Monday, December 17, 2012

M&A Deal of the Year Nominee: Amgen/Decode

It's time for the IN VIVO Blog's Fifth Annual Deal of the Year! competition. This year we're once again presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (a half dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Put aside, for the moment, the exit deCODE Genetics’ recap investors will receive; more than a 5x* return on a just under three-year, $50 million investment in a bankrupt company that hasn’t, in that time, shown any clear or remarkable new ability to generate revenues. A vote for last week’s $415 million cash buyout (scroll down one post to last week’s Deals of the Week for a description) as the M&A deal of the year starts with a binary decision: you either think Amgen is onto something by bringing this gene association-driven discovery engine in-house to bolster its target validation for drug discovery, or you don’t.

While we are not presupposing deCODE will not bring anything near-term to Amgen’s bottom line (its revamped business model called for a focus on corporate partnerships), its direct contribution would be minimal. As an internal R&D capability, deCODE won’t have the same pressure to monetize its discoveries as it had as an independent operating firm. And it’s unlikely Amgen would acquire deCODE only to change how it approaches its biomarker discovery research.

The assumption is Amgen will take deCODE on its own terms, with its founding CEO and VP, research, Kari Stefansson, to continue at the helm.

“I think Amgen gets that they have a special jewel here and are going to work with it accordingly,” says Terry McGuire of Polaris Ventures, which along with ARCH Venture Partners came to deCODE’s rescue in late 2009. “They completely understand that deCODE has created a unique environment and they want to be as respectful as possible of that and at the same time recognize that there have to be commercial applications of the science,” he says.

As is well known, that unique environment is grounded by the detailed genealogical and health care records and samples contributed by the citizens of Iceland, the starting point for deCODE’s gene association studies and the identification of variants that cause or influence the course of disease. No other company can offer such a unique, extensively annotated data set, and mining those data has led to a plethora of publications: As McGuire blogged the day the deal was announced, deCODE researchers have published over 400 major studies in peer reviewed journals, and their work has been cited in more than 5000 other manuscripts. In 2012, the company published on gene variants found to confer high risk of acquiring the late-onset form of Alzheimer’s disease and that protect against AD and cognitive decline in the elderly. It’s been active in gene-based disease target discovery in cardiovascular disease and cancer, and since the recapitalization, has been collaborating with Illumina, the leading supplier of sequencing equipment now eying clinical diagnostics, in cancer and gout and with Pfizer to search for variants associated with risk of lupus.

What it has failed to do is translate those discoveries into meaningful revenues, except as a provider of contract services and, to a small extent, through the offering of genetic diagnostics. (And with Amgen, expect that diagnostics business to wither.)

Genomics overall has failed to live up to its promise of reshaping drug discovery, but the $415 million Amgen is paying to access deCODE’s capabilities pales against some of the colossal collaborations of the late 1990s – remember Bayer’s $465 million, five-year licensing deal, including $130 million up front, to access Millennium’s discovery technologies?

McGuire says deCODE is “really starting to throw off meaningful insights that will change medicine.” Amgen agrees, and sees near-term opportunities in its areas of strength including CV and osteoporosis (see comments from its head of R&D, Sean Harper, here). In addition to the roughly $14 million it cost Polaris and ARCH to recapitalize deCODE, the investors added in about $36 million more, evening out to a $12 million annual spend. Amgen spends $800 million in R&D per quarter.
Amgen is not adding to product pipeline with this transaction, nor is it getting blockbuster IP. But for those who think genomics is here at last, it may a shrewd and opportunistic spend. You decide.

*(Fortune’s The Term Sheet says more than 6x, which we now understand is pretty close.)

--Mark Ratner

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