Friday, November 19, 2010

Deals Of The Week Looks For Quarters Under The Couch Cushions

In today’s cash-constrained environment, drug markers are doing everything possible to limit the burn, while finding new sources of innovation. Hence this week’s news that Pfizer is teaming up with UCSF in an $85 million research collaboration (see below), as well as the respective emphasis at Roche and Novartis on “operational excellence” and “focused diversification”.

This desire to wrest as much value out of available resources is also the driving force behind various big pharmas’ decisions to outlicense deprioritized assets, whether they are single-asset focused arrangements or spin-outs of actual whole departments.

In the good old days, pharma didn’t have to think too hard about such measures. With abundant free cash flow and blockbuster projects these activities were a distraction deemed not worth the time and effort required.
But like graduate students searching for additional cash underneath their sofa cushions, big pharmas can no longer afford not to monetize, monetize, monetize.

Thus, AstraZeneca’s desire to sell off its medical device subsidiary Astra Tech, which manufactures dental implants and medical devices for surgery and urology, is hardly surprising given the drug maker’s patent cliff. (What is surprising is that it took this long for AZ to see the wisdom of the strategy.)

Astra Tech is forecasted to pull in roughly $533 million in 2010 according to analysts; that’s just 1.6 percent of AZ’s overall sales. Given the biz is entirely separate from the drug maker’s pharma initiatives – Astra Tech’s areas of expertise don’t even give AZ’s sales and marketing team an extra call point – the proposed divestiture makes a ton of sense (provided AZ can get a decent price for the subsidiary).

And therein lies the rub. Over a year ago, Elan tried – and failed – to spin-out its drug delivery business, which arguably could have closer ties to its overall strategic plans than dental implants and urology devices do to AZ’s. But the biotech has shelved its efforts because it can’t find a buyer that values the company as richly as it does.

One other option: tap the public markets, which while still chilly, are finally thawing, especially for companies with products and revenues. (And yes we know device IPOs remain a rare beast, but they do happen.) This is what Bristol-Myers Squibb, which faces its own steep cliff with Plavix and Avapro, did so brilliantly a year ago with its divestiture of Mead Johnson in two acts, first via an IPO that sold a small percentage of the company and then via a stock swap that increased BMS’s earnings-per-share. (It also won a DOTY nomination for its efforts.)

Such creative deal making can yield a lot of spare change – the Mead Johnson IPO alone pulled in 2.88 billion quarters, proving that more banal assets like baby food provide a very big cushion in the post-patent cliff world.

It's time to get out from under the couch cushions and read...

Stromedix/UCSF: Privately held Stromedix in-licensed exclusive, worldwide rights to a preclinical monoclonal antibody to integrin alpha-v-beta-5 Nov. 18 from the University of California, San Francisco. Deal terms were not disclosed. Stromedix, a Cambridge, Mass., biotech backed by several venture capital firms and Biogen Idec, is focused on developing new therapies for fibrosis and resulting organ failure. Its lead program, in-licensed from Biogen in 2007, is STX100, a monoclonal antibody that inhibits the activation of transforming growth factor by targeting integrin alpha-v-beta-6, a cell-surface adhesion molecule and TGF activator. STX100 has completed Phase I studies, with Phase II trials in idiopathic pulmonary fibrosis and chronic allograft neuropathy in planning, Stromedix says. Noting that preclinical research suggests alpha-v-beta-5 plays a key role in a variety of acute and chronic organ failure settings, Stromedix believes the monoclonal, which regulates endothelial barrier function, could be a second candidate for treating fibrotic disease, particularly conditions associated with vascular leakage. CEO Michael Gilman said Stromedix would apply its proprietary biomarker database to the antibody to discover a biologically active dose for the purpose of investigating anti-fibrotic activity in a small trial.—Joseph Haas

Pfizer/UCSF: The Stromedix deal was only one of two deals inked by UCSF this week. On November 16, the university announced a sweeping arrangement with Pfizer that goes well beyond the transfer of intellectual property around an interesting target. It’s no secret that big pharmas are increasingly looking to tap the innovative science contained within academia’s ivory towers. It’s one way drug makers can revitalize their early stage R&D organizations that is also cost-effective (to put it bluntly, we mean cheap). Even though the $85 million Pfizer is pledging to UCSF over a five year period is significantly more than its ever put to work in its previous academic deals, the dollars are still a drop in the bucket for a company its size. Moreover, based on a conversation with Anthony Cole, who heads a new division within the drug maker called Global Centers for Therapeutic Innovation (GCTI) responsible for spearheading such collaborations, it seems likely more of these partnerships are in the offing. In exchange for funding that broadly supports biotech research at UCSF, Pfizer receives joint ownership of early-stage drugs and exclusive options to develop them once they complete Phase I studies, with additional milestone and royalty payments due back to the university if an option is exercised. Any compounds that Pfizer elects not to develop further will be returned to UCSF, which will be free to negotiate with other potential partners, although royalties may still be due to Pfizer. The Big Pharma will also open a private laboratory, which will focus on multiple therapeutic areas of interest, with at least 20 staffers at UCSF’s Mission Bay Campus in San Francisco; approximately the same number of UCSF researchers will work jointly with the local Pfizer staff. – Paul Bonanos

Sekisui/Genzyme: It's two down, one to go for Genzyme, which announced Nov. 18 that it will sell its diagnostics products business to the Japanese chemical manufacturer Sekisui Chemical Co. for $265 million in cash. It is not as lucrative a deal as the $925 million agreement Genzyme announced for the sale of its genetic testing unit to Lab Corporation of America back in September. But it is one more item Genzyme can check of its to-do list as the Cambridge, Mass.-based biotech cleans up its business, potentially ahead of a sale. Genzyme announced in May plans to divest the diagnostics and genetic testing businesses, as well as its pharmaceutical intermediaries unit, as part of a strategic plan to increase shareholder value, mainly by sharpening its focus on core areas like rare diseases. Sekisui will employ the diagnostic unit’s 575 employees and maintain operations in all current locations, according to Genzyme. The business sells raw materials, enzymes, clinical chemistry reagents and rapid tests to manufacturers and clinical laboratories. You may not have heard, but Genzyme is in the midst of an attempted hostile takeover by Sanofi-Aventis. Despite recent rumors that Takeda – the largest Japanese pharma – may be interested in bidding for Genzyme, no white knight has officially materialized. Takeda seems an unlikely buyer for Genzyme anyway, given the awkward strategic fit and the fact that Takeda would have to finance about half of the $20 billion or so acquisition.—Jessica Merrill

BTG/Biocompatibles: News of BTG's planned acquisition of UK drug-device group Biocompatibles seems unremarkable at first glance. It's worth £177 million ($282 million) in cash and shares, meets BTG's well-documented aim of adding specialist products to its pipeline, and is earnings-enhancing for BTG in its first full year. But drill down and there’s an interesting financial component to the transaction worth noting. Rare is the acquisition that comes without an earn-out element these days; lo and behold, BTG's proposed deal includes a "Partial CVN Alternative" -- referring to Contingent Value Notes, which are essentially Contingent Value Rights (CVR), better known as earn-outs. The deal sees Biocompatibles shareholders receiving 1.6733 new BTG shares and 10p in cash, valuing Biocompatibles at a premium of about 28% to its closing price prior to the announcement. But Biocompatibles shareholders can, if they like, forego the 10p cash element in exchange for a CVN, worth €0.56/share (about 48p), linked to whether or not AstraZeneca exercises its near-term option to license Biocompatibles' GLP-1 analog compound. It appears, then, as if Biocompatibles' shareholders are being offered a choice to forfeit their 10p/share today in exchange for rights to the possibility of 48p/share tomorrow. That's interesting since most previous examples of CVRs or CVNs don't involve a price, as such. BTG doesn't quite see it that way, though. This wrinkle in the deal resulted, they say, from Biocompatibles' (quite reasonable) demand that their shareholders, and they alone, be given the opportunity to share in the significant (€25 million) milestone payable by AstraZeneca if it options-in the program.—Melanie Senior

Eisai/Forma: How much are platform technology deals worth these days? This week’s tie-up between Japanese pharma Eisai and privately-held FORMA Therapeutics provides one benchmark. On November 16, the two parties announced a strategic drug discovery collaboration that gives Eisai non-exclusive access to FORMA’s proprietary Diversity Oriented Synthesis (DOS) chemistry-generated library and cell-based screening platform. For access to the technology FORMA gets an undisclosed upfront payment and committed funding of $20 million over three years. That’s a far cry from the economics Alnlyam was able to wring via its series of non-exclusive alliances with Roche, Novartis, and Takeda in past years. But for companies not named Agios or Regeneron, the value of platform technology deals has been trending steadily downward in recent years. FORMA has no desire to hitch its wagon to any one drug maker – and as such is trading off value for the ability to play the field. The Cambridge, MA-based biotech has raised approximately $50 million from its venture backers since its founding in early 2009 and inked numerous deals with a variety of partners, including Novartis, Cubist, and the Leukemia and Lymphoma Society. At this stage of the game, when there’s little appetite in the public markets for a high risk but interesting technology, the biotech needs multiple relationships with potential acquirers in order to set itself up for a robust M&A process. –Ellen Foster Licking

Image courtesy of flickrer MarkelConnors used with permission via a creative commons license.

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