AZ's Dave Brennan: Personalization & Partnership... & Business Implications

Each year, the Cleveland Clinic puts on a Medical Innovation Summit focusing on a specific therapeutic category. This year the subject was cancer – though its business speakers focused their remarks more broadly.

On October 5th, the Summit’s opening day, we had the chance to interview two of the featured speakers – Dave Brennan, CEO of AstraZeneca, and Dan Vasella, the CEO of Novartis.

Today, we’ll show you our discussion with Dave, which followed his talk (here’s a link to the text) focusing on the triple themes of personalization, partnerships (which is to say: externalization), and policy.

Our conversation (and the questions from the audience) went far beyond those subjects, however. To see and hear it, click here.

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.

DotW: Noble Pursuits

It's Nobel week and the rewards and riches went to experts who've spent their careers ferreting out the secrets of telomeres (medicine), ribosomes (chemistry), and fiber optics (physics). And then there was Barack Obama, who took home the much vaunted--and in this case highly controversial Nobel for Peace. Who needs Chicago when you have the Swedes and Norwegians, eh?

When their blackberries started buzzing, Obama aides reportedly thought they'd been punk'd--it's not April 1, for the record. It ain't hard to see why. Obama is only the third sitting president to win the award and he hasn't been in office long enough to resolve the Middle East conflict, the war in Afghanistan, or the ongoing conflicts in Iraq. What's more, those rumors keep swirling about an invasion of Canada...OK, we're kidding, but it's hard to parse the logic behind the award. Perhaps they meant to give him the Peas Prize in honor of Michelle's bounteous organic White House garden.

Whatever the reasons, we wonder if the political capital of the Nobel will give Obama the domestic leverage to push through meaningful health care reform. Another noble pursuit, the public option, which was given up for dead after weeks of debate, showed new signs of life this week. In an effort to get to 60 (it sounds like some self-help title aimed at lowering cholesterol and increasing dietary fiber, doesn't it?), Senate Dems have unveiled a compromise. (And this doesn't include the trigger option Senator Snowe is mulling.)

The plan is simple: establish a strong national public option for insurance coverage but give individual states the right to opt out. Such a solution, in theory, assuages the more liberal members of Congress afraid of losing their, ahem, moral compass, while pacifying the more conservative denizens. How this proposal would actually be implemented is a mystery. (Hey, this is a free publication. You want real solutions, go read The RPM Report or "The Pink Sheet".)
But enough dithering. It's time to check our moral compass--wait, it's here somewhere. Hark, the arrow is pointing straight toward...


Novartis/Paratek: A clearer, if not necessarily easier, pathway to FDA approval for antibiotics may have spurred Novartis' Oct. 8 purchase of exclusive worldwide rights to Paratek Pharmaceuticals' Phase III broad-spectrum antibiotic PTK 0796. Specific financial terms of the deal weren't disclosed, but Paratek said it could earn up to $485 million during the life of the deal, including an upfront payment and potential milestones. The privately-held Boston biotech also would receive undisclosed royalties on sales if PTK 0796 reaches the market.

The companies tout the compound as a first-in-class aminomethylcycline--basically a next-generation tetracycline--with the potential to become the first broad-spectrum antibiotic given once daily by I.V. or as an oral tablet to treat infections caused by drug-resistant bacteria such as methicillin-resistant Staphylococcus aureus (MRSA) or multi-drug resistant Streptococcus pneumoniae. Currently being tested in a Phase III trial in complicated skin and skin structure infections (cSSSI), '0796 has demonstrated ability to work as a single agent against a number of infectious diseases. A second Phase III trial in community-acquired bacterial pneumonia (CABP) is planned, Paratek CEO Thomas Bigger told "The Pink Sheet" DAILY. Paratek will continue to participate in clinical study and manufacturing, while Novartis will take care of worldwide marketing.--Joseph Haas

Genentech/SurModics: Genentech inked a small deal--$3.5 million upfront and $200 million in donwstream milestones--with drug delivery specialist SurModics to develop a sustained release version of Lucentis this week. But don't let the small upfront fool you. Age-related macular degeneration remains a hot area of investment for VCs and biotechs in part due to the success of Lucentis. In 2008 it totaled $875 million in U.S. sales, and with the recent CMS decision it's unlikely Avastin will steal its market share anytime soon.

Despite Lucentis's effectiveness--it stops loss of vision in more than 90% of patients and restores some sight to about a third of that population--it's far from a perfect drug. The regular monthly injections are a burden to patients and physicians and costly to the healthcare system. New options to reduce the injection frequency would be a welcome step forward. News of the partnership sent SurModics' stock soaring nearly 20%, but there's plenty of competition to worry about. A number of companies are developing competing delivery or device solutions, including Neurotech Pharmaceutical, Buckeye Ocular, NeoVista, and Oraya Therapeutics.--Ellen Foster Licking

Arigene/Trimeris: South Korean medical equipment maker Arigene's acquisition of Trimeris marks the official end of a once high-flying biotech. Trimeris discovered the HIV fusion-inhibitor class of drugs and partnered its Fuzeon treatment with Roche back in 1999 for $10 million upfront. (The Swiss pharma has since paid out milestones totalling at least $24.75 million during the life of the deal.) But the two firms abandoned development of a follow-on fusion inhibitor, T-1249, in 2004, and a next-generation compound that offered the possibility of less-frequent dosing and a better safety profile didn't pan out either. Roche returned all rights to that program to Trimeris in 2007 in exchange for a nominal royalty on future sales.It's been tough going ever since. Enter Arigene, a South Korean firm that markets a line of medical instruments under the Ubiquitous Healthcare Systems label. Arigene is offering $3.60 a share in cash, a 40% percent bump over Trimeris's closing stock price on Oct. 1, to expand its operations into "the broader biotechnology industry."

GSK/Jiangsu Walvax Biotech: In its second vaccine-related collaboration with a Chinese company this year, GlaxoSmithKline announced Oct. 6 it's creating a joint venture with Jiangsu Walvax Biotech to develop and manufacture pediatric vaccines in China. The firms will build a new manufacturing facility for Priorix, Glaxo's three-in-one pediatric vaccine for mumps, measles and rubella, and they will develop vaccines beyond MMR. The deal also involves a technology transfer to let the JV make the vaccines locally, according to Glaxo. (FYI, Walvax is a recently created affiliate of China's second largest producer of the haemophilus influenzae type b (Hib) conjugate vaccine, Yunnan Walvax Biotech.) The two companies will invest a total of £41.2 million ($65.6 million) in the joint venture, with Glaxo initially providing more than half the money and owning a 65% stake in the JV. This is the second vaccine-related JV Glaxo has signed in recent months. In June, the Big Pharma inked a five-year deal with China's Shenzhen Neptunus to make seasonal, pre-pandemic and pandemic flu vaccines.--Joseph Haas

Our final deal of the week is actually a...



Ipsen/Spirogen: Partners since 2003 on a cancer compound, Ipsen this week gave worldwide rights back to Spirogen, which now takes the reins on future development and commercialization with help from a new financial backer. In the original deal, Ipsen gained rights to SJG-136, a DNA minor groove binder, and took a 20% stake in Spirogen. Six years later with the compound entering Phase 2 to test against ovarian cancer and blood-borne malignancies, Spirogen takes over, and Ipsen becomes eligible for commercial milestones and royalties. Spirogen will also tap private-equity firm Celtic Therapeutics Holdings, which invests in projects instead of companies, for up to $15 million to help development of the compound, now renamed SG-2000. "Up to..." can mean lots of things, of course, but the firms didn't say how much of it was guaranteed.--Alex Lash

(Image courtesy of flickrer niznoz used with permission through a creative commons license.)

Financings of the Fortnight: Appetite for Risk?

Cash continues to flow into biotech offerings big and small. On the large side, Elan and UCB each raised money through debt offerings--Elan pulled in $625 million through the sale of senior fixed rate notes due in 2016 and UCB raised €500 million from senior unsecured convertible bonds due in 2015. UCB planned to raise €350 million then upped that to €450 million, and then sold its overallotment. We highlight some of this fortnight's more interesting venture rounds below.

Besides some creative dealing that saw Vertex sell milestone payments and Valeant buy out the milestones it might owe to former Dow Pharmaceutical Sciences shareholders, we witnessed the return of the biotech IPO this fortnight. Last Wednesday Talecris raised $550 million in its own IPO; not quite a cash-burning biotech, but still noteworthy in the eyes of FotF.

More interestingly, late last night Omeros priced 6.8 million shares of common stock at $10 apiece--right at the low end of its anticipated range. Omeros' lead drug is in Phase III studies to treat pain and inflammation during and post arthroscopic surgery, and the company now has $68 million to finish those trials and get it's product launched.

Is there an appetite for risk out there? We think the answer is yes [UPDATE: even if as of 1pm ET Omeros' shares were trading down 13%]. Of course everyone is still waiting on Anthera's debut; success for that company's impending IPO could open the window a crack more.

Meanwhile let's see how hungry you are for another installment of ...


Epizyme: The epigenetics-focused biotech Epizyme pulled in $32 million in Series B money this week, with backing from existing investors, KPCB and MPM and new investors, Bay City Capital, Astellas Ventures, and Amgen Ventures. (Corporate venture plays a role! Who woulda thunk?) Epizyme is one of two companies leading the epigenetics vanguard, an emerging area of science that aims to understand how misregulation of a second layer of genetic information—the packaging of DNA into chromosomes—can result in human disease. The biotech’s main competitor is Constellation Pharmaceuticals, which announced the third tranche of its Series A earlier this summer. (You can read more about both in this March 2009 START-UP feature.) Both companies are of a type—built by preeminent scientific founders and A-list venture backers, the biotechs are looking to build drugs that specifically block a family of proteins called histone methyltransferases. (Constellation is also working on a related family, histone demethyl transeferases.) Think of it as a platform approach, albeit one limited to a family of biologically related targets, similar to the business model Sirtris Pharmaceuticals employed so successfully with its sirtuins. Epizyme will use the new money to push its lead programs into proof-of-concept studies. If successful, those studies would provide evidence that HMT inhibition is a better approach than inhibiting histone deactylase, another enzyme involved in the epigenetic process that hasn’t exactly yielded many effective therapies beyond Merck’s Zolinza.--Ellen Licking

Threshold Pharmaceuticals: By our count, PIPEs and/or registered direct offerings occurred at a pace of about one per day in the biotech sector during the past two weeks. Of these, the largest was the $35 million raised by Threshold, a company focused on the development of oncology prodrugs targeted at and activated by hypoxic areas within the tumor environment. The cash comes at an opportune time: Threshold had only $9.6 million in cash and equivalents at the end of the second quarter, down from $20.3 million entering the year. Redwood City, Calif.-based Threshold said this summer that its cash would last into first-quarter 2010, as it expected to burn between $19 million and $21 million during 2009. Lead compound TH-302, a novel small molecule candidate, is being studied in Phase I and Phase I/II trials as both monotherapy and in combination with several chemotherapy regimens in solid tumors. The new investment includes significant warrant coverage. New investors including Federated Kaufmann Fund, Frazier Healthcare Ventures and Great Point Partners LLC, as well as existing institutional investors, purchased one common share plus a five-year warrant representing 0.4 shares for a unit price of $1.91. The pricing was based on the stock’s consolidated closing bid price as of Sept. 29, plus 5 cents. The warrants can be exercised at $2.23 per share. --Joseph Haas

Adimab: Antibody discovery play Adimab added just over $8 million to its coffers in a Series D round last week. Interestingly, life-sciences neophyte Google Ventures led the round, and was joined by existing Adimab backers OrbiMed Advisors, SV Life Sciences, Polaris Venture Partners and Borealis Ventures. Google Ventures' Bill Maris, who worked in neuroscience research before moving to finance, is joining Adimab's board. Adimab uses massive computational power to model the human immune system and build libraries of antibodies in silico. Those libraries are translated into synthetic DNA by an outside firm and then engineered into yeast. CEO Tillman Gerngross told our colleagues at "The Pink Sheet" DAILY that there was no link between the biotech's own bioinformatics and Google Ventures' parent and sole limited partner, Google. But Gerngross said the two sides have a "joint vision" of how to use computational power to discover drugs. He said there would be "interactions" between Adimab and Google beyond the investment but declined to elaborate. Check out our previous coverage of Adimab's discovery-only strategy here.--CM

Auxilium Pharmaceuticals: Just weeks after a favorable FDA committee recommended approval for its Dupuytren’s contracture treatment Xiaflex, Auxilium Pharmaceuticals has grossed $119 million in a FOPO of 3.45 million shares (including the 450k-share overallotment exercise by book-running manager Jefferies & Co.) at $34.50. The price was actually low compared with what the company had been trading at--between $35-36 in the week-and-a-half prior to the announcement of the financing on September 25. But the stock had jumped to that range in mid-September from the high $20s/low $30s seen in August after Xiaflex was boosted by a unanimous vote from FDA’s Arthritis Advisory Committee; Dupuytren's contracture is a connective tissue disorder in which thickening of the fibrous layer beneath the skin prevents normal movement of the hands and fingers. A PDUFA date has not been set (the original August 28 date was missed), and it still looks like Auxilium faces some challenges in educating physicians on the drug's proper administration so as to avoid severe side effects including tendon ruptures. One option on the table is to mandate a REMS program that would allow only certain doctors--such as those trained to treat Dupuytren’s--to administer the drug. If approved, Auxilium plans to do the marketing of Xiaflex in the US, where it already has a 190-rep sales force promoting its testosterone gel Testim. As for elsewhere, last year Pfizer paid $75 million up front and promised another $410 million in total milestones in a deal that gave the Big Pharma rights in the 27 EU-member countries plus 19 other European and Eurasian territories. --Amanda Micklus

image from flickr user emdot used under a creative commons license

Triple Check that Scorecard: Lessons from the Links for Health Care Reform?

These days, insurers are widely depicted as the villains in health reform, a group that takes advantage of enrollees in ways both known and secret.

But the pharma industry has buffed up its image, coming in as a generous player and offering $80 billion over 10 years toward making reform work. That figure will require great sacrifice and is a number we can count on, pharma assures us.

Now comes a lesson from the links that gives us pause.

As we learn today from NPR's Marketplace, Behavioral economist Dan Ariely recently surveyed 17,000 golfers from a number of industries. He asked them to report how often they cheat at golf. He also asked them to rank how honest their industry is compared to others.

His premise is that golf can offer insights into business world attitudes. Like many business fields, golf has "lots and lots of rules," and players have some individual latitude to decide which rules to bend and which corners to cut.

Turns out "that people in the pharmaceutical industry cheated a lot, but they also said their industry is the most honest there is," he reports.

[A transcript and podcast of the Marketplace segment are available here.]

And "the most honest quite surprisingly were people from the insurance industry," he said. When host Kai Ryssdal seemed startled, Ariely added: "Could you believe it? Yeah, they cheated…it turns out they thought they were not particularly honest as an industry, but in our sample, they cheated the least."

Another finding: individuals in law enforcement, education, government, sales, marketing and advertising all cheated at about average rates. But the first three groups think they're among the most honest, while folks in the sales, marketing and advertising "think they come from industries that are much less honest."

People also felt better about cheating earlier in the game, and in writing down wrong numbers on their scores than in adding them up incorrectly once written.

It remains to be seen, of course, how many mulligans we'll be taking on health reform.

- Denise Peterson

image from flickr user chispita_666 used under a creative commons license

While You Were Getting a Flu Shot

A quiet weekend yields to the workaday week. At least we have playoff baseball to look forward to. While you were setting your rotation ... (will it be Lee or Hamels in game 1 on Wednesday?)

• Bloomberg breaks down the uphill battle Boehringer may face when its apparently-successful linagliptin DPP-4 inhibitor hits a diabetes market already familiar with Januvia and Onglyza.
• More good news for Genentech's Lucentis after last week's CMS decision re limiting reimbursement for Avastin in eye disease; full results of two previously reported studies of the drug in retinal vein occlusion show a significant benefit.
• The NYT reports on the sweet science of DIY liquid Tamiflu. Mmmmm, cherry. In other H1N1/swine flu news, the WSJ notes that distributing and administering available vaccine may take quite some time.
  
• Ex Intermune CEO W. Scott Harkonen convicted of fraud, facing tough sentence.

image by flickr user Lance McCord used under a creative commons license.

DotW: Straight To It

There's no time this week for snark or clever themes, since the IVB team is also busy pulling together the October issues of START-UP and IN VIVO. (You can rail all you want in the comments section about our slacker attitude.) So we'll get straight to what you all really want: write-ups of the week's most interesting M&A and licensing deals. Herewith your regular analysis...

Sanofi/Fovea: Sanofi-Aventis announced Oct. 1 it would purchase its fellow French company, Fovea, an ophthalmology biotech, for a reported total deal value of €370 million (about $538 million). Fovea CEO Bernard Gilly says his firm will receive a “significant chunk” of the money upfront, with the remainder designed as earn-outs. Fovea will have three years to meet specified clinical milestones in order to obtain the rest of the cash. An increasingly popular characteristic of big pharma acquisitions recently, the earn-out structure also is expected to provide significant incentive for Gilly and the rest of Fovea’s management to stay on. Fovea essentially will become the ophthalmology unit of Sanofi, with Gilly saying his company will have the flexibility to run its programs, but with a reliable source of funds and other resources.
After deciding to get into ophthalmology, Viehbacher and company reportedly scouted out nearly 100 biotechs, many of which were working on vascular endothelial growth factor inhibitor programs. But it selected Fovea, which is not working in VEGF at all. In addition to continuing its own work, Fovea, whose top programs are in-licensed, will be tasked with growing the ophthalmology unit through potential asset acquisitions. It also may get involved with the gene therapy-based ophthalmology programs Sanofi licensed from Oxford BioMedica this past April--Melanie Senior.

Sanofi/Merrimack: The same day as the Fovea acquisition, Sanofi paid $60 million upfront to Merrimack Pharmaceuticals for exclusive, worldwide development and co-commercialization rights to MM-121, a Phase I (yes, Phase I!!!) monoclonal antibody that potentially fights a broad range of cancers by blocking signaling through the ErbB3 receptor. Merrimack CEO Robert Mulroy said his team and Sanofi will spend the next few weeks determining the best cancer indications to pursue with ‘121. Preclinical studies showed the compound inhibited ErbB3 phosphorylation in lung, ovarian, prostate, renal, breast and colon cancer. Meanwhile, in the coming weeks, the Cambridge, MA-based biotech also plans to launch a Phase I/II study of ‘121 in combination with Tarceva in non-small cell lung cancer. The deal specifies that Merrimack will continue clinical development through Phase II proof-of-concept at which point Sanofi will take over development. Better yet from Merrimack's point of view, from this day forward the big pharma is footing the bill for the clinical work. (An enlightened view of alliances, don't you think? Either that or others were competing for the compound.) In addition to the generous upfront payment, the deal also includes significant bio-bucks – Merrimack could earn up to $470 million in milestones plus tiered double-digit royalties on product sales and retains U.S. co-promotion rights to the drug--Joseph Haas.

Johnson & Johnson/Crucell: Taking a plunge into vaccines, J&J will collaborate with Dutch biotech Crucell to develop and commercialize flu-mAB, a monoclonal antibody intended to protect against multiple strains of influenza. Under the deal announced Sept. 28, J&J purchased 14.6 million newly issued shares of Crucell for €301.8 million ($441.8 million), giving the pharma an 18 percent stake in Crucell. (Have you noticed J&J seems to be one of the few companies embracing the partial minority stake ownership model? It's deal with Elan also involved in 18% solution.) With the “swine” H1N1 pandemic strain re-emerging for the Northern Hemisphere’s fall flu season, a combination of public fear, government funding and increased private investment have re-invigorated the influenza market. The U.S. government recently approved and order batches of four H1N1 vaccines, with first doses due this month. J&J’s choice of universal flu vaccine as its first entry into the vaccine arena is viewed as a longer-term play. Crucell, which already manufactures and sells vaccines for a variety of diseases, will retain commercial rights to a majority of European markets for any product resulting from the collaboration. While only preclinical work has been done on flu-mAB so far, Phase IIa proof-of-concept trials are expected to begin in 2010.--Carlene Olsen

Merck/CSL: Merck waited a while to get back into vaccines but on Sept. 28 signed a six-year deal to market Australian firm CSL’s Afluria in the U.S. starting next year. Approved by FDA in 2007 for immunization of adults against virus subtypes A and B, Afluria is a non-adjuvanted trivalent seasonal flu vaccine sold in two different formulations – thiomersal-free pre-filled syringes and multi-dose vials. Previously partnered on the human papillomavirus vaccine Gardasil since 1995, neither Merck nor CSL disclosed the deal’s financial terms. Under the transaction, CSL Biotherapies, a subsidiary of CSL Limited, will supply Afluria to Merck, which will be responsible for all aspects of U.S. commercialization. Marketed in 27 countries, Afluria produced sales totaling $108 million during CSL’s most recent fiscal year, which ended June 30. CSL is one of four firms approved by the U.S. government to provide vaccine for H1N1 influenza this year, and through August it also had sold nearly 4 million doses of standard flu vaccine for this season in the U.S. market.--Emily Hayes

Abbott/Solvay: Abbott has seen the future and the future is Advanced Medical Optics, Visiogen, and now Solvay too. The week's deal winner--in terms of dollar value--was clearly Abbott's $6.6 billion acquisition of Solvay, a company that's been rumored to be up for grabs for months. The deal broadens Abbott's geographic footprint, paves its entry into vaccines and strengthens its ownership stake in the blockbuster TriCor /TriLipix cholesterol-fighting franchise. It also adds more than $3 billion to Abbott's annual sales and will be accretive near term. (Hey, isn't that more important than innovation)? Solvay won't be a complete salve, however. Buying its Belgian business partner increases Abbott's exposure to near-term generic competition, as TriCor loses patent protection in 2011. And the deal doesn't eliminate Abbott's dependence on the anti-tumor necrosis factor Humira, a franchise that is facing increased competition from rival brands. It didn't necessarily satisfy analysts either. "While a Solvay acquisition would likely be accretive to EPS, we would prefer to see Abbott pursue more strategic assets that would add better long-term growth," Credit Suisse analyst Catherine Arnold said in a Sept. 27 research note, ahead of the announcement. Convinving naysayers was a big part of Abbott's strategy in announcing the deal. The focus on the conference call wasn't so much on TriLipix, or Certriad, a fixed dose combo of TriLipix and Crestor that seems likely to be the future growth driver within Abbott's cholesterol franchise. No, Abbott's management played up Solvay's international abd branded generics offerings instead. "We recognized many years ago that growth comes in different forms," CEO Miles White said. "It comes from strong branded franchises in developed economies, as well as from branded generics in fast-growing emerging markets." The focus on high-growth areas such as emerging markets and branded generics is hardly surprising. It's a pattern that has been adopted across the pharmaceutical industry as the U.S. drug marketing landscape has become more challenging and shows again that in the on-going debate about whether to be big or small, most pharma execs say bigger is better.--Jessica Merrill

Vertex: What's a Biodollar Worth, Ctd.

A few months after announcing that its European telaprevir milestones were up for sale, Vertex said last night that it had signed a deal--actually a two-part deal--that would net it $155 million for the future payments from J&J.

Oddly it's the second such deal this week (as you can see by our repeated use of the photo to the right) and the second such deal in, oh, ever? Correct us if we're wrong but we haven't seen this sort of thing outside of this deal and Dow selling its milestones to Valeant.

In any case, $155 million isn't bad for $250 million worth of biobucks--of course Vertex may have to pay it all back, see below. The biobucksbuyers weren't named, as they weren't in Vertex's sale of its royalty stream on GSK's HIV protease inhibitors. CFO Ian Smith said on a call yesterday with investors that there were four buyers, with one principle investor.

Interestingly Smith broke down the kinds of buyers Vertex thought might be interested in the milestones: equity investors, royalty stream buyers, and "folks that move in the middle that do debt and equity and all kinds of top securities."

The royalty buyers were interested, but wanted a piece of Vertex's royalty from J&J, which is in the mid-20% range. That was a deal-breaker for Vertex. The equity guys--if they believed the product would be a success and therefore saw merit in buying the milestones--thought their money would be better spent buying Vertex shares, where they'd see a better return on investment. So Vertex "ended up with... more convert debt equity type money, still high quality," said Smith.

So let's take a look at the two part transaction: in transaction A, Vertex gets $120 million cash in exchange for notes securitized with $155 million in J&J milestone payments. If the payments come through as expected, by 31 October 2012, the milestone buyers get the cash. If these payments don't come through, Vertex makes up the shortfall--in any case, the buyers get $155 million, but Vertex pays nothing before 31 October 2012. In transaction B, Vertex gets $35 million in cash in exchange for $95 million of J&J milestones related to launch in any two territories. If those milestones don't come through, Vertex doesn't have to pay a dime.

Why the split? Smith again: "From an investor's perspective, they have effectively provided Vertex with $155 million which, to a certain point, is interest free. Upon the achievement of milestones, they then get their return on the $155 million." But "the allocation between $120 million and $35 million, it's important, but it's mainly important from the tax perspective of how the transaction came together."

From Vertex's perspective--and we'd define that as the 'going all-in on telaprevir' strategy--the biotech gets access to cash at a reasonable cost. Smith pins that down around 15% cost of capital, "depending on your probability of success with the milestones."

So what's a biobuck worth? In this case, that still depends, ironically, on whether telaprevir is approved and launched in Europe. For the investors who paid out $155 million, they'll get either $155 million or $250 million in return in three years (it's hard to see a middle ground). For Vertex, they get 62% of the value up-front, and if the drug fails, they pay it back.

Of course the milestone sale wasn't the only news out of Vertex yesterday. The company provided a corporate update with a few tidbits: chief commercial officer Kurt Graves has resigned, the company is pushing forward with VX-509, a JAK3 inhibitor going into Phase II in RA, and financial guidance has been updated--Vertex expects a wider loss this year. You can read all about it in "The Pink Sheet" DAILY.

Some observers have been concerned about Graves' departure (the market doesn't like something about the announcement, as Vertex's shares are off more than 6% today). But we see this as a natural consequence of Vertex CEO Matt Emmens' arrival. We don't know anything about the particular circumstances of Graves' exit, but think about it like this: when your CEO is at the core an R&D guy (Josh Boger), you bring on a top commercial guy (or gal!) to help transition the company as your product nears the market; Graves was hired out of Novartis in 2007.

But earlier this year, Vertex went and got itself a new CEO, Emmens, who is a commercial guy (read this September IN VIVO feature Q&A with Emmens about Vertex's transition for more background). His and Graves' skill-sets overlap significantly. Emmens even noted on the call yesterday in response to a question from a concerned analyst that "from my perspective, Kurt and I had very similar backgrounds ... my background is commercial and has been in a variety of areas. And I plan to get involved. We are not behind ... by any means."

Meanwhile Vertex plans to end the year with about $800 million. That is if they don't find something else to sell.

unadulterated version of image by flickr user mackius used under a creative commons license. we're really getting a lot of mileage out of a photo and a little amateur MS Paint work.

Goodbye Empty Promises, Hello Self-Awareness

In case you hadn't already noticed, we drew together some of the industry's most senior, and influential, executives at our Pharmaceutical Strategic Alliances meeting last week in New York. Here's a selection of their most memorable quotes--the ones we think speak volumes about the industry and how it's changing.

1. "I'll look down the back of a sofa for a good medicine. In my darker moments, I've tried it,"--Martin Mackay, R&D chief at Pfizer. Read: not-invented-here at Pfizer is history. Really.

2. "The last thing you can accuse this industry of is being productive,"--Thomas Hofstaetter, SVP, Corporate Business Development, Wyeth. Read: we acknowledge reality nowadays.

3. "We lost our way, as an industry...we have to have patient needs upfront,"--Elliott Sigal, CSO, Bristol-Myers Squibb. Read: as above, & we're no longer complacent

4. "We need to sweat more,"--Moncef Slaoui, Chairman, R&D, GSK. Read: as above

5. "It's possible that we'll terminate a DPU (drug performance unit); we've already given signals to three of them that they're not doing so great,"--Slaoui again. Read: our effort to re-create a biotech-like risk-reward climate in R&D isn't just talk; we will slash 'em if they fail. (But not before the end of the three-year investment cycle.)

6. "Earlier this year, we terminated two Phase III programs because of pharmaco-economics. They were safe and effective compounds,"--Martin Mackay, R&D chief at Pfizer. Read: yes, we do (at last) realize that reimbursability is the new proof-of-concept.

7. "In the US, we're so far from being able to talk about 'cost-effectiveness'. Congress won’t even use ‘comparative effectiveness’ (…) the fear that [UK cost-effectiveness watchdog] NICE brings to the US is such that US advocates of comparative effectiveness research have to stress it’s ‘not like NICE’,"--Ian Spatz, former VP Global Health Policy at Merck. Read: many in the US have their heads in the sand when it comes to figuring out how to pay for health care.

8. "There isn't really a fixed cost-per-QALY threshold; advisory committees aren’t told not to go beyond £30,000-per-QALY,"--Andrew Dillon, CEO, NICE. Read: don't be scared, Americans. There's room for maneuver when it comes to getting your drugs past us. (Paying for advice ahead of time helps.)

9. "We just forecast how much we'll need the following year, and request the money from our CFO's office,"--Asish Xavier, VP, Venture Investments, Johnson & Johnson Development Corporation. Read: if you're a private biotech working in one of J&J's areas, you're in luck.

Our summary (of 1-6, anyway): Goodbye empty promises, hello self-awareness.

image by flickrer m kasahara used under a creative commons license

Valeant/Dow: More Fun With Milestone Buyouts

Not content with essentially owning all of Dow Pharmaceutical Sciences, Valeant Pharmaceuticals announced today it is buying out all of Dow stockholders' downstream claims to various royalties and milestones included in the original deal to acquire the topical formulations specialist.

This latest data point in the what's-a-biodollar-worth conundrum is less than straightforward to unpack, and might not have much relevance to, say, what Vertex might rake in by selling its European telaprevir milestones (recall that's $100 million for EMEA approval and $150 million more related to "launch" of the drug in Europe--whatever that means. Maybe it means reimbursement?).

But unpack it we will anyway. So Valeant is paying Dow's backers $115 million cash-money. (Those backers--which include VCs Essex Woodlands, Skyline Ventures, and Galen Partners have already done quite well; the initial deal last December netted them $277 million.) In exchange Valeant gets income rights to "all out-licensed and pipeline products" and is off the hook for a potential slew of milestone payments totaling $235 million.

First the royalty rights. Valeant's release today states that the initial deal excluded income rights related to the generic 1% clindamycin and 5% benzoyl peroxide gel (aka Sanofi-Aventis' BenzaClin) that was under FDA review at the time of the acquisition. That ANDA was approved in August 2009 and Dow partner Mylan Labs began marketing the drug, the first BenzaClin generic, later that month.

We're unsure what Dow's royalty was here, though Leerink Swann analyst Gary Nachman suggested in a note today that the profit sharing arrangement between Dow and Mylan may even exceed 50%. We don't have an exact estimate of what the generic will pull down revenue-wise, but Sanofi's branded product sold $221 million in the 12 months through June 2009 and Mylan has since captured a third of new prescriptions--so, depending of course on the generic price, it's not peanuts. To put the payments from that one drug into context, in 2008 Dow's revenue was $45 million, of which only $20 million came from royalties on a variety of others' products. This could be Dow's biggest earner, but still, it seems unlikely that the revenue from the Mylan royalty payments made up the bulk of $115 million price tag.

So if most of that $115 million is for the $235 million in milestone payments, and those milestone payments are, as the release announcing the December 2008 acquisition states, "based predominantly on the achievement of approval and commercial targets for certain pipeline products still in development," that leads us to believe two things.

First, Dow's backers got a pretty good deal. Dow's latest-stage proprietary dermatology projects were only in Phase II at the time of the deal and aren't expect to launch until 2012; plus milestones based on sales targets aren't easy to cash in. And second, because this is a pretty good deal for Dow, Valeant has some pretty high hopes for those projects.

Nachman also liked the deal from Valeant's perspective, and posited a third possibility. He said today that Valeant may be positioning the dermatology assets for a partnership--removing the $235 million in future milestones may make it easier to strike an alliance.

unadulterated version of image by flickr user mackius used under a creative commons license