Record VC dough for device makers

The New York Times on Monday drew attention to the boatload of cash that venture capitalists are bestowing on medical device companies lately. Seed investment in the sector, according to the National Venture Capital Association, is up 60% from last year to $1.1 billion. Says the Times:

These investments in recent years have financed a range of technologies, including devices designed to unclog arteries, rebuild heart valves, monitor body functions from within, limit chronic pain and spinal problems and treat sleep dysfunction, acid reflux, epilepsy and diabetes. “The venture-capital-backed boom in medical devices has delivered extraordinary new technologies,” said David Cassak, an editor at In Vivo, a monthly publication for the medical-device field. “There’s virtually no sector of medical devices that hasn’t been given a tremendous boost.”

The emphasis there is clearly our own. But we hope to add David and his device-focused colleagues to our blog roster soon to bring you more regular medical device industry analysis.

For now, it's back to the NYT: the paper points out that investors wary of high tech as well as biopharmaceuticals, for the perceived high risks that each of those fields represents for the earliest of investors, can find a happy middle ground in medical devices.

But it remains to be seen if the boost in VC investment for device companies will last. Sure medical technologies tend to be more intuitive, ostensibly less risky investments than biotech, but they remain cyclical nonetheless.

Israel’s Public Venture Market

Israeli biotech is bursting with ideas—or so IN VIVO Blog discovered at the country’s annual biotech fest in Tel Aviv, ILSI Biomed Israel 2007.

But virtually none of them are financeable along the usual venture-capital path. There are only a few Israeli VCs with any significant capital, and they prefer the faster, surer returns from device investing. Meanwhile, US and European VCs prefer to work closer to home (for more, see this START-UP article).

And thus Israeli entrepreneurs are tapping what their richer confrères in the US could never do: public investors.

Since the deregulation a few years ago of the investment rules for Israeli pension funds, investment managers have been willing to put money into higher-risk, higher return companies. Which is how 10 Israeli biopharmas have gone public since August 2005, raising a total of $149 million. So far, none of these companies has crashed, though only one, Kamada (it produces specialty injectables and immunoglobulins), has seen any dramatic updraft, its stock price tripling since its 2005 IPO.

Not that Israeli investors are particularly daring. At least half of the Israeli IPOs are themselves highly diversified biotech investment vehicles. Three are biotech investment groups: Clal Biotechnologies, Bio Light, and Capital Point. Two others have gang together a variety of therapeutically unrelated projects: BioLineRx has in-licensed some 14 programs from Israeli academic groups and companies, and Hadasit Bioholding is a collection of nine programs from Hebrew University Hospital.

Nor do Israeli investors put much money at risk. Only two IPOs have approached US values: BioLineRx, raised $50 million; Clal raised $43 million. Most of the others have raised between $3-10 million.

In short, the Tel Aviv biotech boom doesn’t much resemble Germany’s Neuer Markt, which blossomed with the German biotech boom of the late 1990s and utterly collapsed in 2001, disappearing altogether in 2003. Since Israeli offerings are small, the market should be able to absorb the inevitable failures. And as such the failures won’t be crushing defeats—but learning experiences. They’ll “create people who will know how to run biotechs,” says BioLineRx’s CEO Morris Laster. “They’ll learn from their mistakes. And that’s how you develop an industry.”

CVS/Caremark Loses a Big One

Sometimes history doesn’t repeat itself.

When the Blue Cross Blue Shield Association awarded the lucrative Federal Employee Program pharmacy benefit management services contract June 6, it made a surprising decision: splitting the contract into two parts, one to manage the retail pharmacy side of the network, and the other to provide mail service to the almost 4 million federal government employees, retirees and dependents covered by the BCBSA plan.

They let CVS Caremark keep the retail. But they gave the mail service back to Medco Health Solutions Inc. That is the arrangement that BCBSA had for most of the 1990s, until it decided three years ago to give Caremark the whole enchilada.

CVS Caremark says it is happy it will continue to provide retail services. Medco says it is happy to be back as the mail order provider. So everybody’s happy, right?

Hardly. The decision by BCBSA to split the contract again surprised most PBM analysts on Wall Street—and it definitely disappointed investors in CVS Caremark.

It also marks an ominous beginning for the newly merged CVS Caremark business. The big question surrounding the company is whether the marketplace will accept Caremark’s new status as a division of the retail chain giant CVS. (There is much more on the implications of the CVS/Caremark deal in the January issue of The RPM Report.)

And that’s where the historical parallels come in. The last time Caremark was involved in a big merger, it was the acquirer, buying the PBM Advance PCS. At the time of the deal, Caremark said it expected the acquisition would boost its bid for the FEP mail order business—and the company was awarded the contract soon after the deal closed.

There was another factor that may have played a role in that decision three years ago: Medco had just settled a Department of Justice investigation into its mail order pharmacy practices, which included claims that the company had falsified some of its reports to BCBSA under the Federal Employees Program.

It sure is nice of BCBSA to let bygones be bygones. But it is also a clear indication that the stand-alone PBM giants (all two of them, including Express Scripts Inc.) still have life left in them.

Fat Chance for Rimonabant

Tomorrow is a big day for Sanofi-Aventis’ fat-buster rimonabant. FDA’s Endocrine and Metabolic Drugs Advisory Committee will scrutinize whether the drug’s beneficial effects on weight, triglyceride levels and cholesterol outweigh its side-effects, most significantly depression and suicidal thoughts.

The odds don’t look good for Sanofi. The timing is terrible—this review comes amid huge political controversy over FDA’s role in assessing drug safety, inflamed most recently by the cardio-vascular concerns raised around another drug the endocrinologist experts know well: GlaxoSmithKline’s diabetes drug rosiglitazone (Avandia).

What’s more, Sanofi hasn’t been known for its smooth relations with FDA; nor, say analysts, was it fast to get endocrinologists on its side. The French group is said to have cosied up early on in its rimonabant campaign primarily to the cardiovascular experts it knew already through anti-platelet drug Plavix. (Don’t forget that rimonabant, an cannabinoid receptor antagonist, is one of these multi-faceted treatments that act on a number of pathways, making it both incredibly effective in addressing metabolic disease, says Sanofi, but also incredibly dangerous in terms of unknown or unwanted side-effects, say detractors.)

Small wonder, perhaps, that the FDA review document released yesterday has no qualms about washing rimonabant’s dirty linen in public. The document highlights a statistically significant increase in suicidal thoughts and behavior, a high drop-out rate in the rimonabant trials, in part due to depression side-effects, and reels off various neurological side-effects seen with greater frequency in patients taking rimonabant.

Now granted, the drug is already approved in Europe, as Acomplia, although Sanofi still faces marketing and reimbursement challenges (many European countries consider obesity treatments as life-style medications; a convenient excuse to avoid huge payouts). So won’t six-months’ worth of post-approval data from over 78,000 European patients help reassure the US gate-keeper?

Seems not. The FDA document lists over 2300 cases of adverse reactions in the UK and Germany, “frequent” reports of nervous system disorders “driven predominantly by dizziness”, and describes in detail a handful of individual cases including a man who attempted to strangle his daughter, and another who beat his wife while on rimonabant.

This degree of detail may very well be standard Advisory Committee meeting practice. The experts will know to consider these adverse events in the light of the thousands of patients using and potentially benefiting from the drug.

But rimonabant’s path to the US market has already been bumpy. Its sponsor’s ambition has been heavily clipped by US regulators: Sanofi submitted its NDA in May 2005 for three indications besides weight management (Type II diabetes, dislipidemia and metabolic syndrome), none of which were approved. Even for the obesity indication, FDA in February 2006 requested additional data—you guessed it, on adverse events. Even the Advisory Committee meeting was hurled at rimonabant at the last minute: back in 2006, it wasn't considered necessary. Not to mention the FDA's requested name-change: just to make life a little more challenging still for Sanofi, rimonabant will be known as Zimulti in the US.

If it gets there.

Launching Alli

GlaxoSmithKline is about to find out whether the phrase "oily discharge" sounds better over-the-counter than it does by prescription.

The big US Alli launch is scheduled for this week; pharmacies will be stocking up on the OTC weight-loss drug (a half dose of Roche's prescription-only Xenical) as of this Wednesday, and the drug goes on sale next Monday. For all its reportedly softly-softly approach and emphasis on only helping those people who have a strong will to drop a few pounds, GSK is sure going to spend a ton of cash to get its message across.


Reuters is reporting that the launch--which should see GSK spend $150 million on marketing this year--is chock full of superlatives.

"It will be one of the largest launches that GSK has ever undertaken and probably one of the largest OTC launches that has been made," Greg Westerbeck,
global marketing head for Alli, told reporters in
London.

Between Alli and Sanofi-Aventis' rimonabant (Zimulti/Acomplia)'s date with the FDA on Wednesday (which, depending on your view of psychiatric events, might get messy), prepare yourselves for an onslaught of diet-drug stories. For Medtech Insight's recent take on the obesity products market, including drugs and devices, click here.

While You Were Watching the Finale

We hear the onion rings are great

So what else happened (didn't happen?) this weekend? A few stories below that IN VIVO Blog picked up on ...

• The New York Times writes on pharmaceutical and biotech companies' efforts to fight Alzheimer's disease. Wyeth and its "professorial" chief exec Robert Essner take center stage.
  
  
• Endo Pharmaceuticals presented positive data from a Phase III study of its Frova migraine therapy in menstrual migraine. The company has been hoping for years that a menstrual migraine indication would allow Frova to make some noise in the crowded triptan class. A supplemental NDA for the indication is on file with the FDA.

• And a few notes from this morning--IN VIVO Blog is on deadline for the monthly magazines so we mightn't get to these later on: Merck KGAA and Archemix expanded their aptamers alliance in a deal that sees Merck taking a $30mm stake in the biotech co. And good news for Schering-Plough; one of Organon's top prospects, the anesthesia drug sugammadex, posted solid data in a Phase III pivotal trial.


• So, David Chase's The Sopranos ended its eight year run last night, with a twisted reminder for viewers that not everything (not even every television show) achieves, deserves, or even needs resolution. Cop-out or genius?

It must be two-for-one week on private biotechs

It was always a question of when, not if. Amgen needed to do something to provide for its post-EPO future; now the action has started. Today's acquisition of private Alantos, for $300 million in cash, takes this week's shopping bill for Amgen up to $720 million. Just a couple of days ago it snapped up Ilypsa for $420 million.

Ilypsa fits nicely with Amgen’s existing nephrology franchise: the company’s focused on renal disorders and has a Phase II candidate to treat high blood phosphate in dialysis patients. But Alantos takes Amgen into new, uncharted territory: diabetes.

Now granted, diabetes is a huge and expanding market—that’s why, as Amgen’s executives made clear to IN VIVO last month, it’s a development priority (along with cardiovascular disease). It’s the only primary care area where sales forces are increasing, not shrinking; the number of US reps has doubled to 10,000 in the last five years.

But it’s also gotten highly competitive, with Big Pharma including Merck & Co., Novartis and Roche all piling in. Amgen may have taken faith from the spectacular performance of Merck’s DPP-IV inhibitor Januvia, in the same class as Alantos lead Phase IIa program. But will there be room for many more in the same class?

Not according to Novo Nordisk, who pulled out of the oral anti-diabetics space earlier this year. They might just have sour grapes, since their own DPP-IVs failed several years ago, and the variety of DPP-IVs out there all bind the target differently, with differing degrees of safety and efficacy. But there’s another shadow over the class: GLP-1 analogs (glucagon-like peptide-1 analogs).

For a variety of reasons that you can read about in the forthcoming issue of IN VIVO, many experts believe that GLP-1s, not DPP-IVs, are the place to be in diabetes. Sure, DPP-IVs are oral, GLP-1s are injected. But, getting back to Amgen, it’s not as if they don’t know about proteins.

All that said: good for Amgen. At least they’re doing something, and who knows, maybe Alantos’ DPP-IV will trump Merck's in efficacy or safety (although if so, Amgen will want to take back ex-US rights, which were licensed last October to Servier). Meanwhile Alantos’ investors have done okay—the company has raised a little under $60 million since its foundation (as Therascope AG) in Germany in 1999. --Melanie Senior & Chris Morrison

The Wisdom of Buybacks

Last week both Biogen Idec and Genzyme announced significant share buybacks. Wall Street was happy.

Biogen is buying back $3 billion worth of stock, or 57 million shares (16% of its outstanding share capital) via a dutch auction. Genzyme--which announced its buyback on the same day it said it would spend $345 million to buy Bioenvision--is buying back $1.5 billion worth (or 20 million shares) over the next three years.

Genzyme's efforts, the company said, are designed to reduce the dilutive effects of its share-based compensation programs and demonstrate that the company sees its shares as a good investment. Biogen too says that the move will return value to shareholders. Buybacks, according to people with more financial acumen than us, are a tax effective way of returning money to shareholders.

But IN VIVO Blog doesn't quite get it. Biogen Idec and Genzyme aren't banks, or fast food chains, or textbook suppliers. For companies aiming to generate medicines and the long-term gains that go with novel and effective drugs, buybacks seem to us a waste of money. Especially for biotech companies--who ought to be investing in R&D, alliances, M&A, basically any way that builds pipeline value (and whose investors should be in the game for a big return, not just the single-digit short term percentage gains that accompany a buyback announcement). Of course, Biogen and Genzyme maintain that they have ample free cash to both invest wisely in their pipelines and to buy back shares. Perhaps they do, and there's always debt ... though that can come back to bite companies whose share price declines before the convertible matures.

In any case it seems to us that buybacks provide investors with, at best, a short-term bounce in stock price and little long-term value. We're not financial gurus, of course, so tell us what you think. We'll talk to a few bankers and take a look at the buyback issue a little more closely in the next IN VIVO.

PhRMA's DTC Verdict: it ain't broke, we're not gonna fix it

PhRMA's second Office of Accountability report on DTC advertising is out today (covering the second half of 2006) and, well, nobody is taking it very seriously.

They probably shouldn't. PhRMA is hardly a watchdog, as several commentators have pointed out today, and their report, which updates all of us on its constituents adherence to 15 'guiding principles' of DTC advertising, isn't exactly a model of transparency. Names were not named. Examples were not provided. But hey, nice charts.

Brandweek's NRx blog sums up the instrinsic conflict and comedy nicely (and hangs on to $50 in the process).

R&D: Worth It Only When You Don’t Pay for It

The late Michael Sorrel, one of biotech’s most perspicacious analysts, had a few basic rules for investing, one of which was the call option. Did the biotech have not merely a lead program, which could anchor the company’s valuation, but something else the stock buyer could get for free.

Same holds true with pharma. Analysts are now so skeptical of early-stage Big Pharma R&D that they want it for free. Or at least that’s the implication of some intriguing calculations from Craig Maxwell, European equity research analyst at JP Morgan.

Maxwell summed the estimated value of the six major European pharmas based solely on their current products plus their Phase III pipelines – the “embedded value” -- and then compared it to their current share prices (see chart). The closer these values came to the share value, the less the market—theorizes Maxwell—is valuing research. And that means the less the investor is paying for R&D.

Conversely, the bigger the gap between product value and share value, the greater the value the market is putting on research. No free R&D option—and a poor deal for investors.

Best value on the European market: Novo Nordisk (products equal 104% of share price). Worst deal: GSK (products equal just 74%).

Now, you can disagree with Maxwell’s estimates of product value. Maybe he’s discounting the value of GSK’s products and inflating Novo’s. But the fact that he won’t pay for R&D—that he wants it for free, and apparently can get it—seems about as damning an indictment of the value of R&D as we’ve heard in a long time.