Roche/Genentech: When Independence Costs Too Much

It's already Tuesday but that won't stop us from our penchant for Monday morning quarterbacking--especially when it comes to the biggest deal we're likely to see all year: Roche's unsolicited bid for the remaining 44% of Genentech it didn't already own. So why do it?

Certainly, Roche’s earnings are slowing and buying the remainder of Genentech will allow it to consolidate 100% of Genentech’s profits, not merely 56% of them. And there may be, as one banker noted, obscure tax reasons pushing a deal: Roche has always had a complex financial structure.

But ultimately Roche’s acquisition rationale must out-argue the one big reason not to do the deal: this has been the most successful relationship in pharmaceutical history. Neither company would likely exist as an independent entity without it. Genentech was an acquisition waiting to happen back in 1990 when it managed to keep at least managerial independence by selling Roche 60% of its shares. Without Genentech, the Swiss giant would most likely be part of another Swiss giant, Novartis (which still owns a small stake in the pharma.)

It's worth remembering that in 2007, Roche got 28% of its sales from Genentech-sourced products, which include the large molecule trifecta Herceptin, Rituxan, and Avastin. Moreover, one third of its Phase II and III pipeline is comprised of Genentech programs. Meanwhile, Roche's 56% ownership of Genentech accounts for roughly a third ($55.2 billion) of its $154 billion market cap, the second biggest in Pharma after Johnson & Johnson.

In case you aren't getting it, let's be clear: Roche’s success is largely due to Genentech.

By buying Genentech – and no one we spoke with figures this deal will end up any other way, as we noted yesterday the only question is the ultimate price tag– Roche is betting that this unique relationship has already borne its best fruit. The independence that kept Genentech productive has simply become too expensive.

Sure, the Roche press release made the obligatory soothing noises about Genentech’s independence and culture. Severin Schwan, Roche's CEO even went so far as to say “I would like to reiterate from my side how big [our] respect is for Genentech’s achievement, how big the respect [is] for Genentech’s culture” on a same-day conference call announcing the news. “We have sent very, very strong signals to Genentech [about] how much we appreciate the strength Genentech brings into our organization," he said.

I'll say. Actions, as your mother taught you, speak louder than words. And the manner of Roche's bid does much to destroy any future positive collaborations between the two companies. Apparently, Genentech CEO Art Levinson only learned of the deal on Sunday, July 20th, the day before it was announced.

If the intent was to preserve the Genentech culture, wouldn't Schwan's team have first outlined the positive rationales for the deal to Levinson and his board, and allowed them a window of time in which to suggest alternative governance structures that might have preserved Genentech's independence? Instead the announcement was sprung upong Genentech as a fait accompli.

The deal, in short, has more of the hostile flavor of the Ventana takeover. That shouldn't be too surprising: the Ventana acquisition, which took seven months from start to finish, was also spear-headed by then diagnostics-leader Schwan. Moreover, Greenhill & Co., the boutique bank that advised Roche in that high stakes gambit, is also advising on the Genentech tender offer.

Few people we talked to figure that Genentech’s best scientists will stick around. In the first place, most of those responsible for the marketed and later-stage products are already gone or wealthy enough, thanks to Genentech options, to chance a start-up. “They’ve already got their nest eggs,” says one former Genentech executive. “I suspect most would stay if Art Levinson does,” says a senior Genentech executive. “But they won’t if he doesn’t.”

And the early betting is that he won’t. “This deal humiliates him,” says one banker. “They didn’t talk to him first.” Adds a Big Biotech CEO: “Even if they let him run the pharmaceutical operations, do you think he’d want that? I certainly wouldn’t.”

Perhaps David Hamilton of bNet Industries is correct when he writes that Roche "has vastly underestimated both the difficulty of managing biotech operations and the risk that Genentech’s scientists will simply walk away at their first opportunity." They certainly aren't the first Big Pharma to take the biotech plunge that's faced significant cultural issues--MedImmune, anyone?

But Roche is populated by extremely smart folks, so our guess is Schwan's team has probably figured the likelihood of mass exodus into its deal calculus. Instead, it’s betting that the strategic and financial flexibility complete ownership permits are more valuable than the theoretical continued R&D productivity achieved by keeping Genentech at arm’s length.

Indeed, a financially strong Roche is buying Genentech at a time “when the house of Pharma is burning,” says one Big Biotech CEO. With Genentech, Roche will be be much larger by market cap than all of its pharma rivals and far out of reach of its Swiss nemesis, Novartis, ensuring freedom from takeover threats.

Which gets to what we suspect is the real point of the deal: industrial efficiencies. Roche’s last major pharmaceutical acquisition– of Syntex, in 1994, for $5.3 billion– worked out quite well, if not exactly as the pharma company imagined. Roche cut massive costs out of the operation, saw their shares rewarded for the expense reductions, and netted themselves, in the transplant drug CellCept, one of their most important products outside of the Genentech collaboration.

Today, Genentech is one of the few large companies Roche could buy without angering Wall Street, which has come to see the large cost-cutting horizontal mergers characteristic of the 1990s as value destroying. But the aura of the Genentech pipeline allows Roche to make a horizontal acquisition–with plenty of opportunities to cut significant expenses and thus increase earnings (Roche’s PR estimates savings of $750 - $850 million a year).

And while a number of analysts were angry over the deal’s terms, Roche shares were up on the announcement. “It may not create value long term,” says the Big Biotech CEO, “but it lets Roche do what these deals used to do – cut costs – and live to fight another day.”

Indeed, Schwan’s vision of the pharmaceutical future is one in which large companies will compete on the basis of industrial efficiency, not the kinds of innovations Genentech is known for. The value of such innovation is too unpredictable and perhaps growing more so as payors increasingly question the high prices charged for a cancer drug like Avastin which provides, on average, only a few extra months of life.

It's likely Roche took a look at the price of its current Genentech relationship--with its manufacturing transfer prices, up-front fees and royalties, and most importantly no ability to leverage its investment in the US marketplace where the economics of oncology marketing look more and more like primary care--and figured those costs outweighed the innovation it would lose if Genentech's world class talented departed as a result of a takeover. Just as no primary-care force can afford to sell a single product, Roche can’t afford a US oncology operation selling only Xeloda.

Moreover, Roche is clearly not convinced that Genentech’s productivity would have continued at the rates it has in the last decade. And there are plenty of people who agree. “We all know that Amgen is now a Big Pharma. We talked about it eight years ago. But I think Genentech has now sneaked over that line too,” says the CEO of one of Genentech's peer Big Biotechs.

Without having spoken with him for this story, we suspect Severin Schwan’s vision of the pharma future looks a lot more like the cost-constrained world he knew at Roche Diagnostics – where innovation was rare and rarely paid for; where extraordinary business acumen counted for more than outsized research capabilities. Roche’s first gamble on Genentech was all about R&D. Its new gamble: business synergies will drive the next wave of pharmaceutical success.

--By Roger Longman

Is There Another Roche-Genentech Out There? Signposts for the Rare Beast

The emotional dust raised by Roche’s takeover bid for Genentech has largely settled (you can download a free collection of our coverage of the event and some of its implications, here).

But there’s still plenty of strategic dust obscuring the view. The Genentech/Roche model – the most admired relationship in industry history -- seemed almost uniquely able to solve two enormous challenges: biotech’s ability to access capital and Pharma’s to feed its pipeline.

We don’t believe that Roche's move to acquire its junior partner means the structure can't work elsewhere. Roche simply figured Genentech’s run of innovation was close to the an end, and that the deal’s cost of accessing further innovation (royalties, milestones, geographic limiations) was simply not worth the candle.

But the fact is that the model has been rarely attempted. Here’s why. Thanks to a unique confluence of partnering requirements, Roche and Genentech both got something they needed from this deal without insisting on getting more (until Roche did by announcing its bid for Genentech). That set of circumstances has rarely occurred in the past -- and will rarely do so in the future.

To review these circumstances: Genentech wanted to fund R&D at what it believed was the requisite level – but couldn’t without killing its share price and thus closing off its access to capital. Not so rare a situation, by any means.

So it convinced Roche to offer Genentech stockholders a generous put on their shares: if the stock began trading too low, Genentech shareholders could force Roche to buy them out. That meant that Genentech’s shares could only fall so far while its competitors in the game of attracting capital could make no such reassuring promise. Many had to – still have to -- overdose on dilution.

But that put cost Genentech something few biotechs would be willing to pay today: a fixed-price option for ex-US rights to its pipeline. The option, which secured Roche some of the most successful biotech drugs, was based on deal prices from the mid-90s. Now, no one could really forecast the extraordinary inflation in deal values consequent upon the equally extraordinary lack of R&D productivity in Big Pharma (not excepting Roche). But it’s hard to believe that anyone today, knowing now what we’ve learned about biotech dealmaking over the past decade, would agree to that kind of fixed-priced option.

The option didn’t turn out to be all that bad for Genentech either. As we could not forecast inflation in deal prices, we could not have forecast the ability to regularly charge $50,000 for a course of therapy applicable to hundreds of thousands of people. Genentech, in short, limited itself to the US market at precisely the moment the US market was at its most lucrative for the kinds of products Genentech was selling.

And one other thing: Roche was getting something it could not develop on its own or easily find on the outside: large-molecule discovery, development, production and marketing capabilities. Roche couldn’t duplicate Genentech’s pipeline. That means that there were relatively few entrenched interests at Roche who would see Genentech as duplicating their own efforts -- and therefore competition. Moreover, because Genentech had actually created three approved products (and developed and sold two of them – TPA and human growth hormone; Lilly developed and sold the third, human insulin), Genentech’s pipeline didn’t look like a pipe dream.

So: a rare set of circumstances. There are several companies, like Genentech, with a platform for producing a new kind of drug. But few of them would be willing to sell a fixed-price option to their entire pipeline. The pressures on US pricing (compounded by the likely advent of biosimilars) will force companies to be stingier in parceling out ex-US rights all at one go. Moreover, there aren’t many companies like the Genentech of 1995, which had successfully developed and commercialized products -- but which still needed help in accessing capital. Celgene, for example, certainly doesn’t need Big Pharma’s guarantee to wring money out of Wall Street; nor does Genzyme; nor does Gilead.

The two closest recent examples of a Genentech/Roche-like model – the Idenix/Novartis transaction from 2003 or the Theravance/GlaxoSmithKline deal of 2004 – don’t exactly shine as examples of successful development organizations. Moreover, neither of those companies provide their would-be acquirors any special new platform. Theravance, in fact, is all about me-better small-molecule drugs. And the fact that GSK chose its own long-acting beta agonist to work on, rather than Theravance’s, does at least call into question the acquisition value of Theravance’s platform – indeed, last year GSK formally decided not to acquire the additional Theravance shares it could have.

So, granted the rarity of candidates, who might fit? Which companies with unique or at least important R&D platforms have produced an approved but only marginally successful drug … and who thus would be willing to pay a price similar to the one Genentech paid in order to access capital at a reasonable rate?

RNAi platforms are certainly hot. But none of the independent RNAi players (like Alnylam or Silence) has actually developed a drug let alone proven that the platform actually can produce them. Too early for the 60% solution.

Aptamers haven’t generated huge partnering buzz but there’s at least one on the market (Macugen, from Eyetech/Pfizer) so Archemix, granted it can push its pipeline along, might be a good candidate for a 60% deal (the VCs in that company which have been unable to get it public would be happy with such an outcome).

Isis Pharmaceuticals’ antisense platform has attracted various partners; it’s got a late-stage program in development, mipomersen, that it pushed through on its own. But the market likes Isis now; the stock has dramatically outperformed the biotech index. So if we were CEO Stan Crooke we might insist on a bit more valuation than most Big Pharmas would be willing to tolerate – particularly since the company already sold Genzyme the rights to mipomersen. So: better candidate than Alnylam (would Genzyme’s Termeer do a 60% deal for Isis? We think he’d consider it) but not so good, or as inexpensive, as Archemix.

Exelixis has managed to put together a pretty fair set of targets and chemistries; has gotten a few products into pivotal trials, albeit none further than that. But it sure hasn’t secured the unalloyed confidence of investors. That combination of scientific quality and market skepticism has made Exelixis attractive to, and attracted by, innovative financiers like Symphony Capital and Deerfield – and which probably would attract them to a 60% acquirer, were one to come along. But it’s not clear to us that an acquirer would be as interested: small molecules are Pharma's bread and butter, too close to what they think they already know.

And a few ideas a bit further afield.

Big Pharma is increasingly interested in generics, particularly of the large-molecule variety. Might make sense for investor-poor, technology-rich Momenta to stay quasi-independent but let a Big Pharma sell its biosimilars as part of a push into emerging markets.

And then there's China; could Pharma tap into that increasingly attractive and rapidly transforming market by teaming with a service play like WuXi Pharmatech or a still-small and home-grown biotech play like Hutchison China-Meditech's recently emancipated MediPharma subsidiary?

So another Roche/Genentech is possible. Likely? Not so sure. Because there was one other element to that we haven't discussed: strategic courage. And that may be the rarest element of all.

Image from flickr user Steffe used under a creative commons license.

DOTY 2009 Big Pharma Nominee: Roche/Genentech

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™.

Last but most definitely not least, the biopharma voting public would be crazy not to consider the Roche/Genentech tie-up as the Big Pharma Deal of the Year. After all, it's Roche's surprise hostile offer for Genenetech in the summer of 2008 that sparked the mega-merger madness that eventually resulted in Pfizer and Merck's respective take-outs of Wyeth and Schering-Plough. In case you quibble about its eligibility: the deal may have been hatched in 2008, but the wheeling and dealing lasted well into 2009.

True, the deal value isn't as eye-popping as Pfieth. And it doesn't have as much cleverly worded legalese as the Merck/Schering agreement. But the Roche/Genentech deal seems most likely--of the big three mergers at least--to actually work as advertised. And we'd note that up till now the track record on mega-mergers isn't even up for debate. It's been abysmal.

Already heavily diversified into specialty biotech products thanks to its long-time partial ownership of Genentech, Roche doesn't need a transformative deal to move the company to the next level. Nor does it need to buy time a la Merck as it bolsters its pipeline, thanks to ex-US revenues on Genentech products. But it also can't afford to leave 100% of the US oncology market on the table anymore either and the opportunity to take Genentech private allows the company to build itself into a power-house of personalized medicine.

Thus, with its landmark agreement with Genentech already nearing a sunset, Roche made a preemptive strike, betting it would gain more by owning 100% of sales juggernauts such as Avastin and the ability to slash duplicative infrastructure than it stood to lose if the top talent at Genentech hung up their lab coats and gave up their iPhones. (And there’s no doubt some have, including David Schenkhein, Susan Desmond-Hellman, and Art Levinson.)

Is there hope that by acquiring Genentech the Big Biotech's drug hunting prowess will spill over to the Rochies? Undoubtedly. But it's a nice-to-have NOT a need-to-have part of the deal. Despite the clever and very public lexical contortions Roche CEO Severin Schwan gave in discussing this deal--especially in the early and very hostile days of negotiating--this tie-up isn't about innovation. It's about efficiency. Even as FIGs (friends of an independent Genentech) get out their voodoo dolls in protest, we'll state again that the Genentech of 2009 was a far cry from the discovery-oriented scrappy biotech with high growth prospects of yesteryear.

And the acquisition's final price tag--$95-a-share, while certainly a great deal more than the intitial $89-a-share bid price, is more than matched by the likely earnings potential of Genentech's already marketed products. Furthermore, analysts estimate the biotech's mid- to late-stage pipeline adequately supplies Roche with a pipeline reservoir through 2016.

Moreover, it's not as if Schwan and co. haven't worked overtime to preserve the semblance of Genentech's autonomy. The DNA ticker symbol may be gone, but the early R&D group still has a biz dev unit, despite the seeming overlaps that come from having two such organizations under the Roche roof. Thanks to a restructuring of the executive committee that has Genentech's head of R&D Richard Scheller reporting directly to Schwan, Genentech also has extraordinary visibility within the new organization.

So vote for Roche/Genentech for Big Pharma deal of the year. It's a transaction that's got it all: drama (the hostile-then-ultimately-friendly (sort of) offer); high stakes months-long brinkmanship (a lower than expected offer followed by an even lower offer price); and ultimately, a chance of being successful.

All In The Family: Genentech and Roche Together At ASCO

In the immortal words of one Archie Bunker those were the days, weren’t they? Back when biotechs were biotechs (small and innovative—and usually cash poor) and pharma companies were pharma companies (big and blockbuster-focused and hugely profitable), everyone knew their place in the industry. But the disappearance of the DNA ticker symbol has made things so much more confusing. Should we think of Roche as pharma or biotech? Is Genentech a stand-alone biotech within Roche or the Swiss pharma’s future?

In one of their first appearances together since Roche officially took Genentech private, the two drug makers chose to make a big splash at the American Society of Clinical Oncology. (The Roche-Genentech business development dynamic duo of Joe McCracken and Dan Zabrowski also stepped out at BIO. Look for an indepth Q&A in a coming issue of IN VIVO.)

And what a splash they made. The newly consolidated Roche-Genentech oncology portfolio is soooo big that the industrious executives at the newly blended company couldn’t fit it into one night.

Indeed, the two organizations dominated ASCO, presenting 12% of the entire scientific content in various break-out sessions, plenaries, and posters. But it was the two-night event aimed at analysts—four hours of oncology updates—that illustrated what the future might look like for Rochetech (or is it Genenroche? It doesn’t have quite the same ring as Wy-Pfi, does it?)

The IN VIVO Blog couldn’t help but see the occasion as a wedding of sorts, with the requisite awkwardness and strained politeness of a rehearsal dinner on full display. (We aren’t revealing the identity of the drunk uncle.) The “head table” on stage was loaded 8 across with managers. And by night two, Roche felt compelled to put up nameplates—a move necessitated by the fact that analysts typically follow either Roche OR Genentech but not both and so might not have a sense of the cast of characters.

Much of the first night was spent rehashing the failed adjuvant colorectal cancer trial for Avastin, C-08. (There’s a slight possibility you’ve already heard about that, but see “The Pink Sheet” DAILY coverage here.) The firms also talked about new uses for old drugs – Herceptin’s move out of breast cancer with the ToGA trial in gastric cancer – and some new offerings from the early stage pipeline, like hedgehog inhibitor GDC-0449 and the BRAF-targeted PLX4032 partnered with Plexxikon. (Check back with the DAILY and “The Pink Sheet” in coming weeks for more coverage.)

But time was also spent addressing two particularly large elephants in the room: the on-going Roche/Genentech integration; and the impact the C-08 trial failure had on both the deal offer and the newly combined organization’s bottom line. Outgoing Roche head of U.S. pharma Bill Burns gave a finely orchestrated bit of messaging as he tried to dispel certain misperceptions.

“Since we are all sitting together as a united family now, and I know that this may be something in the back of many of your minds, I want to lay to rest two or three elements I think the mischief makers in the media were playing on in the run up to the family coming together.” (Us? Make mischief? Your Honor, in our defense, Roche made it fairly easy to categorize “the family” as dysfunctional.)

Burns delved first into continued questions about the ability of Genentech to remain an independent entity with its traditional characteristics of a quirky culture, high science, and individually-driven success. Ever since Roche announced its hostile bid for Genentech last July, that fear has been one of the brightest issues burning. Noting incessant references in the press to questions such as “Will people stay?” and “What will happen?” Burns emphasized the quick steps Roche took to establish a management team.

IVB cannot tell a lie. Roche did in fact move swiftly—within weeks of the disappearance of the DNA ticker came the April 14th announcement outlining changes at Genentech. But what Burns conveniently forgot to mention is that those changes included losing some of Genentech’s most talented leaders: Arthur Levinson and Susan Desmond-Hellman stepped down from their roles as CEO and Product development president, becoming mere advisors. A few weeks later Desmond-Hellman confirmed what media had speculated: she would be leaving Genentech to take the reins as UCSF’s chancellor, a position that starts in August.

Burns also pointed out that Roche has followed up on its intention to keep some of the innovation coming out of the Genentech labs operating “as is” in South San Francisco. (We are willing to bet however, that G’s researchers would have given up their iphones and their apple computers if it would have kept Levinson and Desmond-Hellman on board.) Moreover, said Burns, operations are continuing as normal under the leadership of Richard Scheller and his more than able assistants, Marc Tessier-Lavigne and Andy Chan.

“The team is fully in place and we have given them also the elements like business development that are required to make sure that accessing some of the bright new elements, either enablers in science or early programs, can continue,” he told investors.

Along with those tortured phrasings, Burns unveiled the creation of an internal acronym that describes Genentech’s function in the Roche family: “GReD”, for Genentech Research and early Development. IVB’s reaction? The “pharmafication” of Genentech is complete—it has its own nutty alphabet descriptor that is just one letter shy of the word greed. (Defn. Greed: (noun) the excessive desire to acquire or possess more—especially more material wealth—than one needs or deserves.)

Burns also tried to “put on the table and lay to rest” allegations that the then-pending C-08 trial results played a critical role in both the timing and the price of Roche’s even more hostile move in January, when it lowered its offer price from $89 to $86.50. Acknowledging that the potential for Avastin use in the adjuvant setting had “raised the rates” and was clearly “an inflection point for the then independent Genentech stock,” he maintained it was just one more data point Roche execs used to calculate their valuation. Acknowledging that the C-08 trial results were significant, Burns asserted “you do not go into a $46 billion privatization on the basis of one clinical trial.”

--by Mary Jo Laffler and Ellen Foster Licking

Genentech Gets Tough: Who is the Target?

How do you crack down on compounding labs without adversely affecting your key customers? That is the tricky question Genentech is grappling with as it tries to shut off the primary source of supply for bevacizumab (Avastin), for ophthalmologic use against neovascular macular degeneration.

An October 11 letter from Genentech to “retinal community” members makes the compounding pharmacies the clear target. “As of November 30, 2007, Genentech will no longer allow compounding pharmacies to purchase this product directly from wholesale distributors,” the company declared.

In response to questions about potential limitations on supply to hospital pharmacies, the company emphasizes that is not taking any action to limit that source of supply. A Genentech spokesperson says there will be no allocations to hospital pharmacies to try to restrict spillage from the use of VEGF in oncology to the ophthalmic markets.

If ophthalmologists want to get Avastin from hospital pharmacies, that route will remain open, a company spokesperson explains.

That makes the October 11 announcement appear to be a surgical strike by Genentech against one class of trade – a class that the company argues has raised quality control issues. Genentech points out that it has the Food & Drug Administration on its side in questioning use of compounded Avastin: a December 4, 2006 warning letter from the agency to the New England Compounding Center; and FDA inspection observations at Genentech which note continued off-label ocular use of Avastin.

But is Genentech really restricting this fight to compounders? By cutting off the supply of the inexpensive ($17 - $50 per shot) Avastin, the company will be moving more of the ophthalmologists to the $1,950 per moth (ranibizumab) Lucentis.

Genentech is shifting a large inventory risk to its customers: the wholesalers and ophthalmologists. The firm says it is not changing payment terms from its current 85-day dating for the product. It could have extended the payment terms to soften the blow of forcing more doctors to the higher-priced version of anti-VEGF treatment. The higher priced product also puts the eye doctors in the uncomfortable position of trying to collect average co-pays in the $400 per month range.

The tough approach to its customers is exacerbated by the context of the extended argument that the company has been having with segments of the ophthalmologic community over the potential for Avastin and the effort from the specialty community to support a comparative trial of Avastin and Lucentis. Genentech has helped to make that trial difficult for the eye doctors and the government to undertake. In the fight, the company has created bad feelings among a number of opinion leaders in the small customer class of ophthalmologists.

The move against compounders also shifts liability risks as well as carrying costs. One close observer of the field says Genentech is making this move to isolate the company from liability and make ophthalmologists fully liable for any adverse events that could arise from using Avastin in the eye.

The observer notes that there is an ongoing study of Medicare macular degeneration claims at Duke (the AWARE study under Scott Cousins) to try to pick up the frequency of untoward events from excessive anti-VEGF from injection in the eye. The study uses date from the Chronic Condition Warehouse database, managed by a Medicare contractor, the Iowa Foundation for Medical Care (IFMC), a Medicare contractor. Genentech claims that Lucentis has been designed as an antibody fragment to bind more specifically in the eye and avoid appearing systematically.

If Genentech can shift Avastin ophthalmic sales to Lucentis, the investment community will be impressed, but the cost might be forcing more financial and liability risk on its customer base.

Genentech Wanted Roche To Pay How Much?

How about $112 a share? No kidding.

That's what Genentech's lead director, Charles Sanders, told Roche chairman Franz Humer to expect back on December 12. That was just before Genentech's financial adviser, Goldman Sachs, got in touch to discuss the drugmaker's proposed bid for the biotech. This little tidbit was revealed in the tender offer Roche filed late Monday with the U.S. Securities and Exchange Commission (please see page 15).

You may recall that, last July, Roche initially offered $89 a share for the 44 percent of Genentech it doesn't already own, but late last month, lowered the price to $86.50. Why? All sorts of reasons, starting with the worsening global economy and comparable public company valuations that decreased and, in the process, lowered applicable multiples Roche used to value Genentech shares.

Genentech's fetching demand ultimately prompted a January 9 meeting in New York between various Genentech and Roche legal and financial advisers, as well as senior Roche R&D execs, to debate the virtues of a rosy financial model the biotech devised in November. Genentech used this to justify its $112 price tag, while Roche claims the financial model was hokum.

The following week, Roche's advisers, Greenhill, sent Goldman a list of "key areas of disagreements, which included, among other things, assumptions regarding annual price increases; pipeline productivity; development costs; the value of the extension of Roche's 'opt-in' rights relating to (Genentech's) products outside of the U.S.; Avastin adjuvant (trial) indications; future revenues for Lucentis, Herceptin and Raptiva, and potential tax benefits." In other words, they disagreed over just about everything.

And so Roche upped the ante by taking a new, lower offer directly to Genentech's shareholders, although some Wall Street analysts believe Genentech could easily be worth $100 or more a share, if upcoming Avastin adjuvant trial data is positive.

Of course, this is Roche's version of events, which the drugmaker is using to explain its alleged frustration with Genentech's board these past few months, as well as its rationale for playing hardball with its newly lowered bid.

What will Genentech do now? Not surprisingly, a special Genentech board committee urged shareholders "to take no action at this time" in this statement. But it won't be long before we know more. That's because the special committee indicated it would take a formal position on the Roche offer "within ten business days, and will explain in detail its reasons for that position by filing a Statement on Schedule 14D-9" with the SEC.

And we can't wait. Maybe the biotech will raise its asking price. And why not? This is poker, after all.

(Image courtesy of flickr user fhwrdh through a creative commons license.)

Who's Afraid of REMS Marketing Limitations?

Some coincidences can be very instructive and tell you a lot about the future.

RiskMAPs & black boxes don't necessarily spell doom

If Genentech’s current experience with its omalizumab (Xolair) allergic asthma therapy is any model, FDA's new risk minimization action plan (RiskMAP) authorities don’t look like necessarily a bad thing.

The safety issues facing the drug--an expensive therapy at the root of Genentech's recent acquisition of partner Tanox--were troubling, and resulted in a black box warning proposed in February by FDA and updated earlier this month.

Almost to the minute as the House of Representatives wrapped up its version of the FDA revitalization act (user fee reauthorization and drug safety reforms) last Wednesday evening, Genentech was explaining to a small group of financial analysts that one of the prominent, new regulatory powers being granted to FDA by Congress may actually be a boon to a threatened Genentech brand:

11 July, 6:00 PM at the Capitol: The House halts its truncated debate on the FDA Amendments (HR 2900), only one representative (New York Democrat Maurice Hinchey) speaks out against the well-managed bill. A final one-sided roll-call (403-16) passed the bill at 8:29 PM.

3:00 PM in South San Francisco: Genentech product development president Susan Desmond-Hellmann (right) tells a conference call on Genentech’s second quarter results that the company’s adoption of a new RiskMAP for Xolair will be a stabilizing event for the product and good for its continued growth. (Indeed the product's sales have been growing since the initial FDA warning anyway: Xolair sales were up 17% to $111 million in the first quarter when the safety alert was announced and up 14% in the second quarter to $120 million while Genentech and FDA were working out the specifics of the RiskMAP. The accepted plan was announced on July 2.)

Asked to comment on the commercial impact of the RiskMAP, Desmond-Hellmann characterized the company’s dealings with FDA and creation of a new safety program as a very positive effort. She said that the RiskMAP would help Genentech balance the needs of a very sick patient population with “a wish to protect them from adverse events.”

But RiskMAPs or REMS (as they are being called in the new legislation) have been signaled out by critics of the new legislation as one of the more threatening aspects of FDA’s new safety armentarium. An informal short-hand for describing the new authorities has already developed in pharma circles: the RiskMAPs allow FDA to “inform, nag and nudge, and impose limits.”

Not to Desmond-Hellmann or Genentech. Noting that many of the analysts might not be familiar with the procedures “because they are relatively new,” she portrayed the RiskMAP as a good way to work with FDA to supplement traditional labeling and provide more guidance to the medical community.

Both the Senate and House drug safety bills will make REMS more prominent by giving FDA more explicit authority to require extensive programs to alert doctors and patients to problems with new or already-marketed drugs. That authority includes requiring special messages to the medical community and patients, safety messages in ads, limited access restrictions, and follow-up surveys, registries and closer product surveillance.

Lets break down the elements of Xolair's RiskMAP:

Black Box Warning: The most onerous part of program is the box warning at the top of Xolair’s professional labeling.
Patient Medication Guide: Pateints are to be given a brochure starting with a direct mention of the analphylaxis risk before each injection.
Patient observation after injection: The RiskMAP stresses that physicians should keep patients in their offices for an adequate period of time after administration of the shot to watch for a reaction. FDA doesn't specify a waiting time but patients generally wait about two hours already, according to a 2005 study by Genentech's Xolair marketing partner Novartis.
Follow-up surveys: Genentech will follow-up with doctors administering the drug (mostly allergists and pulmonologists) and with patients to find out how the educational materials are working. In effect, the surveys just act to keep Genentech and Novartis more closely in front of the doctor and tied to the patient.
Two post-marketing studies: One will look for a skin test for use with Xolair to try to address the unpredictable nature of the side effect. This is an obvious step that the company would have likely undertaken on its own at the first sign of the increased rate of anaphylaxis. The second test is a version of closer product surveillance through an creation of an observational repository of cases of hypersensitivity reactions associated with Xolair and appropriate control cases. Again, this is a reasonable portective move to assure that the company will not be left at the mercy of FDA’s adverse event reports in the future.

Overall, the Xolair RiskMAP looks like a sound product protection plan that actually cements the company’s position with providers and assures that the product will be restricted to a very sick group of patients: a group which justifies the current high cost of the treatment. If FDA’s new authority makes more companies adopt plans like this, the industry could be headed into a period when postmarketing problems become resolvable and not the cause of sudden product withdrawals.

DotW: Titanic Meets Iceberg

Titanic, Meet Iceberg. Iceberg, Meet Titanic.

Just what did these two men say to each other on Monday at the press conference announcing their $68 billion cash-and-stock tie up? Readers weighed in with some creative suggestions, including the correct pronunciation of the new merged company's name. "Let me help you...it's pronounced FI-ZER," wrote one of our loyal readers. It was tough to choose the winning-est caption for this photo--anything IS better than the corp speak that accompanied it--but at day's end this Blogger was quite taken with the reference to the storied sinking ship. (Congratulations, "Anonymous"--if that's your real name--you win!)

Will historians look back on Jan. 26 as the date titanic Pfizer started its slow slide into the debths of non-existence? We aren't sure. Debate continues to rage over the wisdom of the deal and the ability of the mega-merger to bridge the chasm of patent expiries. (You can see ongoing coverage of the deal from "The Pink Sheet" here and here and here, as well as here at IVB.)

Another frequent topic of conversation--and of no less import--what to call this new premier biopharma? Wy-Pfi remains a popular and humorous choice. Certainly Pfieth doesn't exactly trip off the tongue, and it's first syllable connotes distaste or disapproval--or at least a big ugly Giant. (Wait, MAYBE it is a fitting name after all.) Wyeth employees are rumored to prefer "Wyzer". That might be the wiser course of action, especially as Pfizer woos some top-notch execs such as vaccine guru Emilio Emini to stay on at the new firm.

But Kindler and Poussot were be no means the only newsmakers this week. Clearly disgruntled that Pfizer pushed its name off the front page of the WSJ--okay, there were other reasons like pending Avastin trial data--Roche made headlines with its openly hostile, lower bid for Genentech. Not surprisingly, Genentech responded to Roche's salvo with a resounding "No" and followed up with a "Nein" and a "Non" just to be sure the Swiss pharma got the message. (See below.)

On the clinical front, Takeda finally experienced some good regulatory news. Despite a missed PDUFA date, the company's Kapidex, a follow-on to the GERD-treatment blockbuster Prevacid, won regulatory approval on Friday. The news came in the nick of time: Prevacid loses patent protection later this year.

This week also brought good news for Lilly and Daiichi Sankyo. As "The Pink Sheet" Daily reports, the two pharmas scored big with the FDA heading into their Feb. 3 advisory committee meeting on prasugrel. In briefing documents to the Cardiovascular and Renal Drugs Advisory Committee, FDA said that prasugrel's strong cardiovascular efficacy profile outweighs its risk of bleeding--largely putting to rest concerns that multiple delays during the NDA review would prevent approval. The news defininitely off-set the pharma's somewhat lackluster earnings.

Speaking of earnings calls, Amgen's was interesting for it's all-denosumab-all-the time undertones, which will likely swell into overtones given the dearth of products in the Big Biotech's pipeline. (Putting even more pressure on denosumab, company execs signaled that disappointing data associated with the phosphate binder and Renagel competitor AMG 223 warranted a "range of options for the development of this molecule rather than pursuing it by ourselves.") AMG 223 was acquired in the $420 million purchase of Ilypsa in 2007--not money well spent, we guess.

As you take a breath and try and catch up on the week's news, we are here to help. Time for...

Roche/Genentech: Remind us never to play poker with Severin Schwann. The man cut his teeth on hostile deal-making when he launched a months long pursuit of the molecular diagnostics maker Ventana Medical Systems in 2007. That courtship had a happy ending--the deal turned friendly after Roche finally upped its price 19%. But Schwann is playing a much trickier game with this latest hostile bid for Genentech, which requires Roche to persuade at least 80% of the biotech's minority shareholders of the deal's value if the Swiss Pharma is to prevail.

Not only could shareholders reject this latest offer, forcing two marquee investment banks to assess a fair value for Genentech that Roche can either accept or walk away from, there's a serious risk that this heavy-handed move will alienate the top-flight Genentech talent Schwann and his team have worked so hard to keep.

While risky, the $86.50 offer, which is 3% lower than the price Genentech rejected last summer, was intended to send a clear message to Genentech execs to return to the negotiating table or face the potential of an even smaller future bid. “We are disappointed that the discussions over the last six months between Roche and the special committee of Genentech have not produced a negotiated agreement,” Roche chairman Franz Humer said in a statement. “We feel it is now time to give the Genentech minority shareholders the opportunity to decide on our offer.”

The pharma is in a race against time: it would prefer to bring negotiations to a conclusion ahead of the release of widely anticipated data associated with the adjuvant use of Avastin in colorectal cancer. (Indeed, Genentech may have provoked Roche's gambit when it issued news last week that it anticipated trial data as soon as mid-April.) If the data are positive, many analysts expect Genentech's share price could skyrocket into the triple digits, which would add considerable cost to the deal.

Especially given the current cost of debt. Roche hasn't said for sure that it's lined up the money to do the deal. But others have reported that the pharma intends to use $14 billion of its own cash, financing the remaining $28 billion with a combination of commercial paper, bonds, and traditional bank financing. In July, sources say the original cost of debt would have been around 4%. But it’s now “at least 6 percent and could be even higher given the terms Pfizer got for Wyeth,” says a knowledgeable financier who spoke with IVB on Friday afternoon.

Moreover, Pfizer’s recent agreement to buy Wyeth for $68 billion may add to Roche’s pressure as banks may have a limited appetite for backing additional large pharmaceutical deals.

Many expect Roche to sweeten this latest offer in the ensuing weeks. But for every dollar per share Roche increases its current offer, it needs to come up with roughly an additional $500 million. The key question is how much higher is the Swiss Pharma willing to go?

Wyeth/Pfizer: Okay, so we covered this deal in last week's edition but we would be remiss if we didn't at least mention it again. (Let all our top-notch analysis go to waste?) As we write in the issue of "The Pink Sheet" due out Monday, with Wyeth, Pfizer gains a levee to buffer the encroaching storm. The deal could set the stage for more industry consolidation to follow as other big pharmas seek to weather their own patent challenges. Certainly it provides one strategy for covering up bad news associated with off-label drug use.

But whether a mega-merger will solve Pfizer’s problems remains to be seen. Although the move helps position Pfizer as a future biologics and vaccines Prevnar powerhouse, the addition of Wyeth doesn’t position Pfizer for near-term growth, but rather will allow the company to maintain its 2008 revenues and earnings-per-share levels through 2012. The company is forecasting $70 billion in combined revenues in 2012, although Wall Street’s consensus estimates have been about $4 billion lower. With that in mind, investors will have to keep an eye on the horizon toward the long-term.

“We’re obviously very focused on here and now and 2012, but this is a very long-term business, and we believe this deal positions us extremely well for long-term shareholder value creation,” CEO Jeff Kindler said during a same-day conference call. (But Jeff, what about the dividend?)

Wyeth partners could feel the pain of the merger sooner rather than later. Kindler indicated Monday that the company would move quickly to integrate the two companies. After months spent righting its own house, that likely means Pfizer aims to slot pipeline programs into its six invest-to-win areas. For Wyeth partners pursuing programs that fall outside this world-view, especially in de-prioritized areas such as CV and obesity--it's likely to be sayonara. Already one would-be partner has felt the axe. On Monday, Crucell announced that Wyeth had broken off acquisition talks in light of the Pfizer's offer.

Astellas/CV Therapeutics: Already partnered on the myocardial perfusion imaging agent Lexiscan, the two companies had been talking behind the scenes for more than a year about partnering in some manner on CVT’s growing angina drug, Ranexa. Then, on Jan. 27, the Japanese pharma went against its country’s traditional business practice of seeking consensus and publicly revealed its $1 billion bid to buy CVT for $16 a share. Astellas’ public letter to the CVT board noted Astellas first offered to buy the Palo Alto, Calif., biotech last November, but was rejected. The letter asserts that Astellas has the U.S. presence and sales infrastructure to help Ranexa, which posted $30.3 million in U.S. sales during third-quarter 2008, reach its market potential and asked that the two firms “work together … to reach a mutually beneficial transaction.” CVT issued a statement Jan. 28 acknowledging that it had declined Astellas’ previous offer, but adding that its board would “again review developments in the context of the company’s strategic plans and the long-term interests of its stockholders.” To be sure, that “context” will mean seeking a higher price for CVT. While Astellas’ offer represented a 41% premium over CVT’s share price at close of trading on Jan. 26, and a 69% premium over the previous 60-day average, the biotech’s shares jumped to a high of $16.68 on Jan. 27 and remained in the $15 range as the week progressed. Cowen & Company analyst Eric Schmidt predicted that Astellas would land CVT eventually, but at a share price ranging between the high teens and low 20s--Joseph Haas and Melanie Senior.

GSK/NeuroSearch: GlaxoSmithKline and NeuroSearch, which have been drug-development partners since well before the merger that created the current GSK entity, extend their five-year drug-discovery collaboration led by Phase IIb depression and ADHD candidate GSK372475. Denmark-based NeuroSearch gets an undisclosed upfront payment to continue the alliance, which now includes an expanded portfolio of novel compounds. NeuroSearch says it could realize more than $1.2 billion in milestones under the deal, along with double-digit royalties on any products that reach market. While Glaxo Wellcome collaborated with NeuroSearch in the 1990s on potassium-channel central nervous system compounds and anti-depressants, the companies’ more recent work has centered on triple monoamine reuptake inhibitors that GSK in-licensed in 2002. The NeuroSearch work was moved into GSK’s Center of Excellence for External Drug Discovery after it was launched in 2005. CEEDD programs like this one enable GSK to expand its pipeline while shifting more responsibility and risk onto its partners – NeuroSearch performs discovery and research of the GSK-partnered programs through proof-of-concept, at which point GSK takes over development and commercialization of the compound. With ‘372475, GSK expects data from two Phase IIb studies on the compound and to make a Phase III go/no go decision during the first half of this year. During 2009-2010, NeuroSearch says it will earn about $90 million from the partnership between the upfront payment and milestones. While the collaboration mainly will focus on joint development of candidates advanced during the previous five years, NeuroSearch says, the expanded deal also includes five preclinical compounds along with several qualified lead compounds that will move into preclinical development by mid-year. The deal also gives NeuroSearch a share-put option to sell up to $25.6 million of its stock to GSK at market price in four equal tranches through November 2010--Joseph Haas and Melanie Senior.

Deerfield/NitroMed: After raising its offer a second time, Deerfield Management’s “black knight” bid to acquire NitroMed, and forestall what it saw as dilutive transactions with Archemix and JHP Pharmaceuticals, appears to have succeeded. On Jan. 27, NitroMed announced it had entered into a merger agreement with Deerfield – which owns 12 percent of its stock – after the investor increased its offer to $0.80 a share. However, the agreement includes a “go shop” provision enabling NitroMed to seek a better offer through Feb. 26. NitroMed said it will actively solicit offers during that period. If a better offer doesn’t materialize, the merger is expected to close in April. At this latest offer price, the question remains whether this deal amounts to an exit for Deerfield, especially with NitroMed’s poor-selling BiDil, a heart-failure drug for black patients, still in the fold. BiDil sales totaled just $7.8 million for the first half of 2008. Deerfield made its initial bid after NitroMed announced two deals last fall, one to sell BiDil to JHP for roughly $26 million, and the other to reverse-merge with private aptamer-focused biotech Archemix. The agreement with Deerfield required NitroMed to terminate the JHP and Archemix deals, resulting in termination fees totaling $2.4 million. The reverse merger would have brought about $60 million in cash – post sale of BiDil – and a NASDAQ listing to Archemix, which had abandoned plans for an IPO early in 2008. Deerfield clearly was unhappy with the merger terms, which gave NitroMed shareholders only a 30 percent stake in a highly illiquid company. Managing Partner James Flynn said a review of other biotechs with Phase III assets showed many of them were valued lower than the theoretical $100 million value the reverse-merger would create for Archemix. Archemix, meanwhile, is pursuing business as usual as a still private enterprise, focusing on advancing its lead aptamer, ARC1779, through Phase IIb clinical trials. Despite losing out on NitroMed’s cash, the company says it has sufficient money to support operations through the end of 2010, thanks in part to a large R&D deal inked with GSK late in 2008--Joseph Haas.

Ipsen/Novartis: In a deal that may reflect increasing sales and marketing clout for regional players — or just the efforts of one big pharma to reduce its overhead in one strategic market — Novartis increased its anti-hypertension drug co-promotion work with Ipsen on Jan. 28. Paris-based Ipsen has promoted Diovan (valsartan), the world’s top-selling hypertension therapy, in France since 2003. It also helps market the product in Europe, along with Nisisco, a combination drug that includes hydrochlorothiazide. The newly expanded agreement calls for Ipsen to sell Exforge, another anti-hypertensive combining valsartan with Pfizer’s amlodipine, in France. Novartis reported 2008 worldwide sales of $406 million for Exforge, which gained FDA approval in 2007. With Ipsen well entrenched in France’s primary-care market, this deal appears to position Novartis to grow its hypertension franchise further through Exforge--Joseph Haas.

Helsinn/Sapphire: Switzerland’s Helsinn apparently picked up privately-owned cancer supportive care group Sapphire Therapeutics for an (undisclosed) bargain. The deal adds three clinical candidates to Helsinn’s pipeline: Phase II anamorelin, an oral first-in-class cancer cachexia treatment, an intravenous compound for post-operative ileus, also in Phase II, plus a Phase I oral drug for opioid-induced bowel dysfunction. It also provides the group with “a direct presence in the major pharmaceutical market of the world,” CEO Riccardo Braglia said. Reflecting the sorry state of many private biotechs, there were reportedly no other interested buyers. Moreover, Sapphire’s VC investors likely were eager to exit from a group that already had re-invented itself once. Bridgewater, N.J.-based Sapphire was launched in 2000 as Rujevenon, with a focus on anti-aging therapies and $12 million in private financing. By 2004, it had changed its therapeutic focus to small-molecule cancer and metabolic drugs, and raised more than $37 million in a Series B financing led by SV Life Sciences--Joseph Haas and Melanie Senior.

DotW: The Rumorville

Pssst! Did you hear that Elan is up for sale? Probably, since it's hardly a secret that the company has been up for grabs since the start of the year, when the Irish biotech hired Citigroup to conduct a review of its business.

On Wednesday, CEO Kelly Martin added fuel to the rumor fire when he spoke at a Goldman Sachs healthcare conference, suggesting a strategic transaction "in the near term" was in the offing. "A lot of people are interested in talking to us," Martin said.

But as we all know talk is cheap. And talk certainly hasn't resulted in a deal with either BMS or Pfizer to date--two pharmas that have in recent weeks been rumored buyers of the perpetually troubled company.

Has Martin's bravuro performance assuaged investors or Elan's board? It doesn't look like it. On Thursday, Reuters reported Elan decided to forgo the proxy fight and nominated two dissidents to the board. (Perhaps Elan's board learned something from the recent experiences at Amylin and Biogen Idec?)Interestingly, Jack Schuler, cofounder of Crabtree Partners and a vocal critic of Martin, is one of the candidates. The annual meeting, scheduled for July 16, promises to be very interesting doesn't it?

What other rumors surfaced this week? Sanofi board members may have nixed a big acquisition according to Les Echos, after major shareholders rejected the planned purchase as too risky. Or maybe not. A Sanofi-Aventis spokesman said the company "formally denied" that a major acquisition project in the U.S. had been presented to the board. (Denial is a river in Egypt, right?) Wasn't it just one week ago that Sanofi's stock was on an upswing as people speculated the company had its eyes on partner Merck's shares of the animal health biz Merial?

And now that the FTC has come out against the 12-14 year exclusivity period for follow-on biologics, rumors are, of course, flying about what's actually feasible. Still think it's possible to get a proposed pathway for FOBs into the healthcare reform legislation happening this summer? According to "The Pink Sheet" DAILY, FDA is likely to be a critical player in this ongoing drama's next act. Will the agency testify before Congress or write a letter supporting a FOB approval pathway? Alternatively, will the agency adopt a cautious tone, much the way the Bush FDA chief medical officer Frank Torti did last September when he warned in a letter to Congressman Pallone of serious questions associated with the approvability of follow-on biologics? (Washington types, what are you hearing through the grapevine?)

Do you have Clorox wipes, Purell, and surgical masks handy? (For you DIY types, eHow.com notes that while pre-fab surgical masks exist, "sometimes it’s more fun to make your own." Somebody has got to get out more.) After weeks of rumors, the WHO finally pulled the trigger and raised the pandemic alert level to 6 (on a six-point scale), the first time in 41 years. What does the new alert level mean? Nothing radically different in the US, where public health specialists and the CDC put pandemic preparations on the front burner some time ago. (I know. You were secretly hoping for an updated color coded warning system ala the Homeland security threat notices weren't you?)

As you mull the events of the week, here are some items that are far from rumor. Your "just the facts, ma'am" analysis, courtesy of IVB's resident Sgt. Friday and...

Merck/Xenon Pharmaceuticals: So much for being distracted by its take-out of Schering-Plough. This week, Merck announced a small deal with privately-held Xenon Pharmaceuticals in the CV space. In what is now becoming de rigueur in the industry, this pact is a low money down (but certainly better than no money down), option-style arrangement that initially provides Xenon with research funding related to the development of its small molecule compounds. Xenon will perform validation studies using its clinical genetics platform, as well as drug discovery for those targets selected by a joint steering committee. Under the terms of the agreement, Merck has the option to exclusively license targets and compounds from Xenon for development and commercialization. In return, the biotech also stands to receive option-exercise fees, and milestone payments tied to research, development, and regulatory progress. Unlike other biobucks deals, milestones aren't sky-high: totaling up to $94.5 million for the first target and up to $89.5 million for each subsequent target selected for drug discovery. In addition, Merck will pay Xenon undisclosed royalties on sales of products resulting from the collaboration. Of course, Xenon retains the right to develop and commercialize certain compounds for which Merck does not exercise its option. Simon Pimstone, CEO of Xenon, waxed poetic in an over-the-top statement announcing the news. "We are very excited to be collaborating with Merck to define new therapeutics in the area of cardiovascular diseases," he said. "With this deal, Xenon is continuing its strategy of risk mitigation by select partnering, while retaining ownership of other programs." (What else was he going to say? "We wanted more money upfront, but we couldn't get it." That would have gone over well with Xenon's existing backers, which include MX Associates, LipoteRx, and Invesco Private Capital.) In truth, the deal probably is a big step forward for Xenon, which hasn't raised money since it pulled in $31 million in private financing in 2006, and hasn't inked a deal since late December of the same year, when it signed a pact with Roche worth $7 million up-front for its anemia inhibitors. Merck, of course, could use an infusion of innovative CV medicines. The drug maker suffered a major setback last week when it announced that preliminary results from the Phase III study of its highly touted rolofylline for acute heart therapy failure did not meet primary or secondary efficacy endpoints. In a note to investors, Sanford F. Bernstein analyst Tim Bernstein noted the setback represented a "psychological negative for Merck." (You think?)

Genentech/Bayhill Therapeutics: Genentech announces a deal and the whole world sneezes. Not really, but we do sit up and take notice. Genentech is definitely not one of the most active deal-makers in the industry; it's focus is typically on access to new technologies or compounds that bolster it's on-going work in cancer. For examples, recall last November's arrangement with Thermo Fisher Scientific for RNAi design and the October 2008 pact with GlycArt. Moreover, this is the first in-licensing deal announced since Roche took the big biotech private, providing an early glimpse in what to expect from Genentech biz dev now that it is a wholly owned subsidiary. (You'll be able to glean even more if you read the upcoming June IN VIVO.) As is typical for most BD deals involving Genentech (unless it's Genentech being bought), there's not a lot of money on the table: just $25 million and that includes an equity stake in the smaller biotech. (There are, of course, the requisite bio-bucks, which could bring privately-held Bayhill another $325 million in the product hits certain sales and regulatory milestones.) Interestingly the deal, which is focused around a Phase I/II compound called BHT-3021, seems to move Genentech into a new direction: type 1 diabetes. '3021 is a DNA-based immunotherapy designed to protect against an inappropriate immune response that triggers the destruction of insulin-producing islet cells. In an interview with "The Pink Sheet" DAILY, Genentech's head of business development, Joseph McCracken explained why the Big Biotech was interested in the compound: "The mechanism of action suggests that it could actually impact the underlying cause of type 1 diabetes, truly be disease-modifying, [instead of] just treating symptoms," he said. Under the deal, Bayhill will complete ongoing clinical work with '3021, to be reimbursed by Genentech. At that point, Genentech will assume all development, manufacturing and commercialization work for the compound, advancing '3021 through Phase II before handing the program over to a joint global development organization that will be managed by execs coming from both Genentech and Roche. Apparently Genentech had been interested in Bayhill's technology for quite some time--long before Roche's bid for the company came to fruition. McCracken's team brought the deal to Roche, explained why it was excited about the science behind '3021 and made the case that Genentech was in position to close the deal. The money should help Bayhill fund the rest of pipeline, including lead program, BHT-3009, a Phase III candidate for multiple sclerosis, and may spark additional deal-making. (If Genentech thinks the immunotherapy technology is a "go" will other Big Pharmas comes to the same conclusion?) That's important--the small company tried to go public last year but ultimately pulled its IPO due to market conditions. To date, it's raised an estimated $63 million in venture funding from backers including, Morgenthaler Ventures and Lilly Ventures.

GlaxoSmithKline/Shenzhen Neptunus: How many buzz words can we include in the write-up of this deal? This week's joint-venture with China-based Shenzhen is noteworthy despite its modest deal size because it seems to bolster the Big Pharma's vaccine distribution network in an important but opaque emerging market at a time when there is renewed fear about the global spread of swine flu. (How's that?) In addition to a cash infusion totaling roughly $30 million, GSK will provide the joint-venture with leading-edge vaccine technology and equipment. Stephen Rea, a spokesman for GSK, told sister publication PharmAsia News that the J/V should be operational by next year. "It might take a couple of years to begin producing vaccines at the joint venture," he explained, noting that the initial focus will be to produce a seasonal flu vaccine, but the outpost could also be used to generate a defense against swine flu. The J/V seems likeley to become a lifesaver for Shenzhen Neptunus, which produces vaccines, and recombinant human proteins, including interferon and interleukin-2. The firm has been fighting to stay afloat, hit hard by earnings losses, and the halt in March of production of its influenza vaccine. In a report submitted to securities regulators at the Hong Kong Stock Exchange--where the firm's shares are listed--Neptunus execs stated that the biotech outfit posted a loss of RMB 5.089 million for the first quarter of this year, compared with a loss of RMB 1.498 million for the corresponding period of 2008. Neptunus also revealed in the report that the Good Manufacturing Practices certification for its interleukin-2 facility had expired, and that to meet higher regulatory standards established by China's State FDA in 2008, they would be forced to make a significant investment into upgrading production.


CSL/Talecris: Ever since the Federal Trade Commission filed a complaint in late May to halt the proposed $3.1 billion deal between CSL and Talecris, a break-up has seemed in the cards. Realizing it didn't have the requisite hand to call FTC's bluff, CSL folded this week, shelving its planned acquisition of P-E backed Talecris, saying it was not worth the money and time to battle the agency in court. In early June, CSL's CEO Brian McNamee offered strong words in protest to the FTC's complaint that the proposed tie-up, which would have created the largest maker of blood plasma products, was not anti-competitive. But despite initially signaling that it would challenge the commision in court, CSL had a change of heart in the intervening week, announcing June 8 that it would pay Talecris a $75 million break-up fee. "CSL's Board of Directors did not believe that entering into a protracted litigation process with the FTC, with its inherent risks, substantial costs and lengthy distraction of CSL management and staff from planning and running our businesses would be in the best interest of our shareholders," said McNamee. That $75 million is likely cold comfort for Talecris and its private equity backers, Cerberus Capital Management and Ampersand Ventures. Back in 2005, Cerberus and Ampsersand put up the capital necessary to buy Bayer's plasma business and found the company, which was originally known as NPS Biotherapeutics. Talecris, which has roughly $1.4 billion in revenues, markets Gamunex, an intravenous immunoglobulin. The company was in the throes of attempting to go public when it pulled its IPO because of CSL's lucrative $3.1 billion offer last August. Because of the specialty pharma's lucrative revenue stream, the company is still a viable acquisition target but the question is who might be interested in picking it up. Bayer and Baxter, the other major players in the plasma market, are out of the running since they would generate the same FTC concerns as CSL. We suppose another private equity group or a big pharma company looking to diversify might make a bid. Alternatively, the company could be one of the first to test the IPO waters.

Image by flickrer Pricklebush used with permission through a creative commons license.

Genentech/Roche: A Big Pharma Vet Weighs In

Roche's offer to acquire Genentech in full has got everybody talking. The most frequent subject of discussion in conversations we've had with biotech and pharma leaders is culture. What impact will Roche's deal have on Genentech's biotech roots and culture? To read our initial take, click here.

One former head of R&D at one of the largest pharmaceutical companies in the world who now works at a biotech weighed in.

"Roche and Genentech have for a very long time said that one of the key to the success of Genentech is Roche’s ability to leave it alone and continue to function in a biotech model. So, I think there are two questions," he says.

"One, is that Genentech has now grown into the size of any respectable major pharma company. Is it really still functioning in a biotech model at all? Second, will Roche have a different level of control over Genentech when it owns all of it than when it had when it owned a majority stake?"

The implicit answer to the first question is a clearcut, no.

"That second piece is in Roche’s control. They can either choose to change how they govern or just leave it alone. Frankly, I think the success of Genentech has been simply outstanding and I hope that Roche allows them to function [as they always have]."

Please keep your comments on the deal's impact on culture coming as this will be a major theme as an increasing number of biotechs get snapped up by large pharmaceutical manufacturers.

There have been a number of interesting angles to come out of the most recent proposed Genentech/Roche combination.

One theme that intrigued us in the wee hours of the morning when the deal was first announced was the nationalistic/protectionist angle of a large Swiss company taking full control of an American company, which serves as the model for the biotech industry. We've written a little about this before. To read our previous stories, click here and here.

We even wondered whether this deal triggered a formal national security review (remember Dubai Ports?) by the Committee on Foreign Investments in the US (CFIUS). The committee is made up of representatives from the State Department, Homeland Security, the Office of Science & Technology Policy, the Department of Defense, the Justice Department, the Council of Economic Advisors, and the US intelligence agencies.

We asked one of the foremost experts on the issue if it does? He says it doesn't. The only way the deal would require approval from the committee were if Roche was "gaining control through acquisition." Roche already owns 56% of the company.

Nevertheless, the patriotic angle shouldn't be altogether discarded. For example, when Roche was readying to launch it's follow-on EPO Mircera (the courts eventually had something to say about that plan), Amgen quickly built a case that a Swiss company was going to be entering the US market with a higher priced product, which would gouge Medicare and American taxpayers. To read about it, click here.

Even though the deal won't trigger a national security review, Genentech could use the protectionist argument to defend itself in a public relations fight if it decided to get down and dirty.

Do you think there is a legitimate nationalistic defense in this case? Or is this just globalization at its finest?

The Lucentis/Avastin Investigation: “The Story is Far From Over”

If you thought the battle over Lucentis and Avastin was confined to FDA, CMS and NIH, you’re wrong. Now Congress is jumping into the fray in significant fashion as is typically the case when the government feels they are overpaying for something.

On October 18, Senate Special Committee on Aging Chairman Herb Kohl (D-Wisc.) sent a letter to Acting CMS Administrator Kerry Weems asking why Medicare was paying a steep premium for Lucentis when the “chemically similar” cancer drug Avastin can be used off-label for age-related macular degeneration at a fraction of the cost.

The letter was in response to Genentech’s decision to cut off distribution of Avastin to compounding pharmacies, which are responsible for creating micro-doses of the drug that are tolerable in the eye. For more on Genentech's strategy, see this feature in the December RPM Report.

Kohl asked two questions of CMS: 1) How much has Medicare spent on the two drugs since 2005?; and 2) What measures has CMS taken to reduce expenditures on Lucentis, such as using Avastin?

Now things are starting to heat up. On November 7, 14 and 16, Kohl launched a formal investigation by sending two letters to FDA Commissioner Andrew von Eschenbach asking for all documents related to FDA field inspections and one letter to Genentech president of product development Susan Desmond-Hellmann, respectively. Kohl asked Genentech for essentially any document related to the Lucentis/Avastin dispute, from the company’s decision-making to meetings with FDA, NIH and CMS.

“We’re trying to figure out what really happened,” says one Senate staffer involved in the investigation. The committee is receiving “conflicting stories” from FDA, CMS, NIH, Genentech and the compounding pharmacies, the staffer says.

The Aging Committee has interviewed officials from Genentech and received documents from the government agencies. However, investigative staffers are still waiting for more evidence to come in.

The investigation is focused on several questions, according to the Senate staffer. First, “what happened during the FDA inspection” of Genentech’s San Francisco facility and the reason for the destruction of several lots of Avastin at the site.

Second, the staffer says, Genentech had agreed to take part in the National Eye Institute-sponsored head-to-head CATT study of Lucentis and Avastin if the design were changed to focus more specifically on safety and the trial was extended to allow for longer follow-up. “This summer, Genentech had a change of heart,” and the committee wants to know why the company changed its mind and chose not to participate in the trial and charge the government retail price for Lucentis.

Third, there was “initial concern” that Health & Human Services General Council Daniel Meron may have been unduly influenced to reject designating the CATT study a demonstration project in order for CMS to fund the trial. Then-Acting CMS Administrator Leslie Norwalk had approved the demonstration project.

The Office of the General Counsel justified its decision by saying it was obvious the demo project would improve the quality of the clinical trial and would benefit from having Medicare beneficiaries participate in it, therefore a demonstration project was not needed to prove it.

As a result of the CATT study delay, Kohl is developing legislation that gives CMS authority to waive co-pays for patients participating in government-funded clinical trials and comparative-effectiveness studies. Co-pays present a study design challenge because beneficiaries can be unblinded to what drug they are receiving because it represents a percentage of the total drug cost. In other words, the higher the co-pay, the more expensive the drug.

The Senate staffer says this type of situation occurs routinely with head-to-head studies but the CATT study is the “most egregious” example.

The Senate Special Committee on Aging will wait to receive more documents over the next several weeks, and after review, decide whether to hold an oversight hearing. “We have enough to hold a Q&A hearing right now, but we want to wait until we have all the documents,” the staffer says. “The story is far from over.”

The Secret To Keeping Genentech Alive Is In The Ties

The suits at Roche were clearly doing their best to channel Genentech's biotech vibe during a recent R&D update for investors, the first since the big pharma acquired Genentech outright last year. From the venue (the splashy New York City restaurant Cipriani instead of a hum drum midtown hotel) to the menu (calmari! braised fennel! meringue cake!), Roche took every opportunity to remind investors of the excitement surrounding the annual R&D meetings Genentech used to host back when it was still independent.

Genentech's R&D previews were highly regarded, hotly anticipated meetings, the equivalent to the drug industry of what a Marc Jacobs runway show is to Fashion Week.

And speaking of fashion, perhaps most notably missing from the day (Art Levinson aside) was ties. Not one of the nine presenting senior managers wore one, though only long-time Genentech researcher Richard Scheller was brazen enough to forgo the jacket too. (And yes, the entire cast was male).

We suspect the story behind the missing ties is actually quite straightforward (not to mention sitting in a memo in Severn Schwan's inbox). But we suspect the story goes something along the lines of that ties bring to mind highly-paid, smooth talkers and savvy marketers, not endearing researchers toiling day and night at the lab bench. Another even more obvious theory is that parading Genentech executives on stage in ties would have been more uncomfortably conspicuous than having Roche executives take them off.

In that regard, Scheller was probably being somewhat honest when he offered up his own answer to the pressing question: "I don't own one, so people didn't want me to look out of place."

Whether Roche's presentation March 18 will turn out to be style over substance remains to be seen. The company certainly has a pipeline of interesting opportunities, from a first-in-class BRaf inhibitor for metastatic melanoma to a high-risk/high-reward cholesterol drug. You can read all about Roche's mid- to late-stage pipeline in "The Pink Sheet." But Roche didn't unveil any surprises March 18 either, and of the 16 new molecular entities Roche is planning to file in the next five years, most are planned for the later end of the timeframe. This year is shaping up to be a quiet one for Roche in terms of new drug launches.

There's a lot riding on future pipeline successes; Roche invested close to CHF 10 billion in R&D in 2009, and is expecting to invest only slightly lower levels this year. Just as importantly, Roche folded in one of the industry's most lauded R&D engines when it acquired Genentech in a hostile fashion, and the company needs to prove it can keep Genentech running even within the confines of well-oiled big pharma machine.

If Roche can deliver on its promises, then maybe we won't have time or interest in debating fashion when we hear about the pipeline next year. Or they could always add a woman to the senior management lineup – that alone would up the fashion ante, and be nice for plenty of other reasons.

– Jessica Merrill