Versartis: So Cutting Edge

Early Wednesday, Versartis said it had raised a $21 million B round and, at the same time, spun out its lead molecule, an extended-release version of the type-2 diabetes drug exenatide, into a new company. Dig a little deeper, and you'll find the deal encompasses two cutting-edge trends in biotech financing.

First, Index Ventures, the firm that backed Versartis' Series A in 2009, is also investing in the new company, Diartis. It would love to match what it did with PanGenetics: create companies around single molecules with a leaner, cleaner path to exit. With PanGenetics, Index successfully sold one compound but saw the second fail in 2010. Last year, Index funded Mind-NRG, essentially one person and one asset, with an initial tranche of €1.5 million. This asset-financing vision is one Index has embraced, with other VCs cautiously following, as more traditional venture strategies are buffeted by continuing financial pressures and rare exit opportunities.

Second, the carve-out of Diartis from Versartis creates a second investment for Amunix, the platform company behind each firm's extended-release technology. The technology is the pegylation-like XTEN, which Amunix co-founder Willem "Pim" Stemmer wants to apply to a whole host of proteins. He says the firm is focused on a list of "20 to 30," some already commercial like exenatide, some "fallen angels" that failed in the clinic, and some addressing new targets. The idea is to get them ready for clinic, then either sell them directly or create new, Versartis-like companies around them.

It's a platform-only model, once dismissed as unworkable by investors who didn't see enough value creation to build a viable exit. But it's gaining traction. As this blog first reported last month, yeast-based antibody company Adimab is licensing its technology to newcos that will do the drug-development dirty work. First up is Arsanis, in Vienna, Austria.

We have a lot more on the deal in the next Pink Sheet Daily, including more thoughts from Stemmer -- who's been named a recipient of the 2011 Draper Prize, the nation's most prestigious engineering award -- and Index partner Kevin Johnson -- no, not that Kevin Johnson! -- plus a comparison of the Diartis GLP-1 diabetes molecule to other next-generation diabetes treatments. -- Alex Lash and Chris Morrison

Photo courtesy of flickerer LollyKnit.

Big Pharma, Polar Bears, and the Need to Specialize

For at least a decade, biotechs have been perceived by many observers as the likely evolutionary winners in the race for survival and prosperity in the drug industry. The credit crunch has drastically altered the environment in which companies operate and the biotech business model now looks much less likely to supply the fat returns on capital, and the price/earnings ratios, that have historically been associated with companies supplying novel medicines.

So, who will the new winners be, and what strategies must they employ to thrive in these challenging times? Scisive Consulting chairman Robert Easton, partner Catharine Staughton and consultant Matt Young weigh in with a naturalist analogy.

Granted historically lousy P/Es, growth, R&D productivity – pick your measure -- Big Pharma has one thing going for it. The current financial crisis has, at least in the short term, reversed the fortunes for still cash-rich pharmaceutical companies and the biotech upstarts that have been—for oh, about 25 years—inexorably learning to beat pharma at its own game.

The financial collapse seems itself to have been a sort of bailout for Big Pharma. Now they are able to buy novel compounds cheaply from smaller companies who are dying to sell them.

The 20 largest pharmaceutical own a combined war chest of over $100 billion. If current projections hold, their cash and cash equivalents will rise to more than $500 billion by 2014. With these funds on hand, Big Pharma could buy up not only enough candidates to replenish their pipelines, but the majority of the biotechnology industry itself.

On the other hand, according to Burrill & Co, one third of publicly traded biotechs have less than six months’ worth of operating cash.

The outcome of the financial collapse will be that Big Pharma will remain pre-eminent, at least while the capital crunch lasts, albeit with more modest P/E valuations. As a consequence, biotech companies, which had attracted investors with the long-term hope of valuations based on the high P/Es of Big Pharma, are struggling to fund their pipelines and must focus on - and perfect - their business development strategies just to stay viable.

So can Big Pharma do something to make its new lease of life more than temporary?

Superficially, the recipe for evolutionary success seems obvious: the Big Pharma companies use their enormous cash reserves to acquire cash-strapped biotechnology companies. But before launching into the fray with an open checkbook companies need to consider the attractions of the approach, in the light of their own specific situation.

Scisive Consulting has defined drug companies according to six types of animal: those that have adapted to a narrow evolutionary niche, and those that are more flexible inhabitants of their environment.

Consider the polar bear. These beasts are powerful and can move quickly – challenge them at your peril. Nevertheless they must adapt to a shrinking environment, thanks to global warming, in order to survive and flourish. Not a bad analogy, we believe, for Big Pharma.

At the other end of the spectrum, biotechs are rabbits. They eat a lot of green. And their population varies widely according to the availability of food. When rabbits are stressed by predators or lack of resources, they eat their own young. (It’s true, you can look it up!)

Like polar bears, Big Pharma are the top predators in their shrinking world. To stay relevant, however, they need to either figure out how to live in their shrinking environment – or find and adapt to new territories.

In industrial terms, such an imperative translates to the need for a wholesale change in the drug industry’s business model. When this industry began, it was built on a rather simple model. Science created a pill which was manufactured cheaply and marketed by sales forces to a large group of patients. This model led to profit margins that are almost unthinkable today.

The model also allowed all of the Big Pharmas to evolve in very similar looking creatures. For example, AstraZeneca, Novartis, and Bristol-Myers, all operate in the fields of neuroscience, oncology, and cardiovascular health. While some pharmas involve themselves in nutritionals, animal health, infectious disease, and other fields, all of these companies also engage with a mixing pot of therapeutic areas.

The relative strategic uniformity isn’t generally the case with the leading companies in other industries. In the high-tech industry, for example, there is a much higher level of specialization. Google is mainly in the advertising business; Microsoft, software; Research in Motion, in wireless solutions. You aren’t likely to see Facebook manufacturing semiconductors any time soon. (Yes we are aware of Microsoft’s Bing search engine and the new Google Chrome OS, but still.)

It is likely that health care businesses will evolve in a similar fashion. The leaders of the future will be those with unique and complex models which sub-speciate into differentiated forms. Companies will focus nearly all of their efforts on a single therapeutic area, becoming “immunology companies” or “cancer companies”. These companies will also become more integrated across sectors. A cardiology company will sell diagnostics, devices, and therapeutics pertaining to cardiovascular health.

Such a transformation will involve radical changes to their structures. Fortunately, pharmas have a great deal of cash now, which gives them the resources to undergo such a transformation. The winners, ultimately, will be those who recognize this need to adapt, specialize, and develop more complex business models, and subsequently capitalize on their first-mover advantage.

A good example of this can be seen in Astellas’ determination to acquire CV Therapeutics. Although CV’s board rejected the offer numerous times, ultimately fleeing into the arms of Gilead, the attempted acquisition has marked a watershed event in how Japanese companies operate with respect to their American counterparts. Typically Japanese companies have refrained from hostile corporate activity and this fundamental change in Astellas’ strategy shows its willingness to adapt and its understanding of the new reality in the pharmaceutical market.

Secondly, Pharma’s polar bears must acquire the best candidates from their prey, the cash-strapped biotech rabbits of the world. However, there is an issue of timing at play here. Although biotech assets are cheaper than ever before, they have probably not yet hit rock bottom. It is clear that these cash-eating biotechs will get more desperate as this crisis wears on and hence the pickings for the polar bears will get better.

The astute will watch and wait, and the true art will be in knowing when to pounce: before competitors do and the opportunity passes.

For the full article, including the likely fate of the duck-billed platypuses and other animals of the pharmaceutical world, see www.scisive.com.

Adimab Banks on the Value of Discovery

Adimab, the yeast-based antibody discovery play we wrote about here, and here, will announce its first two alliances today: a multi-target therapeutic deal with Merck & Co. and a single-target therapeutic/diagnostic deal with Roche.

There aren't many details in today's press release, but that's OK: these are very early stage deals anyway. What's more interesting to us is Adimab's overall partnership strategy, and its co-founder and CEO Tillman Gerngross' staunch belief that a focus on discovery--and not taking a single step down the development pathway--will allow the company to capture significant value.

(For our readers familiar with the revolting flavor of spreadable yeast extracts, apparently drug development is a lot like Marmite: either you love it or you hate it. )

First the new deals. For Merck, Adimab will use its discovery platform to identify fully human antibodies against a number of targets selected by Merck. We know that number is greater than one, but that's about it. Merck has rights to develop and commercialize those antibodies as therapeutics. Roche has tasked Adimab with discovering antibodies against a single target, and has the right to develop and commercialize those antibodies as therapeutic or diagnostic products.

Importantly there is absolutely no exclusivity around any of the targets, Gerngross tells us; Adimab can do deals with other companies on the same targets if it chooses. For its labor Adimab gets undisclosed up-front payments, pre-clinical and clinical milestone payments, and eventually commercial milestones and royalties. Though we should note that the two deals aren't necessarily structured in the same way: as Gerngross told us in May at BIO, Adimab is flexible with regards to upfronts versus royalties and terms in between. "Just pay us," he said. The biotech is also open, in some cases, to its partners taking an equity stake (though again, there is no clarity as to whether Merck or Roche has done so).

See here for an overview of Adimab's technology; essentially the company says it has created a faster and more fully human antibody discovery technology unencumbered by the various IP cross-licenses prevalent in existing platforms like phage display. Once Adimab has been given an antigen it typically takes eight weeks to deliver about a hundred antibodies that bind that target.

So Adimab will rake in cash from its discovery deals, which it plans to announce more of in the coming months (Gerngross tells us the biotech is essentially cash-flow positive, with minimal burn and no plans to raise additional capital), and build its business: keep expanding the library, do more deals. But here's where the company parts ways with about 99% of discovery-focused biotechs. It has no plans to build a pipeline of its own. At least not directly.

Adimab will not do development work. "I think that's where many other companies have made mistakes," says Gerngross. Often they're forced down the development route to validate their own technology for partners, he says. If a biotech is promoting a technology platform that isn't well-validated, "what ends up happening is that people will say 'the science sounds great, but show me that this really works,'" he says. "And before you know it you're in the business of conducting preclinical development with a company that was originally put together to solve a scientific problem. And it creates tension and requires resources that are very significant."

Gerngross contends this isn't a problem for Adimab. "Who will argue that fully human antibodies aren't a validated modality? Having strategic access to antibody discovery is a must, it's not an option" for pharmaceutical companies that are near-uniformly saying that 20 or 25% of their pipelines will come from biologics, he says.

So the challenge is to monetize the discovery capabilities within Adimab. If you're going to eschew the development pathway the problem becomes getting sufficient value for the company's investors with a series of discovery alliances. Adimab has raised cash in three venture rounds from SV Life Sciences, Polaris Venture Partners, Orbimed Advisors, and Borealis Ventures.

The simplest way would be to whet the appetites of a few pharmas and wait for one of them to pounce. Cue bidding war and a GlycoFi-esque takeout valuation. VCs invested a total of about $35 million since 2000 in that company, Gerngross' previous effort, which Merck bought in 2006 for $400 million.

But "we're not building Adimab to be acquired," insists Gerngross. "We think we can build a cash-flow positive company that can generate an enormous amount of value," he says (though there's always an offer that's too good to refuse).

And to be sure there are other ways of monetizing discovery. Gerngross points to some of the deals signed by Regeneron (like this one) as an example. "Very big upfronts, five-year commitments, royalties ... if you can do a number of those it's more attractive than a single acquisition," he points out. To which we'd add: particularly if you aren't ploughing the cash into pipeline development and can find a way to return it to your shareholders in a tax-efficient manner.

So Adimab will continue to sign the kind of funded research programs it has just announced with Roche and Merck, with an eye toward more strategic discovery deals that give large companies direct access to Adimab's platform, says Gerngross. "We can transfer the capabilities to them," he says, for them to use the discovery platform non-exclusively across a pre-determined swathe of targets or programs, unlimited targets, unlimited programs, whatever. It'll depend on the price. These sorts of non-exclusive arrangements sound like the kinds of deals Alnylam has managed to sign with the likes of Roche.

And then there's another wrinkle, a third kind of deal in the works at Adimab outside its Big Pharma discovery services ambitions. "We see opportunities for smaller, more agile players that really understand the valuable targets in, say, oncology," says Gerngross. Put that expertise together with Adimab's antibody platform, he says, "and we're looking at a story that's very compelling."

Adimab has identified oncology, inflammation, and infectious disease as three areas to embark on these sorts of ventures, and is already in active discussions in two of those therapeutic spaces. How such a deal would be structured remains to be seen but Gerngross envisions an autonomous entity in which Adimab and the other party would have equity stakes and which would be able to raise its own development capital.

These ventures will keep Adimab a step removed from drug development, where it won't have to compromise its platform business. The only question is what potential partners and investors would be willing to pay for that discovery platform: do they value discovery as much as Adimab?

image from flickr user jonben used under a creative commons license.

Deals of the Year Nominee: Novartis/Alcon

Ah, awards season. Why should film critics have all the fun? And voting! It's not just for presidential elections. This year your IN VIVO Blog team is nominating a handful of alliances, acquisitions, financings, regulatory negotiations and legislative compromises in our First Annual DOTY competition. And then you, dear readers, will vote (early and often, we hope) for the winner. Imaginary federal and international biopharmaceutical statutes prohibit us from awarding a monetary prize. But our winners, when they die, on their deathbeds, they will receive total consciousness. So they've got that going for them, which is nice.

The more legs you’ve got, the more stable you are when you’re standing still. But how do you get all those legs moving in synch?

Attitudes vary towards just how much diversification is worthwhile, but – with just a few holdouts -- drug companies agree that basing a business on novel small-molecule research is way too risky.

But as with multi-legged creatures, the problem with diversification is how managers good at (or at least familiar with) running one kind of business – R&D-intensive prescription drugs – do with another kind. Which is why the more conservative of the diversifiers aren’t actually getting out of the drug business per se – by going into branded generics or OTC medicine they’re still staying close, theoretically, to home. Take the most recent convert to diversification – Merck: its recent announcement that it would be going into follow-on biologics edges it toward a kind of generics but without the full-blown commitment to just-in-time product development and manufacturing and rock-bottom prices that the small-molecule end of that business requires.

Novartis, too, certainly recognizes the managerial challenge of diversification. Among the most aggressive of the industry’s diversifiers with extensive consumer and generics businesses, it moved this year even further afield through its play for Alcon (see our transaction summary here and a longer analysis here) – another nominee for deal of the year. Alcon’s largest and fastest growing business is in largely self-pay surgical products, which make up 45% of its total revenues. The consumer side of ophthalmology makes up another 15% -- the rest is specialty eye drugs.

Novartis is trying to minimize the problems of a pharmaceutical company managing a device business in part through the structure of its deal. Novartis is merely investing in the company (starting out with a 25% stake -- for $11 billion -- with a plan to increase it, sometime between 2010 and 2011, to 76%, for no more than an additional $28 billion). It theoretically won’t be managing Alcon any more than Alcon is managed by its current majority owner, Nestle. Instead -- once it owns a majority of Alcon’s shares -- it will be able to consolidate Alcon’s double-digit-growth-sales-and-earnings but without the executive headache of actually running the business. And with Alcon trading independently, investors should still be able to independently follow and profit from its progress, and with luck according it a bigger valuation than what it might receive hidden inside the much larger and slower-growing overall Novartis business.

The disadvantage: with Alcon as an independently trading company, Novartis can’t do the usual cost-cutting most acquisitions allow; nor will it be able to combine marketing efforts (e.g., between Novartis’ ophthalmic businesses in its Ciba Vision contact lens unit or its two eye drugs, in particular the macular degeneration drug Lucentis.

The closest recent comparator we know of to the Novartis/Alcon deal is what Bristol-Myers Squibb is trying to achieve in spinning off of its consumer nutritionals business, Mead Johnson (see our analysis, here). Bristol, too, wants to get the benefit of non-pharma growth without having to manage it. The company figured its pharma-oriented execs couldn’t pay quality attention to the much smaller and much different nutritionals unit; and that when they did pay attention to it, these earnest auslanders probably didn’t add significant value. Investors, too, ignored the group – Big Pharma analysts, hardly experts in the area, buried the Mead results in their spreadsheets.

By spinning off just 10-20% of Mead, Bristol opens up the company for investor examination, frees its own managers to focus 100% of their attention on the pharma business, and focuses Mead’s execs on the competition in nutritionals, rather than the competition for corporate resources. Meanwhile, Bristol still gets to consolidate Mead's top and bottom lines.

So far, quite similar. The big difference between the two deals is that Novartis is paying for its diversification (and had it waited six months, it could have saved 50% or so on its $11 billion down payment); Bristol wants to get paid (albeit the market meltdown will presumably lower the take it had hoped for).

And from an investor’s point of view, Novartis is therefore asking its shareholders to fund its attempt to do what investors might see as their job – buying stock. Since it’s leaving Alcon independent, Novartis can’t argue that its money will be adding much corporate value to the ophthalmic company. One could argue, on the other hand, that Novartis is limiting investor choices: because they could buy Alcon shares on their own, shouldn’t Novartis do something with their money that investors couldn’t (like buy pipeline)?

On the other hand, Bristol’s spinoff actually offers investors a new choice – if they prefer to unload pharma shares for stock in a nutritionals business, well, the menu of choices just got bigger (and theoretically Bristol wins either way). The real strategic equivalent: Novartis could spin off a minority of its generics business, Sandoz, which likewise has virtually no synergies with its parent and which might profit from some independence.

Or you could argue that Novartis is in fact offering investors a new set of choices. Those with a higher appetite for risk can put their money into Alcon; those who want the security of a big company, but now with a frisson of mid-size company excitement, can buy Novartis stock leavened with Alcon growth.

Image via Funny-Dog

Is Biotech Running GSK?

"Smaller, biotech-like units" have been the name of the game at GlaxoSmithKline ever since the CEDDs (Centers of Excellence for Drug Discovery), round one, were announced post-merger in 2000.

Fast-forward eight years and now it's not just biotech's size that's influencing the pharma giant. These days biotech CEOs are showing GSK pod-chiefs how to run an R&D business--and, since earlier this week, one is running part of GSK himself.

Christoph Westphal, former-CEO of Sirtris, which GSK acquired for $720 million in April (one of our Deals of the Year Nominees), will now head up the externally-focused CEDD (or CEEDD), along with Sirtris' VP Corporate Development Michelle Dipp. While remaining at Sirtris' premises, Westphal will "challenge the norm and stretch us to consider new ways of working" in drug discovery, according to GSK's head of Discovery Patrick Vallance.

The idea is that Westphal’s experience founding, running and investing in biotech will help the CEEDD attract promising assets into GSK’s pipeline via alliances and partnerships.

Westphal’s appointment isn’t the first of incoming CEO Andrew Witty’s attempts to infuse the group with biotech-like management, accountability and creativity. Ian Tomlinson, former CEO of Domantis (which GSK acquired in 2007 to beef up its next-generation biologics capabilities) is a senior R&D exec at the Big Pharma. And earlier this year, Witty invited Actelion CEO Jean-Paul Clozel to talk to GSK CEDD heads about how biotech manages research—and give them a few lessons from one of Europe’s few biotech success stories. (Actelion has since signed a deal with GSK on sleep drug almorexant.)

The moves make sense. GSK’s CEDDs are supposed to be run as more or less autonomous units with their own P&L responsibility, but structure alone doesn’t create a mindset. Thus far the CEDDs haven’t exactly revolutionized Glaxo’s pipeline, even though several other Big Pharma, including Roche and Pfizer are trying similar things. “The challenge is to make the CEDD heads entrepreneurial,” comments one analyst--and to incent them to perform, or else.

Witty’s June announcement of the latest CEDD-like iteration, 50-person-strong Drug Performance Units focused on specific biological pathways and competing internally for resources, sends a clear message: We’re no longer just pretending to be like biotech, cushioned within a comfortable, cash-rich bureaucracy. We are a series of biotechs.

And as is abundantly clear out in the real biotech world, there ain’t many safety nets about.

jacket image by flickr user ckount used under a creative commons license

Pfizer's Newfound Flexibility

The restructuring at Pfizer that will see the group split into business units may or may not improve productivity, boost the bottom line, or resonate positively with investors. But one thing's for sure: Pfizer's move should lead to a more flexible, nimble company. If they're not quite Gumby, they're no longer Pokey either.

Our take on the new structure--and on Pfizer's slimmed-down R&D focus--will be in the next issue of IN VIVO.

In the new Pfizer, the company's business units--comprising mature products, emerging markets, oncology, specialty products, and primary care--will be managed independently.

Essentially the groups will vie for resources with one another, manage their own P&Ls, and as Pfizer R&D chief Martin Mackay tells us, essentially run the show. "It really empowers those business unit heads to run P&Ls so they will have tremendous responsibility to maximize revenues of the projects we have in those groups but also to make sure the business is thriving at the earlier stages," he says.

Mackay and the rest of the executive leadership will then decide how to dole out Pfizer's dollars between these different businesses. "Of course a lot of strategy is simply down to where do you allocate your resources," he says.

Running smaller units under the umbrella of a large pharma isn't a new concept; GSK's centers of excellence in drug discovery (CEDDs) similarly compete with one another for corporate resources, albeit earlier on in the value chain. In some ways Pfizer's move is less ambitious than GSK's experiment, started way back in 2001 and aimed in part at mimicking the entrepreneurial essence of a biotech firm.

The CEDDs though still have to prove their worth 8 years on--GSK may talk about a broader pipeline but the proof of the pipeline is in the marketing, to stretch a phrase. And if the CEDDs were really thriving, new initiatives like GSK's drug performance units, announced over the sumer, mightn't be necessary. (It's worth noting too that GSK has also recently created an oncology unit--GSK Oncology--which takes different DPUs out of various CEDDs.)

But Pfizer's new structure ought to by its very nature (in that the units are later-stage development and commercialization focused) thrive or fail more quickly.

And when Pfizer decides its time to pull the plug on a unit--presto!--it's already wrapped up in an easy to spin-off or sell package. And it should, by then, have plenty of practice in offloading unwanted assets. As part of the research reshuffle, Pfizer is pushing forward with its efforts to monetize shelved programs. Earlier this year, it spun-off both RaQualia and Esperion 2.0.

“We’ll be much more active in out-licensing assets,” Mackay promises. “It will vary between single assets and small groups of assets, depending on what is the best deal for both parties.” Pfizer, he says, is in active discussions with potential collaborators. “We’ll be much more creative than we’ve been in the past in this particular arena.” For more on Pfizer's externalization program, see this piece in today's Pink Sheet Daily.

image from flickr user jessedybka used under a creative commons license.

Hurricane Devastates Galveston; Heads for Biotech

At the end of this unprecedented week we are still too shell-shocked to have probed deeply into the implications of the Wall Street meltdown on our corner of the economy.

But we’ve done enough thinking to disagree with the majority of respondents to our IN VIVO Blog poll, 83% of whom think the effects on their companies will be merely mild to moderate. And disagree too with those still-in-denial private-equity investors our fellow blogger visits with here, who apparently think that our industry is a nice, safe place to put their money.

OK, that may be true for Big Pharma. After all, as in previous times of market turmoil, investors may vote Pharma because they see the companies as defensive plays, where demand for products is relatively independent of the economy. And indeed most drug firms have done, during this disastrous week, a bit better than the S&P 500 (though pretty much everyone is still down).

But Pharma looks a lot less defensive than it used to be. The generic cliff is way too steep and R&D way too unproductive. The traditional side-benefits of pharma investing, too, look kind of iffy. With cash flow likely to shrink, dividends are at risk – even more so the absurd stock repurchase programs into which, like some vast currency shredder, drug companies have continued to throw their money. And just a small issue: the dollar has been gaining value, and is likely to gain more. That means US companies won’t be able to simply rake in some incremental revenues. So maybe pharma is a better short-term bet than much of the S&P – but better ain’t great.

Far more worrisome, however, is biotech – which to some degree looks a lot like these incomprehensible derivatives. Like the buyers of subprime mortgage securities, buyers of biotech stocks have by and large invested on faith. Our bet is that few investors really understand the science they’re buying. Hell, we’ve met too many biotech CEOs who don’t understand their own science. How else, other than faith, do you explain why people continue to invest in an industry which over three decades has swallowed a lot more public money than it's returned?

And in a world in which investors will shun risk for a good long time, particularly risk they don’t understand, biotech is about as attractive as Galveston after Ike. Like other high-risk/high-return businesses, biotech attracts the extra cash investors have in their funds. And there’s going to be precious little excess cash for at least the next several months. And the fact that there are now three fewer banks to help biotechs with funding, stock coverage, and M&A advice isn’t particularly happy news, either. (Anybody want to bet how long Morgan Stanley is going to remain free-standing?) An IPO year which has started out as badly as any in recent memory – just two US biotechs managed to raise money, and paltry money at that -- will finish as the worst since the late 1980s.

Not that history is going to provide any answers, says Fred Frank, the vice-chairman of Lehman Brothers and soon to be a Barclay’s employee. This isn’t 1998 or 1988, he told us in a phone call today. “This is a whole new day for biotech. Don’t interpret by [historical] analogy; interpret with analysis.”

So here’s what we see. At the top end of the valuation pyramid, we’d bet PEs like Celgene’s – 51, at last viewing – are pretty vulnerable. Maybe those companies will recognize their currency is overvalued and will use it to buy some real cash-flow producing assets. (Not cash-starved early-stage biotechs, incidentally).

At the other end, what has been a relatively steady flow of start-up activity will slow to a trickle. Start-ups have been a tough investment argument in any event, given the dismal IPO market. But at least acquisitions have provided some fine returns over the last three years. The problem is that even before the Wall Street tornado hit, the M&A door had begun to close, (for our in-depth analysis of returns from acquisitions of private biotechs, see this Start-Up article). We suspect you’ll see health-care VC move towards devices and maybe services – avoiding new investments even into the kind of biologicals platforms Big Pharma has been snapping up over the last few years (for example, check out our write-up of the Bayer/Direvo deal here).

And in the middle: we have now come around to the notion that we’ll finally see a significant number of biotechs just close their doors. (Neose, for example, sold off its assets today.) Like everyone else, we’ve been amazed at the ability of many end-of-life biotechs manage to raise just a bit more money to keep the lights on and a program or two bubbling along. But we just don’t see that in the climate ahead. The investors won’t be there. Like the sensible Galvestonians, they’ve fled to higher ground.

Image from flickr user juliemwood used under a creative commons license.

Biotech’s Original Sin

If you’re of a particular religious bent, you believe we’re born into the world stained with original sin, which we struggle to overcome in order to find grace.

To trivialize thousands of years of theological debate into a self-serving metaphor: biotech, too, is tainted with its own version of original sin that it must overcome. In this case, we're stuck with the sin of hype. And we pray for the grace of business sustainability.

It is part of the fun of the annual JP Morgan health-care extravaganza to identify in company meetings the stain and then see why it’s essential. Sirtris, that hottest-of-discovery companies, is a more interesting than average example of this essential biotech trait.

Sirtris has never been shy of elaborate media coverage (including our own). And like everyone else, it dances close to the edge of credibility. In a press release previewing its JP Morgan presentation on its lead anti-diabetes candidate, the company’s head of development described its sirtuin targets as “the genes that control the aging process". Not “genes that help control” aging. But the genes.

OK, admits Christoph Westphal, the company’s CEO and a co-founder of Alnylam and Momenta, it would probably have been wiser to qualify the claim. On the other hand, he says, a phalanx of scientific papers says that activating SIRT1 (the first of the sirtuins Sirtris is targeting) does extend life – a lot -- in yeast, worms, fruit flies and mice.

But the overly loose language creates a larger penumbra of scientific interest around Sirtris’s most advanced compound, SRT501, a formulation of resveratrol. New data from a one-month, 98-patient study, showed the drug “trended” to lower fasting glucose levels and, more definitively, significantly improved results on the oral glucose tolerance test.

That’s pretty good for a Phase Ib study. And Sirtris should report out a more probative Phase II trial sometime in the second half of 2008.

But that drug needs more than its clinical data if it's to generate the kind of publicity and momentum that can lead to a blockbuster deal and its life-supporting non-dilutive cash. SRT501, however good its data is, won’t likely win a huge partnership: it’s got no composition of matter patent.

The follow-ons do, says Westphal, and they’re 1000x more potent than resveratrol. But they’re further behind. The first of these NCEs is likely to begin a Phase I trial in a few months but—as with all more potent molecules—brings with it higher risks of unforeseeable toxicities, which is why early-stage molecules for primary-care diseases – particularly those on brand new targets -- don’t generally see high-value deals.

Sirtris needs to keep the interest--okay, the hype--going until its NCEs can stand on their own feet. It has to validate its target with a molecule that won’t drive all that much licensing value so that the follow-ons will. And that’s one reason why Sirtris tells people not to expect a deal within the next 18 months or so – by then, it should have more clinical data on the target itself and, with luck, proof-of-concept data on its NCE.

Granted the company can do all that, the partnering road will be lucrative. There’s huge interest in diabetes among Big Pharmas hit by withdrawals (cf. Avandia) or left out in the cold by Januvia’s success and the difficulty of differentiating their own new DPP4’s (which are marginally efficacious in any event).

Getting there, however, is expensive. Which gets to another Sirtris innovation: it employs just 50 people but created its NCEs with the essential and inexpensive help of 40 full-time chemistry contractors in China. That’s why the company’s progress so far has kept its annual burn rate at a relatively moderate $25 million. (We're a big proponent of limiting uneccessary infrastructure, but even we don’t know of any biotechs who’ve been able to generate that kind of cost-effective discovery productivity through off-shoring. If you have other names, please send them our way.)

But the burn will now get hotter as clinical costs mount. Sirtris will need all its $130 million in cash and more. It wouldn’t have the money it has now if it didn’t have its publicity – and it probably wouldn’t have that publicity if it didn’t dance pretty close to the edge of hype.

That’s biotech’s original sin. Where there’s biotech, there’s hype. And without it, there’s no biotech.

Spec Pharma: Wrong Bandwagon, Guys

Ok, so we’ve commented before on the definitional problems around ‘specialty pharma’—the topic came up at our PSA conference, and in this IN VIVO feature.

But we feel compelled to say some more. Yesterday during an industry conference in London, yours truly came across two further 'interesting' uses of this label, which is fast becoming totally meaningless as a result.

The first was a UK drug delivery firm that has developed a technology to push tiny, splinter-shaped solid doses of biologics, vaccines or any other drug through the skin where they apparently dissolve and distribute just as fast as a subcutaneous injection. Fine. (Read more here, if you want.) But why call the firm ‘specialty pharma’, as its CEO Charles Potter insisted on doing (and insisted that I do, too)?

“We don’t want to be seen as just drug delivery,” Potter explained, “since that implies we don’t have our own products.” Yet, he continued, we don’t want to be pharma or biotech either, because then people might think we do discovery, and that’s risky. “So we decided to call it specialty pharma,” he concludes.

Ah. So ‘specialty pharma’ means ‘reformulation and delivery’. But then why is Spain’s mid-sized pharma firm Almirall also calling itself specialty pharma? In a press release announcing Almirall's acquisition of some drugs cast out by Shire, CEO Dr. Jorge Gallardo declared that the deal "..reinforces our position as one of the key European specialty pharmaceutical companies.”

Ok, so newly-listed Almirall wants to be a bit more like Shire and get into specialist niches (though it’s unclear at first glance how the $213 million worth of assets, which include peppermint oil, help further that cause). And ok, drug delivery wants to shed its service-associated image, and highlight the lower-risk nature of its game.

But jumping onto the spec pharma bandwagon in order to do that is not a good idea. First, it’s confusing, embracing, as the term now does, so many diverse strategies (and yes, biotechs are in there too). Second, the original spec pharma model is broken anyway, so why go near it?

The traditional acquire-and-market strategy, minus R&D risk, may have created substantial value in the US. But the party’s over. The winners can’t rely on in-licensed, low risk assets to sustain the growth they need. Rumors are that MGI Pharma is up for sale. Endo is looking at strategic options, including moving upstream into risky innovation. Shire and Cephalon have both long shed their specialty pharma clothes, and now prefer to be known as ‘biopharmaceutical firms’ (another popular new label, including among Big Pharma—the ‘bio’ bit supposedly adds a valuation premium).

Despite the challenges of spec pharma version 1.0, new players are emerging. But as Bryan Morton, the CEO of Europe-based newcomer EUSA Pharma, declares, we're not really spec pharma, “we’re start-up Big Pharma.” That, he reckons, captures the idea of possessing full commercial capabilities, adjusted for size.

So the industry re-branding is official, then. Big Pharma and the old spec pharma are now biopharma, new spec pharma are 'start-up Big Pharma', and pretty much everything else, from drug delivery, through mid-caps and even biotechs-with-commercial-ambition, is now spec pharma. Got it?

On the Beach at St. Tropez

Oh please, please Brer VC, please don’t make me go to St. Tropez.

But he did, and your blogger has endured the vins de Provence, smoked salmon and paté, chevre and Roquefort, moules mariniere, and breast of duck of Atlas Venture’s Riviera hospitality to provide you some personal takeaways from its Life Sciences retreat.

We’re not quoting attendees or speeches thanks to our journalistically questionable promise to ascribe none of the chit-chat to particular attendees—a promise we assume doesn’t apply to IN VIVO Blog's own presentation, which is available here for free downloading (thanks to Atlas’ Kevin Clancy for preparing the slides).

And oh yeah, it also doesn’t apply to the other day’s Myogen vs. the VCs post.

So what did we learn midst gawking at boats the size of our house?

The increasing leverage of biotech. Everyone agrees that the pivot point of deal values is proof-of-concept (for more on why, see here and here).

But will the prices continue to increase? Yup. Despite Big Pharma’s relatively rich early-stage pipelines, thanks in part to a better understanding of chemical challenges, the biological risk has soared—and with it the attrition rates. While we at least believe in the possibility that collaborations are now inching toward the asymptotic endgame of full value, one top Big Pharma executive argued--with the authority to do so--just the opposite: given the appetite from his and other companies for post-proof-of-concept candidates, deal prices will continue to rise on just about the same steep slope they’re on now.

No end in sight to the Big Pharma biologics appetite, whetted by lower perceived risk, higher pricing, and—thanks to the regulatory Berlin Wall against biosimilars—longer product lives. (For an in-depth analysis of pharma strategies here, see the upcoming October issue of IN VIVO). Particularly mouthwatering: technologies—like Adnexus’s Adnectins—which open up the IP spaces around validated mechanisms targeted by antibodies to improved fast-followers.

But not so fast. Let’s at least admit we really don’t know the risk of biologics, at least not in quantity. Think first about manufacturing, cautioned one former research chief. Are companies whose QA/QC processes were built around the relatively straightforward chemical characterization of small molecules really prepared for the kind of QC necessary for parallel bioprocessing of perhaps a dozen biologics (a slide on Pfizer’s pipeline, chock full of biologics, showed just how possible a flood of biologics might be)?

Then think about their commercialization. Given that more and more of these biologics will end up being used chronically (after all, Big Pharma wants to replace post-expiration chronic-care small-molecule drugs and most acute-care biologics won’t fill their revenue shoes).

Suddenly, said the ex-research boss, the number of patients on large molecules will dramatically increase the likelihood that unforeseeable signals will show up – like the two PML cases which yanked Tysabri off the market for a time and which would have been impossible for any approval statistics to uncover. At least with small molecules, we’ve got the tests for the likely toxicities, allowing us to shoot compounds in the head before they ever get developed. So with biologics: what signals are companies setting themselves up to look for?

Now let’s talk pricing and patents. Our reading of the meeting’s consensus opinion: BIO made a colossal mistake in stalling a pathway to approval for follow-on biologics, pulled by the nose—accused a variety of meeting attendees--by its richest members (Amgen, Genentech, Biogen Idec, J&J) while ignoring its smaller members. A panel on Washington matters was utterly dominated by the subject, with most of the audience (or at least the many in the audience who voiced their displeasure) apparently convinced that the biotech industry had thrown away its political white hat in favor of the guise of intransigent profiteers.

The political chance lost: a Republican majority which could have at least passed a bill reasonably attractive to biologics innovators while allowing in lower-priced competition. Now it’s payback time: a Democratic majority, more closely tied to a few large-ish generics players, heel-dragging for a bill with relatively minimal exclusivity provisions, speculated attendees.

We'll have more to say about the retreat once we’ve been to the gym to repent our hedonism.

How to Improve Drug Development? Fail Fast!

In this morning’s PSA panel on “Development Dilemmas and Opportunities,” Michael Clayman, MD, VP of Lilly Research Laboratories at Eli Lilly & Co., presented a unique option for optimizing clinical pipeline success. Perversely, it depends on failing fast. Clayman heads Lilly’s Chorus division, an organization that is trying to create a new model for drug development built on not reducing attrition but increasing the chances post-clinical proof of concept that a drug will make it to market. We took an in-depth look at Chorus in May in IN VIVO.

Clayman estimates that 90% of drugs in development will fail anyway, so why devote the time, the resources—the dollars—driving a product forward if it’s not going to make to market? The goal of his group: cut costs, and dramatically narrow the time to a decision point—typically proof of concept in man, what Clayman jokingly refered to today as “pull out your checkbook”—down to as little as twelve months.

It’s a goal Clayman claims Chorus is well on its way to achieving. To date, the company has shown that it can shave 12 to 18 months off the time it takes a drug to reach proof of concept and reduce the R&D dollar spend from $30 million to $3 million.

But, outside these metrics, there aren’t obvious ways to measure the group’s success. It’s not as if the company can use drug approvals as a measure, since the goal of Chorus isn’t to get drugs on the market, but to de-risk them as much as possible. Indeed, it’s an organizational tool to manage Lilly’s vast portfolio of drug products so that the bias is on the ultimate winners. And while nearly 80% of Lilly molecules might be pushed forward according to this program, to date the strategy has been applied to just 10.

According to Clayman, one critical component of the strategy is that Chorus is compound agnostic. No one on the 24-person team has a driving loyalty to a molecule that might sway him or her to push one project forward over another. The group also operates as an autonomous division within Lilly so that it is not hide-bound by the operational infrastructure of the larger organization. “Once a molecule is transferred to us, it’s no longer worked on by Lilly scientists. We outsource the experimentation,” he says.

That level of outsourcing is likely to be troubling to most other major pharmas. It seems unlikely that many outfits would be willing to adopt such a strategy unless there were significant proof that it improves R&D productivity. Until such time, expect the refrain to remain simply Lilly’s chorus.