It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.
How good was the Sanofi-Aventis/Regeneron alliance announced Nov. 10? We're nominating it for deal of the year even though it was actually an extension of a deal signed in late 2007. Before we dive into the details, consider this scenario.
You own a cement factory. You make very nice cement, some of the best cement in the land, but it's hard to make fat profits selling cement, no matter how many skyscrapers go up in Shanghai. (For the sake of our analogy, please pretend there is no global real-estate bloodbath.) Then one day, one of the biggest skyscraper builders says to you, Psst, hey buddy, how about we pay you to make cement for us, you get to split the profits our skyscrapers make, and you pay us back for some of the building costs, but only if our skyscrapers fill up with tenants and make lots of money! Oh, and we'll help you expand your cement factory.
You'd squint and purse your lips and wonder, "What's the catch?"
The world could lose its zest for skyscrapers, perhaps, but unlikely. The company could be full of dolts whose skyscrapers all fall down, but... enough, already. You get the picture. Biotechs often link their destinies to a Big Pharma big sibling, but few have gotten such sweet deals as Regeneron has with Sanofi-Aventis.
If our bricks-and-mortar analogy didn't refresh your memory, here are the details: Sanofi pays Regeneron $160 million a year in research funding through 2017 and can take over development of any antibody candidate at IND. Sanofi then funds clinical development, and if the candidates come to market, Regeneron splits profits (50/50 in the U.S., and a sliding scale from 65/35 to 55/45 in Sanofi's favor outside the U.S.). Regeneron reimburses Sanofi half the development costs from its share of the profits, which means no profits, no reimbursement.
What's the catch? You tell us when you find one, at least from Regeneron's point of view. Oh, we guess Sanofi could totally flub development, and Regeneron could find itself hitched to a broke-down wagon. Or a different pardner, if there's more mega-merging in store. But with the ambitious goal of putting 30 to 40 compounds into the clinic over the eight-year deal extension, they'd truly have to be all thumbs. (They've already promoted five projects.) The companies have been partners since 2003 -- Sanofi has development rights to Regeneron's aflibercept (VEGF-Trap) -- and Regeneron is willing to take the risk.
It cuts both ways: Sanofi's only escape clause isn't an escape at all. It can reduce the annual R&D payments from $160 million to $120 million after 2013. However you slice it, Regeneron gets paid. It said it expects to add about 400 employees, or 40%, in 2010, mainly in its two locations in upstate New York. How's that for a jobs program?
And unlike Genentech-Roche, another famous biotech-pharma couple that were joined at the hip, Sanofi can't hold out the threat of total ownership to squeeze better terms from Regeneron. Sanofi owns 19% of Regeneron, most of which it paid for when they struck their original agreement in 2007, but it can't go higher than 30% ownership without permission. And no board seats, either. "This deal tries to take the best of Genentech and Roche, but there won't be threats of calls [to buy up stock] every few years," said Regeneron CFO Murray Goldberg.
Image by Flickr user Onion used under a creative commons license.
Thursday, December 17, 2009
2009 M&A/Alliance DOTY Nominee: Sanofi-Aventis/Regeneron
For Adimab, Deals and Deal Milestone Payments Come in Twos
Adimab, the yeast-based antibody discovery play, will announce this morning that it added two new collaborations to the Merck and Roche deals it announced over the summer. And Tillman Gerngross, Adimab's co-founder and CEO, tells us the company plans to do "two deals per quarter with top fifteen pharma companies for the foreseeable future."
But we're getting ahead of ourselves. For now, the biotech will identify fully human antibodies against an undisclosed CNS target selected by Pfizer and against an undisclosed oncology target selected by a separate, unnamed partner. As with Adimab's previous deals, neither partner gets exclusive rights to that target--the biotech can do another deal with another company around whatever target it chooses.
The new collaborations appear identically structured if a little slim on financial detail: Adimab's partners get all rights to the antibodies the biotech delivers, in exchange for an upfront payment, preclinical and clinical milestones, commercial milestones, licensing fees and royalties on any therapeutic and diagnostic product sales.
Also today, Adimab reports that it has received milestone payments from Merck and Roche based on delivery--within eight weeks--of the antibodies specified in their original respective deals. It's this kind of disclosure that Adimab thinks will raise eyebrows at other companies looking to augment their biologics engines.
It's no coincidence that most of Adimab's deals are around single targets. The company does have customers and potential partners saying 'we want broad access', says Gerngross, "but they need to see exactly what they're buying before we can have a meaningful discussion," he says. "These deals are geared toward informing and educating our customers" about what Adimab's technology can do: better yields, broader epitope coverage, faster delivery, etc., he says. Sooner or later the companies that came in early "are probably going to start expanding their deals," he says, without saying what that broader access might look like. In any case, "currently we're resisting it. We don't want [any one company] occupying too much bandwidth."
This always-leave-'em-wanting-more approach sets the stage nicely for future M&A (a la GlycoFi), though Gerngross won't be drawn into that discussion. Instead he says that he's trying to build a cash flow positive, revenue generating biotech company. And as we've pointed out before, Adimab wants to do this while remaining focused on discovery and avoiding development projects of its own.
Apparently, it's nearly there. Gerngross says there's a "good chance" the company will be profitable in the first quarter of 2010, and perhaps for the whole year. It has no plans to raise money, having recently tapped new investor Google Ventures and its existing backers Polaris, SV, Orbimed and Borealis in a Series D. Furthermore it "discourages" partners from taking an equity stake in the company as part of any discovery deal.
Surely any biotech could use a little extra cash cushion, though. "Looking at our net burn and cash in hand we have ten years of runway," says Gerngross. Ten years? "Yes. It's an unusual situation."
buy one of those fuzzy yeast toys here.
2009 M&A/Alliances DOTY Nominee: Abbott/Solvay and the Foreign Cash Dilemma
It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.We'll admit it. Abbott's $6.6 billion acquisition of Solvay's pharmaceutical unit doesn't have the same level of drama as, say, Halle Berry's performance in Monster's Ball. Or to put it into the perspective of our own Race for the Roger, even the show of Johnson & Johnson's swan dive into Alzheimer's disease with its 18% stake in Elan.
But there's a conundrum floating around Big Pharma halls these days that makes the move by Abbott seem pretty strategic, DOTY-worthy even. That is: how to spend the billions of dollars held outside the US before the Obama administration decides to crack down on a tax deferral for multinationals.
All in all, the buyout follows a pretty straightforward plot line, but the clincher to the story is this: Abbott is buying the Belgian drug unit with cash, most of which is coming from overseas.
It's a smart use of those funds since repatriating it would subject it to a hefty 35% tax. And while multinationals sidestepped a withdrawal of the overseas tax deferral by the Administration earlier this year, some in the industry still think the axe could fall (think Kathy Bates in Misery), next year when the budget review comes around.
Abbott's decision to buy Solvay isn't just about spending ex-US cash though. The drug maker also adds more than $3 billion to its top line and gains full control over the blockbuster TriCor/TriLipix dyslipidemia franchise, a business Abbott has big plans for. The company is developing Certriad, a fixed-dose combination of TriLipix and the statin Crestor, under a partnership with AstraZeneca. The addition of Solvay's drug unit also extends Abbott's geographic footprint, adds a branded generics business and provides entry into vaccines. (Ooh, diversification.)
Management didn't have much trouble selling the deal to investors, given the short-term gains. But the acquisition does little to address the holes in Abbott's pipeline. The major drugs in development at Solvay are pardopronox in Phase III development for Parkinson's disease, Duodopa, an L-dopa suspension system for advanced stage Parkinson's disease and gabapentin GR, an extended-release form of gabapentin (Pfizer's Neurontin and generics) for neuropathic pain and post-herpetic neuralgia.
How the buyout will play out over the long-term remains to be seen. But Abbott chief executive Miles White has impressed us before. Abbott's $3.7 billion buyout of Kos in 2006 added Niaspan and Simcor just before Pfizer's next-big-thing torcetrapib blew up, and with the $6.9 billion acquisition of Knoll in 2001, Abbott gained Humira, a drug that today generates more than $4 billion a year. Now that's what we call foresight.
DOTY isn't a Lifetime Achievement Award. But maybe it is time to stop doubting.
image by flickr user GazH used under a creative commons license.
Wednesday, December 16, 2009
PhRMA Wins Reimportation Battle; Can it Win the PR War
Here, once again, is an Obama campaign video (simply called "Billy") from last year:
Does anyone really doubt that industry could be facing a much bigger bite from health care reform if it didn't cooperate early? (This is why we nominated PhRMA's deal with the White House--which we like to call "dollars for donuts"--for Deals of the Year.)
The only problem with the vote is how bad it all looks. And we think that's a bigger problem for PhRMA than for the White House.
Sure, Obama's taking plenty of hits for flip-flopping on reimportation. (He supported it on the campaign trial, but the White House worked with PhRMA to kill it in the Senate.) But that PR hit has an upside: it reinforces to other industries that when this White House makes a deal it sticks to it. (Is that why the CEOs of several major banks now say they will work directly with the Administration on regulatory reform for their sector?)
But there is no upside here for pharma companies. The pharmaceutical industry has proven that it can defeat reimportation yet again. What the industry needs to do, though, is get to the point where no one seriously thinks reimportation is a useful public policy option in the first place.
We think this column in today's Washington Post should be required reading for everyone in the brand name industry. There is almost nothing in the article that won't make brand executives angry. But it is a fair reflection of how the political chattering classes view this issue: evil Big Pharma's lobbying clout trumped a common sense proposal to help the average Joe.
If industry can't change that perception, its victory in health care reform may be short-lived.
2009 Exits/Financings DOTY Nominee: Vertex's Milestone Sale
It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.In the future, when the industry's historians sit down in their maroon smoking jackets in comfy, plush leather chairs situated in dimly lit libraries smoking apple-scented tobacco from antique Exubera inhalers to write the history of the biopharma industry (while watching the earth rise out the window) we like to imagine they'll pause, and smile a little smile, when thinking about our friend, the once-elusive biobuck.
Oh, phantom biobuck! We've mocked you, for sure. But we also recognize that in your capacity to spread risk, you make the bio-universe go round. And in 2009 we got a fleeting glimpse of you without having to resort to hijacking the Large Hadron Collider to smash NCEs together under the Swiss countryside. And for that, we can thank Vertex Pharmaceuticals.
In July Vertex announced that it would sell its future milestone payments associated with the filing, approval and launch of the HCV protease inhibitor telaprevir in Europe. Those milestones are owed (potentially, of course) by J&J, which licensed European rights to the HCV protease inhibitor from Vertex in 2006, and could total $250 million: $100 million for filing and approval of the molecule, $150 million for launch.
The proposal was just the latest move by Vertex in a series of ambitious financings that have raised hundreds of millions of dollars over the past two years (one of which you'll remember was nominated for a DOTY last year).
But more importantly it gave us a data point in the ongoing debate about the value of biobucks. So what's $250mm in biobucks worth? In this case, $155 million. Only it's not so straightforward, and involves TWO transactions, so let's go back to what we wrote when the deal--with undisclosed investors--was announced September 30th.
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? CFO Ian Smith: "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.
Is this the Exit/Financing of the year? We say yes. It's novel, shrewd, and--we'd guess--soon to be imitated. What's next for our friend the biobuck? Only time will tell.
image by flickr user mackius used under a creative commons license.
2009 Exits/Financings DOTY Nominee: Cephalon/Ception
It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.
With all due respect to my colleagues, I insist that if you vote for one option-based deal, it must be the Cephalon/Ception transaction. As we've told you, option-based deals are in vogue and likely to remain so--unless something dramatic happens to the IPO market. And I completely agree that option-to-license deals are flexible, low-cost, risk-mitigating, pay-for-performance-oriented and, indeed clever. But they're also not really all that new. If you want novelty, it's the option-to-acquire, which despite all the hype (or handwringing from VCs) remains a relative rarity.
According to Elsevier's Strategic Transactions (a better source than the magic eight ball), there have been just six option-to-acquire deals in the past two years, including five in 2009 alone. Among them: Alcon/Potentia; Novartis/Proteon; Novartis/Elixir; and Cephalon/BioAssets. But the one that got the '09 party started, so to speak, was Cephalon's option to buy Ception for $100 million upfront and another $250 million in milestones, with the purchase tied to the clinical performance of the start-up's Phase IIb/Phase III anti-interleukin-5 antibody, reslizumab.
As we wrote at the time the deal was announced, the option-to-buy strategy is a clever way for Cephalon to acquire a potentially valuable large molecule platform while simultaneously capping the expenses it might owe down the road as it tries to build a pipeline of novel drugs to treat inflammatory diseases. It's fair to say the deal hasn't worked out exactly as planned: Cephalon and Ception renegotiated the option-to-buy in November after a trial of reslizumab in patients with eosinophilic esophagitis, a rare autoinflammatory disease, yielded disappointing results. Now the two companies will focus on results in another indication, eosinophilic asthma, with data expected sometime in the first quarter of 2010.
But the companies are still tightly linked--$100 million dollars has a way of doing that--despite the ups and downs of reslizumab's clinical development. Indeed, Cephalon appears even more enamored of the molecule than it did back in January, spending quite a bit of its recent R&D day 
highlighting the drug's potential.
And that level of engagement is critical in today's climate, where exits are still primarily via acquisition. Pharma is barraged by would be sellers--especially privately-held venture backed biotechs ala Ception. Contrary to popular opinion, the economic doldrums haven't sparked a rash of dealmaking just because assets are suddenly cheap (or cheaper), leaving VCs even hungrier for exits.
The question becomes how best to get a potential acquirer's attention? One answer: make sure the drug maker has some skin in the game. Give the company a financial reason to think seriously about wanting to own all of a particular start-up--even as the two parties get to know each other better as they work on furthering a common goal such as the development of a drug. In other words, the option-to-acquire.
We know--and recognize--that the option-to-acquire model necessitates trade-offs. Buyers are taking on some risk by ponying up money for an asset or platform that may require additional tweaking. Meantime, sellers must let go of the dream that a future deal will yield outsized returns, trading a highly theoretical fortune for the greater certainty of a profitable--albeit capped--exit. But as the Cephalon/Ception deal shows, there's increasing value to this kind of certainty, both for biotech execs and their VCs.
Don't you know a bird in the hand is worth two in the bush--or at least $100 million.
(Image by flickrer toyfoto used with permission through a creative commons license.)
2009 Big Pharma DOTY Nominee: Merck/Schering-Plough
It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.
"What are we on?" you're asking. How can Merck's acquisition of Schering-Plough stand a chance of winning a Big Pharma Roger, when it's up against Pfizer/Wyeth? At $41 billion or so, the Merck deal was considerably smaller than Pfi/Wy, and it wasn't transformative in the way Pfi/Wy is supposed to be (new kind of pharma 'n all that).
Still, we all know size isn't everything, and that details count. Merck might've only been buying time through this deal--time to figure out what on Earth to do about a $4 billion patent-expiry problem--and will be doing the usual, un-prize-worthy cost-slashing (the deal's synergies represent a whopping 40% of sales). But what it lacks in headliners it makes up for, we argue, in behind-the-scenes cleverness.
Firstly, Merck got Schering-Plough for cheap. Less glitzy numbers, then, but less costly for the buyer, too. Merck paid only about 40% more per share than the price when CEO Fred Hassan joined in 2003....and it paid about 60% in stock, unlike both Pfizer and Roche which had to cough up hard cash for their booty.
Yet Schering brings valuable assets to Merck: a marketed portfolio that fits nicely into Merck's current organization, and an R&D palette in the same therapeutic areas but with very little mechanism-of-action overlap. Cheap diversification, then, to create a much more impressive combined pipeline, but within comfortable boundaries.
The second clever bit was the deal's structure, designed to minimize the chance that Johnson & Johnson comes in to spoil the party. Per the companies' 1998 agreement granting Schering ex-US rights to anti-TNF drugs Remicade (and follow-on Simponi), J&J has a change of control clause allowing it to scoop back those rights in the event that Schering-Plough is taken over. (The two drugs in question are potentially worth up to $8 billion together.)
But technically Schering-Plough isn't being taken over: the deal is a reverse-merger in which Schering is the surviving entity--renamed as Merck. And run by Merck's CEO Dick Clark out of Whitehouse Station, N.J. Crafty, eh?
Now okay, J&J has sought arbitration. So that crafty bit may not work out. (And indeed, management at the time of the merger provided guidance both with and without the anti-TNFs.) But good for them, we say, for trying.
Vote for the shrewd under-dog deal, then; the one that appears run-of-the-mill but which may be the smartest, at least in the short-to-mid-term, by going for certainties and not betting on entirely new models. Vote here for the deal that in fact isn't simple or risk-free but which takes a gamble--yet not a crazy, potentially fatal gamble. Vote here for the deal that lets Merck wait and see for a while before committing to anything radical.
(As for what happens when the bought time runs out...well, watch out for DOTY 2012 or thereabouts.)
Tuesday, December 15, 2009
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.)
2009 Big Pharma DOTY Nominee: Pfizer, Feds Settle for $2.3 Billion
It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.Alright, we know this one isn’t going to get the Roger. In fact, it probably won’t get any votes, since technically speaking Pfizer’s $2.3 billion deal to settle a wide-ranging investigation into its promotional practices doesn’t even count as business development.
More like the opposite.
But you should think about this deal anyway. Trust us. In fact, trust is the point here.
Pfizer’s September settlement is by far the biggest in the wave of industry prosecutions that defined the decade of the 2000s. So you should take note for that fact alone.
Indeed, the circumstances of the case (Pfizer has the deepest pockets in the industry, it is in essence a repeat offender, and the allegations involved the now notorious Cox-2 inhibitor class) coupled with the retirement of Acting US Attorney Michael Loucks may mean it is a record that is never broken.
$2.3 billion is a lot of money. Okay, it is not $68 billion, the price tag on Pfizer’s purchase of Wyeth, a deal we expect will get more votes than this one in the DOTY competition. But, it is enough to pay a $.30 cent per share one-time dividend—more than enough to offset the dividend cut Pfizer announced in the context of the Wyeth transaction. Oh, right, and Pfizer announced something else the day it announced the Wyeth deal: the tentative settlement with the US Attorney in Massachusetts.
So this deal does have something to do with business development after all.
But these settlements have always been more important than the dollars. Each case—and the headlines it generates—marks another step down in the reputation of the industry. They have helped stoke a puritanical fire in the medical establishment, one that aims to root out all industry influence over clinical research, medical education, and clinical practice standards, a movement that could, taken to extremes, jeopardize the entire private sector biomedical model.
It is hard to put a price tag on a loss of trust. But there is a cost. It shows up when juries award damages in product liability suits. Or when legislators say $80 billion isn’t enough of a contribution to health care reform. Or—most importantly and hardest to measure—when patients stop taking their medicine in response to a negative headline. Because, after all, every time someone takes a prescription drug, it is an act of trust.
Pfizer seems to have gotten the message. At least, CEO Jeff Kindler is telling anyone and everyone that he has, during a kind of post-Wyeth integration mea culpa tour. So the CEO of Pfizer clearly agrees with us that reputation counts.
But here's the thing about trust. Once it is lost, it is hard to earn back. If you don't believe us, check out this New York Times take-down of the estrogen replacement therapy market, which basically says that Wyeth's entire franchise in that category is the result of a decades long, um, fraud.
See, in an era defined by loss of trust, buying new companies only buys new headaches. Wyeth's HRT franchise is Pfizer's now. Kindler has more work to do.
Monday, December 14, 2009
2009 Exits/Financings DOTY Candidate: PanGenetics/Abbott
It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.The next time you hear about a biotech's shots-on-goal discovery/development strategy, spare a minute to consider the alternative. Asset-focused funding of early-stage projects has fallen in and out of favor over the years, but the success of PanGenetics November deal with Abbott for its nerve growth factor antibody may draw imitators.
Led by former Cambridge Antibody CTO Kevin Johnson, PanGenetics was seeded by Index in 2005 to find early stage antibody assets and quickly develop them to the point where pharma would step in and buy them. To date, the privately-held firm has raised about €38 million, the bulk of which has gone to fund the development of two separate compounds. (In addition to the NGF antibody, PanGenetics is also working on an anti-CD40 antibody in autoimmune indications.) In an interesting twist on company creation, the outfit was structured from the get-go as essentially two independent one-asset companies, of which Index still owns 40% apiece.
At first the Abbot/PanGenetics transaction looked like an oddly up-front-heavy licensing deal. But when Abbott paid $170 million up-front plus a potential $20 million milestone to access the biotech's PG110 Phase I anti-NGF project, it was in fact buying one of those PanGenetics companies. The $170 million went straight to PanGenetics' investors; it won't be ploughed into the anti-CD40 mAB program. Nor will Abbott pay any downstream royalties to the biotech or its investors.
Although this may be a formula for success it should be noted that there will always be plenty of attrition along the way. Assets will surely fail (either in the very early stages before a PanGenetics-like company grows up around it or after the molecule gains momentum and a bit of biotech infrastructure).
But funding assets, Index partner Francesco De Rubertis tells Start-Up in an article about the deal this month, removes wasted energy and capital from the system. “The key to having two molecules run independently means there are no portfolio decisions,” he says. Portfolio-based drug development (with the exception of platform based drug discovery operations) is inefficient from the perspective of early-stage venture investors, he says.
“We want every molecule to move forward on the basis of its own merits,” and though managers will deny it, he says, companies with multiple shots on goal can often become too relaxed. “If you always have something on the burner to make sure you can keep raising money, that’s terrible for returns,” he says.
So there it is: a clean deal, a hot target (NGF has been the subject of several deals and has captured the attention of Pfizer, Johnson & Johnson, and Sanofi, among others) and a unique business plan combine to create a smart return for Index and co.
A terrific venture deal, for sure. But is the asset sale the exit/financing deal of the year? We can think of 170 million reasons the answer is 'yes'.
image by flickr user peregrinari used under a creative commons license
