Financings of the Fortnight Buys Me Some Peanuts and Cracker Jack

Sometimes you go looking for a recovering economy's green shoots and instead you find a pristine swath of outfield grass and a stadium full of fans ready to shake off winter. It's Opening Day, a national holiday in waiting if we could ever rid the Congress of all those football fans.

If you're not in the US, we're talking about baseball. Though it's possible at this moment someone somewhere is getting ready for bog snorkelling season.

And it's also possible they're celebrating in Europe the large Series A round just raised by Swiss biotech Anergis, which we detail below. Big fundings across the pond are few and far between these days, so we can't blame optimists for seeing fundraises like those from Anergis and Acacia (also below) as signs of better things ahead. In venture these days, however, much more optimism is emanating from emerging markets, as this survey suggests.

Ah, regional differences. Without them we wouldn't have such wonderful things as truffle pigs, Diwali, funny Canadian accents, and fish tacos. (And bog snorkelling, of course.) But regional differences also contribute to suspicion, tribalism, and persecution. Sometimes such divisiveness is justified. You simply shouldn't trust certain people.

Regional venture differences are actually a topic for another day, or for op-ed pieces like this one, which piles on anecdotes of bad capitalization and even worse manners to explain the difference between US and European venture fortunes. Today, we cheer the men who take the field as world champions, celebrate our quasi-holiday, and sing. You know the words. Take me out to the ballgame, take me out with....

Anergis: Birch pollen. It sounds so woodsy. Makes you want to pack a lunch and take a hike. But it's no picnic for allergy sufferers, who often have bad reactions to many foods, too, including apples, carrots, peaches and potatoes. Swiss biotech Anergis said this week it has raised a Series A round of CHF 18 million (nearly $20 million) to fund a Phase II trial of its lead allergy vaccine, AllerT, for patients with birch pollen allergies. Before the Series A round, the company had raised CHF 3 million from private investors and a grant from the Swiss Innovation Fund (CTI). Anergis CEO Vincent Charlon told our "Pink Sheet" colleagues he expects to look for additional financing and/or development partners in about two years to advance AllerT into Phase III clinical trials. Anergis' vaccine technology, Contiguous Overlapping Peptides (COP), consists of a mixture of synthetic peptides each identical to a small part of the allergen. Between them they represent the allergen's complete amino acid sequence. The vaccine is administered in five injections over two months to induce immune tolerance. Because the allergen is in sections, the three-dimensional structure of the complete allergen is not present and so cannot bind to immunoglobulin E (IgE) to induce hypersensitivity reactions. This potentially means higher doses of COP-based products can be administered than with other allergy products like intravenous injections or sublingual tablets, and tolerance should occur sooner, in months rather than years. The round was led by Vinci Capital-Renaissance PME and BioMedInvest (managed by BioMedPartners AG), both based in Switzerland, as well as Copenhagen-based Sunstone Capital. -- John Davis

Acacia Pharma: We couldn't make this up if we tried. Not only is Acacia also European, based in Cambridge, UK, but it's named after a tree often blamed for bad allergies. Much maligned, apparently. The tree, that is, not the company, which certainly isn't allergic to tidy sums of venture cash. Acacia said March 31 it has raised a $10 million Series A round from Lundbeckfond Ventures and Gilde Healthcare. Nothing to sneeze at, indeed. The cash will help complete Phase II trials for its two lead compounds: one treats nausea and vomiting in post-operative patients; the other treats severe dry mouth in patients with advanced cancer. Acacia says it aims to build its own hospital-focused sales force for cancer support care in Europe and outlicense its products elsewhere. If you're wondering about Lundbeckfond, why yes, it is related to the drug firm H. Lundbeck. Known as LFI Life Science Investments until late last year, it was founded in 2009 through the holding company that owns the family shares in the pharma company. The evergreen venture firm operates independently, however, in an arrangement similar to the relationship its Danish counterpart Novo Ventures has with the diabetes specialists Novo Nordisk. Our START-UP colleagues delved into Novo Ventures' hot streak in this November 2010 piece. -- Alex Lash

Arena Pharmaceuticals: Buy low, sell high, isn't that how it goes? Not for Arena. Rebuffed by the Food and Drug Administration late last year, Arena said March 29 it raised $35.5 million by selling stock at $1.46 a share, near its all-time nadir. Half the cash will pay down existing debt from the same investor, Deerfield Management, that bought low this week. The only time Arena's stock dropped lower came last November, soon after FDA rejected its obesity treatment Lorquess (lorcaserin) with a complete response letter. The regulatory decision was hardly a surprise; an advisory committee voted in September against approval because of troubling indications of tumors in rats and marginal efficacy. The tumor problem particularly galled analysts and investors, as it had surfaced months before with Arena management downplaying its significance. Arena has said it will re-file lorcaserin this year in the US with its partner Eisai and stump for European approval, as well, though analysts wonder if the company is better off doing a 12-month study to better define the cancer risk. Meanwhile, with $150 million in cash at the end of 2010, Arena is buying financial time. Deerfield bought 12.15 million shares of common stock at $1.46 a share and 12,150 shares of preferred stock at $1,460 a share. The preferreds are convertible to common at any time unless the conversion bumps Deerfield above 9.98% ownership, according to SEC filings. In addition to the stock sale, Arena also repriced more than 14 million warrants held by Deerfield from an exercise price of $3.45 to $1.68 a share. Since Arena's setback, the outlook for obesity treatments has worsened. Development partners Amylin Pharmaceuticals and Takeda Pharmaceutical Co. recently halted Phase II trials of a combination therapy. And FDA has slapped two other drugs with complete response letters: Qnexa (phentermine/topiramate) from Vivus and Contrave (bupropion/naltrexone) from Orexigen Therapeutics. -- A.L.

AssureRx Health: Until now backed primarily by angel groups and individual investors, the personalized medicine startup AssureRx said March 25 it has completed a new Series B round worth $11 million that includes Sequoia Capital, Claremont Creek Ventures and Allos Ventures, alongside several existing investors. Led by Sequoia and Claremont Creek with a smaller contribution from Carmel, Ind.-based Allos, the round exceeds AssureRx’s stated goal of raising $9 million, and builds on $7 million in Series A money that it raised in several installments since 2006. The startup’s product, GeneSightRx, allows physicians to examine a patient’s pharmacogenetic profile via a cheek swab, shedding light on risk factors for specific antidepressant and anti-psychotic drugs and their dosage levels in an effort to avoid trial-and-error prescriptions. Based near Cincinnati, AssureRx also plans to use the funds for a second-generation product. Returning investors for AssureRx’s new round included the Cincinnati Children’s Hospital Medical Center, the Mayo Clinic, and CincyTech; Claremont Creek took two seats on the startup’s board, expanding its membership to seven. Sequoia and Claremont Creek also invested side-by-side in a $17 million Series C round for molecular diagnostics company Gene Security Network in November 2010. -- Paul Bonanos

Photo courtesy of flickr user ShutterBugChef under a Creative Commons license.

DotW:Talk Is Cheap; Debt Is Cheaper

Sanofi-Aventis set the debt world aflutter (or is it atwitter these days?) with its massive $7 billion bond offer this week. We'll spare you the gory details; suffice to say there are six tranches and a mixture of fixed and floating rates (tied to the low low 3-month Libor of 0.31). The most important thing to keep in mind? The highest interest rate Sanofi could be paying? 4%.

With debt that cheap who needs to invest in R&D?

It's a relevant question. The only story generating more ink these days than Sanofi/Genzyme (which still manages to capture a weekly headline or two thanks to ongoing production snafus), is Big Pharma's R&D crisis.

Just this week GlaxoSmithKline's Witty took to The Economist with an op-ed about the perils of industrializing the drug model and the need to think (and act) smaller via a new kind of research environment. (Our take on that model is here.) The March IN VIVO has an article of a similar vein from Bernard Munos, the former Lilly exec, who's been one of the leaders in the debate on how to move big pharma out of its R&D slump.

Still, if you believe analyses by McKinsey and other consultancies that calculates the internal rate of return for in-house small R&D at 7.5% at a time when the cost of capital is around 10%, and balance that against the low cost of debt, you start to wonder. It sure seems like big pharmas might be better off in the short term shelving R&D in preference for a more -- how shall we put it? -- transactionally driven approach.

As much as big pharma likes to talk about the intrinsic value of R&D, the real problem for many biopharma players -- and Sanofi definitely falls in this camp -- is bridging the patent chasm looming as blockbusters like Plavix go generic. To solve that problem you don't need R&D, you need products with near-term revenue. A platform for growth is nice, but as the Genzyme purchase shows, $4 billion in annual short-fall is a lot nicer -- and more attractive to investors who are often weighing not whether to invest in Pfizer or Roche of Sanofi but whether to invest in pharma versus IBM and General Electric.

Certainly if debt stays this low, Deals of The Week! ought to continue to be a happening place. And you can't quibble with our value proposition. IN VIVO Blog is one of the few things cheaper than the current borrowing rate, something to consider as you peruse this weeks offering...

Teva/Procter & Gamble: Sanofi-Aventis, which has been snapping up consumer health outfits small and large --think Chattem--for the past two years, may have some competition. This week comes news that the Israeli giant Teva is joining forces with P&G (known to midwesterners as Procter & God --they make diapers so you can understand the appellation) to create an ex-US-focused over-the-counter J/V. Teva doesn't have a sizable presence in the OTC space currently, but P&G does, with its so-called "personal health care" business generating around $2.3 billion in 2010, mostly in the US market. According to execs at the two companies, combined ex-US sales of their OTC products were more than $1 billion in 2010, with projections soaring north of $4 billion in a "a few years." As part of the deal, Teva gains access to P&G's leading OTC brands, including Metamucil and Pepto-Bismol. In exchange, P&G said it will benefit from Teva's broad geographic reach, its manufacturing capability and portfolio of 1,500 active ingredients. Teva has a stronger distribution network to pharmacies, whereas P&G has a stronger network to food and mass retail outlets. P&G is a recognized world leader in consumer brand marketing, an expertise Teva plans to tap. But while the consumer space is hot -- Sanofi isn't the only big pharma avidly interested in selling medicines direct to consumer -- the real rationale for the deal may be in creating a powerhouse well positioned to move Rx products to OTC. It could be tough to beat a Teva/P&G juggernaut in the switch, given Teva's R&D capabilities and P&G's brand equity. Sanofi's Chattem, beware.--Jessica Merrill & EFL

Cephalon/Gemin X: When Cephalon announced March 21 it was buying privately-held Gemin X in a deal worth $225 million upfront, the twitterverse erupted, with at least one biotech watcher tweeting -- and we are paraphrasing -- "one of these days CEPH will buy a company I've heard of." You may not know Gemin X from Adam, but it's true the specialty pharma has a penchant for seeing value in companies Wall St. finds arcane. Mesoblast? Ception? BioAssets? The Gemin X deal gives Cephalon two mid-stage oncology assets, including the pan-Bcl-2 inhibitor obatoclax, which will help bolster an aging franchise dominated by CLL therapy Treanda and cancer pain treatments Fentora and Actiq. Given obatoclax's Phase IIb status, the deal's price tag seems to be at a discount to acquisitions of other oncology players with assets at similar stages of development. In particular the upfront is about 60% what Gilead paid for Calistoga to obtain that privately-held biotech's selective PI3 kinase inhibitor. Nor is this take-out providing Gemin X's dozen or so backers, which include Sanderling Ventures, HBM Partners, and ProQuest-- much of a return. The upfront price is about $100 million more than the company says it raised in private venture money since its 1998 founding.--Lisa Lamotta & EFL

Sanofi-Aventis/The Vision Institute: So pharma’s sharing-caring, all-embracing, academia-targeted R&D approach continues: Sanofi Aventis this week added two further public-private partnerships to its research network, one on each side of the pond. The first was a three-year R&D alliance with the Vision Institute in Paris, France (the second is a three-year diabetes tie-up with scientists at Columbia University Medical Center in the U.S.). The ophthalmology deal stems directly from Sanofi’s 2009 purchase of eye-disease focused biotech Fovea, which is based on the Paris premises of the Vision Institute. Created in 2008, the Institute houses research teams from several of France’s top-ranking research centers, and is located within the Quinze-Vingts National Ophthalmology Hospital. Its director, Prof. Jose-Alain Sahel, helped found Fovea in 2005. Not content, it seems, with owning Fovea – now the Big Pharma’s ophthalmology division – this deal grants Sanofi “priority access” to the Vision Institute’s technological platforms, and commits the Big Pharma to supporting research projects in the areas of optical nerve regeneration, vascular biology, inflammation and gene therapy in various eye tissues. Sanofi will get exclusive global rights to anything resulting from the collaboration, and pay royalties. Fovea’s pipeline includes two Phase II compounds for retinal vein occlusion- induced acute macular edema and allergic conjunctivitis, respectively; Sanofi also has some pre-clinical gene-therapy candidates in eye-diseases from a 2009 deal with U.K. biotech Oxford BioMedica. It’s not clear how many Sanofi scientists are involved in the Vision Institute tie-up, nor what their hoped-for goals are for the three-year partnership. But the emphasis on translational R&D, the highly fashionable magic mix of private and public research, and on co-location – a driving force behind the creation of the Vision Institute as well as this deal – remind us of Pfizer’s flavor of public-private partnership, the city-based Centers for Therapeutic Innovation.--Melanie Senior


Merck/Portola: Is Merck still king in cardiovascular? In mid-January the big pharma pulled the plug on Phase III trials of its anti-clotting agent vorapaxar (remember, that was one of the major assets of the Merck-Schering reverse merger?). Now comes news that Merck is giving back to partner Portola Pharmaceuticals full rights to the Phase-III ready oral Factor Xa inhibitor betrixaban. The reason? Apparently a pipeline review. (Makes you wonder, huh?) Oh, we know the oral anti-coag space, one of the few arenas where you can point to drugs with blockbuster potential, could be a tough one to conquer if you're as far behind development-wise as betrixaban is. Boehringer Ingelheim's direct thrombin inhibitor Pradaxa is already on the market in the US and Europe; two Factor Xa inhibotors -- J&J/Bayer's Xarelto is pending with US regulators and apixaban (from Pfizer and BMS) is a not too distant third -- are next in line. In today's cost-constrained environment is there room for a fourth warfarin replacement? Maybe, but the drug won't just have to be superior to warfarin; coming so late to market, it's likely it would also have to be a damn sight better than the newer agents OR priced at a significant discount. And given the size of Phase III trials required to demonstrate the safety of cardiovascular drugs, pricing at a discount could be a money losing proposition.) Portola put a brave face on the news, talking up the advantages of having a wholly-owned Phase III asset and its desire to work with academic partners like Duke Clinical Research Institute. But the privately-held company, which has raised over $200 million in venture capital and debt since 2003, only has a $100 million in its coffers. Can it afford to run the Phase III trials on its own? Will its venture backers support such a decision? No and probably not. (In prior statements, Portola's CEO Bill Lis has estimated pivotal trials in just one indication could run as high as $400 million.) In the meantime, Portola and its venture backers have to be hoping partner Novartis, which paid $75 million for rights to the anti-thrombotic elinogrel doesn't have a change of heart.--EFL

Merial/Intervet: A little over a year after Sanofi-Aventis and Merck revealed they would combine their respective Merial and Intervet divisions to create the top dog in animal health, the pair decided to call the whole thing off. The logistics in settling anti-trust concerns are just too complicated to make the planned J/V worthwhile. It's not as if these anti-trust issues are new; since the 2010 announcement, market analysts have predicted a consummation would only occur if the companies divested assets worth about $500 million, much in the poultry vaccines arena. (In this case getting rid of the chicken would have had to come first.) In a joint statement, Merck and Sanofi announced each company will retain its current, separate animal health assets and businesses.There is no break-up fee and Sanofi and Merck will cover their individual expenses for the past year’s diligence. (Isn't it nice when a planned deal unwinds so easily?) --Joseph Haas

Image courtesy of flickrer Steve Rhodes via a creative commons license.

AZ's Payer Push No Help to Brilique in France

These days, you've got to schmooze with the payers as well as the regulators. AstraZeneca knows that; it has indeed been playing up its payer-focused strategy, with recent declarations of its bid to become "the number one company in terms of payer interactions," according to top AZ dealmaker Shaun Grady.

So it should have known that just because clot-buster Brilique was approved by the European authorities in December 2010, that wasn't the end of the story. And indeed, the French health technology assessment agency, known as the Transparency Commission, following a Jan. 19 review meeting, rejected the drug for reimbursement/pricing discussions. Hence AZ withdrew its submission.

The agency is concerned about the drug's side-effect profile, and was also influenced by FDA's lukewarm response to AZ's application for approval in the U.S.: FDA in December sent the company a complete response letter questioning the drug's efficacy in U.S. patients.

Fair enough; after all, the drug didn't seem to work among the U.S. cohort of AZ's 19,000-patient, multi-national Phase III trial. There are all sorts of discussions ongoing as to whether it's because the U.S. patients were on higher aspirin than those in other countries. According to AZ, the French want to see additional information, including clinical data contained within the company's response to the CRL, which was submitted on Jan. 21. (In other words, too late for the French meeting).

Anyway, the moral is that payers are likely to jump on concerns raised by any approval agency, even those outside their own territories. (We don't suspect France's concerns are anything to do with the fact that the genericizing competitor drug Plavix is ... well, French.)

It's tough luck for AZ, though, despite its best intentions (..."we're meeting payers' needs for value-based product differentiation by improving our ability to assess clinical and economic outcomes in real-world populations (as an example, earlier this year we announced a new outcomes study we were kicking off for Brilinta) declared an AZ spokesperson earlier this year).

France accounts for nearly a third of the market share for anti-platelet drugs in Europe, according to Sanford Bernstein analyst Tim Anderson. And AZ needs Brilique it faces expiries for Nexium and Seroquel. It also needs the drug to start generating revenues fast, because Plavix is either going or gone off patent.

AZ says it plans to supplement the Brilique reimbursement dossier and plans to resubmit to France's Transparency Commission within the coming months. Hopefully for it, the French set-back won't give FDA, set to rule by July 20, any further concerns. Anderson suggests in a March 23 note that "the odds of a negative ruling would seem to increase at least slightly."

Zut alors.

Update: AZ has corrected us on a couple of technicalities: The Transparency Commission didn't actually reject Brilique, they asked for additional information, and AZ withdrew its submission. Similarly, FDA wasn't questioning the drug's efficacy in U.S. patients, it was requesting additional analyses with respect to those patients. Sorry.

Down On The Pharm: Implications of the Merial/Intervet "No Deal"

Merck and Sanofi-Aventis’ joint decision March 22 to shelve the planned merger of their animal health units may have left the other big pharmas playing in the space acting a bit like … well, chickens with their heads cut off.

Some industry observers may view animal health as -- dare we say it -- small potatoes. But a quick look at 2010 sales growth rates for big pharma animal health units indicates such business is not a poultry (er, paltry) matter.

A little over a year after the two companies revealed they would combine Sanofi’s Merial division with Merck’s Intervet to create a business with over $5 billion in annual sales, the pair decided there are just too many antitrust complications to make the joint venture worthwhile. Originally hoping to complete the merger within 12 months, Sanofi and Merck earlier this year announced it would not be finalized earlier than third-quarter 2011.

Market analysts expected a set of divestitures totaling about $500 million would have been necessary to pull off the deal, with Dow Jones reporting that the combined company’s holdings in poultry vaccines likely would have attracted antitrust scrutiny.

In a joint statement, Merck and Sanofi said each company would retain its current, separate animal health assets and businesses – there is no break-up fee and each company will cover its own expenses for the past year’s due diligence. (Isn't it nice when a planned deal unwinds so easily?)

The two companies were partners in animal health previously, jointly owning Merial, but Sanofi bought out Merck’s share of that business in 2009 as part of the antitrust review that eventually okayed Merck’s merger with Schering-Plough. Intervet was among the assets Merck acquired in that transaction, meaning the New Jersey pharma essentially stepped out of and back into the animal health business simultaneously.

Seven of the 12 publicly traded big pharma companies participate in the animal health business, along with privately held Boehringer Ingelheim. On March 15, Eli Lilly made an undisclosed offer to buy out Johnson & Johnson’s relatively small, Europe-based animal health business. But will Merck and Sanofi’s abandoned deal and the relative parity within big pharma animal health lead to additional M&A or some of the players exiting the space?

Pfizer, which acquired Fort Dodge Animal Health in 2009 as part of its merger with Wyeth, has talked recently of selling off units and focusing more on core businesses under new CEO Ian Read. Might it want to sell off its animal health unit, which generated $3.58 billion in sales, overall a bit more than 5% of the entire Pfizer enterprise, last year?

If so, would Lilly, at roughly two-fifths the size of the world’s biggest pharma company, be both willing and able to absorb Fort Dodge? Likewise, could smaller animal health players Bayer HealthCare and Novartis be looking to grow their divisions?

It’s worth noting that all of the five big pharma companies that reported their animal health revenues for 2010 recorded sales growth during the year, ranging from 2.6% for Sanofi to a very healthy 29% for Pfizer. (Pfizer’s number needs to be rationalized, though, with the reality that its growth was generated partly by the acquisition of Fort Dodge, not just sales increases.) Bayer and Lilly both enjoyed animal health sales growth in the 15% range, indicating why the firms’ may be interested in expanding that portion of their businesses.

By Joseph Haas

Image courtesy of flickrer terrydu used with permission through a creative commons license.

What Biotech Wants From Big Pharma Partners: Survey Says!?

With Big Pharma's internal R&D productivity in the proverbial toilet, business development plays a critical role in securing drugmakers' future wellspring of innovation. Thus, what biotechs think of pharma as partners matters, perhaps more than it ever has before.

Two companies that can pat themselves on the back? Roche and Merck & Co., who took home top honors as best partners in a recent survey of biotech execs published by the Boston Consulting Group.

GSK, Novartis, Eli Lilly and Pfizer also scored well, with one biotech – Celgene – sneaking onto the leader board with the third-highest proportion of respondents having a favorable impression of the company’s partnering capabilities. (Celgene's appearance shouldn't surprise our blog readers; in our 2010 Deals of the Year competition, the biotech, whose deal making prowess will be analyzed more completely in an upcoming IN VIVO feature, chalked up wins in two different categories.)

The BCG survey is the fourth in a series, following similar efforts in 2003, 2006 and 2008. The goal, says BCG partner Simon Goodall, is to determine the key characteristics companies are looking for in a partner, and which buy-siders are best fulfilling those wishes.

The survey was sent to about 500 heads of business development and chief executives during the summer of 2010, and the results are based on approximately 100 responses. Interestingly, BCG found that changes in Big Pharma corporate leadership could impact the perceptions of potential biotech partners quite quickly; despite Chris Viehbacher’s short tenure at Sanofi-Aventis, for instance, biotechs believe the French pharma is a more attractive partner because of its more outward-looking focus.

Moreover, views of Roche and Merck were not hurt by their respective mega-acquisitions of Genentech and Schering-Plough. And Japanese companies – which scored poorly in earlier surveys and were largely indistinguishable in potential partners’ view of their characteristics – have made great strides both as a group and individually. Several now score above the average overall.

“In 2003 the results told us that everyone was awful,” recalls Goodall. Less than one in three companies received a positive overall response from BCG’s list of biotech partners. Those results improved in 2006, and again in 2008, with nearly half garnering positive responses. At the same time the list of biotech ‘wants’ shifted from solid commercial capabilities to a willingness to allow biotechs to retain control over their assets. At last reckoning, in 2008, the full impact of the financial crisis was yet to be felt by the biotech community, says Goodall. “They felt they wouldn’t be as badly affected as pharma,” he says.

The financial meltdown and its impact on the biotech financing climate have helped to shape biotechs’ current wish list of important partner characteristics. In 2010, practical considerations like clinical and sales/marketing capabilities, alongside a partner’s ability to add value to a biotech’s compound, rose to the top of the list. Fuzzier characteristics, including ‘responsiveness during the deal negotiation process’, ‘fit with corporate culture,’ and ‘alliance management capability’ faded in importance. Even so, “organizations are thinking more carefully about how they project a partnership image,” says Goodall. “There’s a careful orchestration and coordination and companies are recognizing they need to make decisions more quickly, and be more efficient.”

BCG has not divulged the “losers” in its survey (feel free to ruminate in the comments below), and so we’ll have to make do with analyzing which pharma companies performed the best against key characteristics in the eyes of the respondents.

Ranked as a percentage of responders that agreed a company exhibited particular criteria, Roche struck gold in four categories, as the company is most associated with deal structure flexibility, executive leadership, alliance management, and manufacturing expertise. Merck led in five categories: responsiveness, BD/licensing group access, therapeutic areas of interest (tied with Novartis), control over development, and ‘develop and prosper,’ a metric related to post-deal success.

Pfizer and Novartis took honors in three categories apiece. Novartis took the prize for TAs of interest, regulatory capability, and research expertise. Pfizer excelled in global reach and access/reimbursement, as well as in an area it would perhaps rather forget: ‘pay highest price.’

Price tags aside, on the whole it appears that industry is moving in the right direction -- and when business development is companies' best hope at securing the next generation of important, valuable drug candidates, that's good news for everyone.

UPDATE: you can request a copy of the survey here.

Pfizer Channels Economist E.F. Schumacher

Okay so how 'bout that for an esoteric title?

Permit IN VIVO to flash back to the 1970s for a few minutes. In 1973, British economist EF Schumacher published his landmark series of essays Small Is Beautiful during the midst of an energy crisis and a raging debate about the risks of nuclear power. Among the many notable passages in the treatise is this gem:

“Even today, we are generally told that gigantic organizations are inescapably necessary; but when we look closely we can notice that as soon as great size has been created there is often a strenuous attempt to attain smallness within bigness.”

Schumacher, who worked with John Maynard Keynes and John Kenneth Galbraith, didn’t aim his book specifically at biopharma, but it’s striking how relevant the concepts proposed – especially the notion that “the fundamental task is to achieve smallness within the large organization” – are to our industry. As it faces its great R&D stagnation, Big Pharma is on the undeniable quest to manage size, creating smallness within the bigness in hopes of improving upon its innovation track record.

In their R&D strategies, GlaxoSmithKline, AstraZeneca, and Sanofi Aventis are all at different places in terms of promoting the small is the new big concept, with GSK leading the charge. Years into a radical R&D reorg, Glaxo continues to evolve its model, with the goal of integrating its biotech-like drug units with the respective downstream medicines development centers to create end-to-end business groups.

Beyond R&D, there’s also the raging “focus versus diversification” debate, which gained new significance after Bernstein Research’s Tim Anderson published a March 14 note suggesting the world’s biggest pharma was mulling the heretofore unthinkable: shrinking from its outsize $67 billion revenue base to a much more modest—and manageable—base of $35 to $40 billion. ( For those keeping score –and since March Madness has begun who isn’t?—it’s a question IN VIVO explicitly raised two years ago in “Why Doesn’t Pharma Get Smaller?”)

Say what? Didn’t Pfizer buy Wyeth after jettisoning its own consumer health program in part to lessen its exposure to high risk-- and expensive to develop--innovative therapeutics. Given Pfizer’s lack of immediate success, do we now throw the idea of the industrial pharma out the window?

Maybe not. Just days after the Bernstein note came news that Eli Lilly wanted to bulk up its own animal health division via the acquisition of J&J’s Janssen Animal Health group. And there’s no doubt GSK, Sanofi, and Novartis remain enamored with the diversified approach: each has formidable consumer health care operations and emerging markets strategies relying on selling branded generics. Novartis has of course pushed into commodity generics as well, through Sandoz, and still manages to notch innovative R&D successes: If the launch of the first-in-class oral multiple sclerosis drug Gilenya wasn’t proof enough, look at last week’s announcement that the pharma’s Phase III Janus kinase inhibitor INC424, partnered with Incyte, has wrapped a second pivotal trial and is on track for EU and US regulatory filings by Q2 2011.

Make no mistake. Pfizer’s ruminations on the spin-offs of its four non-traditional pharma businesses – as well as its Established Products Unit – seem unlikely to spark an “hey everybody, let’s get small” moment. That’s because there’s still plenty of risk in the high flying R&D model espoused by companies like BMS (and Amgen). One only has to look at new mechanisms like UnitedHealthcare’s Cancer Care pathway program, which bundles payments to doctors using evidenced-based medicine guidelines, to see how changing reimbursement practices could make new product launches tougher.

So maybe the lesson isn’t that everybody should get small, but some companies definitely ought to get smaller. If the words of one of Pfizer’s top executives, head of R&D Mikael Dolsten are any guide, the big pharma’s management is coming ‘round to this way of thinking. Speaking at Barclay’s Capital investor conference March 17, Dolsten emphasized: “We need...to understand what is the maximum value for those businesses, which of them actually have a higher value by being inside Pfizer…and which would...create more value for shareholders outside the company."

Let’s suppose Schumacher is right and “the large-scale organization is here to stay.” As he points out in Small Is Beautiful that also means “the stronger the current, the greater the need for skillful navigation.” For biopharma this entails managing size appropriately to restore R&D productivity but in such a way that it is possible to mitigate the risks associated with health care reform and payor decisions.

At the end of the day, a behemoth the size of Pfizer may just be too damn big to be flexible enough to pivot in a rapidly changing health care environment.

Deals Of The Week Breaks For March Madness

It really is a mad, mad, mad, mad world. Libya. Yemen. Japan.

The relentless worrisome news is enough to drive this blogger to the madness that is the NCAA. (I suppose I could tune into the unceasing Kate/Wills show on BBC and TLC instead, but there's at least another 6 weeks to indulge that craving.)

For now, however, I'll have to make do with Deals of the Week. (EBI's corporate parent frowns a wee bit on live streaming during work hours, even if it allows one to make artful pop culture references.) And thankfully, there are plenty of suprises, setbacks, and leadership changes to make biopharma worthy of its own bracketology.

We'll return to weightier matters on Monday. For now it's time for...

Human Genome Sciences/FivePrime Therapeutics: On March 16, one week after winning FDA approval for Benlysta (belimumab), the first new lupus drug in 50 years, Human Genome Sciences inked a $50 million deal for rights to FivePrime's lead pipeline candidate, FP-1039. FP-1039, an inhibitor of the fibroblast growth factor (FGF) pathway that may be key to survival and proliferation of solid tumors, has been well tolerated in safety studies and is now being tested in endometrial cancer patients. No word yet if HGS will continue down that clinical path or prioritize other cancers. There are several members in the FGF family; FivePrime said its molecule inhibits most of them, with preclinical work showing strong inhibition of angiogenesis related to FGF and VEGF. The license agreement, extremely lucrative for an asset that hasn't yet dosed in Phase II, gives HGS development and marketing rights in the US, Canada and European Union. In addition to the $50 million upfront payment, HGS will pay FivePrime $445 million in potential milestones, plus double-digit tiered royalties on net sales. The biologic will slot into HGS's clinical pipeline, which beyond Benlysta includes monoclonal antibodies for anthrax, cancer and ulcerative colitis. -- Alex Lash

Seattle Genetics/Millennium: With their antibody-drug conjugate brentuximab vedotin heading toward an FDA approval decision this year, Seattle Genetics and Takeda Pharmaceutical's Millennium have extended their partnership to include an undisclosed second antigen target. The firms did not reveal financial terms, but Millennium will be responsible for all R&D and commercialization of the compound, with Seattle due milestones and single-digit product royalties on worldwide sales. That's different from the b. vedotin collaboration, in which Seattle Genetics has retained US and Canadian commercial rights, with Takeda/Millennium responsible in the rest of the world. Buoyed by positive data in its pivotal trials, b. vedotin inhibits CD-30 and was submitted in February for approval for relapsed/refractory Hodgkin lymphoma and relapsed/refractory systemic anaplastic large cell lymphoma. If approved, the medicine would be the only antibody-drug conjugate on the market, as Pfizer's Mylotarg was removed last year after post-market studies showed serious safety concerns. Other companies, including ImmunoGen and Roche's Genentech group, are pushing ADC technology through the clinic with the hope that the antibody conjugates, which consist of a cell-killing payload tethered to a tumor-homing antibody, provide strong cancer-fighting properties without the drastic side effects of chemotherapy. -- AL

Sanofi Aventis/Genfit: If it were ever in doubt, the high-profile failure of fat-buster Zimulti back in 2007 hasn't put Sanofi-Aventis off metabolic diseases – even outside diabetes. Zimulti's failure forced the French pharma to lean heavily on insulin treatment Lantus, and its moves to build a stronger diabetes franchise are well-documented. (Recall the French pharma’s deals with WellStat, CureDM, Metabolex, and its 2010 update of its 2003 Zealand Pharma alliance.) Most recently, on March 17, Sanofi Aventis signed a research contract with French biotech Genfit, hoping to identify molecules targeting the mitochondrial dysfunctions believed to be behind some metabolic disorders. Genfit has collaborated with both Sanofi-Aventis' predecessor companies since 1999. Back then, when Genfit trendily called itself a 'functional genomics' outfit, the biotech signed up Aventis to work on PPARa agonists in exchange for €5 million up front and some research costs; the same terms applied to a tie-up with Sanofi-Synthelabo in atherosclerosis. The latest pact sees Genfit, now described as experts in gene regulation and nuclear receptors, receiving annual payments to fund research, plus development, regulatory and commercialization-linked milestones that could, in a best-case, reach $54.5 million. Genfit's most advanced in-house compound, GFT505, is in Phase II trials for diabetes/pre-diabetes. –Melanie Senior

Merck/Ariad: Just last year , DOTW covered Merck and Ariad’s decision to revise their 2007 deal for mTOR inhibitor ridaforolimus, with Merck taking development control for the program and Ariad retaining an option to co-promote the medicine in the US and fielding 20% of the US sales effort. This week comes news that Ariad has opted in; and the announcement is worth noting for several reasons. When Ariad downsized its obligations in 2010, the move was about sacrificing long-term return in exchanging for securing its near-term cash runway. But if the company was seeking stability, reserving the right to co-promote provided a healthy compromise, allowing it to preserve some ownership of what could be an important revenue driver, rather than be reduced to sales milestone and royalty payments. Why is that important? For starters, even a 20% stake in ridaforolimus, an oral mammalian target of rapamycin that has the potential to be the first targeted agent for the treatment of sarcoma, is likely to be attractive to future acquirers--and that's above and beyond ridaforlimus licensor Merck. Indeed, with a pipeline of products in development including Phase II ponatinib, Ariad could catch the eye of bigger players looking to build their oncology pipelines. But with even big companies counting pennies, noone wants to leave money from marketed products on the table (or in the pockets of a competitor). Thus, while a co-promote may give existing partner Merck the lion’s share of the value, it still leaves enough to satisfy would-be buyers giving Ariad greater strategic flexibility. Want proof? Just ask Plexxikon, which managed to sell itself for a hefty price to Daiichi for its targeted melanoma drug PLX4032. –Ellen Foster Licking

Elanco/Janssen Animal Health: Elanco, the animal health division of Eli Lilly and Co. announced an irrevocable, unconditional offer March 14 to acquire Janssen Animal Health, part of Johnson & Johnson subsidiary Ortho McNeill Janssen. Financial terms were not disclosed. Belgium-based Janssen is focused primarily on Europe and would add a portfolio of about 50 products to Elanco’s line. Its products treat both companion animals and livestock, with an emphasis on poultry and swine. The deal would include no manufacturing facilities, but Janssen’s animal health employees would transfer to Elanco, which already employs more than 2,300 people and markets products in 75 countries. Elanco President Jeff Simmons said the transaction would provide synergies with current operations, as well. “Through this transaction, we intend to further expand our European presence, bolster our growing portfolio of companion animal medicines and diversify our food animal portfolio with new swine and poultry products,” he added. Elanco generated sales of $1.39 billion in 2010, 15% growth over 2009, and contributed roughly 6.0% to Lilly’s overall $23.1 billion in sales for the year. J&J does not break out sales data for Janssen Animal Health in its financial reporting. The sale would mean J&J’s exit from animal health, a space in which seven of 12 publicly traded big pharma companies currently play, led by Sanofi-Aventis, which generated €2.64 billion in sales last year, comprising 8.7% of its earnings.—Joseph Haas

Quest/Celera: Players of various stripes continue to snap up specialty labs, starting with GE buying Clarient last fall and Novartis bringing Genoptix into its molecular diagnostics fold in early 2011. Now, Quest is buying Celera for $671 million, or $344 million net of Celera’s $327 million in cash and short-term investments. For the money, Quest gets Celera’s Berkeley HeartLab (BHL) and its proprietary tests, as well as the smaller testing company's biomarker pipeline and R&D capabilities. The move is in line with Quest’s expansion of esoteric and gene-based test operations in cancer, CV, infectious diseases and neurology: less than a month ago, Quest snapped up Athena Diagnostics for $740 million, deepening its neuro testing channel. Celera has been limited by high infrastructure costs and commercial constraints and the BHL business should benefit from Quest’s distribution capabilities, including its patient service centers. Indeed, access to Quest’s patient service centers to perform phlebotomies and get the message out about new tests should accelerate growth. Celera will continue to operate independently and Ordonez and senior management will stay on. Quest no doubt values Celera’s pipeline as much as the tests Celera sells: Quest does not expect the deal to add to EPS for two years.—Mark Ratner

Industry Still In The Dark About UK Value-Based Pricing

A few of the light bulbs in the room in which the Association of the British Pharmaceutical Industry (ABPI) held its March 14 press conference on value-based pricing (VBP) refused to shine. They were not alone in failing to shed any real light on even the broadest aspects of a new and wholly untested pricing system set to come into force in less than three years.

The idea is that VBP will take into account wider benefit measures than are currently used, including societal ones, in order to improve access to high quality medicines whilst ensuring that industry continues to enjoy healthy profits. But while interested parties seem to understand (and agree on) the aims of the UK government's VBP proposal - which is out to public consultation until March 17 - all sides, the government included, appear, at least as far as this blogger could tell from the aforementioned press conference, in the dark as to how it should function.

And somewhat disconcertingly for industry, ABPI Director General Richard Barker said that there is no guarantee as yet that the government won't impose random price cuts, of the variety seen in most other European countries during 2010, either before or after VBP arrives. He instead exclaimed how "striking" it was that "while other European countries have, as part of their cost controls, already introduced arbitrary price reductions for medicines, the U.K. hasn't."

We know already that the new pricing system will include a cost-effectiveness element, a disease burden element and an innovation element. But their relative weighting and relationship to one another is still unknown. And although the National Institute for health and Clinical Excellence will be an important agent in assessing cost-effectiveness, how and by whom the other two elements will be determined is as yet unclear. So, therefore, is what happens when the "value-based" price provided by the assessing authorities (whoever they may be) does not conform to the price proposed by the industry.

Light has also yet to be shone on the thorny question of precisely how the VBP scheme will fit in with another element of the government's health care overhaul: the granting of commissioning powers, budgetary responsibility and hence huge prescribing influence to a series of GP consortia across the country. On paper this risks leading to an even worse case of "postcode lottery", the term used to refer to variations in treatment access across the country, than is currently the case. Instead of NICE dishing out nationwide reimbursement advice, each region may choose to fund different drugs.

There was also little sign of forward momentum in establishing precisely how the new VBP system will provide the necessary incentives for innovation. There are two fundamental issues that need to be defined: the cost of incremental - or what Barker termed "progressive" - innovation; and how to assess the cost-effectiveness of a new technology against a rock-bottom priced generic.

Here's a suggestion: why can't the UK just cherry-pick the best of value assessments of drugs from the rest of Europe? They could pluck, for instance, societal aspects from Sweden, emulate France's consideration of innovation, and pick some of Germany's assessments of value which the ABPI considers to be quite advanced. The ABPI claims that it's looking at other nations' systems as they help design the UK's VBP ... but few concrete details were forthcoming.

Ok, so there's still two and a half years to run before VBP is slated to arrive. And the government has bigger fish to fry right now: it's still struggling against opposition to its broader health care system reform proposals, which is probably why it hasn't given industry much to work with.

But, at the risk of delaying the arrival of a system that appears fair in theory - and certainly better for industry than most alternatives - we would have expected at least mini-steps of progress by now. The ABPI appears to have missed an opportunity to seize the bull by the horns and lay out what it would like to see in a VBP scheme. That, at least, would have been a reason to hold a press conference. -- By Faraz Kermani

Financings of the Fortnight Asks for a Moment of Silence

The Pacific gives, the Pacific takes away. There is no rhyme or reason. Life is short, strange, horrible and precious. Let's have a moment of silence and contemplation, and if you haven't helped Japan yet, please do what you can. This is one good place to start, and this is another.

Here on the other side of the Ring of Fire, where we see ourselves in the reflection across an ocean, it's been a difficult week to focus on the task at hand. But life is full of work that must be done. As our mother often told us, "If it was fun all the time, it would be called play." Boy, did we hate hearing that when we were 11 years old.

But this week, in our little corner of the biopharma world, Mom's admonition put us in mind of Exelixis, the San Francisco Bay Area firm whose discovery engine and small-molecule pipeline were once the envy of emerging biotechs everywhere.

But the firm seemed stalled for a couple years in the late stages of clinical testing, and 2010 became Exelixis' annus horribilis, if we could borrow a phrase from Her Majesty. It lost longtime CEO George Scangos to Biogen Idec, it laid off two-thirds of its 670 employees with plans for even more, a key partner for its lead compound XL-184 walked away from the program, and it shut down all R&D beyond XL-184, now known as cabozantinib.

But Exelixis, sleeves rolled up, upper lip stiff, found a silver lining at the end of the year. In November cabozantinib returned remarkable results in a small Phase II prostate cancer study. Of 20 men whose cancer had spread to the bone, 19 had their lesions shrink or disappear, an effect one investigator called "spectacular," though with the caveat that the mechanism of action remained mysterious.

And now with its drastically pared headcount, narrowed pipeline, and more interim data from the prostate study, Exelixis has enjoyed another surprising result: a stock price that rocketed from below $3 a share last summer to nearly $13 earlier this month, prompting the company to raise cash from a stock sale. And indeed it did, selling 17.25 million shares at $11 each to net $179 million. (It closed at $10.90 Thursday March 17.)

Under previous CEO Scangos, Exelixis was nimble in its fundraising, tapping what seemed like every possible source from asset financing to debt vehicles to grand-scale partnerships. That willingness continues; perhaps not surprising, as top management has remained fairly stable through the turmoil. New CEO Michael Morrissey has been a top scientist -- or the top scientist -- at the firm since 2000; longtime CFO Frank Karbe has stayed on, too.

There's a long way to go before cabozantinib proves worthy of approval in prostate cancer or any other indication, but the difficult work, not to mention the pain of letting hundreds of colleagues go, is paying off in at least one respect, as investors have voted their approval with their pocketbooks. That might be cold comfort to those laid off, or to current employees still pushing the rock up the hill toward product approval, but with the cash, Exelixis has more resources to keep fighting another week, another month, another year, and perhaps to bring a drug to market that helps patients do the same. In the end, isn't that what we all hope for?

Aerie Pharmaceuticals: North Carolina-based Aerie pulled in a $30 million Series B on March 7, with new investors Clarus Ventures and Sofinnova Ventures joining an existing syndicate that includes Alta Partners and TPG Biotech. Proceeds will fund continued development of Aerie’s glaucoma pipeline, with the lion’s share likely to support clinical trials of AR-12286, which is in the lead to become the first so-called rho-kinase inhibitor to market. These inhibitors directly modulate the trabecular meshwork, the spongy smooth-like tissue in the eye responsible for fluid outflow. Because of the new mechanism of action, it’s believed drugs such as AR-12286 can reduce intraocular eye pressures, either alone or used in combination with existing medicines. Aerie published positive top-line Phase IIb data in September 2010, building on an earlier 88-person study showing the compound was as good as Pfizer's standard-of-care Xalatan in reducing IOP, with mild to moderate eye redness observed in a minority of patients. With the genericization of Xalatan imminent, however, the commercial hurdles for next-generation glaucoma drugs have risen, and potential partners are cautious about paying too much for an asset without proof that it can dethrone a very good and cheap drug as a first-line agent. To build its case for AR-12286, Aerie is running additional Phase II trials and plans to initiate Phase III trials by year’s end. With its Series B cash, the company is certainly in a better negotiating position when it comes to partnering, with less pressure to do something near-term. It certainly helps that glaucoma clinical trials are shorter and less expensive than studies in cancer, diabetes or cardiovascular disease, allowing Aerie to keep the R&D burn low. -- Ellen Foster Licking

Nimbus Discovery: The Cambridge, Mass. firm emerged from stealth mode on March 10 with a seed funding of undisclosed size from Atlas Venture Partners and some guy named Gates. Bill, perhaps? Yeah, we think that was it. The name sounds vaguely familiar. Nimbus is using technology from computational drug design specialist Schrödinger, which holds an undisclosed material equity stake in the biotech. Schrödinger’s in silico WaterMap technology evaluates the energy of individual water molecules at a target’s binding site, and knowing that architecture makes lead optimization much more efficient, says Atlas partner Bruce Booth. Schrödinger’s fundamental business is software, not drug development, so the company worked with Atlas to build Nimbus, which has exclusive rights to use Schrödinger’s tools around 20 targets. What further sets Nimbus apart from traditional discovery ventures is its structure as an LLC holding company that acts as an umbrella over target- or molecule-specific C-corp subsidiaries. Each time a candidate is licensed, it will be in effect an acquisition of a company that includes just the IP and data surrounding that candidate. The structure, though more complex, is reminiscent of Index Venture’s PanGenetics, which also ran multiple companies (one of which, an anti-NGF antibody, was sold to Abbott Labs) under one management and investment structure. Spending less than $2 million, Nimbus has generated an inhibitor of IRAK4, an immunokinase target implicated in various cancers and inflammatory conditions, and lead scaffolds against other targets, Booth told our START-UP colleagues. You'll have to read the upcoming issue to find out more, which we highly recommend because you'll also find out about other biotechs, such as Adimab and Ablexis that are embracing the LLC model and diving deeper into the asset-financing pool. -- Chris Morrison

BioCryst Pharmaceuticals: BioCryst has sold $30 million in debt, using milestones and royalties from its flu medication Rapiacta (peramivir) to secure the notes. The deal, which closed March 9, is an interesting twist on the typical royalty play. BioCryst created a wholly-owned subsidiary, JPR Royalty Sub LLC, and assigned it future payments due from Shionogi & Co. on the sales of Rapiacta in Japan and Taiwan. BioCryst, which also has peramivir in Phase III in the US, is eligible to receive royalties between 10% and 20% on net sales of the drug under its 2007 licensing agreement with Shionogi. JPR issued $30 million in senior secured notes, due Dec. 1, 2020, and will pay out 14% interest annually derived from the drug's income. BioCryst netted $23 million from the transaction and will use the proceeds to develop other pipeline assets, such as BCX4208 in Phase II for gout. The deal differs from other recent royalty stream deals, in which companies such as NeurogesX and Dyax obtained funding from private-equity royalty investors in exchange for future potential earnings. BioCryst is on the hook for the repayments even if the milestones and royalties from Shionogi don't come through, and it said it's reserving $3 million to cover shortfalls. -- Joseph Haas and Maureen Riordan

Omthera Pharmaceuticals: Heading into a key Phase III trial for its omega-3 cardiovascular treatment, Omthera of Bedminster, NJ, said March 14 it has raised a $34 million Series B round led by new investor New Enterprise Associates. The company will use the cash for a just-initiated Phase III trial of Epanova, which proved superior GlaxoSmithKline's Lovaza, the only omega-3 prescription treatment on the market, in a recently completed trial. Omthera is positioning Epanova as a treatment for very high triglycerides (greater than 500 mg/DL). Omega-3 fatty acids exist naturally in algae and fish oil, but prescription versions vying to compete for a potentially huge market are not all the same, varying their formulations with different ratios of two types of Omega-3s, eicosapentaenoic acid (EPA) and docosahexaenoic acid (DHA). For example, Lovaza contains 46% EPA and 38% DHA, Epanova is 55% EPA and 20% DHA, and another entry, a Phase III compound from Amarin, is 96% EPA. The new round, which is not tranched, puts Omthera's total cash raised over two rounds to $40.4 million. NEA partner David Mott, the former CEO of MedImmune, will join the Omthera board, and existing investor Sofinnova Partners joined NEA for the B round. Omthera licensed worldwide rights to Epanova from Chrysalis Pharma. -- Alex Lash

Photo courtesy of flickr user OiMax under a creative commons license.

Amgen's Dividend Dilemma: To Pay Or Not?

Amgen investors have high expectations for Amgen's Business Review Day, scheduled for April 21. With Medicare's coverage decision on March 16 settled in Amgen's favor (or at least not against it), their main focus now is on whether the big biotech will initiate a dividend. The question is tantalizing to Wall Street analysts, who are predicting that anything less than a positive announcement by the company will be a major setback for the stock.

Dividends have been an active, ongoing part of investor dialog with Amgen for several years. But very recently, the grumbling is getting louder, and Amgen is showing signs of capitulating. Until recently, the big biotech has refused to commit to a number or time frame. Now, apparently, executives have told analysts that they will provide a clear explanation of their capital allocation policy, presumably including dividends, on April 21.

Amgen's approach to dividends says a lot about its place in the biotech world and its strategy going forward, as well, perhaps, about the rise of shareholder activism. With its business maturing, and its growth prospects slowing, it is by far the largest of a small contingent of successful biotechs that are throwing off profits or expected to shortly. All of these companies – Gilead, Biogen, and, down the road, Vertex and Human Genome Sciences - are the subject of dividend questions, some more serious than others.

Most of these companies are sitting tight - HGSI and Vertex have yet even to launch products. And, after all, issuing a dividend means relinquishing a perception – or perhaps illusion – that a growth company can grow forever. Occasionally, one, like EU-based Actelion, the beleaguered maker of Tracleer, latches on to dividend payouts as a short-term, somewhat misguided and obviously desperate lollipop-attempt to respond to shareholder activists until the something it's waiting for happens (in Actelion's case, it wants favorable data from a late-stage compound to come out in late 2011 or early 2012).

With Genzyme and Genentech no longer independent, Amgen is clearly at the moment a special case. Its numbers tell of its maturity: 2010 revenues were roughly $15.1 billion, with growth in recent years ranging from -2.4% to +2.7%. Even with the launch of Prolia/Xgeva (denosumab) in the U.S. in 2010, Deutsche Bank analyst Robyn Karnauskas projects its top-line CAGR will only reach 2% between 2010 and 2014, although bottom line growth will rise 8%. Yet, it has the pharma industry's highest net margin, is sitting on $14 billion in cash (most of it stashed overseas), and generates $5.4 billion a year in free cash flow. With the exception of its purchase of BioVex in January 2011, it hasn't made a sizeable acquisition in years—if one can call BioVex "sizable". Investors and others insist that they want to know how the company plans to allocate this enormous amount of capital.

But what they really want is a clear articulation of Amgen's strategy. Analysts are divided on how comfortable they are with what Amgen's told them to date. They largely concur that the core franchise in anemia and anti-inflammatory drugs is set to decline slowly. Even if denosumab peaks at $3 billion to $4 billion, it is likely at best to contribute incrementally to overall long-term growth, Karnauskas says. The company has a sizable Phase II portfolio, but that will take time to mature and everyone knows the stats around R&D success.

Then there's the international question. Amgen has previously hinted that it is intent on making an acquisition that would be synergistic with its base business, perhaps one that is centered in the West but has a presence in emerging markets. Indeed, new CFO Jonathan Peacock, in comments that may have muddied rather than cleared the waters, indicated as much to analysts last year. More recently, on March 1, SVP International Operations Rolf Hoffman told a Citigroup Healthcare investors' meeting that the company "might consider non-organic options" to accelerate its global expansion.

Some on Wall Street fear the worst: a highly dilutive acquisition in a region of the world that is hard to value quantitatively and overshadowing any other news affecting the stock. Indeed, "If they are going into something we don't understand, they need to outline their strategy," Karnauskas argues. A sizable dividend would go a long way toward making investors more comfortable.

Ultimately, however, despite the hoopla, Wall Street expects Amgen will initiate a token dividend, yielding 1% to 2.5%. That should be enough to appeal to investors who are restricted to buying only stocks that pay dividends. But it won't eat up too much cash flow, especially in the long-term, when several key Amgen products go off line.

"The idea is that if you give a token dividend, those investors can 'check the box,' " says Karnauskas. On the other hand, for some investors, even 2% isn't enough, so Amgen might aim higher, at about 4.5%. About 10% of Amgen's annual cash flow would have to be dedicated to a dividend with a 1% yield, she says.

If this math addresses the logical part of the equation, it doesn't directly help the cultural transition from a growth to a value investment, which comes once a company enters the dividend world. Still, the move for Amgen may be unavoidable, as the market is already putting it in the value category, points out Standard & Poor's analyst Steve Silver.

The market is pushing less hard for other biotechs to change for now; indeed, the biggest step the next tier companies like Celgene and Biogen are taking to placate shareholders is introduction of stock buy backs. It behooves them to watch how Amgen maneuvers into a space where few biotechs have tread.

Leptin Fails Again: The Thin Line Between Hope and Hype

Sanofi Aventis CEO Chris Viehbacher is upset that Wall Street places no value on drug industry pipelines. As he put it during a recent media briefing sponsored by the brand name trade association PhRMA, “If you made chocolates and soda, you are going to be a better investment than in R&D today.”

Viehbacher clearly has a point (though we can’t resist pointing out that Viehbacher’s own questions about the value of Genzyme’s pipeline held up the consummation of that deal).

And it is an exaggeration to say there is no value in R&D. When Merck’s vorapaxar stumbled, for instance, it was clear that there was a great deal of value in that particular asset. Of course, when Pfizer announced R&D cuts, the stock went up—suggesting, if anything, a negative value for those assets.

Still, Big Pharma doesn’t really have to care that much about how investors value R&D. Deliver steady earnings growth and life will be fine. (Easier said than done with the looming patent cliff, but still.)

Not so for biotech companies. There, the pipeline is (generally) the only asset. And if investors place no value on R&D, well, no more biotech.

Things aren’t quite at that point yet: A company like Vertex can post annual losses of three quarters of a billion dollars and still command a $9 billion market capitalization, thanks to enthusiasm for the company’s hepatitis C pipeline (and a soupcon of excitement about a cystic fibrosis opportunity as well).

But it’s not like there are a whole lot of billion dollar market caps out there based on nothing but the promise of an early stage pipeline.

We’ve written before about the “original sin” of biotechnology: the seeming necessity of hype—incredibly unrealistic expectations for early stage ideas—to attract capital for the hard (and invariably disappointing) work of converting those ideas into real products.

We’re writing about it again because of yesterday’s news from Amylin, announcing the suspension of Phase II clinical studies of a leptin-based obesity compound. The announcement was terse, but suggested a pretty significant problem with the compound (metreleptin): some kind of neutralizing antibody to leptin.

The announcement caused a stir and a quick drop in Amylin’s share price, but the stock rebounded and actually closed the day up a smidge, once investors remembered that the only thing they really care about is whether Amylin’s once-weekly line extension for the Byetta diabetes line ever makes it to market. This is clearly a case of a pipeline asset with something close to zero value.

Compare that to the value of leptin when the hormone itself was first described. The publication of a paper describing the genetic basis of a role for leptin in regulating weight in 1995 prompted a one day jump in the market cap of Amgen of nearly $600 million, since Amgen held a license to the “ob” gene described in the paper.

At the time, Amgen wasn’t quite the giant that it is today, but it did have two fast-growing blockbuster franchises (Epogen and Neupogen). But that was an era of excitement and, yes, hype—and at least for one day leptin was an incredibly valuable asset. And it wasn’t even in clinical studies!

Leptin died a quiet death at Amgen, also in Phase II, when the company dropped the hormone itself in favor of some “back up compounds” that were never heard from again.

So maybe this is a case where putting no value on an asset makes a lot of sense. After all, Amgen gave up on leptin more than a decade ago.

But for the future of biotech, it would be nice if people got excited by something like leptin again.

image via wikimedia commons