“We’re a Buyer, not a Seller,” Says Genzyme With Isis Deal

Genzyme’s $325 million up-front deal with Isis Pharmaceuticals on Phase III cholesterol-lowering drug mipomersen achieves two goals for the Big Biotech. It plugs a worrying gap in the company’s otherwise healthy growth trajectory and makes a bold statement about Genzyme’s determination to remain independent.

After activist shareholder Carl Icahn took a small stake in the company at the back end of last year, Genzyme needed to do something to minimize takeover speculation. CEO and chairman Henri Termeer--although always clear in his desire to drive an independent ship--took the trouble to go on the road and make his case, as reported in the Wall Street Journal.

Fortunately, as we now know, Termeer was also busy bidding for mipomersen. The product went up for auction last summer, according to Isis' CEO Stanley Crooke, and the timing of Genzyme's victory is opportune. The deal's size and structure--$150 million for about 5% of Isis’ equity, plus $175 million in cash upfront, a headline-grabbing potential $825 million in development and regulatory milestones, plus up to $750 million in commercial milestones—sends a strong message that Genzyme is out to buy and build, not to sell.

The deal also reinforces elements of Genzyme’s diversified-yet-specialist strategy, whose advantages, as we argued in a recent IN VIVO feature, are becoming increasingly clear. Mipomersen, a lipid-lowering compound that targets apolipoprotein B-100, is a weekly injectable being investigated, in the first instance, for familial hypercholesterolemia (FH). That’s a relatively rare, inherited disorder, suitable for a specialist sales force—bang in Genzyme’s bailiwick. Termeer describes the asset in the press release as a “very Genzyme-like product.”

Not that cardiovascular is exactly a Genzyme-like TA; not yet, anyway. For now in this area it sells only Cholestagel, a tablet for high cholesterol patients who can’t tolerate statins or who need additional help lowering LDL. But that’s the diversification bit: CV may now become one of Genzyme's emerging franchises as the company continues to broaden out beyond lysosomal storage disorders, where top-selling Gaucher’s treatment Cerezyme accounts for about 30% of total revenues.

Mipomersen, on paper at least, fits beautifully into Genzyme’s tried-and-tested strategy of broadening out assets beyond an initial niche indication and picking up lucrative corners left un-served by larger, sometimes primary care drugs. Thus mipomersen, due for filing in FH next year, will also be tested in patients with high cholesterol and at high risk of cardiovascular events—those for whom statins don’t work or aren’t suitable. (The drug, a second-generation anti-sense product, likewise confirms Genzyme's willingness to embrace novel, often risky technologies.)

Given the fit, the timing, and the drug's late-stage, it’s no surprise to see the smaller biotech win above-average up front fees, lucrative milestones--although, as Bear Stearns analyst Mark Schoenebaum points out, it’s unclear how these are distributed--and also at least 30% of profits without lifting a finger on the commercialization front.

That detail—commercialization--is perhaps more surprising: until recently, most biotechs have tended to go for a co-promotion option on their drugs at a minimum (although that trend has been waning, as we reported here). If the drug reaches $2 billion or more in sales (unlikely; Bear Stearns is forecasting a conservative $750 million) Isis would be eligible for 50% of profits, with a linear sliding scale in between.

Genzyme also has preferred access to future Isis drugs in CNS and certain rare diseases; that, courtesy of the $150 million equity purchase, at more than double Isis’ pre-announcement share price. Isis’ shares rose almost 50% in after-hours trading on Monday, according to Reuters.

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Why Genzyme's Unlikely to be the Next Target

The Boston Globe reported yesterday that Carl Icahn has taken a sub-1% stake in Genzyme. Is this company his next target for a sale or restructure, the article asks, after the billionaire investor more or less forced the sale of MedImmune to AstraZeneca, and more recently put Biogen Idec on the block?

It's a reasonable question. But there are reasons why Genzyme is less likely to be acquired than Biogen or MedImmune. For one thing, it’s not a big blockbuster company like most of its Big Biotech peers. Notwithstanding its one $1 billion-plus drug, rare disease treatment Cerezyme, Genzyme, in one of its own executive’s words, “is a company of many small ideas, rather than one big one.”

Sure, small, specialist ideas are cool these days, and small ideas add up. Genzyme's had over $3 billion in revenue last year (and is on track for as much as $3.8 billion this year). But Big Pharma at least needs more than a diverse bunch of highly niche and often highly complex products to solve its near-term problems.

And then there’s Genzyme’s structure—it’s organized as half-a-dozen quasi-autonomous business units, operating in area like transplant, surgery, or rare diseases. That means Genzyme “would not be the easiest company to incorporate,” notes Stelios Papadopoulos, former vice chairman of Cowen & Co.

So maybe Icahn’s idea is to split it all up and sell off the divisions? Analysts will certainly point you to one or two under-performing ones. But that would miss the point—the leverage, de-risking, and choice of where and when to compete for deals that Genzyme’s diversified model offers the corporate whole. (And anyway, the company tried issuing separately-listed tracking stocks during the 90’s and it was a disaster.)

Granted, the Street hasn’t considered Genzyme as the sexiest of Big Biotechs—call it the diversification discount. But as purists like Biogen and Amgen stumble, Genzyme’s breadth and global reach begin to look smart, as does its long embrace of external R&D. (You can read more about this in the forthcoming IN VIVO.) Maybe that’s why Icahn’s jumping on board—to enjoy the ride (Genzyme’s promising 20% compounded earnings growth or thereabouts over the next five years).

Ok, maybe not. But if he is up to something, he’ll have Genzyme’s Chairman & CEO Henri Termeer to contend with. And Termeer’s been set on an independent Genzyme since he joined the company in 1983, two years after it was founded. “It was quite deliberate that we should be diversified, global, and independent,” he tells us. Not for Genzyme the kind of vulnerability that would “at some point” come to the likes of Biogen, which, points out Termeer, “never really diversified in the way that we did.”

Termeer told IN VIVO on Wednesday, the day before the Globe's story, that he wasn’t aware of any activist shareholders buying into the stock. (Surprise!) In any case, he doesn’t dismiss activists, either. “They’re a good thing in one sense,” he says, since they force management to understand where their vulnerabilities are, and to unlock maximum value from the business.

In other words, who needs Icahn?

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Shire Steps Up Pressure on Genzyme

If there was any doubt that ultra-specialist drugs for ultra-niche diseases are highly valued these days, look no further than Shire’s deal with Amicus Therapeutics, announced today.

Shire paid $50 million up front and promised up to $150 million in clinical and regulatory milestones for ex-US rights to Amicus’ Phase II oral programs in Gaucher's and Fabry disease, and its Phase I candidate for Pompe disease. These are rare, inherited disorders that affect only a few thousand patients worldwide, for whom the current treatment is enzyme replacement therapy—available by infusion only.

Shire takes on half of all development costs from now on, and will pay tiered double-digit royalties on all three compounds. Not bad—especially as Amicus gets to keep the US rights, and as lead compounds migalastat (Amigal) in Fabry and isofagomine (Plicera) in Gaucher haven’t even reached proof of concept yet (although apparently Shire was offered access during its due diligence to more of the ongoing Phase II data than the rest of us).

Amicus’ President & CEO John Crowley points out that there were several bidders at the table—unsurprising, given the size of the deal, and its timing ahead of preliminary Phase II data due year-end. Nor is Shire exactly an unusual choice: it has been building up its presence in specialist biologics, and in particular in lysosomal storage disorders, since its $1.6 billion acquisition of TKT in 2005.

Since that deal, Shire has already been brushing shoulders with Genzyme, who pioneered the use of enzyme replacement therapy with Gaucher treatment Cerezyme and its predecessor Ceredase, launched in 1991. Shire sells a competitor to Genzyme’s Fabry treatment Fabrazyme in Europe, and it sells the only available treatment for Hunter Syndrome, Elaprase (“one that got away”, from Genzyme’s point of view, although the US biotech did claw back Asian rights.)

Shire is, from today, stepping up the competitive pressure on Genzyme’s rare diseases franchise (get the picture, now?)—which, despite the group’s considerable diversification, still accounts for half of Genzyme’s $3.7 billion revenues. The cosy exclusivity it has enjoyed since first creating this business—helped along by orphan drug status for its drugs--is coming to an end. (You can read more about what Genzyme’s doing about this in December’s IN VIVO.)

It’s not just because of Amicus’ oral therapies—although these, being in a pill form, could potentially provide a significant shift in treatment-paradigms for patients. It’s also, in the near-term, because of Protalix’s and, you guessed it, Shire’s own enzyme replacement therapies for Gaucher’s, due on the market in 2009 and 2010 respectively.

Granted, any competitor faces a job cracking Genzyme’s hold on this market—secured by strong patient, physician and payor relationships, well-established support structures, huge commitment and a good track record. But as Shire gains more product candidates in rare diseases, it increases its own visibility, credibility, network and leverage opportunities in this specialist niche.

Genzyme does have its own oral contender, for Gaucher’s at least, also in Phase II—using a substrate reduction approach which it, unsurprisingly, rates above Amicus' pharmacological chaperone technology, and claims will be applicable to a larger patient group.

But the deal removes--or at least complicates the use of--a potential safety net that was available to serial-acquiror Genzyme should anything go wrong with its in-house oral candidate: buying Amicus.

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The Wisdom of Buybacks

Last week both Biogen Idec and Genzyme announced significant share buybacks. Wall Street was happy.

Biogen is buying back $3 billion worth of stock, or 57 million shares (16% of its outstanding share capital) via a dutch auction. Genzyme--which announced its buyback on the same day it said it would spend $345 million to buy Bioenvision--is buying back $1.5 billion worth (or 20 million shares) over the next three years.

Genzyme's efforts, the company said, are designed to reduce the dilutive effects of its share-based compensation programs and demonstrate that the company sees its shares as a good investment. Biogen too says that the move will return value to shareholders. Buybacks, according to people with more financial acumen than us, are a tax effective way of returning money to shareholders.

But IN VIVO Blog doesn't quite get it. Biogen Idec and Genzyme aren't banks, or fast food chains, or textbook suppliers. For companies aiming to generate medicines and the long-term gains that go with novel and effective drugs, buybacks seem to us a waste of money. Especially for biotech companies--who ought to be investing in R&D, alliances, M&A, basically any way that builds pipeline value (and whose investors should be in the game for a big return, not just the single-digit short term percentage gains that accompany a buyback announcement). Of course, Biogen and Genzyme maintain that they have ample free cash to both invest wisely in their pipelines and to buy back shares. Perhaps they do, and there's always debt ... though that can come back to bite companies whose share price declines before the convertible matures.

In any case it seems to us that buybacks provide investors with, at best, a short-term bounce in stock price and little long-term value. We're not financial gurus, of course, so tell us what you think. We'll talk to a few bankers and take a look at the buyback issue a little more closely in the next IN VIVO.

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Genzyme Buys to Build in Oncology, Again

In a move reminiscent of its 2004 acquisitions of ImPath and Ilex Oncology, Genzyme is taking out Bioenvision, its biotech partner on the drug clofarabine, for $345 million in cash. The buyout is the Big Biotech's first move to create a global oncology business--Bioenvision launched the drug in Europe last year, where it is sold as Evoltra--and its first acquisition since its hostile takeover of Anormed last year for $580 million. Evoltra sales over the past nine months in Europe were just over $9 million.

The price represents a 50% premium over the 20-day average price of Bioenvision's shares, and is the latest in a long string of acquisitions of biotech development/marketing partners: see Genentech/Tanox, Lilly/Icos, Shire/New River, Amgen/Abgenix, etc. We expect more of these ally-to-buy scenarios: sometimes having a partner is just too expensive.

Genzyme's share of clofarabine comes via Ilex, which it bought for $1 billion in stock in February 2004 as an early step in building its oncology presence. The drug is marketed as Clolar for pediatric acute lympoblastic leukemia (ALL) since its FDA approval in December that year. The companies are aiming to expand the drug's remit into adult indications such as acute myeloid leukemia (AML).

Genzyme chairman and CEO Henri Termeer noted on a call a few moments ago to discuss the deal with analysts that the companies expect roughly $600 million in peak sales from clofarabine, and stressed the efficiencies of combining Genzyme's and Bioenvision's efforts under one global clofarabine program.

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