Tuesday, November 20, 2007

Pharmion’s Euro Bet Pays Off

So while we all speculated on who might buy Biogen Idec and whether Genzyme would be next, out comes Celgene with its $2.9 billion cash and stock offer for Pharmion (35% cash, 65% equity, at an almost-50% premium to Friday’s close). “We didn’t see this coming,” admitted Citigroup analyst Yaron Werber on the conference call.

Neither did we. But it makes sense: it’s another case of licensor buying licensee, since Pharmion had in 2001 acquired ex-US rights to Celgene’s controversial yet successful thalidomide (Thalomid), marketed first for leprosy in the US and then for multiple myeloma. That deal (amended three years later) had already given Celgene a small equity stake in Pharmion; now Celgene receives 100% of ex-US sales instead of the 23.5% royalty that Pharmion otherwise would have paid.

The big problem is the potential for anti-trust issues: Pharmion’s biggest-selling drug, azacitidine (Vidaza), was approved in 2004 for myelodysplastic syndromes (MDS), the same indication targeted by Celgene’s leader, Revlimid (a variation on the thalidomide theme, lenalidomide) which is on track for nearly $1 billion in sales this year.

The companies have indeed allowed an extended period for FTC review, saying the deal won't close before the end of the second quarter of 2008. But Sol Barer, Celgene’s Chairman and CEO, expressed confidence that anti-trust would not scupper the deal, claiming that Revlimid and Vidaza address very different market segments within MDS. Indeed, this deal will be less about overlap and cost-cutting than about leveraging Pharmion’s commercial organization, he said.

Now admittedly, Pharmion’s European organization is smaller than Celgene’s in sales rep terms. The opportunity there, noted Barer, is for cost-avoidance, since Pharmion was about to strengthen its European infrastructure pending Thalomid’s imminent approval. (For now the drug's only used off-label in Europe.) Now it may not need to. But Celgene certainly will tap into Pharmion’s European expertise as it launches Revlimid in Europe—this was Celgene’s first EU drug approval in June 2007.

Indeed, it’s Pharmion’s European angle, along with its focus, that ultimately allowed it to score this high value deal, worth over 10 times its $256 million in annual revenues. CEO Pat Mahaffy knew from the time the company was founded in 2000 that a European presence would stand the company apart from its in-licensing-focused peers. (You can read more in this 2002 IN VIVO feature.) He’d seen it happen already during his time as CEO and president of NexStar, sold to Gilead in 1999 for $550 million in large part because of the European sales force that Mahaffy had set up.

By being one of the first to offer an integrated development and commercialization service in Europe, Mahaffy reckoned he’d win some product rights on which to build the business. He did. He won Thalomid, though hardly a risk-free proposition, even now: Gruenenthal, the original marketer of thalidomide in its original indication as a treatment for morning sickness, still faces lawsuits. (Read more on this website.) Pharmion also won rights to Vidaza from Pharmacia, again taking a risk since the project had stalled and required further late-stage trials ahead of approval.

The gamble on Vidaza paid off, though: promising Phase III results released in August triggered a near 60% rise in Pharmion's share price, more than undoing the downward blip earlier that summer when GPC's satraplatin, to which Pharmion has European rights, first stalled at the FDA. Pharmion's shares have been rising ever since. Indeed, Celgene's generous premium comes on top of a near all-time-high for Pharmion's stock--more than enough incentive to sell even if Mahaffy didn't want to.

And from our conversations with him, he probably didn't. Mahaffy was one of the few industry CEOs who really did seem to want to build a stable, independent business. More than that: Pharmion is one of the few spec pharmas which seems to have the capacity for long-term independence (a challenge we discussed in this IN VIVO feature), having built an expertise--in European commercialization and in oncology--that distinguishes it as an in-licenser, allowing it to punch way above its weight in the competition for important products.

Congratulations to Pharmion's shareholders. But we're still a little saddened by the loss of one of the rare recent start-ups which succeeded based on a truly innovative commercial strategy.

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