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Friday, September 28, 2007

Co-promotes: No Longer Biotech’s Holy Grail

You could see it coming. Well, kind of. Idenix on Friday snuck out the news that it was bailing out of its US and European co-promote with Novartis on its Hep B drug Tyzeka (Sebivo in Europe).

Co-promotes have until recently been most biotech’s holy grail, and co-promote options, at least, a sine qua non of much of recent licensing activity with larger pharma. It’s all part of that fully-integrated, ‘we-want-to-become-the-next-Genentech’ dream; we wrote about whether the dream made real-world commercial sense in IN VIVO in April.


We also pointed to data showing that barely more than a tenth of biotech-pharma co-promote plans become reality. When they do, they can be a nightmare--there was certainly no love lost between ICOS and Eli Lilly over Cialis before that (inevitable) acquisition.

Now of course, Big Pharma would say that co-promotes are a nightmare: they don’t like diluting their control over commercialization—which is, for all the talk of value inflection points throughout drug development, where the actual money comes from. But some of the arguments they put forward are sound: commercialization costs a helluva lot, even for so-called specialist sales forces, it’s increasingly complex as regulatory and reimbursement hurdles multiply, and, frankly, biotechs would make more profits by securing a good royalty share.

Idenix seems to have come to at least some of those conclusions, too. The biotech needed to rein in after the failure of its Hep C candidate a couple of months back, and this move will save it $40-45 million a year, apparently, by laying off the Tyzeka sales staff. “We have changed our agreement for Tyzeka to a royalty stream arrangement,” said Idenix CEO Jean-Pierre Sommadossi in the release outlining a wider re-structuring at Idenix.


In the original deal, outlined here, Idenix received sales-linked payments only in territories not covered by the co-promote. Neither those, nor the level of the new royalty stream, is revealed, but we’re certainly talking levels far from the single-digit tokens that grateful biotech used to have to put up with.

Funny, though, the timing: just a day or two before the announcement, Susan Koppy, SVP business and corporate development at Idenix, was on a panel at Windhover’s Pharmaceutical Strategic Alliances conference in New York. (Read here and here, for examples of what you missed.) She described the co-promote with Novartis as “a true co-promote,” in response to a question about which of the partners effectively had control (don’t forget that Novartis owns 56% of Idenix). But then, she added: “The relationship may well evolve as we go forward.”

Indeed it has. And it’s a fair bet that the evolution of other biotech co-promotes, real or planned, will go the same way. Biotechs are discovering and developing the drugs right now and benefiting handsomely from that. “Stick to what you do best” applies to them, as much as to Big Pharma.

Ortho Settlement Doesn't Settle Everything


Yesterday’s announcement that the U.S. Attorney and four of the nation’s biggest orthopedics companies agreed to a $311 million settlement of bribery accusations would seem to put this entire matter to bed.

Under the agreement, four companies—Biomet Inc., DePuy Inc., Smith & Nephew plc and Zimmer Holdings Inc.—paid varying portions of the settlement while all agreed to adopt corporate integrity agreements and to hire outside firms that will monitor their relationships with physicians.

(It’s worth noting that Stryker Orthopedics did not take part on the settlement. CEO Steve McMillan touched on the subject before the settlement in a recent IN VIVO magazine article. Medtronic Sofamar Danek also has had prominent role in this debate.)

But once the cloud cover over the industry clears, we may find an orthopedics industry facing a whole new set of daunting questions:

What of the clean up that’s already begun? Certainly, few industry executives would deny privately that there are more than a few skeletons in the closet of most orthopedics companies—arrangements entered into around consulting agreements or royalty payments that richly reward surgeons for minimal amounts of work. But the $311 million settlement aside, our bet is that most orthopedic industry executives are applauding the settlement and—particularly given that no heavier, industry-disrupting judgments were handed down—may even have welcomed the scrutiny that the case brought.

For one thing, many orthopedic companies have themselves been trying to clean up their act over the past several years, following guidelines such as those promulgated by industry trade association AdvaMed governing appropriate compensation in sales and marketing practices and consulting arrangements.

That’s good corporate citizenship, but also good business sense. Particularly as the industry has consolidated in recent years and become much more of an oligopoly, legacy consulting arrangements that don’t deliver real clinical and economic value to orthopedics companies have become both fiscally irresponsible and unnecessary. Were there times in the past when orthopedics companies set up less-than-robust consulting or royalty arrangements with surgeons just because the surgeons demanded arrangements similar to ones they believed other surgeons were getting? Sure. But as the industry has consolidated and competitive positions stabilized, the ortho giants have no longer felt the temptation to enter into these agreements. Adherence to the AdvaMed guidelines were one rationale for pushing against these kinds of practices; the federal investigation into these practices now gives ortho companies more and more plausible arguments to deny surgeons who come asking for lucrative deals.

Does this tilt or level the playing field for smaller companies? The US Attorney investigations focused on the largest orthopedics companies, a group who, in aggregate represent greater than 90% market share. What are the implications for smaller suppliers and start-up companies? Does the ban against aggressive sales training and consulting agreements eliminate questionable practices and level the playing field? Or does it do just the opposite, erecting huge barriers to entry around the market leaders and preventing others from using well-established tactics that get the attention of important customers? More to the point, particularly where things like the AdvaMed guidelines are concerned, what posture should non-market leaders take? Strict compliance with what are voluntary rules? Or an attitude of, “Let Big Ortho do what it has to; we’ll do what we have to?”

What of the historical and vital relationship with physicians?
Most of the scrutiny has focused on sales and marketing practices—product training programs at the Ritz or sales training done on championship golf courses—those kinds of things. But what rules do we want to adopt about surgeon/supplier relationships where it concerns new product development? Rigid firewalls in the area of technological innovation might cut down on some abuses but almost certainly would signal the end of meaningful new product development in a field where innovation comes largely, if not exclusively from collaborations and feedback from suppliers.

Already some surgeons are beginning to claim that rather than simply ending abuses, the current scrutiny is giving orthopedics and spine companies license to deny them fair compensation for new ideas and new product iterations. Many device industry executives argue that while the current wide-scale scrutiny (one which embraces physicians working with drug companies on clinical trials and the like) is entirely appropriate, some special consideration should be set aside for device companies when it comes to oversight on product company/surgeon relationships.

As noted, the settlement is most likely good news, particularly in that few believe it will call for fundamental changes in industry dynamics. But no one should breathe a sigh of relief until we see what impact, if any, the future oversight will have on surgeon relationships as they apply not to sales and marketing efforts, but to product development.

Another Look at Asia

As a small follow up to our post last week on Sofinnova Partners' hiring an Asia-focused professional, VentureWire Lifescience reported this week that Canaan Partners added a principal whose partial duties include finding deal flow from Asia.

Mickey Kim will from Canaan's Westport, Conn. office. He joined the firm in July according to his bio.

Mickey joined Canaan from Pacific Point Ventures, a venture capital fund investing in healthcare infrastructure companies in Asia. Prior to co-founding Pacific Point Ventures, he invested in biotech and medical device companies at BioVentures Investors, including ActivBiotics, Applied Spine Technologies, Cylene Pharmaceuticals, Hydra Biosciences and Sciona. Mickey also served as a strategy consultant at McKinsey & Company and CSC Healthcare, and co-founded an Asian technology venture capital fund.

Canaan doesn't appear to have any health care portfolio companies in Asia at this point. It does have two IT-oriented deals in India.

No doubt there will be more news like this to come.

Thursday, September 27, 2007

What About Specialty?

We've heard a lot at Pharma Strategic Alliance from the Big Pharma, most especially Bristol-Myers Squibb, about externalization and the attractiveness of speciality markets.

But as bigger players look to fill their pipeline gaps with smaller, niche drugs, they're beginning to compete in a market long dominated by the so-called "spec pharma" players, who've traditionally built their businesses by acquiring and selling under-valued late-stage or marketed assets.

"There's a lot of capital chasing the same assets," notes Jeremy Goldberg, Managing Director of Corporate Development at Endo Pharmaceuticals, which has a handful of products for the treatment of pain. "It's measurably more competitive than it was three years ago," he says.
But Goldberg is confident that his company, at least, won't get shut out of the deal-making game thanks both to its focus and it's smaller size. A new product, notes Goldberg, can make a tremendous difference to his company's growth and top-line, an effect that wouldn't be seen in in a big pharma with a $25 billion revenue stream.

When looking to license, "biotechs need to ask who is the right partner for my asset? In pain, it's Endo," says Goldberg.

Okay, fine. But spec pharmas are certainly under pressure to expand into additional therapuetic areas. Look at Shire's willingness to pay $1.6 billion for TKT in 2005 to move beyond its ADHD franchise via access to biologics. How does a company like Endo become the partner of choice in a therapeutic area that isn't pain?

And will a big deal scare off investors who are presumably very focused on the reliable earnings-per-share returns that a typical spec pharma provides?

It's too soon to say. More than likely we'll be discussing a new business model at next year's meeting.

PSA Day 2: Buying into Biologics

AstraZeneca's $15.6 billion acquisition of MedImmune may well go down as the deal of the year. Though it has been described as overly expensive, David Mott, MedImmune's CEO who remains at the helm of the "operationally independent but strategically aligned" biologics business, begs to differ. Think of it this way, he suggested this morning at our Pharmaceutical Strategic Alliances conference: AZ paid 20% of their market cap to secure 25% of its pipeline going forward, a target for AZ's biologics output.


Still, if AZ investors had sticker shock, well, it was a seller's market. Still is. "Fully built biologics capabilities are rare," says Mott. Acquiring MedImmune gave AZ the whole biologics package; it was too late for the Big Pharma to build those capabilities through collaboration.

Building biologics expertise and capabilities piecemeal, says Mott, will be a long, slow and high-risk proposition, thanks in part to the dearth of biologics industry talent in key areas like regulatory affairs.

To get the most out of MedImmune, AZ will have to keep the group at arms length, while at the same time fostering a sort of collaborative independence in R&D as well as sales and marketing between the Big Pharma's traditional small molecule business and its biologics business--which (Cambridge Antibody Technology included) is being transferred in practice if not in geographical terms, to MedImmune.

For example, "juxtaposing the biologics commercial business with a traditional pharma primary care commercial business will help us take the best of both worlds to create a new commercial model" with a lower cost base--something in line with, instead of twice as big, as R&D costs.

Mott noted that the biggest challenge arising from the integration of MedImmune has been subsuming CAT into the organization. "CAT was in a difficult position" after AZ bought MedImmune, having been sidelined only a year after it was itself acquired by AZ to become its biologics arm, explained Mott. Becoming part of MedImmune "was not the vision that CAT had for itself." That said, "what we can do together is actually quite persuasive, and it's striking how non-overlapping" the companies' technologies and strengths really are.

Beyond bringing CAT into the MedImmune fold, the biotech is taking the lead in AZ's venture activities through its own MedImmune Ventures business, as well as ownership of AZ's existing large molecule collaborations and programs such as those with Silence Therapeutics in RNAi and Abgenix in antibody development.
We're taking a look at the state of the industry's biologics efforts in the next IN VIVO.

Wednesday, September 26, 2007

Smaller Big Pharma and the Hybrid Future

Two R&D Heads are better than one


[Updated below.] Today's final panel at PSA featured the heads of R&D at two of the industry's smaller Big Pharma, Tom Koestler, PhD, EVP and president of Schering Plough Research Institute and Elliott Sigal, MD, PhD, EVP, CSO, and president of R&D at Bristol-Myers Squibb Co.

Sigal suggested the industry's challenges in R&D would be best met by a best-of-both-worlds solution: "Some people in large pharma say, 'I want to be a biotech company', but that's not necessarily a good idea. You need to pick the best of pharma and the best of biotech and move on to a next-generation model," he said. Big biotech, like Amgen and Genentech, similarly need to adopt small-molecule strategies to thrive in the longer term, he noted.

BMS has employed this very strategy, embracing biotech risk hedging strategies in its blockbuster deals with Pfizer and AstraZeneca this year (we wrote about those deals here and here). Tom Koestler noted that Schering-Plough has maintained a handful of joint venture agreements to spread risk--notably that company's cardiovascular partnership with Merck, an asthma and COPD deal with Novartis, and its large-molecule JV with Johnson & Johnson (think Remicade).

So what's it take to embrace this hybrid model? A realization that complete vertical integration is not only not necessary, but perhaps detrimental. Co-development and co-commercialization deals, targeted approaches to geography and customers, streamlining manufacturing, and innovative sales and marketing approaches are all part of the model, according to Sigal. If you've got enough opportunities, why not de-risk the portfolio in high risk or expensive areas like metabolic disease?

"We need a new business model, an evolving business model, and R&D needs to evolve in that direction," Sigal said. "You're never too big that you can't benefit from a good collaboration."

UPDATE: For a look at the WSJ Health Blog's coverage of Koestler and Sigal's talks, click here.

How to Improve Drug Development? Fail Fast!

In this morning’s PSA panel on “Development Dilemmas and Opportunities,” Michael Clayman, MD, VP of Lilly Research Laboratories at Eli Lilly & Co., presented a unique option for optimizing clinical pipeline success. Perversely, it depends on failing fast. Clayman heads Lilly’s Chorus division, an organization that is trying to create a new model for drug development built on not reducing attrition but increasing the chances post-clinical proof of concept that a drug will make it to market. We took an in-depth look at Chorus in May in IN VIVO.

Clayman estimates that 90% of drugs in development will fail anyway, so why devote the time, the resources—the dollars—driving a product forward if it’s not going to make to market? The goal of his group: cut costs, and dramatically narrow the time to a decision point—typically proof of concept in man, what Clayman jokingly refered to today as “pull out your checkbook”—down to as little as twelve months.

It’s a goal Clayman claims Chorus is well on its way to achieving. To date, the company has shown that it can shave 12 to 18 months off the time it takes a drug to reach proof of concept and reduce the R&D dollar spend from $30 million to $3 million.

But, outside these metrics, there aren’t obvious ways to measure the group’s success. It’s not as if the company can use drug approvals as a measure, since the goal of Chorus isn’t to get drugs on the market, but to de-risk them as much as possible. Indeed, it’s an organizational tool to manage Lilly’s vast portfolio of drug products so that the bias is on the ultimate winners. And while nearly 80% of Lilly molecules might be pushed forward according to this program, to date the strategy has been applied to just 10.

According to Clayman, one critical component of the strategy is that Chorus is compound agnostic. No one on the 24-person team has a driving loyalty to a molecule that might sway him or her to push one project forward over another. The group also operates as an autonomous division within Lilly so that it is not hide-bound by the operational infrastructure of the larger organization. “Once a molecule is transferred to us, it’s no longer worked on by Lilly scientists. We outsource the experimentation,” he says.
That level of outsourcing is likely to be troubling to most other major pharmas. It seems unlikely that many outfits would be willing to adopt such a strategy unless there were significant proof that it improves R&D productivity. Until such time, expect the refrain to remain simply Lilly’s chorus.

Merck: Embracing Externalization, From the Top Down

Updated Below. One business magazine greeted the tenure of Dick Clark as Merck's new CEO in 2005 with the instruction to "say hello to boring," Roger Longman reminded the audience today at PSA. Investors will be clamoring for more boring if that's what has spurred Merck's shareprice onward and upward over the past two years.

Our Pharmaceutical Strategic Alliance conference kicked off this morning with Roger's Q&A with the Merck CEO, in a discussion that focused on the changes implmented by Clark over the past two years and the challenges faced both by Merck and the industry as a whole.

Clark said many of the things you'd expect a CEO to say. He talked about putting patients first, talked about unmet needs and striving to discover and develop strongly differentiated products. He acknowledged the industry's regulatory challenges and difficult reimbursement environment. And he deflected much of the credit for Merck's recent success to the pharma's employees in general and the interdisciplinary, horizontal and empowered teams that were behind the success of recent launches of Januvia and Gardisil in particular, as well as the timing of his appointment, suggesting his predecessor Ray Gilmartin had put necessary processes in place that have helped the company succeed today, not least hiring Merck's current research head Peter Kim.

And while the executive has spent his entire working life at Merck, he credits his several years at Medco--then Merck's PBM subsidiary--with providing him an external perspective on the company that once felt that the only good science was the science done in its own laboratories.

Externalization, both as an industry meme and in practice at Merck is becoming more important. "Medco allowed me to take an outside-in approach at Merck," Clark says. It's an approach that has more or less been embraced company wide. Only a few years ago, Clark noted, Merck did only a handful of licensing deals per year. "Last year we did something like 53," he said, pointing out acquisitions like the recent NovaCardia deal, and large molecule platform building moves like buying GlycoFi, Abmaxis, and Sirna. Scientists and managers within Merck are no longer rewarded based soley on what they can develop and create in-house, but for what they can bring into the company from the outside as well.

And there is still a ways to go, says Clark. "It’s important to understand that Merck hasn’t declared victory yet, that we’re about 40% of where we want to be and there’s still a lot of work to do." The danger, he says, is to revert to an internal focus.

Commenting on the $1.1 billion acquisition of Sirna in the RNA interference space, Clark emphasized the importance of continuing to augment its platform with the best available technologies. "I don’t think it ever ends, the external focus has to continue. If you raise your hand and write a billion dollar check," you need to make sure you're putting the right tools to work to execute your strategy.

UPDATE: The WSJ's Health Blog dropped by this morning. You can read their take on Clark's talk here.

Tuesday, September 25, 2007

IPOs: Just Another Facet of the M&A Auction

It's pretty much official now: filing an S-1 is just another part of an M&A auction.

BMS' acquisition of Adnexus, like Merck's recent acquisition of NovaCardia, demonstrates that Big Pharma, when nudged a bit by the prospect of a target hitting the public markets, is prepared to pounce.

We won't get into the details of the $415 million (plus earnouts) BMS/Adnexus deal right here--plenty of other blogs have covered the deal well (see the WSJ Health Blog or Pharmalot). Plus we're going to cover the Big Pharma biologics (and next-generation biologics) land grab in depth in the next issue of IN VIVO. And on top of all that, we're going to have Bristol's CSO and president of R&D Elliott Sigal, MD, PhD, up on stage at this week's Pharmaceutical Strategic Alliances shindig, and we'll surely get into the deal then.

But lets take a peak into the near future (tomorrow's PSA talk from Roger Longman) and look at both flavors of biotech exit; acquisitions and IPOs.

In 2007, M&A continues to climb in both total value and number of deals, while IPOs seem to have reversed a downward trend both in terms of valuations and pre-money step ups.

So which companies in the IPO queue are teeing up M&A exits simultaneously? Adnexus and Bristol's previously struck $240mm deal made BMS the biotech's logical acquirer--BMS' lack of a large molecule discovery engine greased the skids a bit for sure. Who else is angling for a public exit that could provide pharma with a similarly lacking discovery platform?



Maybe Archemix, the aptamer play without any significant Big Pharma ties could fill that kind of hole. And while Ablynx has yet to file for an IPO, its recent broad strategic alliance with Boehringer Ingelheim both gives it the pharmaceutical validations prerequisite for public investors and sets BI up as a logical acquirer should the biotech go that route.


Monday, September 24, 2007

Can't Keep Quiet About This

Perhaps lost in the headlines about Emphasys Medical Inc. filing to raise up to $86.3 million in an IPO is the important fact that this company, the leader in the race to develop the first interventional treatment for emphysema, this month submitted the results of VENT, its 321-patient pivotal trial, to the Food and Drug Administration.

It’s all there in the S-1.

VENT, which stands for Bronchial Valve for Emphysema PalliatioN Trial, was a randomized clinical trial conducted at 31 centers in U.S. Its goal was to demonstrate the clinical benefits and safety of the Emphasys Bronchial Valve.

According to Emphasys’ S-1, the treatment group got EBV treatment in one lung along with optimal medical management including pulmonary rehabilitation. The control group received only optimal medical management treatment and pulmonary rehabilitation.

The endpoints were (drawing from the S-1):

Physiologic Improvement: FEV1, a co-primary endpoint of the study, measures the volume of air forcefully exhaled by a patient over time.

Exercise Tolerance: A patient’s exercise tolerance is used as a proxy for the patient’s ability to function on a daily basis. VENT used two tests of exercise tolerance. A co-primary endpoint of the study was 6MWT, which measures the distance a patient can walk in six minutes. Cycle ergometry, one of the secondary endpoints in VENT, measures the maximum workload exerted by a patient on a stationary bicycle.

Quality of Life: VENT used a standard, pulmonary-disease-specific questionnaire called the St. George’s Respiratory Questionnaire, or SGRQ, as a secondary endpoint in the study. Patients answered questions related to frequency and severity of symptoms, activities that cause or are limited by breathlessness, the impact the disease has on social functioning and any attendant psychological disturbances resulting from the disease.

Breathlessness: VENT used a standard questionnaire called the modified Medical Research Council Dyspnea Scale, or mMRC, as a secondary endpoint. The mMRC asked patients to report on when they experience breathlessness and what causes it.

Oxygen Consumption. Many patients utilize supplemental oxygen to reduce breathlessness. In the VENT trial, patients reported how much oxygen they consumed on a daily basis.


And the results, according to the S-1, are……:

The patients treated with the EBV in the VENT study demonstrated statistically significant improvements, measured by meeting a p-value equal to or less than 0.025, in both of the co-primary efficacy endpoints, FEV1 and 6MWT, as well as in three of the four secondary endpoints.

FEV1 showed a 6.4% difference relative to the control at a p-value of 0.0047, and the 6MWT demonstrated 5.6% improvement relative to the control at a p-value of 0.0073. We demonstrated improvement in all four secondary endpoints, with the improvement in three of these endpoints, cycle ergometry, quality of life and breathlessness, meeting the hurdle for statistical significance.


As for safety, the primary safety endpoint was a major complications composite at 180 days. The composite included death, respiratory failure, pneumonia distal to the valves, massive hemotysis, prolonged pneumothoraces and empyema.

At the six-month follow-up, the treatment arm MCC rate was 5.9% compared to 1.0% for the control arm, and from six months to one year, the treatment arm MCC rate was 4.5% compared to 4.0% for the control arm.


There's plenty more in there so we encourage you to take a look.

The IN VIVO blog didn't even try to reach Emphasys executives or investors for comment. It is, after all, quiet period time. But the action of filing for an IPO without having heard from the FDA says enough about their confidence in the results. It'll be interesting to see whether final word from the FDA will be needed for this IPO to happen.

But a happy ending to both sagas will be good news for patients, interventional pulmonologists and investors in companies developing devices to treat lung disease. IN VIVO, the magazine, will be profiling another significant player in this area, Asthmatx Inc., in our next issue.

While You Were Packing for New York

A few notes from the weekend that was. We hope you had a good one. Several of your resident bloggers will be converging on New York this week for our Pharmaceutical Strategic Alliances conference (remember, UBS isn't the only game in town this week!). Hope to see some of you there. Stay tuned to IN VIVO Blog for a few updates from the conference on Wednesday and Thursday.

Friday, September 21, 2007

Strange Bedfellows: Novartis Marries VC & Business Development

We’ve been following the two Novartis VC funds for some time now, more extensively here in START-UP and also, in August, here at the Blog. The older of the two funds is a more traditional corporate VC group, reporting ultimately to the CFO.

The second, called variously the MPM Pharma Strategic Fund and the MPM Bio IV NVS Strategic Fund LP, is a joint program between MPM and Novartis’s pharmaceutical business unit, run by Thomas Ebeling.

What’s unusual is that both funds want to get options on research programs along with their investments. The first is looking for options on very early-stage programs and has already managed to sign several deals. But the pharma group’s fund wants options on the far more valuable later-stage candidates.

Now that second fund has closed its first deal: a $10 million equity investment in Radius Health and an option on Radius’s Phase II osteoporosis candidate, BA058.

The press release seemed to imply that the option came as part of the investment. Not true – although that’s originally what Novartis wanted, according to one source.

The Novartis-affiliated MPM fund bought its equity at the same price Radius’s venture investors (including MPM) had paid in its $57.5 million second round, which closed in April. But Novartis is also paying an undisclosed option fee, says Radius CEO C. Richard Lyttle, PhD, plus providing some “in-kind services”--access to Novartis expertise, presumably in the development of osteoporosis drugs. As for governance, Lyttle was a bit cagey: Novartis wouldn’t get a board seat “as a direct part of this deal.”

The option gives Novartis a few months (we estimate 90 days) to look at Radius’s Phase II data once it’s collected– during which time Radius can’t show it to anyone else. At the end of the option period, Novartis can say “no” and walk away (leaving Radius to shop the product to anyone they want)—or “yes” and trigger a pre-negotiated deal.

That deal is worth some $500 million in fees and milestones, $125 million of which go back to Ipsen—the French drug company from which Radius originally licensed the peptide, an analog of the natural peptide human parathyroid hormone-related protein. The terms, says Rich Lyttle, are equivalent to the money they would have gotten had they already had the Phase II data. He knows this, he says, because he talked to a number of Big Pharmas before signing the option agreement with Novartis, getting a good sense of what they’d be willing to pay.

Maybe. As most dealmakers will tell you, the dynamics of an auction aren’t predictable. It’s quite possible that Radius could have gotten a better deal when more companies were hooked with real Phase II data for a bone-building product.

But Lyttle says that even if they could have gotten a few extra dollars in an auction, the process of negotiating a deal would have taken months, delaying the Phase III primary-care trials Radius certainly can’t afford on its own, and ultimately destroying value. If Novartis triggers the option, he says, the program can start right away—and patients will get the drug faster. Certainly, Novartis would be motivated to move it along, he notes, since BA058 dovetails nicely with the Swiss company’s Aclasta, approved in various countries outside the US for Paget’s disease but in trials for osteoporosis (BA058 apparently builds bone rapidly; Aclasta prevents bone loss).

In any event, it’s certainly not a bad deal—the other VCs in the deal wouldn’t have let it happen if it had been obviously harmful to their interests. But it is nonetheless highly unusual, maybe unprecedented (we’d love to hear from you about any previous recent examples of minority investments bringing options on later-stage drug candidates—we don’t know of any).

Indeed, Novartis has managed to combine true business development with a venture-capital strategy. That’s clearly been a goal of many corporate VC programs: get some early looks at interesting technologies which have sometimes led to later transactions. But rarely if ever has the initial investment come with an option. The granddaddies of corporate VC, GlaxoSmithKline's SR One and Johnson & Johnson's J&J Development Corp., have been religious in observing the divide between the medical businesses of their parents and their own investment activities. They’ll facilitate deals—but not if they compromise their investment roles.

The MPM/Novartis fund is, on the other hand, a true melding of business development and VC. And that’s why the outcome will be important to watch. If the Radius deal is more than a one-off example, the fund will provide a popular model for product-poor Big Pharma to gain preferred access to the pipelines represented by VC portfolios. On the other hand, if the deal is seen as preventing Radius from getting a profitable exit for its investors, serving Novartis' needs at their expense, corporate VC will go back to the drawing board.

Going, Going.....Google

Two bits of follow up on previous posts about the health care IT space.

AthenaHealth absolutely hit one out of the park with its IPO.

Shares opened at $18 and nearly doubled, hitting $35.50. This could be a big win for its VC investors including Oak Investment Partners, Venrock Associates, Draper, Fisher Jurvetson and Cardinal Partners. All together the four owned 65% of the company prior to the opening. IN VIVO Blog talked about the importance of this IPO back in June.

Meanwhile, speculation abounds that Google, in a bid to bolster its presence on the Web, is eyeing an acquisition of health care Web site leader WebMD. Last month, IN VIVO Blog admitted to being slightly underwhelmed by the early glimpses of Google's health offerings.

Apparently, we're not the only ones. Dan Penny, director and lead analyst for publishing Outsell Inc., a market research firm focused on the publishing industry, writes:


Implications: The discovery in 2005 that 12% of individuals would consult Google before seeing a doctor has sent a message to the search giant that it should be doing something with health information, but it doesn't seem to know how to add value to an area where others have stolen a march. Google Health, as it stands, is a confusing experiment that offers little more than an old-fashioned portal for health information. Google now realises that it needs to do more than aggregate, because the boom in online health information has sent users flocking to WebMD and similar sites, such as AOL Health and RevolutionHealth. A year ago, the idea of Google acquiring WebMD would have seemed rather bizarre, but since the purchase of YouTube, Google has proven its willingness to spend, and to spend on content as well as technology. Moreover, its rival, Microsoft, bought Medstory earlier this year in a clear attempt to secure some of the healthcare vertical for itself.
Oh yeah, and Google's health care push probably wasn't helped by the fact the fellow in charge of the effort is leaving.

Now back to your regularly scheduled programming....

The Right Kind of FDA Defense

The FDA drug safety law finally made it through Congress yesterday, despite a last minute hold-up over the perennially thorny issue of pre-emption.

The broad outlines of the bill have been clear, and the final passage doesn’t change the big picture impact we’ve been telling you about. (You can read our take on the drug development impact here, and on the new rules for DTC here.)

Still, it is somehow appropriate that pre-emption was the final stumbling block to enactment of the new legislation, because at its heart the FDA Revitalization Act is about rebuilding the credibility of the agency as a drug safety regulatory.

The agency’s credibility is critical in product liability cases, and brand name companies are frustrated that it isn’t more formally recognized as a defense against lawsuits. Industry has long wanted more protection in liability cases, arguing that they should not face lawsuits that in effect second-guess FDA’s decisions about whether labeling appropriately warns of a product’s risks. They want an explicit “FDA defense,” and they hoped that Congress would spell that out as part of the sweeping drug safety changes included in the FDA Revitalization Act.

That didn’t happen. Instead, at the last minute the House inserted a clause stipulating that nothing about the new law can be interpreted as relieving the sponsor of the obligation to “maintain its label in accordance with existing requirements.” Former FDA Deputy Commissioner Scott Gottlieb outlined the issue in yesterday’s Wall Street Journal and makes the case for why industry should be upset.

There is no doubt that the technical-sounding change is a setback for manufacturers facing liability suits. But the glass is still more than half full. Even without new product liability protections, the law should help manufacturers immensely by letting FDA rebuild its credibility as a regulator.

The tradeoff is clear: a tougher and more formally regulatory system that will restrict the market size for many new products. The payoff should come in the form of fewer rejections of pending applications, fewer nasty setbacks like the Avandia debacle or the Zelnorm withdrawal—and ultimately in fewer punitive actions by policymakers or juries who have lost faith in the ability of FDA to assure the safety of medicines.

It is not just product liability cases where the loss of faith in FDA’s credibility is costing the industry dearly. It is in product decisions made or not made, and in policy actions by state governments designed to step into the void. (The RPM Report took an in depth look at the cost of FDA’s credibility problems in this story. If you are not a subscriber, click here to register for a free 10-day trial.)

During the Food & Drug Law Institute advertising and promotion conference September 17, one session focused on a whole host of state legislative initiatives designed to clamp down on professional promotion by manufacturers. Pharmaceutical Research & Manufacturers of America VP Jan Faiks suggested that all of the legislative initiatives can be traced back to the premise that “FDA is in the pocket of the drug manufacturers and therefore the states must become mini-FDAs and do their own compliance and regulation.”

The new legislation holds that promise of reversing the impression that FDA just does industry’s bidding. In that end, that kind of FDA Defense may be even more valuable that a pre-emption clause.

Thursday, September 20, 2007

Shire's Portfolio Solution

Big Pharma management could do worse than take a look at Shire when trying to figure out how to get out of their mess. This specialty pharma turned biopharmaceutical firm has seen its market cap quadruple over the last five years, and just upped 2007 revenue growth guidance to at least 25%. It’s also managed to buy biologics and turn them into a future growth driver—as most Big Pharma are attempting to do.

Now granted, Shire still has a size benefit relative to Big Pharma: it takes less to move the needle. But eager to avoid becoming a top-heavy bureaucracy mired by politics and dulled creativity, CEO Matt Emmens and his team are thinking in terms of portfolio management as the company grows. “We see ourselves [at the corporate level] as a sort of holding company with portfolio businesses sitting under that structure,” Emmens tells IN VIVO Blog.

In other words, top management stays at arm’s length (where possible) with the bigger picture in mind. Beneath are a series of portfolio companies, each run by a separate head and with some degree of independence, steered by the top team. “The primary function of the top group is new business—what to be in and what not to be in. They are not involved in the day to day running of the business,” illustrates CFO Angus Russell. Business development folk sit in each of the units, but they report directly to the corporate BD head, not the head of the unit. That in theory avoids internal squabbles around resource allocation.

For now Corporate sits above two broad divisions, Specialty Pharma and Human Genetic Therapies (ex-TKT, acquired in 2005 for $1.6 billion, shocking the market at the time). It’s a logical split given the fundamentally different nature of biologics versus small molecules. But the fact that TKT has barely changed since it was acquired--“If you went to Cambridge [MA, HGT's main site] now and compared it with four years ago it would probably be the same,” says Emmens, except for the 50% more people—best illustrates the hands-off approach. And the principle applies to the ADHD, GI and renal business units within Spec Pharma too.

Apparently the arm’s length strategy isn’t just helping internal productivity, it’s helping win licensing deals, too. Shire in June won a competitive auction for ex-EU rights to Renovo’s Phase II scar treatment Juvista, a human form of TGF beta 3, for $75 million up front and a $50 million equity stake. Shire beat the Big Pharma, in Renovo CEO Mark Ferguson’s eyes, because it could point to TKT as proof that it was not about to grab the asset and run (not that Shire would have wanted or been able to do so). Renovo’s team will continue development of Juvista, with Shire funding trials relevant to US approval.

Juvista may yet form the seed of Shire’s newest portfolio company—in cosmetic medicine. It’s still specialist, low-ish-risk, with good IP, but provides Shire with a foot in the private market—not a bad thing given the pressure on reimbursement. (And look what Allergan did with Botox, say analysts.) Portfolio management again, then, this time balancing risk across different pricing mechanisms.

So what about Big Pharma? Stop the M&A and start managing a portfolio—which includes selling as well as buying.

FDARA: Changing Drug Development in the Guise of Safety Controls

The Food & Drug Administration Revitalization Act is famously the “drug safety law”—the once-in-forty-years major overhaul of FDA authority to bring the agency’s drug safety activities back up to par with the agency’s focus on drug efficacy.

But don’t overlook the fundamental changes that the new law will impose on the drug development process. It is likely to change drastically how companies seek FDA approval and how they support marketed products with further research. Some previous analysis of incentives in FDARA can be found here.

The separate versions of the law passed overwhelmingly in the Senate (S1082) and House (HR2900) over the last four months are being forged into one bill in active pre-conference discussions.

Two former FDA commissioners see fundamental changes stemming from the FDARA tools. They pointed out two of the major changes during a September 12 briefing on drug safety in Washington, DC, hosted by American University.

Phase IV--no longer the unchallenged province of drug sponsors: Mark McClellan, MD, says Phase IV, strategic research will never be the same again. The new public-private post-marketing surveillance project that is featured in FDARA will change the dominance of Phase IV by drug sponsors.

The “post-marketing period will move out of the control of the pharmaceutical industry,” McClellan declared. McClellan was the first FDA commissioner in the George W. Bush Administration (2002-2004). He currently heads the Engelberg Center for Health Care Reform at the Brookings Institution.

Faster NDA/BLA approvals for narrow, precise indications: David Kessler, MD, stresses the need for the agency and drug sponsors to act more creatively in the initial approval process.

Kessler sees an opening for FDA to encourage sponsors to study smaller patient populations in return for faster approvals and FDARA may provide the right tool for making that implicit deal occur. FDARA offers a form of tighter safety controls through risk management plans and post-marketing surveillance that could represent a new version of conditional approval. Kessler, vice chancellor of medical affairs at the University of California-San Francisco was FDA commissioner under George H. W. Bush and Bill Clinton (1990-1997).

The impact of FDARA on Phase IV cannot be under-estimated. For over two decades, pharma has lavished resources onto Phase IV to support extended indications, improving ties to medical thought leaders, generating cost data and justifications and gaining access to large user groups. The industry has also made commitments to FDA to carry on work on issues raised by FDA during premarket review.

After the American University event, McClellan was asked by Alicia Mundy (author of Dispensing with the Truth, a book on the Fen-Phen drug interactions) about the likelihood that FDARA would increase corporate compliance with FDA Phase IV requests. Asking whether the industry would still be able to use “stall tactics” to delay Phase IV regulatory commitments, Mundy expressed the general skepticism that has grown around the FDA-agreed Phase IV work.

McClellan chose to answer the question from a broader perspective: looking more at who controls Phase IV rather than whether companies meet or don’t meet FDA commitments. He noted that the new law will jump-start a big effort in post-market surveillance and increase that amount of research on commercially marketed products. The law’s encouragement of a public-private partnership and the $25 million initial funding for the program will start a separate effort—beyond the funding and control of pharma.

McClellan looks to other stakeholders in drug treatments to provide competing funding for post-marketing research: primarily health insurers, academic centers and employers. If those groups feel that post-marketing surveillance will help to cut down unsafe or unnecessary drug use, they clearly would have an economic and quality stake in supporting studies.

While pharma’s dominance of Phase IV appears to face a FDARA challenge, another part of the new law appears to provide a surprising boost to the effort to shorten drug trials and achieve faster initial approvals.

Kessler stated the opportunity for changing drug development in a call for a deal between industry and FDA to adopt smaller trials based on genotyping and a target of smaller patient populations. “The industry is in a conundrum,” Kessler said, is it “willing to narrow the number of patients it sells the drug to?” He believes FDA may soon be in a position to create incentives to get sponsors to aim at the smaller populations.

FDA could tell sponsors, for example, that one, redesigned trial incorporating genotyping information could suffice, Kessler suggested.

Kessler, who still frequently slips into the first person pronoun when describing FDA options, said: “Let’s say we are going to allow you to do one trial and we are going to ask you to genotype everybody in that trial.” The sponsor could use data from the first half of the trial to identify a predictive gene panel. The sponsor could then apply that genetic profile to the second half of the trial to determine whether the drug has a “high degree of effectiveness.” That type of development trial could be used toward a conditional or tightly controlled approval.

FDA is already moving in that direction, asking for information on very specific patient populations and then turning that information into very tight risk management plans.

That tailored market approach, in essence, is an updated version of a conditional approval. It is likely to be used more frequently following FDARA when the agency explicitly receives authority to create risk management plans for each approved product through the REMS (Risk Evaluation & Mitigation Strategies) provisions of the law. Kessler recognizes the potential larger role for REMS.

Risk management plans under the REMS procedures “could be no more than what the agency does now or it could be a drastic change in the way the agency controls drugs,” the former commissioner said. But he predicted that FDA will use the authority expansively and REMS will be applied to a “wide array” of products.
Sponsors will be required to submit information on the level of REMS program that they believe fits their product. A clear definition of the target audience will be an important part of those submissions and are likely to become a fulcrum for future FDA approval decisions. If a sponsor can show a well-defined population and a way to make sure that the product is used on that population, the route to approval will be much faster.
(Originally posted at The RPM Report.)

Wednesday, September 19, 2007

Sofinnova Partners Talks China



Add Sofinnova Partners to the list of venture firms taking more than a casual interest in China.

Today the firm announced hiring Chika Yoshinaga, MD, as vice president, Asia. A native of China who had moved to Japan, Yoshinaga will manage a Sofinnova office in Shanghai.

Life sciences investors have definitely taken a strong interest in China over the past few months. Essex Woodlands Health Ventures has invested in two China-based companies, according to VentureWire Lifescience. Meanwhile, Burrill & Co. continues to explore investment as well as business development opportunities through its Burrill Greater China Group.

But Sofinnova may be the first life sciences investor to actually set up shop in China. Again, according to VentureWire, Highland Capital Partners reportedly will open an office this fall, but the firm has invested solely in technology companies in China up until this point.

In hiring Yoshinaga, Sofinnova gains a VC who understands the Asian market. She was most recently deputy managing director at NIF SMBC Ventures in Japan, and her portfolio includes four companies in Europe and one in the U.S with names such as Acorda Therapeutics, BioXell and Innate Pharma.

IN VIVO Blog spoke with Sofinnova Managing Director Antoine Papiernik about the move.

IN VIVO BLOG: How did this arrangement come about?
Antoine Papiernik: Like everyone else who has been looking at China—because you cannot not look at China—we took numerous trips to China. We had this policy that every partner had to go to China and see it for themselves, both for the IT and the life sciences field, to get a sense of what was happening there. We came to a number of conclusions. IT is buoyant. In fact, maybe it’s too hot, but certainly things are happening. But the life sciences industry is completely at the start of things and if there was one place to start we thought it would be there. (VentureOne has some figures on this.)

IVB: How did you get to know Chika Yoshinaga?
Papiernik: We had worked with Chika for many years and she is a really special person. She is Chinese born and educated as a medic. and she has been working in Japan for the last four or five years for NIF. We invested together in several companies and we got to know her and like her. One thing led to another. We thought her experiences were at least as good as anyone looking at life sciences right now. We all decided: why not explore the possibility of doing business in China and planting an office there?

IVB: What sort of companies will you invest in?
Papiernik: “We may not restrict ourselves to what we do in Europe which is more drug discovery, drug development-oriented companies. We may explore a broader field of opportunities that we think may be better fitted to the Chinese market. (Contract research organizations, sales and distributors of devices are possibilities.) Today we are in the exploration stage and it’s too early to make conclusions on that front. Everyone there is on the same level, and the people who are active in China are doing a variety of things that can look quite eclectic. We will explore more over the next few months, and while we already have deal flow, a lot more things are going to start coming our way.”

IVB: How much of your funds might go to China?
Papiernik: “The bulk of what we do is investing in Europe. That is our key strategy and will remain our key strategy. Today we do invest 20% outside of Europe. Most of that traditionally goes in the U.S. So it’s probably out of that pool that any investments would come. We don’t have any set percentages. What is not going to change is our main focus is in Europe.”

IVB: Are you looking to invest in companies based in China or to pull technology out of China for companies based elsewhere.
Papiernik: “If such an opportunity exists on the business and development front we won’t refuse. That is another good thing about having someone on the turf."

IVB: Any concerns about intellectual property protection?
Papiernik: “Things are changing there. We think that things will become more Westernized in that respect and that any intellectual property needs to be protected the best we can. We will not do anything where the IP would disappear or be copied. That is another reason why the drug discovery play may not be the initial direction we take.”

IVB: Are there sufficient capital markets to support your companies after investment and to allow you to exit?
Papiernik: “If you take a five- to 10-year perspective I am absolutely certain there will be opportunities for people like us to make money in this market.”

IVB: Will you invest elsewhere in Asia?
Papiernik: “We also have a Japanese deal flow and thanks to Chika we’ll remain interested. They may not be deals located in Japan. It could be in-licensing or out-licensing technologies in Japan. (See more on specialty pharma players here.) We have (an IT-based) deal in Singapore. And all of us have looked at Indian deals. Again, our focus is Europe so the best opportunity we see is to have someone there.”

Tuesday, September 18, 2007

The Next Big Thing...

... is gene therapy, according to London-based boutique investment bank Mulier Capital, which is raising a $500 million Ingeneous Fund to invest in late-stage, listed gene-therapy companies.

Are they mad?, you ask. Gene therapy? That area steeped in controversy, which elicits visceral public reaction like no other? That dirty word that promised the world, yet delivered nothing more than disappointments, SCID kids, and the tragic, overexposed story of Jesse Gelsinger?

Yes, that’s the one. Now granted, these days, gene-based medicine encompasses all kinds of DNA-based drugs, not just traditional integrative gene therapy; the Mulier group also include the ultra-hot yet earlier-stage gene silencing approach, RNA interference, in their definition. Still, they reckon, it’s all about to happen. “Gene-based medicine is now 8.5 months’ pregnant,” declares Mulier’s founder and CEO Pieter Mulier, previously head of sales at Nomura.

So in order to be in the right place at the birth of this next big thing, the Fund will pool a series of “significant” stakes (up to 28%) in what Mulier describes as the best third of gene-technology companies, thereby spreading risk across about ten Phase III programs and over 30 Phase I or II programs, in earlier clinical phases. Investors will have access to the expertise of the Fund’s advisory board, which includes George Poste (needs no introduction), James Rothman, Chief Scientific Advisor at GE Healthcare, and Max Talbott, a Big Pharma veteran who is now SVP worldwide commercial development and gene-therapy firm Introgen. Given the size of the stakes it plans to buy, Ingeneous will in theory have the negotiating power to achieve the right valuation when (and if) Big Pharma does come bursting in.

Now, there’s no doubt that significant progress has been made in gene-based medicine. Having solved many of the technological problems hampering the field (most notably around delivery vectors) and learnt from its mistakes, the field now boasts about 30 Phase III programs (including Introgen’s delayed p53 tumor suppressor therapy Advexin), over 200 in Phase II, and a somewhat more comfortable FDA. This year has seen gene therapy IPOs—like Holland’s Amsterdam Molecular Therapeutics, which went out at the top of its range in June—and Big Pharma deals, like Oxford BioMedica’s March tie-up with Sanofi-Aventis for Phase III renal cancer immunotherapy TroVax.

But the inherent complexity of gene-based medicine—delivery system, drug, target, breadth of effect, duration of action—and still unanswered commercial questions (can these kinds of therapy make money? Are they practical to administer?) mean not everyone’s calling this the next monoclonal antibody revolution. As we’ll discuss in a forthcoming feature in START-UP, plenty of Big Pharma are still steering well clear; others like Johnson & Johnson are dipping cautious toes in via corporate VC. They, and similarly tentative VCs, are anxious not to miss out completely just incase gene therapy does take off.

It’s this tantalizing ‘what if’ that Mulier is trying to exploit in pulling in its investors, a mix of institutions and high net worths that Mulier says have already made $300 million worth of ‘soft’ commitments. If the first gene-based medicine is approved in 2008, as optimists expect, then perhaps the sector’s value will explode. But if anything goes wrong—even just one SAE, for instance, as in the case of Targeted Genetics’ AAV-delivered inflammatory arthritis candidate, which the Recombinant DNA Advisory Committee is still pondering over)—then there’s a serious risk that investors will be left high and dry.

So gene therapy’s still a gamble. But IN VIVO Blog agrees with Mulier in believing the odds look better than ever before.

Can a Sleep Drug Awaken Demand from European Consumers?

Superficially, it’s paradoxical.

Sepracor wouldn’t sell US marketing rights to its sleep drug Lunesta, even though it could probably have gotten a great deal. And then last week it goes and sells European rights to GSK for just $20 million upfront and another $135 million in milestones?

OK, that’s by no means a true yawner. But it’s hardly a wake-up call in this age of colossal licensing fees and milestones. VX950, the barely post-proof-of-concept hepatitis C candidate from Vertex, fetched $165 million upfront, and $380 million in pre-commercial milestones for merely European rights. Why didn’t Lunesta, with US sales approaching $600 million, do at least the equivalent?

Because the comparison isn’t at all fair. Hep C is a life-threatening disease currently treated with a couple of inadequate, problematic therapies. Insomnia is probably just as big a market -- but is less important to doctors than it is to patients (for some background on the insomnia markets and related dealmaking, see our coverage here and here).

And that’s precisely the challenge. In the US, Sepracor sets its own price and then can spend hundreds of millions of dollars getting its message out to consumers. In Europe and Japan it can do neither.

Which means that Lunesta will have a lot more commercial risk outside the US than something like VX950. GSK’s $20 million bet on the product isn’t exactly trivial, but it isn’t a huge vote of confidence that European insomniacs and their doctors will clamor for Lunivia (European for Lunesta) in the face of a host of generics like racemic zopiclone, Ambien, and a number of benzodiazepines.

And it’s why so much of the deal’s $135 million in milestones apparently depends not merely on getting a centralized approval, but on getting reasonable levels of pricing from various European countries. Sepracor could still make plenty of money: we estimate that it’s getting what might, on a blended basis, work out to a 15% royalty (the rate increases with sales) plus another 10-15% profit on selling the material to GSK. But Sepracor will only make money if the drug is successful.

Thus the $20 million upfront fee represents a cautious gamble that Lunesta’s data package will not only pass muster with the EMEA, but will convince the national reimbursement groups that they should pay a premium for a drug that can be used chronically and which comes with a host of data showing its beneficial effects on insomnia-associated co-morbidities, like depression.

Same thing in Japan, where a pricing milestone on Lunesta is also a key part of the value in the deal Sepracor signed in July with Eisai. The upfront in that deal was probably considerably smaller than what GSK paid: not only is the market about half the size of Europe, the product has to jump through more clinical hoops before it can be approved. In any event, the Eisai terms were undisclosed, which means they weren’t material.

Financially material that is. Sepracor is certainly hoping they’ll be seen as strategically material. The company has recently been a punching bag for investors, taking particularly heavy punishment when new CEO Adrian Adams lowered revenue expectations for 2007 during the company’s July earnings call.

Thus the biggest value to the deals may yet be validation for Sepracor’s ability to take a product developed in the US and convince leading CNS companies they can rely on the company’s US clinical and marketplace work to win approval for, and successfully commercialize, a consumer-driven product in markets where consumers don’t rule.

Monday, September 17, 2007

A New VC On The Block. Finally!

News of Third Rock Ventures closing on its new $378 million fund got us thinking. It’s been a long, long time since a new potentially top-tier venture firm has hit the scene.

No offense to firms like Clarus Ventures or New Leaf Ventures. True, both raised their first funds over the past few years and both will try to raise follow on funds over the next few months. (Clarus will go out later this year. New Leaf is out, according to VentureWire LifeScience.)

But neither of those firms presented new stories. Clarus split from MPM Capital. New Leaf Ventures was an off-shoot of Sprout Group. Their teams and strategies were largely the same.

So IN VIVO blog is more than a little excited at the formation of Third Rock for a few reasons. First, the name is cool (kudos to partner Robert Tepper). Second, the strategy is unique and very ambitious. Third, limited partners lined up quickly behind a concept story that is has a fair chance for success given the team but is by no means a slam dunk. A new life sciences venture firm hasn't generated this much buzz since Care Capital in 2000.

It's worth noting that Third Rock’s success comes amid some bad news in the venture industry overall. Venture capital fund-raising, according to VentureOne, is way down. Venture capital firms raised $6.3 billion over the first six months of the year. If that pace continues—and second halves don’t typically exceed first halves—the $13 billion total would be the second or third lowest total in the past 10 years, matching the 2002 tally. Only 2003 stands out as the worst year with $9.9 billion raised. More recently, limited partners over the past two years have committed $25.3 billion and $24.7 billion in 2005 and 2006, respectively. So a $13 billion finish would be an enormous disappointment.

Also, there's been particular bit of bad news for many venture funds--namely, they don't exist any more. Check out this analysis by OVP Venture Partners. It suggests that there are half the VC firms around today than there was in 2000. Not really suprising, but an interesting study.

But the life sciences have largely been immune to this bad news. We haven't had any signficant blow up of venture firms, except the break up that created Clarus and MPM. But no significant firms are dissolving, giving back money or even falling on hard times.

Check out the fund-raising for the past few years. Our industry's top tier firms have done exceptionally well in fund-raising: Alta Partners, Clarus ($500 million), MPM ($550 million), SV Life Sciences ($572 million), Abingworth($587 million) Essex Woodlands Health Ventures ($600 million) and, of course, Domain Associates ($700 million.)

The good times should continue to roll for the industry's blue-chip. Clarus and New Leaf will get their capital. Meanwhile, IN VIVO Blog was told that Frazier Health Care Ventures shouldn't have much trouble securing the $600 million it'll be seeking for its new fund. And can Versant Ventures and Prospect Venture Partners be far behind? Both last raised their funds in 2004, so if they're not out this year expect them to be raising money in 2008 (probably along with Delphi Ventures as well.)

Meanwhile, we're anxious to see what Third Rock Ventures will be able to do.

While You Were in Italy

Temple of Antoninus and Faustina


Your blogger spent the past four days overeating in Rome and Tuscany and trying and failing to think of a Roman empire/Big Pharma joke, and all you'll get is this lousy weekend/early Monday roundup. What, you wanted a T-shirt?
  • We came, we saw, we outsourced: AstraZeneca to offload all manufacturing activities, the Times is reporting this morning.
  • Et tu, Dan? Via Reuters: "I have no indication that could confirm any rumours about tie-ups between big players in the sector," Vasella told French newspaper La Tribune in an interview.
  • Ahead of Sanofi-Aventis' R&D meeting today, the company says it will bulk up in biologics. We'll have much more to say on the Big Pharma haves and have-nots in the biologics world in the next IN VIVO.

Friday, September 14, 2007

EPO’s Future Back in FDA’s Hands

FDA Commissioner von Eschenbach: Whose Side is He On?


That sigh of relief you heard on Tuesday came from Amgen and Johnson & Johnson, when an FDA advisory committee declined to recommend significant changes in the labeling for EPO products in renal failure patients. As a commenter put it in response to our preview of the meeting, “history didn’t repeat itself.”


Probably just as important for the companies was the tone of the meeting. It was a tough meeting—any advisory committee focusing on safety concerns with your biggest products is going to be tough—but in general FDA officials avoided making inflammatory comments or otherwise suggesting that they are going to somehow make life even tougher for the anemia therapy sponsors.


After the meeting, a bunch of Wall Street analysts did something they haven’t done in a long time: they raised their forecasts for 2008 revenues from Aranesp, Epogen and Procrit, and Amgen’s stock responded accordingly.


So is the worst over?


Well, that depends. After the meeting, FDA officials said they plan to finalize the new labeling for the EPO therapies in a matter of weeks. The new labeling will address use of the drugs both in the renal failure/dialysis setting and in oncology.

And right now at least, the oncology setting is where the action is. Amgen, J&J and the oncology profession are waging an all fronts campaign to reverse the restrictive coverage policy put in place by the Centers for Medicare & Medicaid Services in that setting.


A key point of contention is whether CMS’ policy contradicts the FDA-approved labeling for the drugs. (The RPM Report has just published its latest coverage of that issue online. Not a subscriber? You can read the story for free by registering for a 10-day trial here.)


The argument that CMS is restricting access to FDA-approved uses of EPO clearly resonates politically. ASCO’s point about the conflict between CMS’ policy and the EPO label was cited in a “sense of the Senate” resolution urging reconsideration of the coverage decision.


So when FDA issues final labeling plenty of people will be paying close attention. The sponsors hope that FDA will reinforce their view that CMS’ treatment model is ridiculous—in particular, by repudiating the ceiling that CMS has set on hemoglobin levels for chemo patients. If that is how the final labeling reads, the pressure on CMS to reconsider its policy is sure to intensify.
Of course, there is another possibility: FDA could back up CMS instead.


FDA is not likely to insist on labeling that requires treatment exactly along the lines proposed by CMS, but FDA could try to tweak the labeling so that it more clearly states that treatment should maintain hemoglobin levels at the lowest level to prevent transfusions.


Or the agency could support CMS less formally, simply by stating publicly that the coverage policy is consistent with FDA approved labeling. FDA Commissioner Andrew von Eschenbach is an oncologist by training, the former head of the National Cancer Institute, and a prostate cancer survivor. With the political pressure on CMS ratcheting up, the Medicare agency is surely rooting for some show support from the commissioner of FDA.


But will they get it?


So far, there has been nothing. An FDA spokesperson says she is unaware of any plans for the agency or the commissioner to weigh in on the coverage policy, saying that falls outside the agency’s “central mandate to review drugs for safety and efficacy.”


The head of FDA’s Office of Oncology, Richard Pazdur, participated in the September 11 advisory committee review of EPO use in renal failure, but he did not use that forum to make any comments about the CMS coverage policy.


But stay tuned. The September 11 advisory committee review is definitely not the last word on EPO.

Third Rock Ready To Roll

Look around the newswires today and you’ll see Third Rock Ventures wrapped up $378 million for its debut venture capital fund. Great news, no doubt, but we have to ask: Can Third Rock Ventures really, as it intends, resurrect early-stage life-science VC?

As we reported back in May (Third Rock exceeded its $300 million target), the Boston-based venture firm started by a team of former Millennium Pharmaceuticals Inc. executives is intent upon performing “true venture capital.” You know, the kind of roll-up-your-sleeves, get-your-hands-dirty, or fill-in-any-other-tired-venture-capital cliché to describe the investing that you don’t see a great deal of any more from life sciences VCs, a number of whom seem quite comfortable putting millions into companies with late-stage clinical products.

The principals at Third Rock Ventures want to operate much further upstream. Their aim is to build “product engine companies” capable of employing a novel technique or technology—be it biological, chemical, intellectual or whatever—to develop multiple products and to target multiple diseases. In short, Third Rock wants to build the next Sepracor, Millennium, Alnylam, GlycoFi, Momenta, you name the big-picture company.

And when we say Third Rock wants to build these companies that’s exactly what they intend to do. The six general partners—including former Millennium CEO Mark Levin—expect to hold key management positions at these start-ups during the first year or so. They’ll negotiate the deals, set up the shop, do the hiring, etc., etc. to assure these companies get off to the right start. “We’ll be the start-up team,” says Kevin Starr, the former chief operating officer and chief financial officer at Millennium. The partners will serve CEOs, heads of science, whatever is necessary “to make sure these companies are built the right way, have the right cultures, hire the right people, and do the right partnerships. We are going to get involved in a hands-on way.”


Starr says Third Rock’s approach is “quite different than what is currently out there” in venture firms, and he’s right. No doubt, a handful of venture firms still start companies from raw research (See our recent visit with Polaris Ventures) but it’s usually just part of their portfolio, a small part. Starr expect 75% percent of Third Rock's portfolio to be “product engines” built by the firm's partners' own hands. The remainder will be less complex therapeutics companies developing new drugs or devices. Starr says Third Rock should invest the fund in 12-15 companies in three to four years.

That means Third Rock is providing considerably more than just the sweat equity of Starr, Levin and fellow partners Nick Leschly, Lou Tartaglia and Robert Tepper (they’ve all played big roles in Millennium and other companies, please go here for their full and impressive backgrounds). The firm will be positioned to invest up to $30 million into a single company, which, if the firm executes as it hopes, should provide significant stakes in these companies.

This capital plays into the second-part of Third Rock’s bid for “old school” venture capital—get bigger returns by creating companies that require less capital. The math is fairly simple. Venture investors pouring $100 million to $150 million into a company better hope to see the company’s value hit $500 million to $700 million at some time or another, or else they’re not going to see a venture-style return.

Third Rock’s answer: Max out venture investments at $50 million; get pharmaceutical companies to step in with the capital and infrastructure necessary to perform late-stage clinical trials. “It doesn’t make lots of sense to build large clinical groups in early-stage companies,” Starr says. “It doesn’t make sense to build large regulatory groups. Those are things that pharma does very well. We are going to do that collaboratively with pharmaceutical companies.”


All this sounds simple yet very, very ambitious even for a team accomplished as this one. It's the rare start-up that can, in its first few deals, demonstrate enough value to a partner to justify a major-dollar deal. On average, biotechs raise about $100 million in equity before they're ready to go public; most of the more significant acquisitions raise well north of $50 million before the buyer bites (e.g., NovaCardia had raised $88 million by the time Merck bought it for $350 million--a way-above-average return). For Third Rock Ventures to pull off its strategy, it will need to do...well... a Millennium: the company that managed, while Levin was CEO, to raise, via breathtakingly expensive discovery deals, more partnering capital per equity dollar than any other biotech, carving up the diagnostic and product rights to its technologies like a netsuke master.


Now you can quibble with what happened to Millennium--none of its pharma discovery deals drove value to its partners (for lots of reasons, not all of them Millennium's fault)--see, among our other commentaries, here and here. And largely because the discovery-partnership market dried up, and its discovery engine itself produced less than required, Millennium ended up developing precisely the kind of infrastructure Third Rock's partners say their portfolio investments will eschew.


But it's a new day. Discovery is back in fashion; so is the concept that biotech can make plenty of money providing high-value early-stage material for Pharma (and that Pharma might just as well ratchet way back on its own internal discovery spending). And Mark Levin is preternaturally capable of seizing, and commercializing, a trend. In any event, the new fund's limiteds have faith: the company reached its hard cap after less two months or so on the capital-raising trail. IN VIVO Blog certainly looks forward to watching and we would not bet against these guys. But we’ll tell you more, lessons learned from the Millennium experience, and what others have to say, in the upcoming issue of START-UP. Feel free to offer a comment.