M&A Predictions! Fortune Tellers -- They Are Not

Even though the New Year has come and gone, analysts are still making their predictions about what 2011 will bring for the pharma and biotech industries. (Admittedly, it is still early enough to do so, but March would have been pushing it.)

The latest endeavor to predict the future comes from the fine analysts at Morningstar, who released their “2011 M&A Outlook for Healthcare” report this week. The report includes some sound, albeit a little obvious, deductions on what will be moving M&A in 2011 – a move into emerging markets, slowing R&D productivity, and (cue ominous music) the upcoming patent cliff.

Morningstar experts expect further consolidation in Big Pharma; and say Eli Lilly & Co., as well as Bristol-Myers Squibb will be ripe for the picking as the patents on their lead drugs reach their expiration date – but, honestly, who would buy them?

Merck & Co. (Schering-Plough), Pfizer Inc. (Wyeth), Roche (Genentech), and Novartis (Alcon)have all made major acquisitions in the past two years that have added significantly to their debt situations and are unlikely to dump the burden of a major restructuring on top of the issues they’ve already had to bear while trying to make these puzzle pieces fit.

Morningstar analyst Damien Conover suggests Abbott Laboratories could handle acquiring either Lilly or Bristol. He also thinks Sanofi-Aventis and GlaxoSmithKline could benefit from an acquisition of Bristol as well. This sounds all well and good, but Glaxo has made it pretty clear that it is not interested in any large acquisitions and Sanofi has its hands full already with that little Genzyme deal it has been drawing out for months. And let’s be honest, if the past has taught us anything, it’s that bigger is not always better.

So moving on to more realistic prospects for mash-ups in 2011 – let’s take a look at what biotechs Morningstar thinks will offer the best bang for the buck.

They list Biogen-Idec, Seattle Genetics, Human Genome Sciences, Dendreon, and Actelion as their top five take-out targets this year. The reasoning is complex but the basic insight is that these companies have strong pipelines or technology in really HOT therapeutic areas like neurology, orphan drugs, and cancer. Yet, Biogen, Celgene, Gilead, and Merck KGaA will offer an acquirer the most immediate and gratifying (think mid-to single-digit billions) boost to earnings – something every Big Pharma could use right now. These companies also have the nice bonus of having a lot of cash on hand and fairly low burn rates.

While all of these companies have their positives and negatives, it’s important to keep in mind that just because they can be acquired doesn’t mean that they will be. Take the #1 takeout target this year for example, Biogen; it’s been on Morningstar’s take-out list for three years now despite plenty attempts by billionaire shareholder Carl Icahn to get the company on the market.

That said; Morningstar hasn’t done abysmally in its predictions over the last two years. Three companies from the 2009 list were acquired – Trubion, CV Therapeutics, and Medarex, but none of these companies were in the top 15 that year. Another seven got picked up from its 2010 list – Crucell, ZymoGenetics, Talecris, King Pharmaceuticals, OSI Pharmaceuticals, Biovail and Genzyme – with three of these companies being in their top 15 picks.

So what do you think – will this be Biogen’s year to find a suitor or will the Massachusetts biotech continue to dance alone?

Image from flickr user What Makes The Pie Shops Tick? used under a creative commons license

Stromedix Gets $25 Million in Fibrosis Fight

When Michael Gilman, PhD, left his post as EVP of research at Biogen Idec Inc. in late 2005, his goal was to start afresh. He quickly hooked up with Atlas Venture and Frazier Health Care Ventures, the latter through a friend and venture partner at Frazier, Michael Gallatin, PhD. Two years later he was in the thick of his first start-up experience with a Phase I-ready monoclonal antibody to treat fibrosis.

Today that company, Stromedix Inc., announced it has raised $25 million in a Series B led by New Leaf Venture Partners, with participation from Bessemer Venture Partners, Red Abbey Venture Partners, and A-rounders Atlas and Frazier. Stromedix has already begun Phase I studies with its monoclonal antibody, licensed from an unexpected source, Biogen Idec. The Mab targets integrin alpha-v-beta-6, a cell-surface adhesion molecule and activator of transforming growth factor beta, itself a popular target in a variety of indications including fibrosis and oncology. According to Gilman, TGFb is “necessary and sufficient” in the fibrotic process.

Gilman took a few minutes to explain to us how Stromedix got from A to B, and to talk about why fibrosis has received scant industry attention despite its prevalence and well-understood pathways and potential blockbuster markets.

Fibrosis occurs when the body’s typically well-choreographed response to injury either goes haywire or cycles at low levels for long enough that scar tissue accumulates in the affected organs. Function is generally lost, eventually organs fail. “It’s a condition that has been fundamentally missed by the industry. There are no approved antifibrotic drugs and very few in development” despite the condition’s well understood biology, says Gilman.

The reason? Nobody has figured out how to successfully design and run a clinical plan for an antifibrotic drug. “There’s a generalized anxiety about how hard that clinical path is,” says Gilman.

And that, in a nutshell, is Stromedix’s proposition. Gilman, co-founder Gallatin and their small team reckon they have figured out how to do the right clinical experiment to determine that the biology that has been laid out preclinically actually holds up in humans.

So far researchers have stumbled for three fundamental reasons. First, in most instances fibrosis develops slowly, over a long period of time, making clinical study unwieldy. Second, by the time many patients present with disease they’re too far gone for a therapeutic intervention to make much of a difference. Finally fibrosis is a tissue level phenomenon, says Gilman. “There is nothing in the blood you can measure, so you need tissue from patients, and that means biopsies,” he says.

Stromedix believes the population in which to secure proof-of-concept for STX-100 is transplant patients. “You need patients who you can get early, perhaps even in advance of fibrosis, who develop disease quickly, and patients from whom you can get tissue,” he explains. A transplanted kidney, for example, goes in clean—no fibrosis—but is quickly subject to all kinds of drug- and immune system-induced injury, and so it develops fibrosis quickly; transplanted organs are also routinely biopsied. “It’s the perfect setting to test an anti-fibrotic drug,” says Gilman.

There was just one problem: Gilman and Gallatin didn’t have an anti-fibrotic drug.

But Gilman did know of a program inside Biogen that might fit the bill. Unfortunately, it was off limits because the Big Biotech was actively developing the compound for , idiopathic pulmonary fibrosis (IPF). But Biogen doesn’t have a pulmonary business and the thought of spending big on a non-core asset likely didn’t sit well. About eight months after Stromedix was began drug-hunting, Biogen shelved the program—despite its strong preclinical data--as part of a portfolio re-organization. “I called my friends over at Biogen and said ‘why don’t you let us have it?’” said Gilman.

In March 2007, Stromedix raised $4.4 million from Atlas and Frazier and finalized the STX-100 license two months later. The Mab arrived with a complete preclinical tox package, manufactured clinical material, and an IND on file at FDA. “The program came out very nicely baked,” says Gilman. “And within 90 days we were in front of the FDA with a new clinical plan in renal transplant.” Stromedix filed a new IND in October and in early 2008 started a Phase I in healthy volunteers, which should wrap toward the end of the year.

STX-100 is a poster-drug for the out-licensing movement. Biogen Idec had to take it into a much bigger market—IPF, which some analysts predict could be worth upwards of $6.5 billion (with a B) per year—in order to see enough of a return on its investment.

The economics are completely different for a small firm like Stromedix, which can monetize its investment with a well-run proof-of-concept trial in a small indication that might not even be the final clinical destination for the product.

Of course Biogen stands to gain as well—the company owns an undisclosed stake in Stromedix. Although it has no specific rights to the project down the road, Gilman acknowledges his former employer is well-placed should it decide to license the project back after POC. Provided it stays focused, today’s B round should see Stromedix through that proof-of-concept in renal transplant, which should read out in 2010.

Gilman is positively evangelical about putting Big Biotech and Big Pharma assets into the hands of small, focused firms with incentivized management. But whether or not Stromedix pursues further in-licensing opportunities is uncertain. At the moment the company is a clean, capital-efficient play on a well-regarded program that is perfectly situated on the verge of a valuation inflection point, says Gilman. In other words, given proof-of-concept success, why complicate the prospects of a takeover?

(A full version of this article will run in the May issue of START-UP)


image of fibrotic lung via Wikimedia Commons.

Carl Icahn vs. Evil Corporate Governance

Don’t get us wrong. We think corporate governance, as a general, rule, stinks. We never understood how Pfizer could have gotten itself into the position of paying Hank McKinnell $180 million in retirement benefits – the man who presided over the deletion of tens of billions in the company’s market value.

Or, in an act of proportionately greater idiocy, how the board of Cell Therapeutics, that reliably subpar performer, could in 2006 pay its CEO James Bianco some $1.1 million in cash (and a ton of underperforming stock) along with, among other perks, $220,000 in the use of chartered aircraft.

Chancellor, Sith School of Corporate Governance

The charters must have been some compensation for the loss of Air Cell Therapeutics (the corporate jet) – which the board, in a short-lived fit of financial responsibility – sold at the end of 2005.

So philosophically we’re on board with Carl Icahn’s idea of taking lax corporate governance to task in his new blog (http://icahnreport.com/), still post-less as of this morning. "I may do something to finally focus on more than making money," Icahn told Dow Jones.

We’re sure Carl gives generously to all sorts of charitable organizations (there are, after all, the Carl C. Icahn Foundation and The Icahn Charitable Foundation). But forgive us for a certain skepticism re. icahnreport. Oh, we’re sure those widows and orphans will benefit as board members get religion and really start corporately governing. And we’re also sure that when they do, our economy will just pull itself up by its bootstraps instead of whining for more bailouts.

But we also figure that the more Carl can whip up support for board-bashing, the more likely he’ll be to get additional board seats at Biogen Idec. Then, with that malign group finally paying attention to the shareholders, they'll finally force the deal to allow Carl to off-load his Biogen shares.

He bought them, remember, figuring that Big Pharmas had such poor corporate governance that they'd be begging like dogs at the Thanksgiving table to overpay for an acquisition. (For our take on that ongoing affair, see here and here).

They didn’t? Hmm. Maybe there is some real corporate governance out there after all.

Deals of the Week: Deal--or No Deal

The debate over Vytorin's medical benefits and, by extension, the utility of all cholesterol meds, continues to rage. Meantime, the Zyprexa marketing scandal reared its head: new this week, the NY Times reports Lilly is in talks with federal prosecutors to settle investigations into its marketing of the antipsychotic. If an agreement is reached, it could cost the pharma $1 billion, the largest fine ever paid by a drugmaker for breaking federal laws governing a medicine's promotion.

And, it was earnings week, with fourth quarter reports from Wyeth (up, but flat forecast for '08 due to generic Protonix), AZ (down), BMS (down, and WSJ's Health Blog highlights concerns that this big pharma may be affected by the sub-prime mess), Novo Nordisk (down, but did beat analysts' expectations sending the stock up), and Merck (down, thanks to Vioxx settlements) among others.

All in all, a crazy week, but not necessarily on the deal-making front. That's prompted this IN VIVO blogger to ponder the deals that happened--and those that did not. Without further ado, the Deal or No Deal edition.

First, a look at the actual deals that got done...

Inverness/Matria: On Monday Inverness announced its third major acquisition in the health management space, buying Georgia-based Matria for $900 million and the assumption of $280 million in debt. Definitely the big money deal of the week, though Wall Street reacted negatively to the news. Inverness continues to build through acquisition: the Matria deal is its twelfth in the past 12 months. (For more on Inverness's acquisition strategy, click here.) The company's recent emphasis on health management suggests another trend we've been following: the expansion of the diagnostic business model to include services not exclusively related to in vitro tests or reagents. Such business activity has muddied the waters stretching the definition of what it means to be a diagnostic company.

Sepracor/Nycomed: A few weeks ago when Nycomed got FDA approval for its inhaled corticosteroid ciclesonide we figured Sanofi-aventis, the original partner of Altana (bought by Nycomed in '06), still had US rights to the drug--we hadn't heard otherwise, after all. So we were a little surprised on Monday when Sepracor picked up rights to the drug (Alvesco) for $150 million upfront plus various development and sales milestones. Nycomed will also receive payments for manufacturing and royalties on sales. Alvesco's route to the US market has been chock-full of speed bumps. Way back in 2002 Altana suggested the drug might be approved in 2003, but an NDA wasn't filed until December 2003. Altana and Aventis received an approvable letter in October 2004 and the drug was launched in 2005 in Europe.

Iroko Pharmaceuticals/ Merck: Specialty pharma Iroko inked a deal with Merck for non-US commercial rights to Aggrastat, a drug used alongside heparin in patients with unstable angina to prevent cardiac ischemic events. Financial terms of the deal were not disclosed. This is the third product Merck has out-licensed to Iroko and the second in the beleaguered cardiovascular space. Last spring the company acquired rights to Indocin, for rheumatoid arthritis, and Aldomet, a hypertension treatment, from the big pharma. As we reported here, the independent futures of many spec pharmas are in question, as product-poor pharmas gobble them up in hopes of fattening their pipelines. Still, primary care remains a popular space for many, especially as big pharma eschews risky products in the cardiovascular and metabolic disease space.

(Clearly someone forgot the briefcase models.)

BiogenIdec/Genmab: Perhaps we should say "No deal, yet." This week BiogenIdec was once again in the news thanks to manueuvers by Carl Icahn to install three supporters onto the company's board. Also swirling in the ether, rumors that BiogenIdec intends to buy Genmab. Certainly, such a deal would scupper any attempts by Icahn to sell the company to another entity. Adding Genmab's pipeline would go a long way to securing an independent future for the Cambridge, MA-based biotech. But such a deal won't come cheap. In part, because it seems likely that GSK might up the ante. The British pharma, after all, has three partnerships with Genmab, including a very rich co-development, co-promotion deal for the biotech's HuMax-CD20, an antibody to treat cancer and rheumatoid arthritis. Until now, GSK's had no real reason to bring Genmab in-house--it's already got rights to the antibody cow's milk, after all. But it may not be willing to stomach the risk associated with a change in Genmab ownership, deciding its worth the hefty price tag to nail down its rights to its partnered products.

Lilly/Gastrotech: Deal or No Deal? Here's an odd one for you. On Jan 28, Denmark’s Gastrotech Pharma announced it was in-licensing Lilly’s GLP-1 analog GTP 010 for IBS and functional dyspepsia. That’s a deal, not a non-deal, surely? Well, depends on how you look at it. Simply turn it over and you get….a non-opt-in by Lilly.

Lilly and Gastrotech had been collaborating on GTP 010 since 2004, when Gastrotech took over Phase II trials of this Lilly compound in IBS and dyspepsia (in part thanks to the biotech’s ownership of some use patents for GLP-1 analogs in IBS, according to chairman Hans Schambye, though no, that wasn’t mentioned in the release).

That—four years ago--was arguably the real licensing deal. And that was also when Lilly received an option to later take over development and commercialization of the compound in return for milestones and royalties.

This week's news is that Lilly didn’t take that option, which means Gastrotech gets to keep the compound, instead, paying Lilly royalties. “Sure,” Schambye acknowledged to IN VIVO Blog, “you could look at it both ways. Either party could have licensed the drug.”

See? Hmm, exactly. Now ok, we know that small biotechs need all the positive spin they can get, but we're getting pretty close to "Press Release of the Week" territory here. Perhaps Gastrotech will do something big with 010, who knows (Lilly did take an equity stake). But please, a bit of clarity and objectivity wouldn’t go amiss.

Icahn to Biogen: Take a Mulligan

And a Denner and Young, while you're at it.

From Biogen's terse release this morning:

CAMBRIDGE, Mass.--(BUSINESS WIRE)--Biogen Idec (NASDAQ: BIIB - News) today announced that it has received notice from Icahn Partners LP and certain of its affiliates for the nomination of three individuals, Alexander J. Denner, Richard C. Mulligan and Anne B. Young, to Biogen Idec’s Board of Directors at the Company’s 2008 Annual Meeting.

Analysts have suggested this morning that Icahn's endgame may be to restart the failed auction process that concluded late last year. Part of the reason that auction failed, as we've pointed out before, is the restrictive NDA that Biogen management forced potential bidders to sign, essentially preventing interested parties from negotiating in parallel with Genentech and Elan, which hold options on Biogen's two key products in the event of a sale.

Meanwhile ... in news that inexplicably didn't make it into our weekend roundup (what can we say, we bought the Guardian), the Times is reporting that Biogen may make a bid for Danish biotech Genmab. Genmab is up about 7% today on the speculation.

The Biogen Idec Sale: It’s About Revenues – Not Biologics

Last week, IN VIVO Blog broke the news that Biogen Idec had hired bankers to explore a sale.

Now, we know that companies, like people, don’t always act in their economic best interests. And there are plenty of revenue-desperate Big Pharmas (much speculation surrounds Pfizer, as the Wall Street Journal notes here and here) who might let desperation get the better of common sense. One banker peripherally involved in the transaction noted that there was “so much panic [among Big Pharma] about generating revenues they’ll rationalize as much as they need to about cost-cutting to justify the price. If I was at Biogen, I’d be out looking for a job right now.”

But let’s be clear: buying Biogen at this price doesn’t make sense. First, by contract Genentech/Roche will soon be upping their share of Rituxan revenues (from 60% US and greater ex-US to 70% US). And then there’s Elan’s change-in-control option on jointly marketed Tysabri – which could soon be providing a quarter of Biogen’s revenues (or more: it’s likely that Tysabri sales are already beginning to cannibalize sales from Biogen’s other MS drug, Avonex).

It’s possible, perhaps, that Elan and Biogen have reached some sort of understanding over Tysabri. But unless that understanding is worth a ton of money to Elan (which an acquirer would end up paying for), we think it would be hugely stupid for Elan to leave Tysabri in any Biogen-acquiror’s hands without extracting a huge fee (the huge fee they didn’t get when, in 2000, they signed the original deal with Biogen) and probably a far better ex-US royalty rate (we think they now get about 13%).

And Elan would have no trouble – zero – raising the money to buy out Tysabri: investors (who could smell high-profit re-sale to any number of large companies) would jam Elan’s offices with their checkbooks. Imagine what product-poor Novartis would pay for a drug to spearhead its efforts in developing an MS portfolio? “For Elan, this is the best thing since sliced bread,” says a banker. In any event, Elan’s hired Lehman Brothers to advise on the issue – and we’re pretty sure Lehman agrees with us.

So are there non-crazy reasons to buy Biogen at something north of $90/share? If you were intent on stretching a point, you could argue that senior management could use the necessity of making such a big bet pay off to bomb a primary-care mindset into the new world of specialty-care product development and marketing. And a small-molecule Big Pharma could suddenly acquire the rare soup-to-nuts biologics capabilities required to make a go of large molecules. For an in-depth discussion, see this October IN VIVO story.

But there are certainly more sensible compromises an acquirer should make if indeed biologics is the primary goal. For a lot less money, an acquirer could buy PDL, Genmab, MicroMet, Seattle Genetics, Human Genome Sciences or Xoma, each of which would bring some of the requisite capabilities. Certainly there’s plenty of hair on each of these companies—none of them have ever marketed a biological, so they lack proven development and regulatory expertise. None of them are free from management challenges. And they don’t all have the manufacturing capacity some buyers might want. But each of them has far more freedom than virtually any Big Pharma to operate within the IP constraints of the antibody world; they all have at least some of the expertise needed…and the rest can probably be acquired piecemeal.

But we don’t think a biologics business is the goal. The goal is revenues. And what Icahn hopes is that growth-starved, cash-rich Pharmas will be willing to pay an exorbitant exchange rate to trade balance sheet dollars for sales.

Incidentally, while Genzyme stock is up about 20% thanks to the Icahn put-them-in-play treatment, we’re also leery of a sale. To our eyes, Biogen CEO Jim Mullen looks pretty eager to cash out. Our bet is that Henri Termeer, Genzyme’s boss, probably wants to stay right where he is – the grand old man of biotech – and that he’d put up a significant fight to stay independent.

UPDATE: Be sure to vote in our highly unscientific poll on the top-left of the IN VIVO Blog. Who do you think Pfizer and its ilk will take out next?

UPDATE II: Poll is closed. Big winner? Biogen Idec, with more than 50% of the vote!

While You Were Considering the Alternatives

"When you come to the fork in the road, take it."

We hope the weekend gave you a chance to look in on the news of the day, Strategic Alternatives: Biogen Idec edition. We saw it coming (and said so here last Thursday). Late on Friday Biogen Idec confirmed that it is up for sale, having received offers from both strategic and financial buyers (the latter being Carl Icahn). We've noted the folly of buying Biogen for its current products, since any acquirer would have to share Rituxan with Genentech and since Elan has a change-in-control right to buy Tysabri (and the Irish drugmaker has brought in Lehman Bros. to help decide what to do with Tysabri in the event of a sale). But beyond a beef-up in biologics, such a move--likely to cost at least $30 billion--would help a primary-care acquirer to radically shift from primary care drugs into specialist marketing, an expensive kind of reality-show makeover for Big Pharma.

But what else happened this weekend?

• A team of scientists at Stanford University and elsewhere have published preliminary bu promising results of a new Alzheimer's diagnostic. The New York Times reports on the Nature Medicine article. Satoris is the company that aims to commercialize the test.


• News out of ECTRIMS in Prague: Bayer and Genzyme's good-news-bad-news Phase II results for Campath in multiple sclerosis. A Phase III is in progress.


• Reformulation specialist Orexo is buying Swedish R&D co Biolipox for SEK 856 million ($133 million). "The acquisition will create an innovative specialty pharma company [there's that term again!] with a broad product pipeline, global partnerships with major financial potential, and established sales channels" says a statement.


• Second prize, two weeks in Philadelphia! Glaxo considers CEO-also-rans for its board, says the Financial Times.


• The FT also interviews Sanofi-Aventis CEO Gerard Le Fur. What do we learn? Well lets just say there's a lot of color. For starters, Le Fur doesn't smoke marijuana. He prefers the Continental two-kiss to the Anglo one-smooch. And he's a rugby guy, so he probably had a very bad weekend!