in the run-up to and aftermath of the Bear Stearns fiasco.

But you’d expect better from companies with pretty darned good news. Regeneron, for the third time non-exclusively monetizing its VelocImmune antibody production system and this time adding a rich co-development deal on a series of programs, with spectacular downstream economics, has nonetheless lost 16% of its value since it announced the deal.

The day the market heard of the Isis/Genzyme deal, Isis shares jumped 28% -- undoubtedly helped by the amplifier of the JP Morgan conference, during which the deal was announced. Within a month, the company had given up nearly all of those gains (pre-Bear Stearns, mind you). It’s now trading 1% above its pre-announcement price. (Read about the comparative value of the Isis deal here.)

There’s a sort of dog-in-the-manger quality about all this. If investors won’t put in new money, you’d figure they’d at least appreciate it when Big Pharma did. Nope.

Certainly, they used to. At one time, a Big Pharma deal was the required validation for an IPO or additional public round. But now it’s clear that the market no longer gives a damn about such imprimaturs. Big Pharmas’ frequent missteps in development haven’t shined up their product-picking reputations. More importantly, biotech’s institutional investors now have the teams to do their own scientific and clinical homework.

Second, the M&A-based logic of the market leads investors to the conclusion that any product-based deal subtracts value. We’re not aware of any data that actually supports that conclusion (we’ll look into it, of course). But as long as acquirers are willing to pay a nearly 100% premium to what IPO investors are willing to pay, investors are hardly willing to jeopardize a potential merger windfall by selling off rights to a key product.

And finally, investors just don’t like some of the deals biotech is signing, despite the big dollars attached to them. One reason, noted Bill Slattery of Deerfield Partners at the opening BIO-Windhover panel in New York: deals often give Big Pharma development control.

That’s an apparently sensible practice. After all, large drug companies have the development experience to know what they’re doing. Two decision-makers generally take longer than one. And no one wants two voices, with potentially two sets of data, going to the FDA about the same molecule.

But investors are beginning to see things differently. Big Pharma frequently chases only the major indications for a biotech's programs, which may mean they ignore the smaller uses to which the molecule might be better suited – and for which it might be approvable. No approval -- no milestones, no royalties, no value in the biotech, no brass-ring M&A shot.

Take Merck’s deal with GTx. Merck paid the biotech $70 million in cash and equity to get development and marketing rights to its Phase II SARM Ostarine (a terrific validation since J&J had given up rights to the same thing a few years before), $15 million in R&D fees, and a potential $422 million in additional regulatory milestones.

But despite a 63% one-day jump -- good data reported from its most advanced drug, the Phase III prostate cancer therapy toremifene (Acapodene) -- the stock is still off from the day it signed its Merck deal. Indeed, over the three months following that deal, the company lost 33% of its value.

We’re sure there were a variety of reasons for the decline. But one of them is that investors don’t like the fact that Merck now has all development rights to Ostarine. Should toremifene fail, GTx’s future will largely be in the hands of Merck. And for all Merck’s good intentions, its first obligation will be to Merck shareholders. Which is why GTx shareholders have reason to be skeptical.

And more generally why investors are skeptical of biotech deals.

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.

CFOs: Agents for Change?

I'm not convinced. Last year saw an unprecedented five new CFOs among the top drug firms-- at Pfizer (Frank D'Amelio), AstraZeneca (Simon Lowth), Wyeth (Greg Norden), Amgen (Robert Bradway) and Merck (Peter Kellogg). This re-shuffle led to the question, posed during a panel at Windhover's Pharmaceutical Strategic Outlook meeting in New York City today, as to whether these money-men were going to be the drivers of (let's face it, necessary) change at Big Pharma.

Peter Kellogg joined Merck in June 2007 following stints in Big Biotech -- at Biogen Idec--and in the consumer industry, at Pepsi, before that. What has he brought across from those sectors? Well, the biotech experience allowed him, he said, to slip easily into the mega-dealmaking/collaborative culture that Merck has been touting for some years now, and the Pepsi learnings were useful in re-engineering cost structures (common in all Big Pharma these days).

But Kellogg's most radical predictions were more collaborations (especially risk- and cost-sharing ones) and more shrinking SG&A costs. Will Merck shrink so much as to become virtual? "No, that would be too extreme," he said. But the share of overall R&D spend on internal infrastructure will decline in favor of external collaborations, and even then total spend will grow only in the mid-single digits. "We will bring in more from the outside, and we'll be smarter about where we run our trials, and where to find patients."

The other CFO-panelist, Genzyme's Mike Wyzga, claims this Big Biotech's already applying lessons from his previous life in the software industry, where winning companies like Microsoft looked beyond the ten year horizon to figure out how to grow. "From mid-07 we stopped giving quarterly guidance, and instead we predicted 20% in average compound earnings growth out to 2011," Wyzga explained. That, he argues, shifted the company's outlook – and to some extent, the outlook of its investors -- beyond the next decade, as Microsoft did. "That's how you build continued sustainable growth."

Genzyme can already reasonably lay claim to some fairly radical moves, not least those creative financial engineering experiments that stretch back to the company’s earliest years. When Wyzga arrived a decade ago, Genzyme had four separately-listed tracking stocks, seven joint ventures, and 50% of a joint venture with spin-off Genzyme Transgenics (now GTC Biotherapeutics.) So for Genzyme, adapting to the future means maintaining that creativity and flexibility, while at the same time growing larger—closer in size to a mid-sized or even large pharma. There'll be no return to tracking stocks, Wyzga predicted. "Instead, we're creative in how we put deals together."

Evolutionary change, then, not revolutionary; and this driven as much by the dealmaking teams, it seems, as the bean-counters. Indeed, the boldest signs of Big Pharma change in today's PSO sessions were probably from Jim Cornelius, Bristol's CEO. In describing this once-big-but-now-midsized pharma's planned metamorphosis into a next-generation biopharma firm, he talked openly about shrinkage--the 50% cut in sales force that's already happened since 2000, and the further 15% planned reductions over the next three years. "Our total sales force for our recently-launched breast cancer drug Ixempra is 125," he stated. Compare that with the 1500-strong Plavix sales force--which, incidentally, may be out of a job by the end of 2011 when generics hit.

Perhaps this in itself--pharma talking about down-sizing rather than merger-mediated upsizing--is transformation enough.