Tuesday, September 30, 2008

Pfizer to Tin Man: Drop Dead

You're axing what?

Pfizer is, according to today's Wall Street Journal (not to mention at least one astute blogger last week), giving up on R&D in heart disease, obesity and bone health.

The big news here is the abandoning of cardiovascular medicine--Pfizer's profit center driven by $17+ billion annual revenues from Lipitor and Norvasc--but of course there are exceptions to consider. Pfizer isn't dropping its late-stage programs, like the much-written about apixaban, for example.

But the strategic shift, not wholly unexpected and certainly not conflicting with statements made by Pfizer leadership lately (including comments by R&D chief Martin Mackay and head of strategy Bill Ringo at FDC/Windhover's Pharmaceutical Strategic Alliances meeting last week) says a lot about where Pfizer--and Big Pharma generally--is moving.

Where's that? Toward a greater emphasis on specialty therapeutic spaces like oncology (look for a feature on Pfizer's oncology ambitions in the next IN VIVO) and into large molecules like next-generation biologics, of course. By now this is not a surprise, but just how Big Pharma manages to transform itself while at the same time dealing with massive patent expirations and the demands of dividend- and buyback-hungry shareholders remains to be seen. Nevertheless, pulling out of the increasingly genericized cardiovascular space and some other primary care areas should speed this transition.

Some of the smaller top-tier companies, like Bristol-Myers Squibb, can make do with focused business development strategies--the acquisition of Adnexus, for example, or the please-let-it-be-over-soon-we're-so-sick-of-it Imclone takeover. For Pfizer such add-ons won't do the trick. But Bill Ringo noted at PSA that although Pfizer on the whole would have trouble moving the growth needle with a string-of-pearls strategy akin to BMS's, it could do so within the context of specific disease areas. Cardiovascular R&D is clearly not one of those areas.

Layoffs are likely (as of now still no official word from Pfizer on the cuts). But look also for more Pfizer spin-outs like the Japanese business RaQualia and the second incarnation of Esperion, as well as out-licensing deals, to help smooth the transition. Pfizer has, by its own estimates, too substantial a Phase II pipeline to take through to pivotal trials. "We need to be more creative with development," noted Mackay at PSA, and he said RaQualia was a good example of that creativity at work, as was the apixaban deal, which could be replicated in the other direction with Pfizer partnering on one of its own Phase III candidates. What should be worrying to Pfizer and other pharmas is that despite a Phase II glut these companies have a difficult time determining which post-proof-of-concept projects will succeed in Phase III and at the regulators.

Pfizer isn't the first pharma to abandon what most would consider its core therapeutic space. GSK and AstraZeneca, for example, sustained for years by the profits from GI franchises, each exited the bulk of their R&D in that area (witness AZ's spin-out of Albireo, though that pharma has noted it remains active in GERD research whereas Pfizer seems unlikely to continue in hypercholesterolemia R&D).

So where does the Tin Man turn when his new ticker gets rusty? And where do those small pharma and biotech companies in need of a partner for their next-big-thing HDL raiser or anti-hypertensive turn? In this up-is-down, black-is-white pharma shift to specialist drugs, perhaps primary care becomes the domain of a few specialists while the rest of the industry piles into oncology and orphan drugs.

One further irony: even as its exits cardiovascular research, Pfizer wants to remain one of those few remaining primary-care specialists. Bill Ringo noted exactly that at the PSA and in this article in IN VIVO -- as other Big Pharmas cut back primary-care commercial programs to boost their presence in specialist marketing, Pfizer, while certainly doing the specialist thing, is going to keep its primary-care capabilities, theoretically giving itself a comparative advantage as an in-licenser when it comes to those increasingly rare, and expensive, late-stage primary care candidates.

Monday, September 29, 2008

Waiting on Prasugrel: No News is Good News

Another NDA, another missed deadline.

This time around, it’s a product upon which Eli Lilly has hung much of its future, the anti-clotting drug prasugrel (Effient).

Lilly has already been on a rollercoaster ride on Wall Street over prasugrel once the risks associated with the drug surfaced (32% increased chance of bleeding). And time is not on Lilly’s side: the company is racing to establish the drug on the market before 2011, when Plavix generics will complicate the anti-clotting landscape.

Prasugrel has also been closely watched as another sign of how FDA will use its new risk management authorities under the FDA Amendments Act. The billion-dollar questions: would FDA agree that the bleeding risk associated with prasugrel could be appropriately managed by a REMS, or is more needed for approval? And is there any chance for a relatively clean label?

All that makes prasugrel the closest-watched drug approval this year. Indeed, between the September 26 prasugrel user fee deadline and the Wall Street bailout agreement, there were more than a few investors who were constantly refreshing their computer screens as Friday wore on.

While a bailout deal may be at hand, we’ll have to wait a little longer to find out about the fate of prasugrel. For now, Lilly’s not talking, except to say—in a press release that crossed the wires at 5 pm on Friday—that FDA would miss the deadline, that the review is “very far along,” and that Lilly “remains optimistic” that an approval is imminent.

Wall Street’s immediate reaction was not positive—the announcement drove Lilly shares down 3.9% to $45.01 in after-hours trading, and shares opened lower this morning. Les Funtleyder at Miller Tabak expressed his frustration in a research note: “This has become a bit of an unsettling trend at the FDA. The decision tree used to be pass or fail, now there is a third column, the ‘I don't know.’” (Hat tip to CNBC).

We think that pessimism is misplaced.

We told you three months ago why we think FDA will approve prasugrel, and that reasoning hasn’t changed. Indeed, the fact that the agency missed the user fee deadline bodes even better for the drug’s prospects, because it indicates—barring any last-minute surprises—that an approval is close at hand.

Here’s why: Since FDA’s drug review divisions were given the green light to start missing deadlines, most of the applications delayed by workload issues were eventually approved within weeks, based on a recent analysis in The RPM Report. (If you don’t already subscribe, you can sign up for a 30-day trial to access the story.)

For one recent example, look no further than Amgen’s Nplate, which cleared FDA a little over two months after the user fee deadline. GlaxoSmithKline’s Entereg was approved 10 days late. UCB Pharma’s Cimzia was three weeks late. And there are other examples of how small allowances for heavier workloads at FDA have led to product approvals.

There are many reasons for a missed deadline, and some (like finding enough members to staff an advisory committee) have led to months-long delays for new products. But that’s doesn’t appear to be the case with prasugrel: “This is a very large, complex submission, and it should not be surprising that delays occur,” Lilly said.

Given the much-ballyhooed size of that NDA package, perhaps it’s not surprising that it would take FDA extra (and then some more) time to read through it. The absence of an advisory committee meeting for prasugrel is also a positive sign, given that drugs without one have a greater chance for a first cycle reviews.

Sanford Bernstein analyst Tim Anderson agrees that no news is good news: “Our best guess at this point is that while the Effient review is not yet complete, a final decision by FDA is not likely to require that LLY/Daiichi-Sankyo generate new clinical data; the issue may be a smaller one like finessing the label, the risk management plan, etc.”

We couldn’t agree more.

Cephalon Learns Some Old Tricks to Protect Old Products

You can’t teach an old dog a new trick. But some recent product lifecycle management strategies by Cephalon suggest that you can teach a maturing company some old tricks to save old products.

It is probably a sign of Cephalon’s advancing age (passing the 20-year milestone in 2007) that the company is now at the stage where strategies to combat loss of exclusivity are as important as new product development.

It is employing some clever strategies: not exactly new but aggressively executed.

The first strategy uses pricing to create niches for new products and to lengthen the tail of a franchise. Specifically, Cephalon is using high, pre-expiration price hikes to create attractive slots for follow-on compounds and, intriguingly, for its own generics. (See here).

Two examples demonstrate Cephalon’s approach: Provigil (modafinil), the company’s current flagship product heading toward loss of exclusivity in April 2012; and Actiq, which began facing generic competition in the third quarter of 2006.

Cephalon has begun taking big price increases on Provigil (12% in August). The company’s investor relations VP, Chip Merritt, told an investment meeting earlier this month that that increase is just the start. “You should expect that we will raise Provigil prices to try to create an incentive for the reimbursers to preferentially” move to the next generation product, Nuvigil (armodafinil), which has been approved by FDA but not yet launched.

Similar price increases on Actiq in the two quarters prior to the start of generic competition for the fentanyl lozenge created room for another oral dosage form, Fentora.

But it also, created an opportunity for Cephalon to introduce its own "authorized" generic at a price that the company found attractive. Having three products in the oral fentanyl field (Actiq, Fentora and a generic) has permitted Cephalon to maintain a franchise at about $120 million per quarter since Actiq lost exclusivity. That’s higher than the quarterly sales that the company had from Actiq alone prior to its pre-expiration price hikes.

The second strategy of Cephalon’s young adult period is to find alternative exclusivity protections for a recently introduced product. That may, technically, be more of a product development strategy than protection of an aging product, but in Cephalon’s case, it was a way to take an old product (with thirty years of experience in Europe) and make it a new product with five to seven years of exclusivity (See "Wacky World of Generics: Treanda Edition").

The product is Treanda (bendamustine). Approved earlier this year for the first time in the US, the product treats an orphan indication (chronic lyphocytic leukemia – 15,000 new cases per year). The orphan indication gives it seven years of exclusivity for that use. But Cephalon has other plans for the product, so the company has found another form of exclusivity – and this is the clever part. As an old compound, it does not have a listed patent in FDA’s Orange Book. That means that there is nothing for companies who want to challenge the patent to challenge. That could lead to up to six and a half years of effective protection for the product.

Cephalon is performing its tricks well. The company just needs to pay attention to the patients using its products and regulators and payers who may develop an attitude towards the company that could come back to haunt it. When the company took the aggressive Actiq price increases, the web began to fill up with plaintive accounts of cancer patients trying to afford the medication. Too much of that and it won’t matter how long the company is able to stretch the life of products.

While You Were Debating

We know you spent the weekend discussing the liklihood of a Phillies' sweep in the NDLS. I mean, what else could possibly merit your attention?

Well, there was that face-off in Oxford, Mississippi between two Senators both trying to look presidential. Congressional leaders and the Bush administration also agreed to the terms of a revised $700 billion bail-out package that will be voted on today in the House. And of course, there was Tina Fey--what's the word I'm looking for? Oh, yes...mocking--there was Tina Fey mocking Sarah Palin's recent girl-talk with Katie Couric. We can't wait for Thursday night's confab with Senator Biden.

Meanwhile in our own industry, a mostly quiet weekend was interrupted by the following newsmakers:

* Regeneron and Bayer HealthCare announced positive Phase II results with their VEGF Trap-Eye in patients with wet AMD at the 2008 annual meeting of the Retina Society in Scottsdale, Arizona.

* FDA delayed for a second time its decision on the approval of Daiichi Sankyo and Eli Lilly's blood thinner, prasugrel (Effient). FDA's decision, which the companies announced after the market closed, drove Lilly shares down $1.81, or 3.9%, to $45.01 in after-hours trading. At least one analyst wasn't fussed about the drug's potential approval: Catherine Arnold of Credit Suisse group, wisely noted that "no news is no news."

* Anemia drugs continue to draw fire. This time US regulators are reviewing the use of anemia meds from Amgen and J&J in stroke patients after a German study linked a J&J version to increased deaths.

* The WSJ reports that more than a dozen non-governmental organizations pledged more than $400 million to improve access to clean water and sanitation in the developing world. The effort, dubbed the "Global Health Mega-Commitment on Water and Sanitation" for the Clinton Global Initiative, aims to reach 8.5 million people and provide a billion liters of clean water to developing areas over the next several years. Among the most visible donors: Napo Pharmaceuticals Inc, with a $300 million pledge for anti-diarrheal drugs over seven to eight years in parts of Africa and the actor Matt Damon.

* The turmoil in the market could spell trouble for M&A according to the FT. Deals at risk, according to the paper, include our favorite deal to expound upon: the Roche-Genentech tie-up. (Hey, it's been a couple of weeks since we mentioned it here on the blog.) We aren't sure if it's fair to blame paralysis in the markets for Roche's unexpectedly slow response to Genentech's polite but chilly "Thanks, but no thanks" from a few weeks back.

(Photo courtesy of Flickr user mrdorkesq through a creative commons license.)

Friday, September 26, 2008

Wacky World of Generics: Thalidomide Edition

Even the title has to cause shivers or a good shake of the head. Thalidomide? Generics? The two words don’t belong together: it can’t be possible.

How can thalidomide (the infamous teratogen and source of the crisis that led to the 1962 FDA efficacy amendments) be the source of a debate about generic use? This is not wacky. This should be inconceivable.

But it’s not.

Celgene’s highly successful Thalomid brand of thalidomide, with sales last year just short of $450 million, has passed its tenth year on the market. And it faces a generic challenge from Barr Labs, which has an ANDA pending for the drug’s initial orphan indication, treatment of the cutaneous lesions of erythema nodosum leprosum.

Now, a struggle is developing on the ability of generic companies to replicate the tight risk management program that Celgene developed to make thalidomide a commercial product.

To get Thalomid to the market, Celgene developed a strictly controlled distribution and patient contact /education program called STEPS. The company devotes more than 175 employees to maintain its risk management programs. The program is so important to the commercial use of the product that Celgene has a patent on the program itself.

STEPS may represent a steep barrier to generic copies; at least that is what Celgene hopes. The company has laid out its arguments against FDA approving generics in a petition filed with the agency a year ago: Sept. 20, 2007. (For an anlysis of the Celgene petition, see our coverage in “The Pink Sheet.")

FDA’s eventual decision as to whether the thalidomide risk management program can be copied or mimicked will be of major significance to the entire industry.

As FDA begins to require more risk management programs (now called REMS – Risk Evaluation & Mitigation Systems) as integral parts of NDA approvals, these post-market controls have the potential to significantly lengthen the life of brands.

Or as Celgene pointedly argues to FDA: "In many ways, the survival of the company depends on the successful implementation of its novel restricted distribution plans." Give away its risk management program to another marketer and FDA will give away the core of Celgene’s ability to market thalidomide safely. The company notes that it has successfully prevented patients from experiencing the horrors of the teratogen. If another company is distributing the ingredient less carefully, it would hurt the public, the drug industry and Celgene’s brand.

But FDA was specifically instructed in the FDA Amendments Act (passed a year ago in September 2007) to prevent companies from using REMS as barriers to generic competition. Something is going to have to give.

The decision on STEPS will be one of the important early precedents arising from FDAAA. It is significant that Celgene used ex-FDA general counsel Dan Troy to craft its arguments to protect STEPS and Thalomid.

Not only is Troy a prominent figure on the issue of FDA’s ability to control industry marketing practices, he has also recently become the general counsel of GlaxoSmithKline – assuring that the issue of the value of REMS as a way to block generics will get the attention of at least one other major pharma player. Indeed, GSK has been--by accident if not design--one of the most active early players in shaping how the REMS authority will be used, having already agreed to three programs for its new products, and with a fourth pending for Promacta.

In the wacky future world of generics, companies will have to learn how to replicate post-marketing control programs as well as how to replicate the chemical structures. The safety programs may turn out to be harder to copy.

Deals of the Week: Slowly, Unsurely

Any day now.

The subheading to today's press release announcing that the intrepid Fluidigm was withdrawing its S-1 says "the company will wait for markets to stabilize." After the week that was, to us that statement is akin to saying that it'd be nice to walk from New York to Lisbon, but we "will wait for plate tectonics."

Who else remains stranded on opposite sides of a slow moving divide? Everyone's favorite biopharma pen-pals Carl Icahn and Jim Cornelius continue to entertain ("absurd!"), though we may have to wait until next week to find out the identity of Imclone's mystery $70 bidder. Alpharma has once again rebuffed King's takeover offer ("inadequate!"). UCB said it was withdrawing its application for European approval of lacosamide in neuropathic pain, citing an advisory committee's view that further clinical study would be necessary to fully demonstrate the drug's efficacy. A deal was reached to settle the details on the bailout of US banks until it wasn't but then it was but no, in fact, it wasn't. We're still not sure whether Barack Obama will be debating an empty lectern down in Mississippi tonight (and that isn't a political statement).

And don't even get us started about the tightening of the NL East race and its potentially waterlogged climax.

In these uncertain and precarious times, however, you can still rely on the movers and shakers that strike ...

Ligand/Pharmacopeia: If alliance encumbrances can sometimes hinder a deal (we're looking at you, Biogen Idec) they can also it seems add up to the primary rationale for a takeout. Royalty/discovery play Ligand said it was buying Pharmacopeia on Wednesday, noting that the $55 million deal was driven first and foremost by Pharmacopeia's array of future royalty streams from deals with Schering-Plough, BMS, and others. The all stock deal puts a value of $1.81/share (a 52% premium on Pharmacopeia's previous closing price, though still much cheaper than the shares' $5 highs earlier this year) on PCOP and provides a potential $15 million earn-out should Ligand enter a deal around the anti-hypertensive DARA, Pharmacopeia's most advanced unpartnered project, before the end of 2011. Our Pink Sheet Daily coverage of the deal is here. Recall that Ligand back in 2006, after a failed attempt to sell the company, new managers ditched its commercial assets via deals with Eisai and King and others, under pressure from activist shareholders. It now remains committed to the kind of discovery-and-license strategy that the acquisition of Pharmacopeia augments, if only slightly.

Medtronic/Cryocath: The arms race for ablative systems to treat atrial fibrillation waged on with Medtronic’s bid to pay $380 million (C$400 million) for device maker CryoCath Technologies Inc. The acquisition would pit Medtronic against fellow defibrillator makers Boston Scientific and St. Jude Medical in another front against atrial fibrillation—tissue ablation. The trio still is struggling to restore physician and patient confidence in their defibrillators. St. Jude has been the most aggressive, snapping up companies including EP MedSystems Inc. Last year, Boston Scientific put a small, but significant bet on another ablation company CryoCor, acquiring for $17.6 million. Medtronic’s paid considerably more for CryoCath’s technology, but it got a great deal in return. The company sells its catheter-based Arctic Front system worldwide, generating more than $40 million in annual sales. It still awaits FDA approval, which the company hopes to obtain in 2009, with a market launch in 2010. Once again, Medtronic and Boston Scientific will be competitors in the a-fib space. However, they’ll have to share, at least for the short term. CryoCath also announced the settlement of a lawsuit between CryoCath and CryCor, news of which was release just before the potential deal was announced. According to a release, CryoCath has agreed to “payment of future royalties on certain future products for a limited time.” The companies also will let appeals at the US Patent and Trademark office work their way through the system, although they’ve agreed not to sue each other however the appeal is resolved.--Tom Salemi

Getinge/Datascope: It might be largely a function of the depreciating US dollar, but it’s been a record year for international acquisitions of US companies. Budweiser beer--that staple of American baseball games--may soon belong to a Belgian company if it succeeds in its bid for Anheuser-Busch. That trend now extends to health care. Sweden’s Getinge announced that it would acquire New Jersey’s Datascope for $865 million in cash. Of course, the timing of the merger doesn’t only have to do with the dollar’s devaluation. In September 2008, Datascope is quite a different company than it was six months ago. It had shed its patient monitoring business to China’s leading medical device company MindRay Medical in March 2008 as well as its slow-growing vascular closure business to St. Jude Medical in August 2008. Meanwhile, it beefed up its vascular offerings by the acquisition, in June 2008, of the peripheral vascular business of the Sorin Group, whose products Datascope had been distributing in Europe. On the other side of the Atlantic, Getinge has long been executing on its strategy of diversifying beyond non-clinical areas like disinfection products and beds for hospitals. In particular, Getinge has been building out its cardiovascular and critical care divisions. To that end, Getinge acquired the cardiac and vascular surgery businesses jettisoned by Boston Scientific at the end of 2007 for $750 million Now Datascope has complementary products; it operates in two cardiovascular segments; cardiac surgery, with cardiac assist counterpulsation pulsation devices, and vascular surgery, which includes synthetic grafts and peripheral stents. After the merger, Getinge plans to realize growth from cross-selling opportunities from a wider range of products and geographic regions. The deal makes sense on a strategic level, and it’s been long coming. Still, while the medtech industry has been waiting for clinically-focused mid-sized acquirers to take over for the absent large company purchasers, Datascope’ s European and Chinese acquirors suggest that the new acquirors may come from abroad.--Mary Stuart

Nuvelo/ARCA: This reverse merger sees ARCA Biopharma's private investors holding two-thirds of the combined company, which will focus on cardiovascular disease. Reverse mergers haven't exactly set the world on fire though, and even pre-global financial meltdown those companies that had reverse merged since 2005 were down an average of 40% since their deals (performing even worse than newly IPOd firms) according to research published in this month's START-UP. Nuvelo had essentially been a shell in search of a partner since its alfimeprase anti-clotting candidate failed back in March, and despite the difficulties faced by newly public firms, no doubt ARCA is attracted by the public company's $76 million cash pile. The companies' lead project will be the registration stage drug/pharmacogenomic test that is the beta blocker Gencaro, which has a PDUFA date of May 31. The Pink Sheet Daily's coverage of the deal is here.

image via Wikimedia commons.

Thursday, September 25, 2008

Venture Capital: The Movie

The New York Times' Bits blog premieres (for us at least) a new video produced and distributed by the National Venture Capital Association.

The video tells the story of an entrepreneur who is trying to build a company around a device that can turn pollution into energy (be nice if it could do the same for sub-prime mortgages.)

Anyway, she's frustrated at every traditional turn--banks, government loans, and some odd hedge fund type--until she, of course, stumbled upon a venture capitalist. Well, he actually stumbles into her.

Readers of this blog won't learn anything from the video, but you might enjoy seeing a few of your colleagues in the cast. We didn't initially recognize Lou Bock from Scale Venture Partners who plays Jim, the oncologist/entrepreneur who has tapped out his friends and family to advance some cancer-related venture. Guess we've never seen Lou in a white lab coat before.

Stacy Leanos of Bay City Capital delivers a convincing performance as an uninterested low-level SBA bureaucrat.

Unfortunately Jim quickly gets elbowed aside by the VC who is immediately captivated by the pollution-to-energy idea (Clearly, green energy has supplanted health care as the VC industry's feel good sector.)

But the many successes of life science venture capital investment get a fair representation throughout the film. Not as much hype as some others, but who is going to argue about the film's highlighting of Starbucks, Intel, Apple, Amazon, Google and other more household names.

Wednesday, September 24, 2008

Venture Round: Looking for the Bright Side

What if this is the best thing that could have happened for venture capitalists and their companies?

By “this” we mean the complete and utter destruction of Wall Street, and by “best thing” we’re obviously thinking long, long-term impact here. Clearly, things will be rough for a long time coming.
But venture capitalists have been squealing about how Sarbanes-Oxley has regulated them right out of the IPO business, saying the costs and oversight were too much for their little start-up companies to bear.

Then, the bulge bracket banks—the big guys with the bankers, analysts and cash—began turning their eyes to bigger, exciting and, yes, revenue-generating deals, leaving their little biopharma and device companies that could under-covered and forgotten in the eyes of many VCs.

Well, those days are clearly done. The question now remains, what will rise from the ashes? Will the banking and analyst staff that once populated the highest offices in Manhattan find their way to some of the boutique banks that have made themselves a nice little business putting together smaller deals, bringing the experience and resources to grow those institutions?

Furthermore, as one institutional investor tells us, venture capitalists could help themselves and this nascent boutique banking industry by steering some of the choice work toward smaller investment banks, eschewing the cache and hoopla associated with one of Wall Street’s blue chip names.

Uh, former blue chip names.

PE Hub had a similar conversation about small tech companies with Paul Deninger, vice chairman of the investment bank Jefferies & Co. We're not buying all that he's selling, but read it here, including the blistering comments. (BTW, we'd hardly consider IPC The Hospitalist Company, a tech company. It's a health care company thanks very much.)

So, is this the end of the world as we know it? Or has the past few weeks been a necessary—and admittedly painful—cutting of the larger trees that will allow some sunshine and rain wash over the growth underneath?


As we said the short-term is pretty bleak. Witness this week's announcement that the spin-out of Angiotech Pharmaceutical is in danger, which likely means no investment by Ares Capital or New Leaf investment.

Also, VentureWire Lifescience and others reported on the recent fund-raising by Kalobios, which didn't include previous investor Lehman Brothers.

"We were all set to close on Friday of last week, until Lehman filed for bankruptcy," said KaloBios Chief Executive David Pritchard. "They had several million committed to the round, and while we only lost one business day...we had to rush to make that up."

Lehman had led KaloBios' $20 million Series C round in July 2007 through its health-care venture capital group. That group invests directly off the firm's balance sheet, unlike Lehman's IT-oriented venture partners group, which closed a $365 million fifth fund in September 2007. Randy Whitestone, a Lehman spokesman, said the venture partners group is part of the firm currently being auctioned off, and he said the firm is not certain of the health-care group's fate.

Pritchard described embattled Lehman as "a great investor and very supportive of the company." Jeffrey Farrell, a senior vice president at the investment firm, was an observer on KaloBios' board.

Pritchard said many of the round's other investors stepped in over the weekend to fill the hole left by Lehman, contributing above-pro rata shares. New investors Genzyme Ventures and Mitsubishi UFJ Capital led the round, joined by existing investors Alloy Ventures, 5AM Ventures, GBS Ventures, Lotus Bioscience Ventures, MPM Capital, Singapore Bioinnovations and Sofinnova Ventures.


Fred Wilson, general partner at Union Square Ventures, has an interesting little post on his A VC blog about how the New York Times came to profile his firm. The serendipitous origin of the article must broil PR pros who would kill to get their clients such a profile, but more often than not this is how such profiles come together.

Anyway, the article relays how Union Square Ventures is willing to take small stakes in tiny start-ups, exclusively in tech. That's easier to do with a $165 million fund, but it got us thinking. We wrote extensively about how larger venture capital firms are maintaining their early-stage medical device flow by committing small bits of capital in ventures started by proven entrepreneurs who are affiliated with the fund. But are there any life sciences VCs who exclusively make similarly sized bets in untested start ups?

The REMS Pioneers: Amgen’s Nplate Sets Another New Standard

Hymen Phelps & McNamara attorney Frank Sasinowski has a prop he likes to use when he calls on Food & Drug Administration reviewers to talk about a regulatory issue.

It is a new drug application filed by Wyeth 50 years ago. It includes, he says, everything you get in a modern NDA. Evidence of safety and efficacy. A chemistry, manufacturing and controls section. Proposed labeling. Everything.

And you can hold it in one hand, a thin stack of paper, organized by a single binder clip.

It sure is eye-catching. Today’s NDAs are so large and complex it is now silly to imagine them in printed form, except for colorful analogies like Eli Lilly & Co. saying the prasugrel (Effient) NDA would be as tall as the Empire State building if it was reduced to stack of paper.

Sasinowski’s message?

The vast increase in complexity of NDAs is not related to a change in the standard for approvals per se. Rather, it is a result of decisions made by individual FDA reviewers about how much evidence they need to be convinced to allow a drug to be approved.

Well, it looks to us like history is repeating itself in the form of rapidly expanding stacks of paper necessary to comply with the FDA's new Risk Evaluation & Mitigation Strategy authorities. The REMS were created by the FDA Amendments Act of 2007, and we are living through history as FDA and the pharmaceutical industry create a new regulatory framework on the fly.

FDA has now used the REMS authorities about half-a-dozen times for new approvals, and the level of complexity is leaping exponentially—at least as measured by page count.

The first handful of REMS were dealt with in the context of the approval letter FDA sends to sponsors of all new drug applications: less than a page of text invoking the legal authority for a REMS, informing the sponsor of the need for a mandatory medication guide, and setting a bare bones assessment schedule. (You can read The RPM Report's coverage of the “REMS 1.0” group here.)

Then came Entereg. The GSK/Adolor post-operative ileus therapy had the first REMS that included restrictions on access (limiting distribution to hospitals who register with the sponsor) and use (no more than 15 doses in the in-patient setting). In addition to an overview of the REMS in the approval letter, FDA released a 24-page summary of the program, including copies of the packaging and registration materials. (You can read The RPM Report's coverage of the Entereg REMS here.)

Now comes Nplate. Amgen’s new platelet boosting therapy to has a still more restrictive REMS, involving registration of institutions, prescribers and patients. (The first in-depth look at that program appears in “The Pink Sheet.”)

The page count? Ninety-four.

So, in the six months since the REMS authority took effect, we have already seen the approved versions of the program expand about 100-fold.

If that trend continues, maybe the Effient REMS will also be as tall as the Empire State Building?

Monday, September 22, 2008

FDA User Fee Deadlines: Jenkins Expands On Interview Comments

In a roundtable interview with top FDA drug officials, Office of New Drugs director John Jenkins said FDA was on track to meet 80%-90% of its prescription drug user fee act (PDUFA) goals. To read Part I and Part II of the roundtable interviews, click here and here.

Jenkins wrote in to clarify and expand on his comments related to user fee deadlines:

“In our recent interview with Ramsey Baghdadi and The RPM Report I made some comments about the status of our current performance in meeting PDUFA goal dates. Those comments have been widely reported and I feel that I need to alert readers to a clarification since I may have misspoke during the interview since I did not have the data in front of me and was working from memory.

What I should have said is the following:

For the FY07 cohort of applications (as of June 30, 2008, which is the most recent update I have and the one I was referring to when we did the interview) our actual performance on application goals is generally in the 80-90% range. For the same cohort for procedural and processing goals our performance is also generally between 80-90%. The FY07 cohort is mature enough to draw firm conclusions regarding performance.

For the FY08 cohort of applications, the numbers are very preliminary since many of the applications in this cohort have not yet achieved their first PDUFA goal date. Our potential performance for application goals and procedural and processing goals ranges from 80-90%. The actual performance to date (as of June 30, 2008) is below these levels in many areas, but the data are so immature that it is too early to make comments on actual performance. In the interview I was referring to potential performance, but I did not make that clear. It is possible that our actual performance for FY08 will be below the 80-90% potential performance level in some areas, but it’s too early to say.”

FDA's Brain Drain Continues

Sometimes it just doesn’t pay to work at FDA.

Even as FDA bulks up its drug review ranks with new money from Congress, attrition continues to affect the agency—including high-level defections to industry. Indeed, drug sponsors are more than willing to bring former agency officials into their ranks and pay them much more than the average government salary.

Florence Houn is the latest to jump ship; as reported in “The Pink Sheet” this week, the FDA official has been hired by Celgene as VP-regulatory policy and strategy.

Most recently,Houn was involved in vaccines regulation: she was deputy director of the Center for Biologics Evaluation and Research’s Office of Vaccines Research and Review. But she also knows a thing or two about drug reviews, having served in leadership positions of two different Offices of Drug Evaluation during her 15-year tenure at FDA.

For Celgene, Houn couldn’t come at a better time: the company is working to comply with the Risk Evaluation and Mitigation Strategies provision of the FDA Amendments Act. Celgene is responsible for two of the most restrictive REMS: thalidomide (Thalomid) and lenalidomide (Revlimid), a thalidomide analogue.

In deciding to leave FDA for industry, Houn is taking a page from her husband, former Office of Antimicrobial Drug Products director Mark Goldberger, who left in early 2007 for Abbott Labs. Other recent high-level departures from within the agency include former ODE II director Robert Meyer, who joined Merck in late 2007.

The Office of Drug Safety has probably had the hardest time holding onto talent. Predecessors to current director Gerald Dal Pan left for industry within a year or two of assuming the top drug safety post: Peter Honig to Merck as VP-risk management and Victor Raczkowski to Cephalon as VP-regulatory affairs.

Dal Pan is showing no signs of leaving anytime soon (and given the Office of Drug Safety's new powers and authority, why would he?). But given the monumental changes in drug regulation under the Amendments Act, FDA expertise is surely fetching quite a premium these days. For the agency's sake (and all of industry's), let's hope few other agency officials take advantage of it.

Burst Bubbles and Bailouts: Big Pharma and the Financial Mess

In Washington, there is a distinct undercurrent of gloating when it comes to the Panic of 2008.

No one is happy, exactly, about the incredible turmoil in the financial markets, nor can anyone be said to be thrilled that taxpayers will be putting up something like $700 billion to rescue Wall Street.

But in a town filled with people who work for the federal government, there is an undeniable sense of vindication. See, we are needed after all. Free markets don't take care of themselves. Sometimes you just have to turn to Uncle Sam to see you through.

Or, as Washington Post columnist Steve Perlstein puts it, "It will no longer be an easy applause line for a politician to declare that government is the problem and that markets always know better than regulators and politicians."

We've already pointed out that it may be naive of industry to think that the financial storm will spare it any damage, since the biotech industry is, in a sense, nothing more than an amazingly complex form of derivative finanicial instrument: a way for investors to tap indirectly into the immense profits of Big Pharma blockbusters.

We've also written about Big Pharma's own bubble problem: the fact that the industry is built to support an unprecedented--and apparently unsustainable--spike in approval of large, primary care brands in the mid-1990s, generating a need for infrastructure--and expectations for growth--that now present a terrifying cliff at the end of this decade. If Merrill Lynch can vanish, why can't Pfizer?

But it is not just loss of confidence in creative financing or in the stability of mega-cap companies that is a threat: there is also the renewed confidence in central government interventions in the economy to think about.

If the government must intervene to save Wall Street itself, then why can't it intervene elsewhere in the economy--like, for instance, in setting the price of life saving medicines?

As tough as it has been to be a Big Pharma company the last three years, it would have been even tougher without the Medicare Part D program, a massive new insurance program to subsidize the purchase of those previously mentioned blockbusters--and one that relies on the principle that free market competition is the ultimate path to efficient, economically effective health care.

This is the program that famously prohibits the federal government from "interfering" in the negotiation of prices between the private drug companies and the private drug insurance plans--and at the same time commits the public to pay whatever the price ends up being.

Its fair to say that the events of the past week will strengthen the hand of those who don't like the Part D model. After all, if the free markets don't work for mutual funds, will anyone believe that they work for Medicare?

Count both Presidential candidates among those with strong misgivings about the Part D program, albeit from very different perspectives. Democrat Barack Obama thinks it relies too much on private contractors, and favors given the government more power to act--especially when it comes to the price paid for medicines. Republican John McCain objects to the program for the opposite reason, saying that taxpayer funding shouldn't be commited to a new healthcare entitlement. But he too wants the government to get a better deal on any medicines it ends up paying for.

Obama has already begun hammering McCain for his free market approach to health care in general. Expect that to continue until election day.

But no matter who is victorious in November, the events of September will ripple into the pharmaceutical sector. After all, if Washington can set the price for AIG or Fannie Mae, surely it can decide how much Avastin is worth...

While you were winning/losing some

This weekend saw two major sports upsets, though neither was as shocking as the deep six of the global financial markets just a week ago. At last, the US finally won back the Ryder Cup, ending nine years of European domination; meanwhile, NFL fans not rooted in the six New England states cheered as the Miami Dolphins absolutely obliterated the Patriots defense with an annoyingly-simple-yet-hard-to-beat "Wildcat play" that snapped the Patriots 21 straight regular season wins. (The last loss was Dec. 10, 2006, coincidentally against the Dolphins.)

  • No financial crisis will slow down the consolidation of the generics pharmaceutical companies, according to this report. Of course, we've been reporting on the rise of generics for some time. At the same time, we're seeing a slowdown of the overall M&A market for pharma companies. (Check out the extensive report here or in this month's Start-Up.) Nevertheless, the Royal Bank of Scotland recorded a level number of buyouts this year, valued at more than $25 billion, an 80 percent increase over last year. Teva Pharmaceuticals' $9 billion buyout of Barr Pharmaceuticals certainly helped drive up that number, and Teva's chief executive for North America, Bill Marth, says more deals may be following the Barr buy. "It doesn't leave us in a position where we won't do more acquisitions that are complementary, it will just change the focus of those acquisitions," Marth told reporters Friday.
  • Speaking of generics, Ranbaxy, Indian's largest drugmaker and a recipient of a smackdown by the FDA, has recruited one-time GOP presidential (and vice presidential?) candidate Rudy Guiliani to take on its fight. The former Hizzoner will push to lift the ban the FDA put on more than 30 Ranbaxy medicines after finding deficiencies in Ranbaxy's plants. The company says the FDA's concerns are baseless. The Economic Times says other Indian pharmaceutical companies aren't overly concerned about selling in the U.S.
  • It ain't Lehmans Brothers, but things aren't looking well for Atherogenics, according to Pharmagossip, which linked to an article from the Atlanta Business Chronicle. Noteholders in the company filed a petition to put the company into Chapter 7 bankrupty.
  • Happy Birthday to Bayer Corp. The U.S. subsidiary of Bayer AG marks its fiftieth year in the US, according to an article in the Pittsburgh Post-Gazette. The paper had a sit down with Gregory Babe, who is to become the first American-born executive to head the subsidiary.
  • Direct-to-Consumer advertising continues to draw fire. The Guardian reports that the British Medical Association and the Royal College of Physicians are among nine medical organization to opposed the introduction of direct-to-consumer medicine. The group's contend that the NHS's eleven billion pound annunal drug cost would skyrocket if pharma comapnies could pitch their product directly. Meanwhile, on this side of the Atlantic, the FDA heard from two physicians who want the FDA to expand its oversight of direct-to-consumer ads to include medical devices. The docs--an orthopedic surgeon and cardiologist--who say drugs and devices should stand on equal footing when it comes to DTC ads, therefore putting the devices under greater scrutiny.

  • Friday, September 19, 2008

    DotW: Bail Out

    In a tumultous week that began with the bankruptcy of Lehman Brothers and the sale of Merrill Lynch, we end with the possible acquisition of yet another storied bank--Morgan Stanley--and the federal bail-out of insurance giant AIG. Investors are still scrambling to make sense of the news, but it should be clear that no entity--not even the supposedly safe port in the storm that we call pharma--is too big to fail.

    Our industry weathered its own stormy seas this week. Schering-Plough, Memory Pharma, and Merck's Banyu site announced job cuts, a not too surprising defensive move given the difficulties all three companies have faced in recent months. Meanwhile, investors continue to bail on Ranbaxy after the U.S. banned dozens of its drugs, a move that could jeopardize revenues in one of its major markets and roil its impending acquisition by Daiichi-Sankyo. (The Japanese firm remains committed to the deal according to this report.) And Neose looks to be giving up the ghost after years struggling to find a niche. This week the company announced the sale of essentially all of its assets to partners Novo Nordisk and BioGeneriX in all-cash transactions worth roughly $43 million.

    It's also just about time for ImClone's mysterious and apparently generous buyer (some would say overly so) to reveal itself. The question is: will this suitor still be as eager to spend on the company given the credit crunch and turbulent market? Or will it prove true that Icahn bailed on the one solid offer he was likely to get for his company? (News this week from London suggests that spurned BMS may be rethinking its offer.)

    There were some silver linings amidst the dark clouds, however. Amgen announced positive news this week about its fully human monoclonal antibody denosumab at the American Society of Bone Mineral Research (held inexplicably in Montreal). In a trial of nearly 8000 post-menopausal women, twice yearly treatment with the drug reduced the risk of new vertebral fractures by 68% relative to those given the placebo. J&J also released positive news about its Phase III antibody for psoriasis, which could challenge Wyeth/Amgen's top-selling Enbrel. And ex-MedImmune CEO and wunderkind David Mott is sitting pretty in new digs at NEA's offices, where he'll look for specialty pharma and biotech outfits in which to invest.

    In need of some comfort food? The intrepid IN VIVO Blog team is here to bail you out with a run-down of the week's news. Yes, it's time for another edition of....

    Bayer/Direvo: Bayer's €210 million cash acquisition of German biotech Direvo is the latest in a long line of takeouts of biologics platforms--which as we point out here are much more likely to consistently provide VC backers with solid exits. Direvo, a protein engineering company that has for the past couple years been focused on modifying proteases and antibodies for therapeutic and industrial applications, had raised about €30 million in venture capital since 2000. Bayer is snapping up the therapeutics side of the business, while existing and new backers are spinning out the industrial applications of the platform into a newco with €8 million in Series A funding. Bayer's bounty includes Direvo's two early stage projects (hyperglycosylated Factor VIII and Factor IX for hemophilia A and B respectively) as well as inherited protease deals with Pfizer and MedImmune. The German conglomerate will maintain Direvo's Cologne site which will be integrated into Bayer-Schering's global drug discovery unit.

    BTG/Protherics: When's a $400 million takeover not a $400 million takeover? When the currency isn't cash. BTG, a surprise suitor for compatriot Protherics, offered about ₤218 million ($397mm, a solid 45% premium to an already rumor-inflated share price) in stock for the biotech company, though trading after the announcement shaved more than 15% from BTG's value yesterday. (It has rebounded a smidgen today.) Ownership will be split roughly 58%/42% BTG/Protherics--see our Pink Sheet Daily coverage for the math. Protherics told the market earlier this summer that it was entertaining offers, and its partner AstraZeneca--the two companies are co-developing Cytofab, a Phase II polyclonal antibody to treat sepsis--was understandably analysts' favorite to pony up some cash. Not that we can't see BTG's logic. The IP licensor has been trying since at least 2002 to morph into a later-stage development company on the back of its Varisolve varicose vein treatment, which has struggled to reach the marketplace. For now, BTG rakes in significant revenues from others' products, including Campath and BeneFIX. Adding Protherics' marketed products to the mix jumpstarts that effort.(It will re-acquire US marketing rights to its snake venom antidote and digitoxin overdose antidote in 2010.) And bulking up should result in cost savings (including reducing the two firms combined R&D spend and operating costs to the tune of about ₤20mm total per year), better liquidity for investors (BTG predicts the combined entity could find itself in the FTSE 250 index) and a strong cash pile (just under ₤95mm) that can be used to establish a US commercial presence and add new products. The combination creates an unlikely UK biotech "champion" for a nation that prides itself in pulling for the underdog.

    Valeant/Coria: Just a few weeks ago, Valeant licensed its first-in-class Phase III epilepsy drug retigabine to GSK in a co-commercialization deal worth $125 million up-front and more than $500 million in potential milestones. Now Valeant is shoring up its dermatology pipeline with a deal of its own. On Wednesday the company announced it was purchasing Coria Laboratories, a division of the privately held specialty pharma DFB Pharmaceuticals, for $95 million. The deal gives Valeant a number of already marketed products, including several acne medications, the CeraVe skin care line, and a cream for hand dermatitis called Tetrix that is expected to launch later this year. H. Paul Dorman, DFB's CEO, called the merger "an exciting milestone in the evolution of Coria". We wouldn't go that far, but we do agree that the combination of cash-rish Valeant with product-rich Coria results in a far stronger dermatological specialty pharma.

    Biovail/Prestwick/Ovation: This transaction--or more accurately, series of transactions--wins IN VIVO Blog's award for deal of the week masquerading as a baseball trade (we have many awards). On Wednesday, the Canadian pharma Biovail acquired privately held Prestwick Pharmaceuticals for, nominally, $100 million (but hold on -- the shareholders got more, but it's complicated). The deal gives Biovail rights to Prestwick's Xenazine, which recently became the first drug approved in the US for Huntington's Disease. Biovail won't get the whole caboodle for such a small sum: Deerfield, Illionois-based Ovation Pharmaceuticals purchased US rights to the drug for an additional $50 million in a separate transaction -- with that cash getting distributed to Prestwick's shareholders, not to Biovail. Biovail, which lacks a US sales force, had no desire to market the drug in the states at this time. But it will market Xenazine in Canada, where it has been approved for at least a decade. In addition, the deal gives Biovail the option to co-promote the dopamine depleter in the US in the future, as well as the right to jointly develop Xenazine and follow-on products in other indications. Earlier this year, Biovail undertook a strategic review of its options with the help of Morgan Stanley. The purchase of Prestwick seems to mark a turning point for Biovail away from the drug delivery and reformulation technology it has focused on for the past two decades to a more product development centered approach. For 5-year-old Prestwick, meanwhile, the deals mean that its backers, which include Sofinnova, Atlas Venture, and Vivo Ventures, got their money out, with a small profit. The returns weren't exactly those VCs want to see ($110 million in, over three rounds; $150 million out in the two transactions), but it's better than the current average. As we noted in this recent START-UP feature, returns from M&A exits are trending downward, and more often than not, acquisitions result in limited exits or write-offs for their private investors.

    Tethys Bioscience/Lipomics: The closely held Tethys Bioscience, chose the June ADA meeting for its big reveal, announcing the launch of its PreDx diabetes risk test, which calculates via a complicated algorithm a person's risk of developing diabetes based on a series of protein biomarkers. Unlike many new diagnostic companies, which have focused on cancer and other specialty markets, Tethys is determined to play in the primary care space and has plans to develop tests that predict a person's likelihood of developing a range of chronic diseases, from osteoporosis to a major cardiac event. It's captain, Mickey Urdea, is no stranger to the vagaries of the diagnostic business thanks to his years at Chiron, where he developed the hugely successful viral load testing franchise. But to be profitable, Tethys faces several hurdles. First, it must convince doctors and payers of the utility of the merits of its PreDx diagnostic, which at $775 a pop is far more expensive than the already widely used fasting glucose test. In addition, the firm, which has already raised more than $50 million from its venture backers, will need to develop and launch new tests in quick succession. The company took its first steps toward that end this week, announcing a tie-up with privately held Lipomics Technologies, another privately-held, Northern California-based diagnostic player. "We believe that the best solutions for predicting and thereby preventing a range of chronic conditions will come from the thoughtful integration of multiple types of biomarkers," said Urdea in a press release announcing the deal. Lipomics co-founder and CSO Steve Watkins will remain with his team as CTO of the newly bulked up Tethys.

    Astellas/Maxygen: Quite a week for protein engineering companies. This week's late breaker is courtesy of Astellas Pharma, which said this morning it had bought worldwide rights to MAXY-4, Maxygen's preclinical autoimmune and transplant rejection program. Maxygen will receive $10 million up-front and the companies will co-develop the next generation CTLA4-Ig protein for rheumatoid arthritis and other autoimmune diseases while Astellas will pursue transplant rejection on its own. Maxygen has opt-in rights to co-promote in North America any autoimmune products and will receive tiered, double-digit royalties on non-co-promoted products. Astellas will chip in an additional $10 million in preclinical development costs after which the companies will split the tab.

    Merck/SurModics: Merck & Co. has decided to end its R&D/licensing deal with SurModics, triggering a $9 million payment to the Minnesota drug and device coatings company and a 23% drop in the firm's shares. The companies were careful to point out that there were no safety concerns associated with SurModics' I-vation drug delivery platform or the specific back-of-the-eye program under development. Merck paid $20 million up-front to access I-vation just last year.

    (Photo courtesty of flickr user amirjina via a creative commons license.)

    Thursday, September 18, 2008

    Hurricane Devastates Galveston; Heads for Biotech

    At the end of this unprecedented week we are still too shell-shocked to have probed deeply into the implications of the Wall Street meltdown on our corner of the economy.

    But we’ve done enough thinking to disagree with the majority of respondents to our IN VIVO Blog poll, 83% of whom think the effects on their companies will be merely mild to moderate. And disagree too with those still-in-denial private-equity investors our fellow blogger visits with here, who apparently think that our industry is a nice, safe place to put their money.

    OK, that may be true for Big Pharma. After all, as in previous times of market turmoil, investors may vote Pharma because they see the companies as defensive plays, where demand for products is relatively independent of the economy. And indeed most drug firms have done, during this disastrous week, a bit better than the S&P 500 (though pretty much everyone is still down).

    But Pharma looks a lot less defensive than it used to be. The generic cliff is way too steep and R&D way too unproductive. The traditional side-benefits of pharma investing, too, look kind of iffy. With cash flow likely to shrink, dividends are at risk – even more so the absurd stock repurchase programs into which, like some vast currency shredder, drug companies have continued to throw their money. And just a small issue: the dollar has been gaining value, and is likely to gain more. That means US companies won’t be able to simply rake in some incremental revenues. So maybe pharma is a better short-term bet than much of the S&P – but better ain’t great.

    Far more worrisome, however, is biotech – which to some degree looks a lot like these incomprehensible derivatives. Like the buyers of subprime mortgage securities, buyers of biotech stocks have by and large invested on faith. Our bet is that few investors really understand the science they’re buying. Hell, we’ve met too many biotech CEOs who don’t understand their own science. How else, other than faith, do you explain why people continue to invest in an industry which over three decades has swallowed a lot more public money than it's returned?

    And in a world in which investors will shun risk for a good long time, particularly risk they don’t understand, biotech is about as attractive as Galveston after Ike. Like other high-risk/high-return businesses, biotech attracts the extra cash investors have in their funds. And there’s going to be precious little excess cash for at least the next several months. And the fact that there are now three fewer banks to help biotechs with funding, stock coverage, and M&A advice isn’t particularly happy news, either. (Anybody want to bet how long Morgan Stanley is going to remain free-standing?) An IPO year which has started out as badly as any in recent memory – just two US biotechs managed to raise money, and paltry money at that -- will finish as the worst since the late 1980s.

    Not that history is going to provide any answers, says Fred Frank, the vice-chairman of Lehman Brothers and soon to be a Barclay’s employee. This isn’t 1998 or 1988, he told us in a phone call today. “This is a whole new day for biotech. Don’t interpret by [historical] analogy; interpret with analysis.”

    So here’s what we see. At the top end of the valuation pyramid, we’d bet PEs like Celgene’s – 51, at last viewing – are pretty vulnerable. Maybe those companies will recognize their currency is overvalued and will use it to buy some real cash-flow producing assets. (Not cash-starved early-stage biotechs, incidentally).

    At the other end, what has been a relatively steady flow of start-up activity will slow to a trickle. Start-ups have been a tough investment argument in any event, given the dismal IPO market. But at least acquisitions have provided some fine returns over the last three years. The problem is that even before the Wall Street tornado hit, the M&A door had begun to close, (for our in-depth analysis of returns from acquisitions of private biotechs, see this Start-Up article). We suspect you’ll see health-care VC move towards devices and maybe services – avoiding new investments even into the kind of biologicals platforms Big Pharma has been snapping up over the last few years (for example, check out our write-up of the Bayer/Direvo deal here).

    And in the middle: we have now come around to the notion that we’ll finally see a significant number of biotechs just close their doors. (Neose, for example, sold off its assets today.) Like everyone else, we’ve been amazed at the ability of many end-of-life biotechs manage to raise just a bit more money to keep the lights on and a program or two bubbling along. But we just don’t see that in the climate ahead. The investors won’t be there. Like the sensible Galvestonians, they’ve fled to higher ground.

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

    Venture Round: Now where's that panic button?

    Private equity investors, reeling from a weekend of news that ranged from bad to really bad to really, really bad, met for a group hug this week at the Private Equity Analyst’s annual conference in New York. But there wasn’t a lot of love to go around.

    The typical bravado of the private equity world seemed to be in short supply at the conference. IN VIVO Blog was particularly shaken as we wound through the revolving door on the Park Ave side of the Waldorf Astoria. A young, private equity professional—the kind of person who typically reeks of overconfidence—declared simply to his cohorts. “I’m terrified.”

    Thus the tone was set.

    To be fair, we did hear a bit of “this is good for the industry” talk, and there’s some truth to that. Richard Caputo, managing principal of The Jordan Company, a PE shop, says many of the debt structures that fueled the rise in private equity are as shaky as any of the sub-prime mortgages that are sinking the US economy. Private equity investors will have to go back to doing smaller deals requiring little or no debt, which will require honest and thorough due diligence to assure the acquired companies are worth the dough. “The world has changed and we’re going to have to work harder,” Caputo says. “There is going to be a lot of carnage before it gets better,” adding that in six months we’ll be looking at the “good old days of Sept. 2008.”

    But here’s the good news. Health care is a safe haven again.

    Terrence Mullen, managing director of Arsenal Capital, says health care companies still are a strong bet. He didn’t elaborate much during the session, but after the meeting, Mullen said the fundamentals of the business aren’t going away. People will get sick. They’ll need to get better, and companies will get paid to provide the products and care. These facts are irrefutable. They’re also word-for-word what we were hearing when the technology industries collapsed eight years ago, forcing venture investors and private equity folks to rediscover health care.

    Arsenal Capital isn’t one of those come lately types. But don’t be surprised if interest in health care deals get a little frothy, particularly in those companies (or divisions within larger companies as you can read here) that generate solid revenues.

    Given the interest private equity firms have shown in pharma, it will be interesting to hear the feedback at our Pharmaceutical Strategic Alliances conference next week in New York.


    Attendees at the last session on Tuesday had the opportunity to vote on several questions regarding the state of the industry. The polling showed that 79% of the attendees don’t think the credit crunch will break for private equity investors until later next year; 50% say the IPO window won’t open until 2010; and 62% say that venture firms will need to change their investment models in order to find faster routes to liquidity.

    Wednesday, September 17, 2008

    Bayer/Direvo: Platforms Trump When It Comes to Exits

    Yesterday, Bayer HealthCare announced its intent to spend €210 million to acquire Direvo Biotech, a privately held start-up with a promising next-generation protein-engineering platform.

    Bayer is the latest in a string of pharmas to bolster its large molecule capabilities via the acquisition route. Other privately held companies with novel technology platforms snapped up by Big Pharma in recent years include GlycArt (Roche), GlycoFi (Merck), Domantis (GlaxoSmithKline), Adnexus (Bristol-Myers Squibb), Agensys (Astellas), Morphotek (Eisai), and CovX (Pfizer). (Are you beginning to see a trend here?)

    START-UP recently undertook a comprehensive review of private biotech M&A, analyzing 184 deals that took place from January 1, 2005 to August 31, 2008 to identify possible trends, including age at acquisition, as well as the clinical status and therapeutic focus of a start-up's most advanced program. (You can read the whole article here.) Interestingly, fewer than half of the acquisitions reviewed resulted in a reliable exit for investors, and those numbers appear to be trending downward.

    But if M&A has become not so much an exit opportunity as a chance to revamp one's business card, there's one group that has continued to hold value in the eyes of acquirers: the platform biotechs, especially those capable of generating multiple therapeutic products of the large molecule variety. In all, 56% of the private companies acquired during the 2005-2008 time period were platform-based. And of those companies that made healthy exits, nearly 60% were platforms. (See chart above--click to enlarge.)

    And that's been very good news for the private investors who've ponied up the cash for these start-ups. For instance, HBM Bioventures, Atlas Venture, Polaris Ventures, Flagship Ventures, and Venrock poured $54.5 million into Adnexus from 2002 until its acquisition by BMS in 2007. But they netted an almost 8-fold return in the process. (And if the company realizes certain developmental milestones, earn-outs could drive the return up nearly 10-fold.) Meanwhile, CoGenesys's backers, which include New Enterprise Associates and OrbiMed Advisors, invested $55 million into the Human Genome Science's spin-out and earned a 7.3x return on their investment when Teva purchased the company earlier this year.

    Direvo, too, netted quite a nice return for its backers, which include TVM Ventures, Danisco Ventures AS, S-Equity Partner, and Mulligan BioCapital. (A full list is here.) The company, which spun off from Evotec, has raised more than €30 million over three private rounds since its 2000 founding; by our calculations that's an ROI of 7x.

    One reason the return for TVM and others was so high: the sale of Direvo was apparently a competitive process. "There were several parties in the race," Direvo President and CEO Dr. Thomas von Rüden told the IN VIVO Blog.

    Late in 2007 and early in 2008, Direvo also inked research agreements with both Pfizer and MedImmune. Financial terms of those deals weren't disclosed--and probably didn't generate a tremendous amount of money for Direvo. But it's clear those deals served their purpose, helping validate the technology in the marketplace. "It put us on the landscape," admits von Rüden.

    Certainly Bayer, which has been somewhat late to the biologics party, didn't have the capabilities Direvo was offering. "We can optimize antibodies, proteases, other proteins, and do glyco-engineering. Nobody else offers all this together," notes von Rüden, who will be staying on until year's end to aid the start-up's integration into Bayer Schering.

    It's true the pace of acquisitions of these monoclonal- or protein-centric outfits has slowed somewhat. Direvo is only the second such company to be acquired in 2008; back in May, Daiichi-Sankyo purchased another German stand-out, U3 Pharma AG, for €150 million. Still, Big Pharma's desperation to quickly add biologics expertise means we're likely to see out-sized returns for platform start-ups of this type.

    And despite a worsening M&A climate, that's definitely good news for the VC community.

    image from flickr user bk-robat used under a creative commons license