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 After a 2004 approval, Tysabri was withdrawn from the market in 2006 due to reports of the fatal brain disease, progressive multifocal leukoencephalopathy (PML).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. 

Isis & Analyst: He Said, He Said

It’s not unusual for a financial analyst and a biopharmaceutical CEO to disagree about the value of a particular program or molecule. But when a CEO accuses an analyst of not having done his homework, it’s a different matter. But that’s precisely the kerfluffle brewing between Isis CEO Stanley Crooke and Leerink Swann analyst Joseph Schwartz. The reason for the skirmish: allegations in a recent note by Schwartz that Crooke calls unfounded.

But first some ancient history. According to an 8-K Isis filed with the SEC on Dec. 8, the biotech reacquired rights to a Phase I antisense cancer compound, LY225796, it partnered to Lilly in 2004. (For more on the deal and its end see here and here.) In an interview with “The Pink Sheet” DAILY, Isis’ Crooke said his company bought back the compound to jump start its own internal oncology program and diversify a pipeline overly focused on molecules treating cardiovascular and metabolic disease. Deal terms weren’t disclosed, but Crooke made it clear this wasn’t Lilly giving back ‘5796; Isis paid for the privilege.

Leerink’s Schwartz saw things quite differently, opining in a Dec. 9 note that Lilly lost interest in ‘5796, perhaps due to unimpressive Phase I data. “It is logical to conclude that lack of anticancer activity and/or toxicity may be the reason why Lilly is not pursuing it and Isis is not showing data,” he wrote. “In our view, this highlights why it is hazardous to ascribe any value to Isis’ early stage antisense programs, most of which attempt to modulate unvalidated targets.”

Not true, Crooke responded, saying that ‘5796 got lost in the shuffle at Lilly after its 2008 acquisition of ImClone. Crooke countered that the Phase I data were very promising and had not been presented at this year’s American Society of Clinical Oncology meeting because ‘5796 was still Lilly’s program at that point “and Lilly is very conservative about what it presents.” No word on why Isis didn’t include any updates on '5796 at its recent Dec. 3 R&D day in New York, however.

Crooke didn’t stop there, bluntly accusing Schwartz of providing “unfounded conjecture” in his notes on Isis.

“Joe has written extensively about Isis over the past two years, and has never spoken to me and never spoken to anybody senior at Isis. Joe has written a report about our analyst day and didn’t attend. And he’s been inaccurate and wrong on almost anything he’s said about Isis. This is another example of his stupidity.”

Ouch.

Perhaps what angered Crooke most was Schwartz’s speculation that Genzyme, which scooped up the antisense cholesterol med mipomersen in early 2008, might be the next partner to return an asset to Isis. While that may be unlikely, it’s not a fringe theory given Genzyme and Isis have already renegotiated their partnership once. And despite positive data at the recent American Heart Association meeting, mipomersen remains dogged by potential safety issues that seem likely to threaten both its approval and its uptake in the marketplace.

Still Crooke’s response to the statement was that of a bull seeing a red flag. “His conjecture that Genzyme will return mipomersen is as inane as anything he’s written,” Crooke told “The Pink Sheet” DAILY.

Who’s telling the truth, or does each side have it partly right? Certainly, products like ‘5796 come with considerable risks; it’s possible Lilly abandoned development to put more resources behind late-stage products to fill the looming revenue gap left by soon-to-be generic brands Cymbalta and Zyprexa.

The Phase I data for ‘5796—when or if they are released—will provide some clarity about the molecule’s likely utility. The fact that Isis paid to bring ‘5796 back in-house and plans to spend its own money developing it further suggests that maybe Crooke’s frustration with Schwartz is well-founded. Schwartz declined to comment for this piece.

By Joseph Haas

(Image by flickrer Tambako the Jaguar used under a creative commons license.)

Sangamo Surprise: Tail Wags Dog

When we checked news on health care stocks and saw that Sangamo Biosciences was up following a press release announcement of a paper pointing to the potential use of its zinc finger nuclease technology to modify human stem cells, we did a double take. It took us a little while to settle back into work mode after the long Labor Day weekend. But we could have sworn we had discussed this paper with colleagues already, several weeks ago.

Indeed, the paper's official release date was August 13, when Nature Biotechnology announced the study's advance online publication (AOP). And the study was accompanied by a press release from the Whitehead Institute at MIT, where the work was done by Rudy Jaenisch’s group. So why did Wall Street only react to it yesterday?

Because Sangamo only put out its PR on the “news” Tuesday morning, when the print edition of NBT came out. According to Sangamo, whose scientists were among the paper's coauthors (but not correspondents with the actual journal editors), the company was first alerted to the AOP the day before it went live. The company was also caught off guard because the paper had only been accepted two days before that, on August 10 – a remarkable and unexpected turnaround time.

With such short notice and summer schedules – and maybe doldrums too – they saw no reason to scramble. (And frankly, it was our view at the time that the paper, although good science and relevant to Sangamo’s platform partner Sigma-Aldrich, was not of any immediate import to drug developers.) That said, the AOP was picked up in a timely fashion by various blogs and press release cut-and-paste services.

Apparently, however, the publication escaped the attention of movers and shakers on the Street until today. There was no blip in price or volume in Sangamo’s stock in mid-August. But on Tuesday, shares rose on the opening and closed up almost 8% on 3x the average volume.

Given the timing of the original AOP, we're not accusing Sangamo of manufacturing or manipulating news. Nor was this a huge movement for a small-cap stock. Surely some trader types would make sophisticated arguments about the need to understand how momentum impels the movement of stocks more than the strength of the underlying news itself. Maybe it was just a handful of traders moving in and out.

But why did it take a company PR to trigger the attention? Aren’t analysts supposed to work hard and dig deep, and that’s why they are paid the big bucks? Or is it that common for the tail to wag the dog? We’re just sayin’.