Friday, December 19, 2008

DOTW: Variations On A Theme

2008 is drawing to a close. Today marks the year's final "Deals of the Week" post. As this blogger takes time to reflect on the pre-holiday deal-making activity, it's no surprise that all of the deals in today's recap reflect broader themes at work in the biopharma industry. From Big Pharma's penchant for specialty products to highly structured alliances that allow both parties to share the financial risk (and gain), these deals mirror past DOTW discussions, as well as the larger themes highlighted in our various Deals Of The Year posts. DOTY voting commences on Monday. Remember to vote early and often. Until then, we hope you enjoy this week's variations on a theme. (Bach is optional.)

GSK/Dynavax: It was a good news, bad news kind of week for Dynavax. The biotech announced that it's partnership with Merck concerning the troubled Hepatitis B vaccine Heplisav was officially over (see below). Despite the bad news, Dynavax can at least take comfort in its recent deal with GlaxoSmithKline: an option-style tie-up that gives Dynavax $10 million up-front in exchange for a worldwide strategic alliance involving endosomal toll-like receptor drug candidates in four autoimmune and inflammatory disease areas, including Dynavax's preclinical TLR7/TLR9 inhibitor, DV1079. Under the deal's terms, Berkeley, Calif.-based Dynavax will conduct research and early clinical development using its proprietary technology, and GSK has the exclusive option to license each program at proof-of-concept, or earlier if certain circumstances occur. Should GSK exercise the option, it will take over development and commercialization activities, with Dynavax getting tiered royalties up to double digits, the two firms said Dec. 17. Dynavax, which could realize milestones up to $200 million apiece in each of the four programs, also retains the option to co-develop and co-market one pre-specified product. During a same-day investor call announcing the collaboration, Dynavax CEO Dino Dina called the partnership with GSK "a transformational event" for his biotech. "The alliance will allow us to diversify and advance a very valuable pipeline of products that target significant unmet needs," he said. According to "The Pink Sheet" DAILY, that's likely to be the case even if GSK ultimately declines the option on Dynavax's drug. Certainly, given the pipeline pressures of Big Pharma companies, it's unlikely there will be the stigma of "tainted product" attached to the program if GSK ultimately declines the option--assuming no adverse side-effects and positive clinical data with DV1079. Case in point: Exelixis. In October, GSK declined its option on Exelixis' small molecule oncologic XL184, ending a six-year R&D partnership that brought the latter firm an estimated $260 million in funding, including an $85 million loan. Exelixis regained all rights to XL184 and quickly partnered the molecule, along with an earlier-stage compound, with Bristol-Myers Squibb for $240 million in assured payments plus a major co-development and marketing role. For GSK , the deal marks the continuation of a business strategy heavily weighted toward option-based deals, which involve a relatively minimal upfront commitment for the global pharma, allowing it to hedge its financial exposure until the R&D risks are known more fully. In addition to its 2002 deal with Exelixis, GSK has also inked option arrangements with Cellzome, Affiris, Anacor, NeuroSearch, Regulus Therapeutics and OncoMed, according to FDC-Windhover's Strategic Transactions database.

Wyeth/Thiakis: This deal, which sees Wyeth acquiring London-based Thiakis’ obesity candidates, could best be described by a made-up word: alli-quisition (hey, you want real words, read a book). Wyeth pays $30 million up-front for Thiakis and its portfolio of synthetic gastrointestinal peptides and up to $120 million in earnouts tagged to downstream milestones. Our Pink Sheet DAILY in-depth coverage of the deal is here. Thiakis’ backers secure an exit—the biotech had raised about $19 million from private investors Novo and Advent Venture Partners—but without some of those milestone payments it’s not a particularly good one. Expect these kind of earn-out based deals to become more prominent as we move into 2009. With Big Pharma content to sit on the sidelines and wait while prices for biotech companies fall, most investors surveyed recently by FDC-Windhover believe future M&A activity is likely to place a premium on hedging risk. Earn-outs haven’t featured in a ton of deals lately—in fact thus far in 2008, just 20 percent of all private acquisitions have included earn-outs, down from a high in 2006 of nearly 43 percent of all private deals. (Read all about it in our next issue of START-UP.) Back to Wyeth: the pharma gets Thiakis' lead project, TKS1225, a potent, long-acting analogue of oxyntomodulin, which is a naturally occurring peptide hormone involved in regulating food intake. The hormone is released by the gut following food ingestion, sending satiety signals to the brain. It is thought to work through the GLP-1 receptor and does not cross the blood brain barrier, an important consideration given the suicidality risks associated with another class of obesity treatments, the CB-1 antagonists--Christopher Morrison.

Pfizer/Auxilium: As Big Pharmas continue to have more negotiating leverage, there’s a clear preference these days for tightly structured alliances rather than the outright biotech purchases. And given the regulatory hurdles associated with many big primary care drugs, Big Pharma is much more interested in specialty care products. Pfizer's tie-up this week with Auxilium illustrates both those trends. The two companies announced this week that Pfizer would pay $75 million upfront for the European rights to Xiaflex, a biological enzyme in Phase III for Dupuytren’s contracture and Phase IIb for Peyronie’s disease. Malvern, Pa.-based Auxilium stands to earn $150 million in regulatory milestones, $260 in sales-based milestones and increasing tiered royalties on Xiaflex if all goes well. Pfizer, meanwhile, has the right to negotiate commercial rights for additional indications within its territories, including frozen shoulder syndrome, where the drug is currently in Phase II trials. It sounds as though there was stiff competition for the biologic. In a conference call discussing the news, Auxilium CEO Armando Anido said the biotech chose Pfizer as its partner over several other global pharmas, because of the larger company's success marketing drugs such as Lipitor and Viagra. As might be expected, Pfizer's newly created specialty care business unit will have the commercialization honors. The Pfizer deal likely occurs at an ideal time for Auxilium, which faces a patent fight with Upsher-Smith Laboratories over intellectual property related to Testim, the biotech's testosterone gel for hypogonadism. Upsher-Smith notified Auxilium in October that it plans to file an Abbreviated NDA with the FDA for its own testosterone gel that it believes does not infringe on Testim's patent, which runs until January 2025.

Baxter/Avigen: Like so many other small biotech companies, Avigen, which focuses on neurological compounds, has had a tough year. The company has the dubious honor of posting one of the largest market cap losses among biotechs valued under $500 million in Q3 according to Rodman & Renshaw. Avigen's share price tanked in October when it announced negative news associated with AV650, its Phase IIb drug for the treatment of spasticity associated with multiple sclerosis. The biotech terminated its development partnership with Austria's Sanochemia Pharmazeutika and said it would focus on developing AV411, a novel glial activation inhibitor, for neuropathic pain and opioid withdrawal. But during its third-quarter financial call on Oct. 28, Avigen unveiled a massive restructuring plan that entailed discontinuing work on the glial activator and another preclinical product, AV513, unless a development partner could be found. CEO Kenneth Chahine said the new direction meant Avigen would have sufficient cash for four years of operations, given the $47.4 million the company had in cash, cash equivalents and securities at quarter's end. But the company's largest shareholder, Biotechnology Value Fund, which holds 29 percent of Avigen's stock and has provided capital directly to the biotech, clearly is troubled by the news. In a Dec. 11 letter to Avigen's board, BVF's Mark Lampert decried the steep decline in the company's share price, which has fallen 90 percent since 2004. He charged the company with threatening to destroy shareholder value by broadening "golden parachute" provisions for executives to one-fifth of Avigen's market cap and adopting a "poison pill" to prevent BVF from trying to intervene by purchasing a majority share. Lampert asserted that "Avigen has no real business at this time and has abandoned the development of all its products." Instead of looking for potential new partners and directions, the letter urged Avigen to return its excess cash to shareholders or at least offer a downside guarantee - an obligation to buy shares back at a specified price on a certain date. This week comes news that might appease Lampert and the crew at BVF. Avigen announced it was partnering its preclinical, oral blood coagulation product, AV513, to Baxter Healthcare in deal worth $7 million. "The sale of AV513 is an example of building value in a product that is differentiated from current therapies, and bringing it to a valuation point that generated a positive return on investment," said Avigen's Chahine in a press release announcing the news. Hmm, we can't wait for BVF's response.

GlaxoSmithKline/Genmab: Back in the days when licensors had clout, co-promote options featured in almost every deal. Biotechs figured they would keep their strategic options open just in case going commercial took their fancy, and Big Pharma were in no position to refuse. This week’s news that Genmab has sold back its co-promote option on CLL candidate ofatumumab to partner GlaxoSmithKline makes two things clear: first, many of these options are unlikely to ever be exercised given the logistical and financial commitments required (which is in large part why Big Pharma were so relaxed about granting them in the first place); second, in today's roiling financial markets, getting a guaranteed cash payment is a wiser course of action than holding out for theoretical money in the future. (A bird in the hand, as they say.) Genmab got just $4.5 million from GSK for the option, which covered a targeted oncology setting in the US and the Nordic region. Not a lot, particularly since GSK had granted Genmab the option to co-promote two of its own drugs , too—and agreed to reimburse some sales reps. But Genmab no longer has anything behind ofatumumab that could make a sales infrastructure cost-effective (one that Genmab estimates would have cost $7 million a year); it ended development of the potentially synergistic HuMax-CD4 for cutaneous T-cell lymphoma and its other program is in head and neck cancer. So if it wouldn’t have exercised the option anyway, why not take the money? And why not re-negotiate a lower share of the (currently 50/50) R&D costs, too, in exchange for a bit of royalty?--Melanie Senior.

AstraZeneca/MAP Pharmaceuticals: Another day, another deal heavily weighted on the back end. On Friday Dec. 18, AstraZeneca and MAP Pharmaceuticals announced a worldwide collaboration to develop and commercialize MAP's proprietary nebulized formulation of budesonide, currently in Phase III development, for treatment of pediatric asthma. While the biodollars sounded huge--"AZ, MAP ink $900 million asthma deal" read one write-up of the transaction--the reality is far less glorious. Under the terms of the agreement, AstraZeneca will pay MAP Pharmaceuticals an upfront cash payment of just $40 million (certainly not bad). True, the company owes MAP another $35 million if the ongoing Phase III trial reaches certain primary endpoints with the appropriate safety results. And, it's also true that at some point in the future, MAP could receive up to $240 million in potential development and regulatory milestones, as well as sales performace-related milestones of up to $585 million in the event the product is a considerable commercial success. Don't get me wrong--$40 million is a sizeable chunk of non-dilutive change and kudos to MAP for getting the deal signed at all. But the other $860 million? It may never well materialize--and MAP and its investors would do well to remember that. (NOTE: MAP wasn't the only potential winner in this deal: Elan Pharmaceuticals may also get a welcome boost. MAP's proprietary formulation of budesonide comes courtesy of Elan's nanocrystal technology. )

Merck/Dynavax: It's official. Merck and Dynavax announced Friday Dec. 18 that they were tabling their agreement concerning Heplisav, a Phase 3 hepatitis B virus (HBV) vaccine placed on clinical hold at the FDA earlier this year after a sgnificant adverse side-effect occurred. All rights to develop and commercialize Heplisav revert to Dynavax. According to the press release, Dynavax will continue to evaluate Heplisav's development options, especially as a treatment for adults outside the U.S. and for the global end-stage renal disease markets, which the company estimates represent approximately 70% of the total market opportunity for this vaccine. If the regulatory feedback is favorable, Dynavax plans to line up a new partner or financing arrangement to support necessary clinical work with the drug. It will be interesting to see how regulators outside the U.S. view the drug. Back in October, the FDA notified Merck and Dynavax that "the balance of risk versus potential benefit no longer favors continued clinical evaluation of Heplisav in healthy adults and children." Though Dynavax is putting on a brave face--it wins our award for the little biotech engine that could--there's no denying the company faces some tough choices in the months ahead. With limited cash resources--just $65 million including the recent up-front from GSK and '08 operating expenses for the first three quarters totalling over $50 million--it's hard to see how the company will be able to push Heplisav to the point where it is sufficiently derisked for potential future partners.

through the fingers by flickr user akash k courtesy of creative commons license.

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