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 Lipitor? Pfizer's Strategic Shrinking Solution

Investor pressure on Pfizer to downsize radically has been rising for several months, controversial as it is, but Sanford Bernstein analyst Tim Anderson's jarring note on Monday underscored how serious Pfizer's new CEO Ian Read is about shaking up the ship.

"If we hadn't been there ourselves to hear it firsthand, we would not have believed it, but it seems from our recent meeting with CEO Ian Read that Pfizer may be destined for a significant shake up in the form of shrinking its behemoth ~$67 billion yr. revenue base," Anderson wrote. "No final decisions have yet been made, but all options appear to be on the table and through a series of major potential moves the "new" Pfizer might end up with annual sales of ~$35 to $45 billion/yr, something Read terms the 'innovative core…'"

The timing of such talk is hardly coincidental. Read was appointed CEO Dec. 5, almost exactly a year to the date from when Pfizer's leading drug Lipitor goes generic. What better way to deflect attention from that cataclysmic event than to rip up a company that just underwent a two-year reorg?

True, Lipitor may not face the worst kind of blood bath encountered by many small molecules once they go off patent, given various global six month exclusivities and extensions and Pfizer's own mapped plan for bolstering its sales in emerging markets. But analysts are projecting that the brand will lose at least 80% of its $5 billion in U.S. sales within a year.

And, if Pfizer spins out its $10 billion Established Products Business Unit – one of the plans under consideration -- even the 20% remaining revenues may no longer belong to it but to the new entity, in whatever shape that entails. Other moves in play include spinning out non-core consumer health, nutritional and/ or animal health businesses, which together make up about 15% of the company's total sales.

Underlying the yakking is a lingering disappointment in Pfizer's 2009 acquisition of Wyeth for $68 billion, as the company clearly has struggled to meet financial targets it set when it first announced the deal. A series of late-stage R&D failures also hurt. And there's the observation that even if the pipeline pans out, in an era of targeted therapy no one drug can move Pfizer's swollen needle. The stock therefore has barely budged, even as management cut spending, closed manufacturing sites, and shaved the once-generous dividend to help pay for the Wyeth acquisition.

Given all the challenges Pharma faces, the fierce discussion underway about right-sizing pharma is appropriate. But until now, deliberately downsizing an industry leader by taking $25 billion in sales off the table wasn't considered a viable option. Recall the debate that consumed Wall Street when Pfizer originally announced its Wyeth deal and Pfizer's then CEO Jeff Kindler's adamant argument that getting bigger was the best way forward.

In part, the sentiment underlying Pfizer's options – as Anderson points out -- could be the grass is greener in my neighbor's yard kind of wishful thinking, given how well the much smaller Bristol Myers Squibb has done as a focused company, which made a killing by spinning out its Mead Johnson nutritional subsidiary in early 2010. It could also be a response to investors looking for any sort of creative strategic idea to raise Big Pharma, and Pfizer in particular, from Wall Street's dumping ground.

Or, maybe it's all part of some brilliant rational plan. Two years ago, an unnamed source spoke to IN VIVO magazine about shrinking Pfizer: "But if Pfizer had wanted to do the spin-offs, they could have," one executive close to the transaction said. The tax problems with spin-offs, he believes, are no more challenging than those Pfizer is incurring by repatriating perhaps $8 billion in off-shore profits, which will likewise increase Pfizer's tax bill. In fact, this executive and others suspect that spinoffs will be in any event the longer term result of Pfizer's acquisition [of Wyeth]: after all, if Pfizer is serious about keeping its five business units managerially independent, each responsible for its own P&L, they'll also be larger and theoretically more sustainable–and thus better candidates for spin-offs."

No matter what course Pfizer takes, none of it gets the company off the hook for the need to improve its R&D. And there's no guarantee that shrinking will help that effort; while disciplined focus is helping Bristol on pharma innovation, it certainly isn't doing Lilly wonders (note the latter's recent efforts to bulk up its non-core animal health business, albeit on an entirely different scale than Pfizer's). But once again, the story will play well on Wall Street, which is waiting for some new ideas from pharma executives. -- By Wendy Diller

Pfizer vs. Merck and the Future of R&D: Deja Vu All Over Again

Pfizer and Merck begin 2011 with brand new CEOs and not a whole lot else in common.

Merck's new CEO, Ken Frazier, took over the reins as part of a planned succession on January 1. Ian Read took over as CEO of Pfizer much more suddenly, when Jeff Kindler resigned abruptly in December.

Both faced essentially the same challenge as 2011 began: how to deal with unrealistic expectations for growth in 2012.

By now you know the story. Pfizer's Read responded by acknowledging that revenues would not meet expectations, but pledged that earnings would, thanks primarily to some deep cuts in R&D. Frazier, in contrast, said simply that Merck would no longer stand by its guidance, taking the position of defending R&D spending rather than sacrifice new opportunities for relatively short term earnings targets.

Ah, its good to have Merck and Pfizer posing a strategic dichotomy in R&D again!

A dozen years ago, Pfizer (under CEO Hank McKinnell) and Merck (under Ray Gilmartin) waged a similar battle for the hearts and minds of investors during an earlier (and much, much smaller) patent cliff period.

Remember when Pfizer swooped in to buy Warner-Lambert away from American Home Products? Though Pfizer wasn't the loudest advocate of the view, the acquisition put the company in the camp of those who argued that the future of R&D depended on "critical mass"--building the scale to allow huge investments across a range of therapeutic areas and targets to drive growth for the decade ahead. Pfizer followed the Warner-Lambert deal with the acquisition of Pharmacia, and built its position as the biggest of Big Pharma in that era.

Merck, on the other hand, declared its intention to eschew big mergers, with Gilmartin saying any mega-deal would be a "distraction" from the core business of delivering organic growth from internal R&D supplemented by licensing or small, targeted acquisitions. And Merck stood by its guns, become the first Big Pharma to weather a genuine patent cliff (Zocor, primarily) without making a big acquisition (or being bought up itself).

So who was right?

Well, its hard to argue that "critical mass" was such a great idea, what with Pfizer's Read taking the scissors to his company's bloated R&D budget. On the other hand, it isn't like Merck did so well with that organic growth thing either; the company's acquisition of Schering-Plough two years ago, was if nothing else a repudiation of the "distraction" argument.

The fact is that neither company succeeded in delivering a sustainable product flow over the decade that followed the strategic divergence. That is why both are in the pickle they are in today.

Read and Frazier are now charting different paths. It seems unlikely that both are right. But history says both could well be wrong.

image from flickr user mtsofan used under a creative commons license

Adimab, Arsanis, and Platform Cloning -- a New Biotech Model?

Adimab, the yeast-based antibody discovery company that has amassed a strong portfolio of partnerships and skyrocketed to a north-of-$500m valuation, has always said it had no plans to do its own development work. If only the company could clone itself, perhaps it could venture down the development path without getting distracted from its discovery platform opportunity -- and the high multiples that can be extracted from a company that doesn't need a ton of development financing.

Enter the clone, Arsanis.

Arsanis is a biotech essentially seeded with Adimab's technology platform that will apply this yeast-based antibody discovery engine to developing drugs against infectious disease targets. The company will run research out of Vienna, Austria and plans to hire 20-25 employees in the next few months, according to founder and chief scientist Eszter Nagy, MD, PhD.

Adimab doesn't own Arsanis (though it stands to make money if Arsanis succeeds), but Adimab's investors do. The new company has raised about $10 million from SV Life Sciences, Orbimed, and Polaris, three Adimab backers. We've spoken to all those firms, to Adimab, and to Arsanis' Nagy, who hails most recently from Intercell. We'll have more on Adimab's strategy, the new company and the advantages of the model for its venture backers in a forthcoming issue of START-UP.

For now suffice it to say that Adimab has enabled a newco with its technology, helped put together a familiar syndicate to back it, and those investors can now put more money to work behind that Adimab platform. If Arsanis is successful we bet you'll see additional Adimab clones in other therapeutic spaces where Adimab's brand of faster/cheaper/better antibody discovery can yield "an unfair advantage," as one of Adimab/Arsanis' venture backers puts it.

How the company defines success remains to be seen. The $10 million should see the company all the way through to "compelling preclinical proof of concept" for a couple of antibody programs against unmet needs in infectious diseases, the players tell us, all within the next two years.

Nobody involved with Arsanis has suggested this strategy is new to biotech, but we haven't seen it work exactly like this before -- perhaps the closest comparator are the twin antibody firms Medarex and Genmab.

Meanwhile, Tillman Gerngross and Errik Anderson, Adimab's CEO and COO (founders and board members at Arsanis), have with their team transformed Adimab from a C-corp to an LLC, something we reported in December, and plan to expand the company's slate of discovery collaborations. The LLC transformation -- no easy feat according to all involved -- allows the biotech to return money from forthcoming collaborations to shareholders in a tax-efficient way.

It also dispels the notion, Gerngross says, that Adimab is for sale. "We're completely uninterested in short-term liquidity. We don't want what has happened in the past, where the company gets bought and then has a limited impact," he says. "We have a greater ambition."

Ikaria Execs Don't Need IPO for Big Payout

Two biopharma firms filed to go public Thursday, marking the first drug-company registrations this year. That's rather remarkable considering the biotech IPO window has cracked open a bit.

The more notable of Thursday's filings comes from Ikaria. That New Jersey-based firm is actually two businesses brought together in 2007 by a deep-pocketed syndicate of investors. The first business actually makes the combined company profitable, selling a nitric oxide inhalation therapy for critical-care patients. It's approved for babies, often near-term*, with hypoxic respiratory failure but used in other settings as well. The company earned $13 million last year off of $274 million in revenue.

The 2007 merger that created the company was designed as a bid to create a self-funding drug discovery model while also acting as a magnet for further bolt-on critical care products already in the marketplace.

Thus the second business is drug R&D, on which the company spent $75 million last year, up 10% from 2008. Its lead program, for hepatorenal syndrome, is expected to enter a pivotal Phase III trial this year. But the current program with the most funding is IK-1001, a formulation of hydrogen sulfide that's meant to slow down a severely injured patient's metabolism by triggering a hibernation-like mechanism and give doctors a chance to save tissue that's been cut off from blood supply. It's been tested in three Phase I trials so far, and the lead indication for IK-1001 is to prevent tissue damage from blood supply returning to tissue after a heart attack.

Turns out that Ikaria's 12 executives and directors have fashioned a nice payday for themselves whether the IPO happens or not. According to the S-1, the company will distribute a $130 million dividend to them this quarter, payable from a new $250 million loan. The company insists it's a one-time deal:

"We have not declared or paid any other cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business and, therefore, other than the special cash dividend described above, we do not intend to pay cash dividends to our
stockholders in the foreseeable future."

Curious investors should also know that majority owner New Mountain Partners, a private equity firm in New York whose founder met his wife in a most unusual way, will continue to call the shots after the IPO with as many as three board seats. New Mountain bought 47.5 million shares -- half the company -- at $4.63 as part of the Series B round that helped form the company as it exists today.

* A previous version of this post mistakenly described the approval for pre-term babies. Pre-term babies are not an approved indication for INOMax. IVB regrets the error.