Deals Of The Week Tracks Obamacare

The pharmaceutical community, like much of the country remains divided about the Affordable Care Act and  its impact on healthcare and the industry, perhaps even more so than when the original law passed in 2010. The industry, of course, supported the initial legislation, and many people continue to believe it made the right decision. 

But as deadlines approach for the all-important next phase of the law, execution realities and uncertainty raise questions, many of which can’t be answered in the near term. Nonetheless, they have implications overall for the healthcare system and patients, and, more narrowly, for pharma commercial and business development strategy. This year, in particular, is important for the market access phase of the legislation, as the country prepares to get new health insurance exchanges running by the Jan. 1, 2014 deadline, and states decide whether and how to expand their Medicaid offerings to broader populations. As of Jan. 1, Americans must have individual insurance coverage or pay a penalty (modest at first); they can buy the coverage through insurance plans listed on health insurance exchanges which begin operations on that date. 

Overall, pharma industry support, officially, at least, seems high, even as executives worry whether their companies will ever make up for the tradeoffs they agreed to three years ago in the form of bigger rebates (for Medicaid and other government programs) and taxes through numbers of newly covered lives. They are concerned about less high-profile provisions of the act, such as its dramatic expansion of the 340b program to new categories of hospitals, and a provision that limits reimbursement companies can get for minor improvements to their product, as well as the federal and state governments’ ability to execute their plans on time. 

Many states are just now announcing which insurance companies are participating in the exchanges and those plans are identifying their basic options, but the industry in general does not yet have a good perception of what drug coverage will look like, how the new exchange plans or Medicaid expansion will be populated, or how the mandatory individual insurance provisions will be enforced. 

Because no one really has the answers, many in the industry expect companies to monitor the ACA’s progress closely but continue to operate status quo. They are not so much keeping their heads in the sand as monitoring cautiously,” says an executive at a firm that advises companies on market access issues. “From a tactical perspective, no one knows what will happen, so they are taking the path of least resistance. Top execs are asking me to come up with projections, and I don’t know them, so they are proceeding as though there is no effect.”

The uncertainty hasn’t stopped Wall Street from predicting winners and losers in the healthcare sector in general, or entrepreneurs form seizing opportunity in the midst of change. At the Jefferies investment bank conference on June 4, a panel of experts opined about investor beneficiaries, and all agreed that whatever else, managed care –perhaps by another name—will be the name of the game going forward. Past efforts to move populations into managed care failed, but what’s different now is the government support for such programs, as well as massive databases that able to monitor how the system is performing.

Meanwhile, the industry’s relentless search for innovation continues – if for no other reason than because without it, there’s not much of an industry – witness the struggles of specialty pharma companies such as Elan PLC, Endo Health Solutions, and Forest Laboratories, all laboring to move beyond the enormous success of an innovative drug but finding it hard to come up with a repeat act.--Wendy Diller

MorphoSys/GSK: MorphoSys has struck a development and commercialization deal with GlaxoSmithKline for its mid-stage rheumatoid arthritis antibody, MOR103, which targets the GM-CSF pathway that stimulates production of immune cells such as macrophages. The deal, announced June 3, gives MorphoSys near-term cash in the form of a €22.5 million ($29.5 million) upfront, plus development, regulatory and commercialization milestones that could add up to €425 million. GSK also will pay a double-digit royalty on all sales of the product. MOR103 has completed a Phase I study in healthy individuals, as well as a Phase Ib/IIa trial in 96 patients with mild to moderate rheumatoid arthritis. Patients in the drug arm of the study showed a significant effect compared to placebo at just four weeks. GSK will take over all development, but did not specify when it will begin Phase II studies. MOR103 has also been tested in patients with multiple sclerosis.

MorphoSys has been shifting gears for the last few months as it tries to move away from the partnership model that has made it profitable to concentrate more on its wholly-owned pipeline. MorphoSys has two drugs in its proprietary pipeline: MOR208, a Phase I asset which targets CD19 for B-cell malignancies, and MOR202, a HuCAL antibody against CD38 for multiple myeloma. – Lisa LaMotta

Pfizer/CytomX Therapeutics: After obtaining preclinical proof-of-concept last year for its approach to tumor-specific delivery of specially engineered antibodies, CytomX has struck its first alliance with a big pharma. Under an agreement announced June 6, the company will collaborate with Pfizer to discover and develop a variation on antibody-drug conjugates (ADCs) for cancer. Pfizer will pay the South San Francisco, Calif.-based biotech $25 million in combined upfront cash and milestones pegged to research and preclinical achievements. In addition, privately held CytomX could earn up to $610 million in regulatory and sales milestones, as well as tiered royalties into double digits on sales of any product reaching market. Because of the selectivity of candidates generated via its Probody Platform, CytomX says it can target broadly expressed tissues that are difficult to reach with other therapeutic approaches because of worries about off-target toxicity. CytomX uses its technology to generate ADCs that it calls Probody Drug Conjugates (PDCs), specially engineered antibodies or other approaches to drug delivery for cancer, inflammation and other unmet medical needs. PDCs will be safer and differentiated from other ADCs, CEO Sean McCarthy said, because they are engineered to combine cytotoxic payloads with Probodies that are masked to become activated only in the tumor’s micro-environment. Pfizer and CytomX are not disclosing the indications or specific targets on which they will work together, nor any timelines for the work, other than that it is an exclusive, multi-target alliance focused on oncology. – Joseph Haas

Janssen Biotech/Second Genome: Janssen Biotech and Second Genome Inc. announced a landmark research alliance on May 5th in which the latter will apply its microbiome discovery platform to characterize the role of human bacterial populations in ulcerative colitis. The goal is to translate the knowledge into therapeutic programs. The deal marks big pharma’s first commercial collaboration in microbiome R&D and may stimulate further deals and investment in the space. Interest in the therapeutic potential of the microbiome has been building over the past three years with the founding of several venture-backed companies focused on microbiome biology. Second Genome gets an upfront payment and milestones, both undisclosed. The upfront does not include equity. Janssen will fund the collaborative research through its Johnson & Johnson Innovation Center and the immunology therapeutic area within Janssen R&D LLC. Second Genome has preclinical programs in inflammatory bowel disease and type 2 diabetes, each about a year and a half from IND. It also has several discovery programs. On the same day, the start-up announced a $6.5 million third tranche to its series A financing, bringing the total raised to $11.5 million.—Michael Goodman

The Medicines Co./ ProFibrix: The hospital marketer The Medicines Co. is expanding into the hemostasis market, and has negotiated an option deal with ProFibrix BV that could improve its position there. The company announced June 4 it has agreed to pay $10 million upfront for an option to acquire ProFibrix later this year after Phase III clinical trial results read out on the company’s lead biologic, Fibrocaps. The dry powder topical formulation of fibrinogen and thrombin is being developed to stop bleeding during surgery. If the results of the single Phase III trial testing Fibrocaps are positive, The Medicines Company would pay $90 million to acquire ProFibrix outright. It also would be on the hook to pay $140 million in regulatory and sales milestones. ProFibrix’s ongoing Phase III trial, FINISH-3, has completed enrollment of 719 surgical patients with mild to moderate surgical bleeding, and the results are expected in the third quarter. The Medicines Company already markets the recombinant thrombin Recothrom, to which it recently gained rights through an earlier option arrangement with Bristol-Myers Squibb Co. The Medicines Company plans to combine the 60-person hemostasis group it gained from Bristol with the ProFibrix team. Both are based in Seattle, although ProFibrix’s leadership and headquarters are in The Netherlands. Plans call for CEO Jan Öhrström to stay on with The Medicines Company and head the company’s efforts in the hemostasis market. – Jessica Merrill

Novavax/Isconova: Eager to add adjuvant technology to its clinical and preclinical recombinant vaccine candidates, Novavax is making a $29.2 million bid to buy Swedish firm Isconova. Spun out of the Swedish University of Agricultural Science, Isconova produces saponin-based, immune-modulating adjuvants. In October 2012, Rockville, Md.-based Novavax, which has vaccines in clinical development for seasonal influenza, pandemic influenza, respiratory syncytial virus and rabies, reported successful Phase I data testing its pandemic flu vaccine boosted with a third-party saponin-based adjuvant. In a release, Novavax said based on those data plus Isconova’s own data, it believes the Swedish biotech’s technology can complement and strengthen its vaccine programs. Novavax announced a public offer June 4 under which it would issue 15.45 million new shares of common stock and swap 1.2388 shares of its stock for each Isconova share. The deal would represent a 26.7% premium over Isconova’s share price at the close of trading June 3 and would result in Novavax shareholders owning 91.1% of the new combined company. Isconova shareholders would control the remaining 8.9%. Novavax said if the deal goes through, it will offer Isconova management “positions subject to their commitment to the combined company,” and it does not plan to seek changes regarding the Swedish firm’s headcount, employment terms or business location.--JAH

Arno/Veridex: Cancer-focused Arno Therapeutics signed an agreement June 3 with Veridex, a subsidiary of Johnson & Johnson, to develop a diagnostic test for seeking optimal patients for its oncology candidates. Based in Flemington, N.J., Arno is developing cancer therapeutics that target the PI3 kinase/Akt pathway, as well as HDAC inhibitors and camptothecins. The two firms will team up to use Veridex’s proprietary CELLSEARCH platform to develop a diagnostic to detect the presence of activated progesterone receptors as a biomarker of anti-progestin activity in circulating tumor cells, those that have detached from a solid tumor and are found in the bloodstream. Arno is developing onapristone, an oral, anti-progestin type 1 progestin receptor antagonist. Now in preclinical development, onapristone is slated to begin clinical study during the second half of 2013.--JAH

AstraZeneca/ Rigel: AstraZeneca pulled out of its three-year partnership with Rigel Pharmaceuticals on June 4 after the companies announced lackluster results of the Phase III program for rheumatoid arthritis drug fostamatinib, an oral spleen tyrosine kinase (SYK) inhibitor. The drug did not show the levels of efficacy that many other drugs in the category have in clinical trials, prompting AZ to pull the plug. Rigel intends to evaluate the data from the Phase III program, which AZ conducted, and make a decision by end of the summer regarding its next steps. Rigel executives believe that fostamatinib could still find a place in the crowded RA market, even if the indication is just for a small subset of patients. Rigel potentially will seek approval of the drug on its own, but said it will not commercialize the drug without a partner. 

The failed program is just the most recent in a string of failures for the British pharma, which has ended programs in cardiovascular and oncology as well. It has also faced a slew of setbacks with its diabetes program, partnered with Bristol.--LL

DOTW: Biogen Puts Offshore Cash to Work

When it comes to corporate tax planning, biopharmas as a group aren’t spectacularly sophisticated. (A few exceptions come to mind, most notably specialty pharma Valeant and Bristol Myers-Squibb, the latter of which upped its game and expects to drop its tax rate to 16% in 2013. That's down from 26% in 2011.)

It’s particularly hard for U.S. biopharmas to do much with offshore cash. That’s unless they buy something outside the U.S. or pay a high tax rate to bring cash into the U.S. Or they can opt to keep stockpiling cash ex-U.S. in hopes a cash- repatriation tax holiday is on the horizon, an unlikely scenario anytime soon given the ongoing fiscal standoff.

This week, Biogen Idec made a bold move by using offshore cash to acquire full rights to multiple sclerosis drug Tysabri (natalizumab) from its previously 50/50 partner Elan. The deal manages to turn cash sitting on its balance sheet, much of it offshore, almost immediately into a bump for EPS and cash flow - a neat trick. Deutsche Bank analyst Robyn Karnauskas upped her 2013 EPS estimate to $7.76 from $7.15 and her 2013 revenue estimate to $6.6 billion from $6.1 billion. She expects the new structure to be in place in the second quarter.

The deal includes a $3.25 billion upfront payment from Biogen to Ireland-based Elan. Most of this will come from offshore cash, Biogen CFO and EVP Paul Clancy said on a Feb. 6 call. Biogen Idec had $3.7 billion in cash at Dec. 31. In addition, Elan will receive 12% of Tysabri sales in the first year and then after that 18% on sales under $2 billion and 25% on sales over $2 billion. Tysabri had 2012 sales of $1.6 billion, with some analysts modelling peak annual sales well above $2 billion.

Biogen CEO George Scangos made reviving Tysabri revenue growth a priority when he began his tenure in June 2010. After a 2004 approval, Tysabri was withdrawn from the market in 2006 due to reports of the fatal brain disease, progressive multifocal leukoencephalopathy (PML). It re-entered the market in 2006 with a label for second-line use and a boxed warning. Scangos pushed for the development and approval of a test for JCV antibodies to assess PML risk. In January 2012, FDA updated the Tysabri label on include information quantifying the risks of developing PML according to JCV antibody status. Last month, the partners submitted applications to FDA and EMA for first-line use of Tysabri in patients who test negative for antibodies to the JC virus.

Wall Street initially was wildly enthusiastic about Biogen’s move, spiking shares up 6% in early trading Feb. 6. But since then, the Street has become a bit more cautious, with the gain retreating to about 2% by market close on Feb. 7. Skeptics worry Tysabri won’t live up to revenue expectations or that Biogen’s execution of this deal just ahead of the March 28 PDUFA date for the oral MS drug formerly known as BG-12, now called Tecfidera (dimethyl fumarate), indicates reduced optimism for the new treatment. On the Elan side, buysiders worry about whether President and CEO Kelly Martin will use that mountain of cash to make useful deals. The company doesn’t have the best track record when it comes to strategic transactions. Elan shares were off 6% by the end of Feb. 7 on the deal.

Biogen Idec is hardly alone among biopharmas in having stacks of offshore cash. At the end of 2011, biopharma companies had a  total of $183 billion in cash most of which was offshore, according to a March report from Moody’s. To put that in some context, that is roughly equal to the combined market caps of Amgen, Gilead Sciences and Bristol. Biopharma is second only to the technology industry when it comes to the sheer amount of cash on the books. Last week, the IT sector also offered an instructive example with the privatization of Dell, which itself could be a partial end-run around offshore cash and corporate taxation issues.

The top biopharma cash hoarders in 2011 were Pfizer ($35.3 billion); Johnson & Johnson ($32.3 billion); Amgen ($20.6 billion); Merck ($18 billion) and Bristol ($11.6 billion). Now that the immediate panic of patent cliffs is behind many of them, perhaps biopharmas will take a breather, look around and think of more creative, tax-efficient ways to deploy all that cash.

For a look the rest of the money that was spent in this week's biopharma deal activity, you need go no further than this week's edition of . . .

Alnylam/The Medicines Co. Hospital specialist The Medicines Co. is jumping into the PCSK9 race for the treatment of high cholesterol in a partnership with RNAi therapeutics developer Alnylam Pharmaceuticals, announced Feb. 4. But the program is far behind other PCSK9 drugs in development at Sanofi/Regeneron and Amgen, which are both in Phase III development. The product, which has completed Phase I testing, will have to prove itself to be differentiated from the leaders if it is to become an eventual commercial success. Alnylam and TMC don’t think that’s a problem because as an RNAi therapeutic ALN-PCS works through a different mechanism of action than the leading drugs in development, which are monoclonal antibodies. That could yield a best-in-class drug, the companies predict, although the results will have to bear out in clinical studies. Alnylam will be responsible for developing the programs further for an estimated one to two years to complete preclinical and Phase I clinical studies of the subcutaneous formulation, and TMC will be responsible for leading and funding development from Phase II forward and for commercializing the program if successful. TMC will pay $25 million upfront and Alnylam stands to receive potential development and commercial milestone payments of up to $180 million and could earn scaled double-digit royalties on sales of the resulting products. It’s not an enormous value for an asset that hits such a hot target. Alnylam Chief Business Officer Laurence Reid admitted the upfront portion of the deal reflects the competitive dynamics in the PCSK9 field and the fact that there are several drugs in later stages of development. - Jessica Merrill

Inspiration/Cangene: French company Ipsen is finally free of U.S. partner Inspiration Biopharmaceuticals. Cangene has agreed to buy rights to IB1001, a recombinant factor IX (rFIX) for the treatment of hemophilia B, which FDA put on clinical hold in 2012. The deal, announced Feb. 6, completes the sale process of all Ipsen and Inspiration hemophilia assets and follows the Jan. 24 news that Baxter would buy the troubled biotech’s flagship hemophilia drug OBI-1 and related Boston manufacturing facility. Inspiration entered Chapter 11 protection at the end of October 2012 to restructure and find a buyer for its two main hemophilia products: OBI-1, a recombinant porcine factor VIII (rpFVIII) for treating hemophilia A with inhibitors, and IB1001. In return for global rights to IB1001, Cangene agreed to pay $5.9 million upfront and up to $50 million in potential additional commercial milestones, as well as net sales payments equivalent to a tiered double-digit percentage of IB1001 annual net sales. Meanwhile Baxter, in its transaction pact for OBI-1, will pay $50 million upfront, up to $135 million in potential additional development and commercial milestones as well as tiered net sales payments ranging from 12.5% to 17.5% of OBI-1 annual net sales. As Inspiration's only senior secured creditor and as the owner of non-Inspiration assets that will be included in the sale of both OBI-1 and IB1001, Ipsen will get some 60% of the overall upfront payments. Ipsen is clearly relieved to have found a buyer for IB1001 given the medicine’s shaky regulatory prospects after the FDA-imposed clinical hold on IB1001 impacted two ongoing phase III trials. Since Inspiration filed for bankruptcy protection, Ipsen has backed the biotech with $23.6 million in debtor-in-possession (DIP) financing to keep it going amid efforts to sell its assets. Ipsen expects to cover the DIP amount with its share of upfront payments from the two asset sales with Baxter and Cangene. The French biotech may take a €100 million impairment charge for the hemophilia assets such as convertible bonds used to finance the collaboration and its investment in the Milford, MA plant. A fuller picture should come on Feb. 27 when Ipsen reports 2012 earnings. - Sten Stovall

Pfizer/OxOnc: Drug-development group OxOnc, which is funded by health care hedge fund OrbiMed Advisors, signed a deal with Pfizer to co-develop Xalkori (crizotinib) in a pivotal clinical trial intended to enable the approval of the drug in Asian countries in a new indication. Xalkori is already approved in the U.S., EU, Japan and other countries to treat patients with ALK-positive advanced non-small cell lung cancer (NSCLC). This trial would be in ROS1-positive advanced NSCLC patients. The trial will be at multiple sites in Japan, China, Taiwan and South Korea. OxOnc will be eligible to receive undisclosed milestones if Xalkori is approved in this indication. No further details were disclosed. - Stacy Lawrence

Isotechnika /Aurinia: Isotechnika licensed out exclusive rights a year ago to its lead drug in a couple of indications and now it’s planning a merger to get it back. Last January, the Canadian company licensed rights to voclosporin to treat lupus and proteinuric nephrology indications to Vifor Pharma. Swiss specialty pharma Vifor subsequently spun out Aurinia with the asset. Isotechnika and Aurinia now are planning to merge under undisclosed terms with post-merger ownership of 60/40, respectively. The merged company will trade on the Toronto Stock Exchange and be known as Aurinia. Management will come from both companies. Aurinia’s management is primarily from Aspreva Pharmaceuticals, which was acquired by the Galenica Group for C$915 million in 2008. Vifor is also part of the Galenica Group. The merger is expected to complete by March 15, pending approval from Isotechnika shareholders and the Toronto Stock Exchange as well as the raising of C$3 million by Isotechnika. The new company plans to start a Phase IIb study this year of voclosporin, in addition to standard of care, to treat lupus nephritis. - S.L.

Stacks of Euros photo courtesy of flickr user aranjuez1404.