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.

Deals Of The Week: The Sputnik Edition

Outside the deal making arena, the word garnering significant air time this week was “innovation.” During this week’s bipartisan date night, also known as the State of The Union address, President Obama mentioned the word at least nine separate times, as he channeled Survivor’s Jeff Probst. “We need to out-innovate, out-educate, and out-build the rest of the world.” He called on the country to “get behind innovation”, exhorting “this is our generation’s Sputnik moment.”

One could well ask if this is Big Pharma’s Sputnik moment as well. The biopharma industry is well aware of the need for innovation. Indeed, the stricter pricing environment in Europe and the US (where payers are pushing back on multiple classes of drugs even if NICE-like decision making isn't yet a reality), has already forced a wholesale shift, with a greater emphasis on devising drugs for unmet medical need and actually demonstrating said value.

As the industry wrestles with its innovation gap, there are a number of puzzles to solve. The first, and potentially easiest, to come to grips with is access to new products and new ways of thinking. It’s one of the primary reasons biopharma companies are cutting deals with academia and not-for-profits with such regularity, none more so than Pfizer, which rolled out its New York-based Center for Therapeutic Innovation(CTI) just hours before the Prez made his way to Capitol Hill.

A thornier question is what actually constitutes innovation these days. Ask a completely random group of industry execs and the answer almost certainly would be new drugs (or devices) to address some unmet medical need: lupus, major depressive disorder, Alzheimer’s. Undoubtedly those are areas deserving investment; so too, however, are improvements in care delivery in high cost arenas like diabetes or hypertension, where the problem isn’t lack of therapy, but actual compliance. There’s a growing opportunity on the service side, and some companies – Sanofi in diabetes, Novartis via its collaboration with Proteus Biomedical – are taking important, albeit early steps, in this direction.

For pharmas to “win the future”, maybe they, too, need to reinvent themselves, like the Michigan-based mom and pop roofing company run by the Allen brothers, which Obama highlighted in his SOTU challenge. One way to do so is by embracing new definitions of innovation beyond the canonical: a new drug hitting a novel target that historically garners a premium price tag. We remain an industry where “better” might mean “faster” (or more convenient) but it almost never means “cheaper”. Why not?

It's a question worth pondering for big drug makers; as Obama rightly reminds us, "Our destiny is our choice." Meanwhile it's time to take a spin through another weekly deal-making wrap up...

Novartis/Genoptix: This week Novartis launched a $470 million cash tender offer for cancer specialty testing lab Genoptix, which offers personalized diagnostics services related to hematological malignancies – and to a lesser extent solid tumors – to community-based oncologists. The acquisition will add more muscle to the Swiss pharma’s two-and-a-half-year-old Molecular Diagnostics unit. As the pharma’s division head of pharmaceuticals, David Epstein, told investors on the company’s quarterly earnings call on Jan. 27, the move ensures companion diagnostics would be “readily available as we launch our new pharmaceuticals.” Indeed, the acquisition gives Novartis infrastructure and also know-how not normally found in pharma-based R&D that should smooth the transition from biomarker identification to actual companion diagnostic test development, which could range from home brew tests run at Genoptix’s lab to more broadly distributed test kits. As such, the deal is another indication of the confidence the pharma has in its pipeline of targeted cancer drugs, largely for hematological malignancies, and their belief in biomarkers – a marching order unaltered since the formation of the Novartis Institutes for Biomedical Research, whose resources directly fuel much of the effort of the Molecular Diagnostics unit. (To learn more check out this issue of IN VIVO.) Even as the industry has turned more and more towards outsourcing R&D, Novartis continues to drive translational research from within via NIBR. By taking on the risk of bringing in and supporting a diagnostics development infrastructure, it’s making a similar statement in the testing realm. – Mark Ratner

Amgen/BioVex: Amgen's Jan. 24 earnings call promised a plan to invest more heavily in research & development. On the same day, the company put its money where its mouth is.
Amgen deepened its commitment to oncology, revealing plans to acquire biologic vaccine developer BioVex for a $425 million cash upfront payment as well as milestone payments totaling as much as $575 million. Cash-rich (the big biotech has around $18 billion in its coffers), Amgen's massive upfront commitment - the largest for any privately held biotech in at least two years, according to Elsevier's Strategic Transactions database - is a powerful vote of confidence in cancer vaccines, the area in which BioVex has concentrated most of its efforts. The agreement is also easily the largest deal in the sector since April 2010, when Dendreon received approval for Provenge. The deal represents a payday for the well-funded BioVex, which has raised $175 million from at least 15 firms since its spinout from University College London in 1999. For BioVex, the sale to Amgen – especially at this price tag – makes obvious strategic sense. With two Phase III trials underway on its OncoVex product, an immunotherapy for both metastatic melanoma and head and neck cancers, the company faced increasing commercial costs that would require an alternate source of funding. "Getting to the public markets is hard in the current circumstances," Coffin told sister publication "The Pink Sheet" DAILY. "Amgen has amazing resources, and we felt that on balance, this was the best overall opportunity." – Paul Bonanos

Ligand/Cydex: For biotechs, the truism “it’s good to have a revenue stream” has never been more important than in today’s capitally constrained environment. The logic of regular income underpins Ligand Pharmaceutical’s purchase this week of privately-held Cydex Pharmaceuticals for $36 million, nearly all of which – $31.2 million – was paid upfront. The move diversifies Ligand, a classic drug development play founded in 1987 that has been moving away from that paradigm to a model described on the company’s website as “developing or acquiring royalty revenue generating assets and coupling them to an efficiently lean corporate cost structure.” Not including new licensing revenue or accelerated growth of the San Diego biotech’s Promacta, the deal is expected to double Ligand’s projected 2011 revenue relative to what it stood to pull in as a stand-alone and moves the firm forward in its goal of becoming a profitable entity. In 2010 Cydex chalked up $16.3 million in revenue thanks to its proprietary drug reformulation Captisol technology, which works by surrounding drugs with specially modified cyclodextrin molecules to allow tighter control of a medicine’s delivery. The Kansas-based Cydex, which will continue to operate as an independent subsidiary of Ligand following the close of the acquisition, already has numerous partnerships with industry players, including Onyx Pharmaceuticals and Prism Pharmaceuticals for the creation of Captisol-enabled IV formulations of carfilzomib and amidarone respectively. And in terms of regulatory risk, the formulation technology is something FDA seems comfortable with – it’s already included in five marketed medications. If Ligand believes it can earn a pretty penny from the Captisol franchise, Cydex’s investors, which include among others SR One, Eastman Ventures, and Techno Venture Management, have barely achieved an exit. Since its inception in 1993, Cydex has raised around $27 million in financing; like so many other private companies, it tried – and failed – to go public in 2008. – EFL

Teva/Corporacion Infarmasa: Teva Pharmaceuticals has conspicuously shied away from the sometimes frenzied investment in China, India and other emerging markets, noting the high valuations and intense competition. It is targeting Latin America for growth, however, as it progresses with plans to increase revenues from $14 billion in 2009 to $31 billion in 2015. Thanks in part to its 2006 acquisition of rival Ivax, it now has operations in Venezuela, Mexico, Argentina, Chile, Brazil and Peru. With this week’s acquisition of Corporacion Infarmasa, one of Peru’s top ten pharma companies, it makes additional in-roads into this Latin American market. Terms weren't disclosed, but Corporacion Infarmasa is owned by two American investment groups: The Rohatyn Group and Altra Investments. Infarmasa manufactures and sells a portfolio of more than 600 branded and non-branded generics, focused largely on antibiotics, antihistamines, analgesics and corticosteroids. By combining Infarmasa with its existing Peruvian organization, Corporacion Medco, Teva will be the number two player in a market that had a CAGR of 12% between 2005 and 2010 and could reach $1.8 billion by 2015. Expenditure per capita on pharmaceuticals in Peru is one of the lowest in Latin America, leaving ample opportunity for future increases, Teva said. – Wendy Diller

Image courtesy of flickrer dad1_ used with permission through a creative commons license.

2010 M&A DOTY Nominee: Teva/ratiopharm

It's time for the IN VIVO Blog's Third Annual Deal of the Year! competition. This year we're 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 (four or five 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™.

There's suicide. There's red-hot competition. There's rumors of personal CEO visits. There's even some Kindler (remember him? That industry veteran who headed up the world's biggest drug company and then retired one Sunday to recharge his batteries?). With that line-up, how could anyone not vote for Teva's acquisition of ratiopharm for M&A Deal of the Year?

We (the Teva/ratiopharm supporters, I know you're out there in your hundreds) don't need snazzy deal structures, CVNs, CVRs or anything else. Nothing clever. Just a good old story of a good old fight, with money of course, for an apparently attractive -- yet vulnerable -- target. And a relevant one, at that: generics has been the the decade's new hot target for pharma. (Pharma beyond Novartis, that is).

Germany's number-two generics firm had been up for sale since January 2009, following Adolf Merckle's suicide. (He and his family controlled VEM Holding, ratiopharm's owner, but was hit by the financial crisis.) The company had to go; that was the deal VEM struck with its angry creditor banks. Towards the end of the process, there were believed to be three suitors, Pfizer, Actavis and Teva.

It looked, at one point, as if Pfizer would win it; Kindler, after all, was reported to have been spotted visiting the company's Ulm headquarters in March 2010, just before the winner was announced. (Last-ditch effort on Kindler's part? Was this disappointment one of the reasons he, errm, left?)

Pfizer wanted ratiopharm since Pfizer needed -- needs -- all the revenue it can get (including in those surer-fire sectors like generics, where it and several of its Big Pharma peers have laid significant stakes), in order to offset the impact of generic Lipitor. ratiopharm offered a strong European presence, and some emerging market holdings too.

But Teva was hungry too, and Teva does this -- generics -- for a living. It's renowned in its aggression determination. The company had been on an acquisition binge for the previous decade, building up to almost $14 billion in annual sales in 2009 (that, by the way, is about Lipitor-sized), and the plan, announced January, was to double that again in 2015.

Given that, and Teva's very weak position in Germany, the largest European market, and it's easy to see why the Israeli group did stump up $4.9 billion for the booty, including $820 million in debt--exceeding analysts' expectations, and apparently also exceeding what even Pfizer was willing to pay. Teva needed to solidify its position in the European generics sector, where it promised sales would increase to $9 billion from just over $5 billion in 2009.

Never mind that Germany is one of the toughest markets when it comes to generics pricing: for the last 3-4 years, companies have been competing on price via a tendering process for two-year sole-supply contracts to the country's sick funds, saving said funds hundreds of millions of Euros. Indeed, this 'all or nothing' set-up makes it even more important that Teva has a place at the table with major customers, as Teva's European CEO put it to our Pink Sheet DAILY reporter. ratiopharm had done very well at winning tenders.

So as well as providing a good, meaty fight with a strong cast, this deal is a finger-on-the-pulse of the decade's industry trends: generics' new sexiness, payer-driven pricing pressure (will Germany become a template in that regard?), and oh, yes, we forgot to mention, emerging markets (ratiopharm had a bit of that) and follow-on biologics (ratiopharm had a bit of that, too, via its BioGenerics division).

In fact, are there any reasons not to vote for it?

Ulm cathedral image by flickr user donvanone used under a creative commons license

At EuroBiotech, Teva The Contender

We've long thought that the largest, most successful generics companies can teach big pharma a thing or two about efficiency and execution. After all, Teva's profit margins rival those of Big Pharma, and could soon surpass them on average(Teva's net margin was 21.8 percent in 2009 and analysts project it will be 25.7 percent this year, compared to 23.6 percent for Big Pharma's group average, according to a consensus analysis by EvaluatePharma, but that's another story).

In addition to efficiency, Teva also believes it can compete with Big Pharma in dealmaking and has chosen some of the most competitive, expensive therapeutic areas to make its mark—oncology, neurology and auto-immune diseases.

Teva's not the obvious choice in these categories. It isn't at all clear that the company is willing to pay top dollar for high-quality assets, and most of its deals to date on the innovative side have been small with tiny upfronts. Still, it seems to be making some in-roads.

According to Gerard van Odijk, president of Teva Europe, however, Teva has a slightly different profile compared with big pharma. “We are attractive because we are quick, and we make deals happen. And when we commit, that’s our deal in a particular area,” van Odijk told Elsevier Business Intelligence’s 17th annual Euro-Biotech Forum last week.

Teva derives about 30 percent of its revenues from branded products, a balance it aims to retain even as it moves to double revenues by 2015. To help maintain that ratio, van Odijk said the company is always seeking either clinical or preclinical partnerships with biotech companies and academic institutions in its areas of expertise.

“There is no lengthy process of debate: if it’s the right fit, the right product, you will get the right decision,” he said. Once its business development group vets an asset, a small group of its top executives signs off on the decision, including van Odijk and his North American counterpart, Bill Marth. Other potential advantages include a highly experienced intellectual property team, and a strong global marketing presence, he said.

That may resonant with biotechs, some of which appear frustrated by the dichotomy between Big Pharma's message, which is that it needs innovation, and its reality: many Big Pharmas striving for greater R&D efficiency, warn that each in–licensed program means a cut from some internal project, leading to higher hurdles to get organizational support for a deal and cautious and slower decision making.

For biotechs thinking about their products' future commercial support, Teva's presence in neurology is obvious, but it is also a leading oncology company in many countries through its generic oncologics, and its subsequent knowledge of the market, van Odijk pointed out. It now has three proprietary oncology drugs in mid-to-late clinical trials, all of which it gained through partners, including an antisense drug in-licensed from Oncogenex in December for $20 million upfront, a $10 million equity stake and up to $370 million in potential milestone payments, and a stem cell product, which is in Phase III for patients with haematological cancers and is being developed by a Gamida Cell-Teva joint venture.

Teva likes to see strong IP and in vivo proof of concept, and not necessarily toxicology studies, and is happy to consider either equity investments or licensing approaches to deals. “There is no one size fits all, we take a pragmatic approach,” he remarked.

With company acquisitions, it was no secret that Teva was interested in increasing its market share in southern Europe, Central and South America, and some Asian markets, he told the crowd. -- John Davis