DotW: Changin' Times

A quick review of the week's news suggests change is afoot. The Dow dropped below 11,000; the second coming of the Jesus phone occurs today (not that Apple needs press from us); and three pharma companies have teamed up to form a for-profit biotech called Enlight Biosciences to develop drug discovery enabling technologies. What next?

For starters, the FDA seems determined to play nice, admitting this week that although epilepsy drug come with the potential for suicide, that isn't enough to warrant a so-called black box warning. Is this the same safety conscious FDA we've come to know and love? Yes, apparently concerned that a warning label might cause doctors and patients to abandon treatment, an advisory committee voted 14-4 against adding the dreaded black box. (Almost certainly, they hadn't overdosed on Chantix.)

In another sign of its new openness, our august regulatory body has also decided to do away with the oxymoron, "approvable letter," which far as we can tell means the exact opposite. The FDA's new stamp of non-approval will be a “complete response” letter that “will describe specific deficiencies and, when possible, will outline recommended actions the applicant might take to get the application ready for approval,” the agency said in a statement. (We are waiting for the "incomplete response letter", but maybe that can't be tied to a PDUFA date.)

And there are shifts on the follow-on biologics front, as Insmed announced results of a study showing bioequivalence between its INS-19 compound and Amgen's blockbuster Neupogen. That could trigger renewed discussion of biogenerics legislation on the Hill. Neupogen, after all, rang up $1 billion in sales in 2007 alone.

Finally, BNet's David Hamilton believes that big changes are afoot at Pfizer, which continues to struggle with the new math of this century's blockbusters. According to Hamilton, "Pfizer is starting to restructure itself into into a marketing-centric, research-light drug company that will most likely be looking for acquisitions in order to restock its depleted drug pipeline." We can but hope. And who knows, perhaps generics--or at least the word diversification--will be part of is mantra. For more on Pfizer's strategy, check out Roger Longman's recent IN VIVO feature. (Coincidentally, Merck KGaA's CEO Karl-Ludwig Kley told the German newspaper Handelsblatt that his company's chemicals division, which makes liquid crystals and specialty chemicals, is 'part of our DNA,' indicating he rules out a sale of the business.)

If true, perhaps Pfizer can dodge Dylan's prophecy: "As the present now will later be past, the order is rapidly fadin'. And the first one now, will later be last. The times they are a changin'" Come gather round people, wherever you roam, it's time for...

Fresenius/APP and Fresenius/Galenica: The German health care products and services company Fresenius gets fearless investor of the week honors for wading into the heparin controversy via a $4.6 billion (at least) buyout of APP, and for following up by acquiring rights to Galenica’s injectable iron product Injectafer—currently “not approvable” at FDA following an advisory committee review that concluded that the drug has a mortality disadvantage compared to oral iron. Of course, there’s a nicer way of spinning things. The APP acquisition gives Fresenius Kabi, a “cornerstone” to build a hospital products pharma presence in the US—and does it at a time when APP is generating explosive profit growth since finding itself as the sole supplier of heparin in the US. Fresenius will be able to ride that wave—though it will also pay more for APP if profits are higher than projected. (You can read the deal terms here.) So far, APP has looked like the hero in the heparin story. The company has also jacked up the price of its product now that is the sole supplier in the US—as much as tripling the price—which could be a risky move given the political attention to the heparin market after Baxter’s catastrophe. (APP defends the price increase in part by noting that its product is still significantly cheaper than any possible alternatives like low molecular weight heparin or Angiomax.) The acquisition, though, may make it less obvious how big a windfall APP reaps from heparin, since its numbers will now be consolidated into the new parent. That could limit its political exposure.

The Galenica deal involves a different division of Fresenius, the dialysis services company Fresenius Medical Care. And the immediate focus is on Galenica’s two marketed injectable iron brands (Venofer and Ferinect). The two companies are creating a joint venture focused specifically on the dialysis market; and in North America a second agreement with Galenica’s partner Luitpold secures the same split responsibilities. Venofer alone is about a $250 million product in the US. And Fresenius will have rights to Injectefer if and when it reaches the market. Despite the regulatory setback, Fresenius says Injectefer “is expected to enhance the treatment of anemia in the dialysis patient population through the application of innovative drug administration techniques.”

Novartis/Speedel: A series of insider stock sales by executives of the Swiss biotech Speedel will add up to the acquisition of the company by its main partner Novartis. On July 10th Speedel said officers of the company, including founder and CEO Alice Huxley, sold their stakes—totaling 51.7% of the outstanding shares—to Novartis at CHF 130 per share. Add to that Novartis’ existing 9.7% stake and the Big Pharma was obliged to make a mandatory public offer to buy the rest of the company’s shares. The acquisition—which values Speedel at about $880 million—is neither unexpected nor particularly expensive, especially in the light of Speedel’s recent stock market decline and the companies’ symbiotic relationship. Speedel in 1999 in-licensed its lead renin inhibitor aliskiren (Tekturna/Rasilez) from Novartis, and Novartis clawed back the drug in 2002 (a 2004 discussion of Speedel’s business model is here). Though successfully approved, the drug has underperformed, putting pressure on Speedel’s stock and disappointing Novartis. That said, the drug remains Novartis’ best post-Diovan strategy (that antihypertensive goes off patent in 2012) and even at $880 million analysts point out that the Big Pharma is essentially tapping the rest of Speedel’s renin-heavy pipeline for free.

Solvay/Innogenetics: We have a winner. Solvay trumped Gen-Probe's hostile bid for Innogenetics with a higher bid of its own, and Gen-Probe has no desire to counter the counter-offer. Analysts widely expected Solvay to up its original April bid for Innogenetics, which was only 5.75 euros a share, when Gen-Probe offered 6.10 euros-a-share in an effort to transform itself into the world's largest stand-alone moelcular diagnostics company. On Wednesday, Solvay announced it would pay 6.50 euros-a-share for the Belgian company--about $361 million--and Gen-Probe decided to take its ball and go home. For Gen-Probe, winning Innogenetics was always a long-shot. The San Diego company, which had 2007 revenue of $403 million and a market valuation of more than $2.83 billion, hasn't done an acquisition since 2003 when it bought Molecular Light Technology for $11 million. Solvay, meanwhile, is a much larger outfit with revenues of roughly $15 billion, and has the economic advantage of making a friendly offer in a stronger currency than the rapidly sliding dollar.

Thermage/Reliant: For aesthetic device companies, where sales and marketing account for the biggest costs and a number of the newer one-product companies find themselves bumping into each other at the physicians’ office, consolidation is the order of the day. Several weeks ago, Medicis purchased Liposonix. Now skin tightening firm Thermage has snapped up skin surfacing company Reliant for $95 million, paid in a combination of stock and cash. Together, these two companies, which offer complementary aesthetic technologies, had $137 million in revenues for the fiscal year that ended in March 2008, according to the press release announcing the deal. The tie-up solves a key problem for Reliant; it was running out of money, having failed to execute the IPO it filed in 2007, perhaps because of its steep post-money valuation, which was north of $200 million. Reliant will also benefit from Thermage’s unique sales model of deploying two separate sales forces, one selling capital equipment, and the other, the disposable tips its devices require. Almost certainly, Thermage’s disposables sales force can help push Reliant’s creams and skin care products.

Lilly/SGX: Lilly receives this week's award for opportunistic acquirer. On Tuesday, the pharma announced a $64 million takeout of its research partner, SGX Pharmaceuticals. Like many other biotechs, SGX has been in a pickle: As of Tuesday July 8, it was trading at a discount to its existing cash reserves--meaning investors believed the company was worth less than the number on its own bank balance. This wasn't always the case, but the company took a hit when its lead project SGX523, a MET inhibitor in Phase I, showed dose-limiting toxicities earlier than expected, and investors fled the stock. With a dwindling bank account and no hope of tapping the public market, SGX had little choice but to sell when Lilly came courting. For more check out this post from earlier in the week.

(A big thanks to fellow Windhover writers Michael McCaughan, Chris Morrison, and Mary Stuart for contributions to this post.)

Heparin Investigation Takes an Ugly Turn for Baxter, Industry

There's nothing like a picture of pig intestines being sorted in China to dramatize the fears that outsourcing is jeopardizing the safety of the US drug supply.

The picture to the right is just one in a series posted on-line today by the Wall Street Journal, showing the first step in the production process for heparin, one of the mostly widely used hospital pharmaceutical products in the US. (You can see the rest of the pictures here if you have the stomach).

You can expect those photos of the heparin production process to show up again, any time someone wants to question the impact of manufacturing outsourcing in the pharmaceutical industry. Like maybe when House Agriculture Appropriations Subcommittee chair Rosa DeLauro holds a hearing on drug safety issues (and especially the Trasylol controversy) February 27.

The photos accompany a lengthy discussion of the investigation into an apparent increase in adverse reactions associated with Baxter's heparin product, which has been recalled in the US. The Chicago Tribune also weighs in with a story including some comments from Baxter CEO Robert Parkinson.

Now, bear in mind that no one knows for sure at this point that the Chinese facility has anything to do with the heparin adverse events. Not that that will make too big of a difference in how much damage the story will do to confidence in FDA, the industry and the drug supply.

First came the embarrassing admission by FDA that it never inspected the plant in China that serves as one raw material supplier for the product in question. That prompted a key overseer of FDA--Michigan Democrat Bart Stupak--to call for the resignation of Commissioner Andrew von Eschenbach.

But Baxter may face some tough questions of its own--at least based on comments made by top agency enforcement officials during a Food & Drug Law Institute conference February 19-20. According to the Tribune, Parkinson says Baxter wasn't even aware that the plant in question was part of its supply chain, since it was a subcontractor to the firm Baxter relied on for bulk API.

David Elder, director of the agency's Office of Enforcement, pointed out that FDA believes it is the responsibility of the finished dose product manufacturer to assure the quality of its products. He was responding specifically to a question about components of medical devices, not heparin. But he pointedly expanded to his answer to include finished dose pharmaceutical manufacturers being responsible for their suppliers.

Deputy Chief Counsel for Litigation Eric Blumberg also discussed the agency's ability to hold individual corporate executives criminally responsible for allowing adulterated products on the market. The authority--known as the Park doctrine after a Supreme Court ruling upholding the principle--allows FDA to file misdemeanor cases against executives even if there is no evidence of intent or even knowledge of GMP violoations.

The principle, Blumberg reminded FDLI, is that an executive has at least the opportunity to prevent a dangerous product from entering the market, while consumers cannot protect themselves from a contaminated drug once it is in distribution.

If Congress does look more broadly at supply-chain responsibility, things could get really interesting.

Both the Journal and the Tribune quote American Pharmaceutical Products Inc. CEO Patrick Soon-Shiong, asserting the advantages of his company's approach to supply chain management. APP is the big winner (if there is one) in the heparin recall, since its product is now the only one available.

Soon-Shiong has been in the news before. APP was the subject of a front page story in the New York Times in 2002 because of its relationship with the group purchasing organization Premier; that was during a time when Congress was looking into GPO practices following allegations by small device manufacturers that they were being shut out of the market.

Before that, Soon-Shiong played a part in the controversy surrounding generic launches of Bristol-Myers Squibb's paclitaxel (Taxol). APP asserted that a patent it held on a cremaphor free formulation of paclitaxel should block generics of the Bristol product. The issue briefly delayed generic launches and prompted a Federal Trade Commission inquiry. (Bristol ultimately settled a series of antitrust claims regarding its patent defense strategies for several brands; APP was never charged.)

One last thing: APP also has first-hand experience with the challenges of global supply chain management. The company acquired its injectable generic product line from Fujisawa USA in the 1990s. Shortly after the acquisition, APP had to recall injectable gentamicin due to endotoxin contamination. The culprit? A Chinese raw material supplier.

Soon-Shiong should make an interesting witness...

While You Were Pursuing Happiness, and a Wimbledon Championship

We hope our US readers enjoyed the long holiday weekend, and did your part to pursue happiness. We dodged raindrops on the Jersey Shore and took in the amazing action at Wimbledon (a condensed version of the fifth set is embedded above if you've got 20 minutes to kill), which oughtta qualify.

• The New York Times asks the hard questions about Genentech and Roche's Avastin, specifically, when does a drug's high cost and modest efficacy combine to make doctors and patients think twice about its worth?


• The Philly Inquirer notes that researchers writing in Nature Medicine are hoping that work in mice with tuberous sclerosis complex (TSC) holds the key to a variety of learning disorders.


• According to a Phase III study from Teva, doubling the dose of Copaxone doesn't result in better efficacy (though safety and tolerability didn't seem to be an issue).


• Investors apparently don't like German dialysis specialist Fresenius' proposed $3.7 billion acquisition of injectible products play APP, according to this Reuters report. The WSJ has the story here.
  
• Angiotech is spinning out its Taxus royalty stream and other assets into a new business with financing from Ares Management and New Leaf Venture Partners.

Deals of the Week 3G S

Welcome to the 3G S version of Deals of the Week! It's just like previous versions of DOTW except much, much faster, and much, much more powerful. Unlike 3G S versions of other technological marvels that coincidentally became available today, DOTW 3G S doesn't cost extra (still free!) and under most circumstances you won't have to queue to read it. Oh, and subscription not necessary, but oh so convenient.

Just for you, dear readers, we've put together an all-star playlist, where your favorite companies cover your favorite hits! Are we reaching just a little? Yes. Is your normal DOTW blogger busy writing something some of you will actually pay for? Absolutely. Are we in a hurry to get down to the pub Apple Store? mmmmaybe.

1. Zicam marketer Matrixx Initiatives covers Nirvana's "Smells Like Teen Spirit"
2. Sanofi-Aventis covers the Red Hot Chili Peppers' "Give It Away Now"
3. Genzyme covers Neil Young's "The Needle and the Damage Done"
4. Arena Pharma covers Bare Naked Ladies' "If I Had Million Dollars" (100 times)
5. Biogen Idec covers Oasis' "Don't Look Back in Anger" (dedicated to Genentech)

Enough already, lets get to the best app store on these here Internets, it's ...


Johnson & Johnson's Tibotec/TB Alliance: The diversified JNJ may be busy crossing the t's and dotting the i's of its pending acquisition of Cougar Biotechnology, but its not too busy to burnish its image and do some good in the developing world. This week came news that JNJ subsidiary Tibotec was teaming up with the not-for-profit TB alliance to speed the development of TMC207, a novel molecule in Phase II clinical trials that targets a specific energy-storing enzyme that looks to be especially promising in taming multi-drug resistant tuberculosis. (Interim mid-stage data for TMC207 recently published in the New England Journal of Medicine have been generating quite a stir in the ID community: in the placebo-controlled study, the addition of TMC207 to a regimen of five other TB meds cleared traces of the nasty bug in the sputum of 48% of the participants, compared to 9% in patients taking the standard-of-care regimen.) Under the terms of the agreement, Tibotec continues to develop TMC207 for the treatment of multi-drug resistant TB, but the TB Alliance will pitch in when it comes to the drug's development costs. Once the drug is approved, Tibotec promises to establish an access program to ensure the compound reaches the people most in need of the the medicine--those in developing countries. The TB Alliance also has a royalty-free license for world-wide development of TMC207 and will collaborate with Tibotec to develop additional follow-on compounds. The deal recalls last fall's collaboration between Summit and Lilly's TB Drug Discovery Initiative and shows the increasing ground swell of support by Big Pharma for what has long been a neglected disease area. No word on whether Tibotec plans to apply for the FDA's Priority Review Voucher program, a new incentive scheme for drug development in neglected diseases, on the basis of the TMC207 research--Ellen Licking.

Watson/Arrow: On June 17, Watson Pharmaceuticals announced a $1.75 billion cash and stock deal to snap up the privately held generic company Arrow Group, which markets in more than 20 countries. Beyond Arrow's 100+ drugs, Watson gets the company's international sales, legal and regulatory infrastructure. Arrow, founded in 2000, operates as Cobalt Pharmaceuticals in the US and generated $647 million in total revenues last year. Watson execs also believe they’ve gained a long-term investment in generic biologics through Arrow's 36% stake in Eden Biodesign, a biologics CMO. The price of the deal--at about 2.7x 2008 revenue--falls in line with other recent generics deals like Mylan/Merck KGaA and Barr/Pliva; since Watson hasn't had to raise debt to pull it off ($1.05bb in cash and 16.9mm shres of common stock plus $200mm in zero coupon preferred stock redeemable in three years), it can continue to shop for more deals. Our full write up is in "The Pink Sheet" DAILY.--Carlene Olsen

GSK/Dr. Reddy’s: On June 15, GlaxoSmithKline and Indian generics giant Dr. Reddy’s allied to develop and market drugs in emerging markets, including India. GSK gains access to more than 100 branded generics in Dr. Reddy’s portfolio and pipeline for cardiovascular, diabetes, oncology, GI and pain indications. GSK and Dr. Reddy’s will co-promote the drugs in some markets and under only one of the company’s brand names in others. As “The Pink Sheet” DAILY writes, GSK says it is still sorting out “which products will be sold under what brand, in which countries." Generally, though, Dr. Reddy's will manufacture generic drugs, which GSK will then market in certain African, Middle Eastern, Asia Pacific and Latin American countries, focusing on key markets such as Brazil, Mexico, India, China and Turkey and aided by its emerging markets sales force, 11,000 reps strong. The announcement comes on the heels of GSK's deals with Shenzhen and Aspen; since the beginning of the year the pharma has entered into at least four deals that expand its presence in emerging markets. You might even say it has an emerging markets strategy.--Carlene Olsen

Vitae Pharmaceuticals/Boehringer Ingelheim: Vitae says it has extended its cash runway beyond 2010 by agreeing to co-develop BACE inhibitors for Alzheimer’s disease with BI. In what we learned was a highly competitive deal, the biotech gets $42 million upfront in its second alliance with the German pharma; as we noted earlier this week, the pair have been partnered since 2007 to develop 11beta-HSD1 inhibitors for diabetes and other metabolic disorders. The cash will come in handy: Vitae CEO Jeff Hatfield told "The Pink Sheet" DAILY this week that Vitae’s lead renin inhibitor compound VTP-27999--which it recently reacquired from ex-partner GSK--should enter clinical development before the end of 2009, and a $13 million loan secured last October was only going to get the biotech so far. BACE inhibition is a very difficult but very promising avenue of disease-modifying Alzheimer's research; hence such a large upfront payment for a program still in lead optimization--Joe Haas

Adimab/Merck and Adimab/Roche: Yeast-based antibody discovery platform play Adimab announced its first two deals this week, with Merck & Co. and Roche. The companies have been light on specifics, but the deals include upfront payments, preclinical and clinical milestone payments, and commercial milestones and royalties. Adimab thinks its on to a winner with a discovery platform it claims is both faster and better than conventional phage display technologies, and unencumbered by IP cross-licensing. (Of course there are plenty of companies who still dig the phage, for whom phage is the rage: this week Morphosys said that Schering-Plough (still betrothed to Merck) extended its access to Morphosys Hucal Gold library for another year.) Adimab will make antibodies to multiple undisclosed targets for Merck, and one undisclosed oncology target for Roche. What's perhaps more interesting is the biotech's overall deal strategy, which we've discussed here and will dive into deeper in the next issue of START-UP.--Chris Morrison

Covidien/Neuromed and Covidien/Nuvo: This is your medical device company on drugs. OK, to be fair Covidien, the diversified ex-Tyco Healthcare conglomerate, is apparently the largest supplier of controlled pain meds in the US, but it's much better known as a medical device company--devices account for greater than two thirds of its sales and its recent business development activity has been dominated by device acquisitions: VNUS, which closed this week, was the latest and you can read all about it here. So now that you've forgiven us for overlooking Covidien's pain drug franchise, part of its Mallinckrodt unit, on to the news! This week Covidien licensed Nuvo Research Inc.'s two topical formulations of the NSAID diclofenac (the more advanced drug is already under review at FDA, with a PDUFA date in early August; the second is in development). The next day, Covidien bought rights to Neuromed's Exalgo extended-release hydromorphone, a compound Neuromed licensed from JNJ's Alza Corp. in 2007. The drug recently hit its primary endpoint in a Phase III trial and has a PDUFA date in November 2009, though Covidien notes in the release announcing the deal that the class-REMS may slow things up a teensy bit. Both deals include undisclosed up-front payments, milestones and royalties.--Chris Morrison

Heparin Investigation: "Unsettling" Indeed

"We at FDA understand how unsettling this whole situation with heparin is."

That is how FDA Office of New Drugs Deputy Director Sandra Kweder wrapped up FDA's latest media teleconference discussing the agency's investigation into adverse event reports associated with Baxter's heparin multi-dose vials in the US.

Unsettling indeed. We have written previously about the ugly turn the investigation has taken, and things keep getting uglier.

Apart from the adverse reactions and potential shortage of a critical hospital product, the heparin story seemingly confirms everyone's worst fears about globalization (though no one knows for sure, the suspicion is that the adverse events result from problems with the raw material sourced from China), FDA (the agency got confused and didn't inspect the Chinese plant in question), and the overall safety of the drug supply (if we see any more pictures of pig intestines in China we are going to be sick.)

In case you missed the latest news, Baxter has now recalled all remaining supplies of the product, having received assurance that the only other supplier, APP, can meet demand in the US. And FDA has completed its inspection of the Chinese facility. The agency determined that it is no longer manufacturing API and--surprise surprise--that there are some "objectionable" issues with its Good Manufacturing Practices compliance.

FDA is not ready to issue a formal regulatory pronouncement about the Chinese facility. However, it did post the standard inspection report (an FD-483--inset above) on its website.

They say a picture is worth a thousand words. The inspection report probably won't do as much to shake public confidence in the drug supply as images of pig intestines at the start of the heparin production process, but for quality control professionals in industry, it takes just 642 words (allowing for redactions) to paint a devastating portrait of the facility.

Our favorite section:

"The inside surface of large, 'cleaned' [Redacted] tanks ...were very scratched, with unidentified material adhering to the insides and the inverted handles held liquid, which spilled to the bottom of the tank when it was uprighted. There was no written procedure showing that the tanks were dedicated to a particular process step. There was no data collected to verify marker and tape volume markings on the outside of the tanks and, the cleaning method was not validated. It was noted that equipment cleaning tags were made of paper and taped to the piece of equipment unprotected from liquids used in the processing room environments."

One prediction: that will definitely not be the last word on the heparin investigation.

Vitae and Boehringer Get on BACE

Vitae Pharmaceuticals and Boehringer Ingelheim will announce today that they're collaborating in the area of beta-secretase (a.k.a. beta-site APP cleaving enzyme 1, or BACE) inhibitors to treat Alzheimer's disease. [UPDATE: release is here.]

Vitae will get $42 million up-front in combined cash, equity payments and research funding, and will be eligible for $200 million in pre-commercial milestones in the Alzheimer's indication for one molecule, as well as commercial milestone payments and royalties, and payments for other molecules or other indications. But it's waaay early, which we'll get to in a minute.

Since re-embracing its discovery roots in 2005 (a phenomenon covered here through the prism of a 2005 deal with GSK in the renin area--a deal that has since been shuttered) Vitae has now entered three discovery alliances. Today's alliance, the GSK deal and a 2007 deal with Boehringer in the diabetes space that brought in $36.5 million up-front. In fact the two BI upfronts combine to equal just about all the other financing that Vitae has raised (not including milestone payments from deals) since its inception as Concurrent Pharmaceuticals in 2001.

This latest alliance is, on the face of it, a taller order than renin or the 11beta-HSD1 inhibitors Vitae is working on in the metabolic space. BACE inhibition is an extremely difficult area of Alzheimer's R&D, and the scarcity of assets around this target perhaps reflects the large-ish upfront payment for a program that Vitae's web site suggests is still in its infancy.

But for BACE-inhibition, $42 million for a program in lead optimization sounds about right. After all, CoMentis got $100 million up-front for its own BACE inhibitor program from Astellas. That compound was only in Phase I, and when it entered the clinic in 2007, CoMentis immediately became the subject of takeover rumors.

The Boehringer cash will augment a $13 million venture-debt deal Vitae closed last October. At the time of that loan announcement Vitae's runway ran 'into 2010' so the infusion should come as a welcome relief. Just maybe they'll get enough of a lead to steal second.

image from flickr user phillenium1979 used under a creative commons license

Deals of the Week Takes Stock in M&A

Here at Deals of the Week, we don’t often take note explicitly of buyouts outside the biopharma sphere. But one well-publicized tech deal last month piqued our interest – and it parallels another recent pharma deal in a way we found curious.

As you may have heard, social networking giant Facebook wowed the tech field with its February takeout of smartphone communications app developer WhatsApp for a jaw-dropping $16 billion plus an additional $3 billion in employee-retention bonuses, reportedly the largest-ever acquisition price for a private, venture-backed company. (We’ll note in passing that one of the deal’s biggest winners, venture firm Sequoia Capital, is also a life sciences investor.)

Now, $19 billion is a lot of scratch – it’s a bigger pile of cash than the gross domestic product of Jamaica, and it’s in the ballpark of the price Sanofi paid for Genzyme in 2011. But a closer look at the WhatsApp deal’s terms reveals that Facebook paid just $4 billion in cash – a quarter of the deal’s baseline value – and the balance, including the retention bonuses, in its somewhat volatile stock. It’s a common formula in tech, a sector in which speculative value far outpaces revenue in many cases.

In the biopharma world, such arrangements traditionally are unheard of – but that might be changing. While many pharma mega-deals include both cash and stock components, most feature bigger cash portions than paper value. Just over a third of the $68 billion Pfizer spent to acquire Wyeth in 2009 was in stock, with the rest coming in cash; Johnson & Johnson’s $21.7 billion deal for Synthes in 2011 was in the same league, weighted roughly 65%-35% in favor of cash.

That’s why Actavis’ pending $25 billion deal to acquire Forest Laboratories last month was so unusual. Actavis paid just $26.04 per share, or 29% of the total $89.48-per-share purchase price, in cash, and swapped its stock for the rest. So there’s financial risk involved: If Actavis shares fluctuate, the deal’s total value could go up or down rapidly, perhaps before it even closes. (We note that the Facebook/WhatsApp deal technically gained more than $600 million in value before it was even announced, since its stock component was based on an already-outdated five-day average of Facebook’s share price.)

It’s not the first mega-buyout to favor equity over the hard stuff; Merck’s $42 billion buyout of Schering-Plough was tilted slightly in favor of stock over cash, with 56% of the price paid in equity. But rarely are large pharma deals ever consummated with paper value vastly outweighing cash money; it’s even less likely with smaller deals. A search of our Strategic Transactions database of reveals that only about one in 10 biopharma deals since 2008 falling into the “bolt-on” range – those ranging from a few hundred million dollars to a few billion – had a stock component.

Some life sciences companies, particularly those living off their sunny growth prospects rather than established, dividend-paying, cash-rich ones, soon could find that their stock is becoming a valuable deal-making currency. And with biotechs soaring in the public markets, some of them look like good candidates for stock-heavy deals. Like Actavis’ stock price, the Nasdaq Biotechnology Index has doubled since November 2012. Emilio Ragosa, a partner with Morgan Lewis & Bockius’ mergers-and-acquisitions practice, said mid-cap biotechs – those valued around $1 billion – are in the sweet-spot. “They tend to have less cash, but their stock is appreciating more rapidly,” he said.

Big biotechs and specialty pharmas, responsible for most of the M&A deal-making action in 2013, are enjoying exceptionally high valuations, but don’t always have big pharma-like cash flow. They’re good candidates to use their strong stock prices to beef up their businesses without denting their cash piles severely.

It’s unlikely that big pharmas will change this aspect of their deal-making strategies much; as Ragosa notes, “They have enough cash on their balance sheets.” Ever sensitive to their quarterly earnings, most large pharmas will continue to avoid using stock to take out biotechs. Seven of the top 50 cash holdings among U.S. companies belonged to pharmas, according to a 2013 Moody’s report; six were sitting on double-digit billions, led by Pfizer. - Paul Bonanos

Transactional activity has been as slow as a snowy Interstate lately, but we’re still taking stock of the latest alliances in...

Biogen/Eisai: Biogen Idec teamed up with Japanese pharma Eisai on March 5 to potentially co-develop and co-commercialize four compounds for the treatment of Alzheimer’s disease. While specific financial details weren’t released, Biogen will pay Eisai an upfront payment of undisclosed size, as well as a fixed number of milestones based on development, regulatory and commercial events. The team also will split worldwide profits on the drugs should they reach the market. Eisai will take the lead on the first two compounds, which it will provide. The first is a beta-site amyloid precursor protein cleaving enzyme (BACE) inhibitor dubbed E2609; Eisai discovered the compound in-house, and is about to begin its Phase II trials. The second monoclonal antibody, BAN-2401, is already in Phase II trials; it’s an immunotherapy designed to break down beta amyloid plaques after they develop. Eisai also has the option to jointly develop and commercialize Biogen’s two in-house Alzheimer’s candidates, the anti-amyloid beta antibody BIIB037 and an anti-tau monoclonal antibody, both of which are in very early stages. The BACE inhibitor space has been heating up as Merck pushes its candidate into Phase III and AstraZeneca follows closely on its heels. Both Roche and Lilly have ended programs in the space after safety signals cropped up in clinical trials. There hasn’t been any proof so far that the safety issues are class-wide, but the industry is keeping a close watch for any signs. - Lisa LaMotta

Genocea/Harvard/Dana-Farber: Fresh from its initial public offering last month, vaccine specialist Genocea Biosciences struck a research deal with Dana-Farber Cancer Institute and Harvard Medical School to study cancer immunology. Under the March 5 alliance, researchers will use Genocea’s proprietary T cell antigen discovery platform to find antigens that correlate with an anti-tumor immune response in melanoma patients. Charitable scientific network Ludwig Trust will sponsor the research; terms weren’t released. The research will play off existing work by Dana-Farber’s Stephen Hodi and Glenn Dranoff in anti-CTLA-4 therapies such as Bristol-Myers Squibb’s Yervoy (ipilimumab). Harvard microbiology and immunobiology professor Darren Higgins will lead the development of a cancer antigen protein library, which will be screened against patient-derived cells using Genocea’s platform in order to seek a correlative immune response. After an initial lukewarm reception, Cambridge, Mass.-based Genocea shares have rebounded, rising more than 50% since the company’s February 5 debut. The company is best known for its clinical pipeline of anti-infective vaccines, including therapies and preventive treatments for herpes simplex virus-2, pneumococcus, chlamydia and malaria. Its most advanced program is GEN-003, a Phase II therapy for HSV-2. - P.B.

NeoStem/Massachusetts Eye & Ear/Schepens: Cell therapy developer NeoStem also inked a deal with some of Harvard Medical School’s tentacles, entering a research collaboration March 6 with Massachusetts Eye & Ear and the Schepens Eye Research Institute. The publicly traded, New York-based stem cell company will sponsor research by Michael Young, director of Mass. Eye & Ear’s ocular regenerative medicine institute, into various eye disorders; financial terms were not revealed. The deal will fund Young’s research using NeoStem’s proprietary very small embryonic-like stem cells, or VSELs. The scientist will perform preclinical work to find uses of NeoStem’s VSEL products to combat degenerative disorders such as retinitis pigmentosa and macular degeneration. Both Mass. Eye & Ear and Schepens are Harvard Medical School affiliates. NeoStem previously has used its VSELs clinically as wound-healing therapy and to treat periodontitis; the company also has targeted cardiovascular diseases and autoimmune disorders. The eye also has been a popular target for gene therapies, thanks to its closed system and immune-privileged status. That has led to several recent fundings of companies with preclinical and clinical-stage programs. - P.B.

Thanks to Flickr user ProAeroPhoto for his photo of a different way to trade cash for stock, reproduced here under Creative Commons license.

Wacky World of Generics: Painful Historical Parallels Edition

New details about a pending Justice Department investigation of Ranbaxy recall some painful memories from veterans of the generic drug scandal in the US at the end of the 1980s.

It is amazing to think—at a time when generic drugs are the political golden child, everybody’s favorite starting point for reining in costs, and everybody’s hope for controlling spending on biologics—that it was just two decades ago that generic drugs were perceived as inherently suspect. Company after company was accused of fraud, and dozens of products were withdrawn from the market.

So no one in the generic sector wants to read that the government is alleging “systematic fraudulent conduct” on Ranbaxy’s part.

Ranbaxy, of course, wants to read that least of all—certainly not while a $4.6 billion merger with Daiichi Sankyo is pending. (PharmAsia News has all the details on what is known about the investigation, and the speculation that it might affect the pending merger of the two companies.)

The companies say the deal is not in jeopardy. The bottom line for proceeding: Ranbaxy says the scope of the investigation is fully understood by Daiichi and the risks to the business as a whole aren’t worth worrying too much about.

Daiichi better hope so.

The alternative is not pretty. The downside risk may best by captured by considering what happened to Fujisawa went it bought out Lyphomed in 1989. The transaction came after a Lyphomed faced a round of manufacturing compliance issues that had seemingly been resolved.

The deal was a disaster on every level for Fujisawa. It turned out that FDA wasn’t done with Lyphomed by a long shot, not as the full extent of issues related to fraud in the generic drug sector started to come to light.

How big a disaster? Well, Fujisawa paid about $1 billion to buy Lyphomed, and ended up writing off $575 million when it finally unloaded the business in 1998. (The buyer? APP, which is being acquired itself a decade later.) Fujisawa spent millions cleaning up the business along the way, including withdrawing many products it acquired because of questions about potential fraud in the applications. Worst of all, Fujisawa’s own products were held up as a result of FDA’s concerns, putting its relationship with Medco Research for Adenoscan in jeopardy.

And strategically, it certainly didn’t help Fujisawa achieve its primary goal of building in the US. Fujisawa has since merged with Yamanouchi, and the new company—Astellas—is still working on that goal.

Painting by Renee Dixon