Deals of the Week: The Break Up to Make Up Edition

Break up to make up, that's all we do
First you love me then you hate me, that's a game for fools.

Has Carl Icahn soured on BiogenIdec, the biotech that last month offered itself up to the largest bidder only to find--so far--no takers? Appears so. His new interest, as we wrote about here, is Genzyme. Maybe. So, in honor of Icahn's roving eye--and to celebrate a possible fairy tale ending for Roche and Ventana Medical Systems--IN VIVO Blog brings you the latest Deals of the Week: The Break Up to Make Up Edition.

First the break ups:

• Pfizer/Nektar: Tired of dismal sales and bong jokes, Pfizer announced last month that its marriage to inhaled insulin developer Nektar Therapeutics was over. Now comes the divorce settlement. In a joint statement issued Tuesday Nov. 13, the two companies announced they have “resolved all outstanding contractual issues." As part of the deal, Nektar gets full rights to Exubera and a cool $135 million for its faith in Pfizer's marketing genius. In addition, Pfizer will continue to support on-going Phase IV clinical trials, while Nektar shops the product around. Just one day later, at a media R&D love fest, Nektar's CEO Howard Robin told the press that he was "very very pleased" with the deal. "[Pfizer CEO] Jeff Kindler and I spent a lot of time on this arrangement and we remain friends to this day," he said. Aww, how sweet. Bet the folks working on the two companies' Phase II partnership for a pegylated human growth hormone are relieved the split was amicable. We'll have more on the future of inhaled insulin in an upcoming IN VIVO article. Meantime check out this story from our May issue, which highlights many of marketing and clinical challenges associated with Exubera.



• AZ/ Infinity: This week Infinity and MedImmune (now a wholly owned division of AZ) also called it quits, partially, nixing their agreement to develop small molecule inhibitors of the Hedgehog cell-signaling pathway (the firms' collaboration around Hsp90 continues). As part of the un-deal, which is the result of some change-of-control-provision-inspired negotiations, Infinity gets back rights to the lead candidate, IPI-926, and AZ/MedImmune agrees to shoulder 50% of the development costs through mid-2008. Infinity can also opt-in on AZ's own Hedgehog program through initiation of Phase III trials. Here's the press release.

• Novartis/Speedel: OMG did they break up? Okay, it's not really fair to call the recent dispute over Tekturna/Rasilez payments a break-up. Think of it as a lover's spat. The two companies made news Thursday Nov. 15 when Speedel cried foul, saying it hadn't received monies related to the new blood pressure drug. In what quickly escalated to a "he said, she said" scenario, Novartis issued a statement saying it believed it had fully complied with its reporting duties to Speedel. Alice Huxley, Speedel's CEO, is confident the two companies will be able to work things out: "We trust that this disagreement can be amicably resolved as soon as possible," she said. From Speedel's point of view, they'll need to make up soon. The company expects to burn through 75 million euros in 2007 so it could do with an infusion of cash. (To get Novartis's perspective on Speedel, check out this interview with CEO Dan Vasella from earlier this spring.)

Life was rosier in device land, where we highlight these match-ups from the week:

• NeuroMetrix/Cyberkinetics: The two companies announced the formation of a JV to develop and commercialize a product for peripheral nerve injury based on Cyberkinetic’s Andara electrical stimulation therapy. For NeuroMetrix, which has struggled to develop non-invasive diagnostics for peripheral neuropathy, the JV gives it entrée into the neurostimulation area. For Cyberkinetics, the deal allows it to expand its use of Andara beyond the ultra-niche market of acute spinal cord injuries. Under the terms of the deal, NeuroMetrix will provide up to $2 million to fund the first two years of the joint venture and has first rights to commercialize the Andara platform for spinal injuries, as well as the inside-track if it decides to purchase Cyberkinetics. (For more background on the two companies look here and here.)



• Synthes/N Spine: Synthes has a whole lotta love for the medical device maker N Spine (profiled in the July/August issue of START-UP). This week, Synthes announced it was spending $30 million up-front and as much as $45 million in milestones and earn-outs to acquire the ortho start-up, which develops fusion and stabilization motion-preservation devices for the lumbar spine. Other terms of the deal, including the date of closing, were not disclosed.
  



• Pfizer/Coley: Finally, back to biopharma, where the word just came across the wire that Pfizer is buying Coley Pharmaceuticals for $8/share, or $164 million. Consider this the bonus make up and break up deal. The writing was on the wall that Coley was on the block since June, when Pfizer backed out of a deal the two companies had on a lung cancer therapy. The reason? An independent data safety monitoring committee's verdict that a mid-trial analysis suggests the compound plus chemotherapy works no better than chemo alone. Since then the firm has been trading at a market value not too different than the value of its cash on hand. We'll try to have more on this deal after the companies' conference call.

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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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Avandia’s Black Box: FDA Office of New Drugs Wins

Yesterday FDA settled a very public internal disagreement by adding another “black box” warning to GlaxoSmithKline’s diabetes drug rosiglitazone Avandia.

The message to biopharmaceutical companies is that the agency’s Office of New Drugs within the Center for Drug Evaluation & Research is the final arbiter of drug safety decisions—not the drug safety group housed by the Office of Surveillance and Epidemiology.

OND’s opinion clearly carried more weight than the OSE staff headed by Gerald Dal Pan when it came to a final resolution on how to handle the heart attack risks associated with Avandia.

A joint panel meeting of FDA Metabolic & Endocrinologic Drugs and Drug Safety & Risk Management advisory committees on July 30 showcased a fissure between OND and OSE. Two high-ranking officials, OSE’s Dal Pan and Office of Drug Evaluation II Director Robert Meyer, openly disagreed over whether Avandia should stay on the market.

Dal Pan staked his reputation by agreeing with OSE director of science and medicine David Graham that Avandia be withdrawn. “While I may disagree with [Graham] on some minor technical issues and the strength of any one given piece of evidence or other, he and I have both concluded that when we look at the data, the balance of benefits and risks of rosiglitazone is not favorable,” Dal Pan said at the meeting.

Meyer countered OSE’s presentation: “I think it is important the committee understand there is a fundamental disagreement within CDER on the scientific conclusions that should be drawn from the information available.”

Months after the meeting, in October, FDA’s drug safety oversight board voted 8-7 to keep the drug on the market, according to Senator Chuck Grassley (R-Iowa) and his investigational staff. The board is made up of federal officials from FDA and other agencies and deliberations are not public.

Fast forward to FDA’s November 14 announcement on Avandia: “We are keeping Avandia on the market because we have concluded that there is not enough evidence to conclude that the risk for heart attack or cardiac ischemia is higher than for other Type 2 diabetes drugs,” FDA chief medical officer and acting CDER director Janet Woodcock said during a media briefing.

Here is what the new box warning says:

A meta-analysis of 42 clinical studies (mean duration 6 months; 14,237 total patients), most of which compared Avandia to placebo, showed Avandia to be associated with an increased risk of myocardial ischemic events such as angina or myocardial infarction. Three other studies (mean duration 41 months; 14,067 patients), comparing Avandia to some other approved oral antidiabetic agents or placebo, have not confirmed or excluded this risk. In their entirety, the available data on the risk of myocardial ischemia are inconclusive.

FDA is requiring GSK to conduct a long-term study to evaluate the potential cardiovascular risk of Avandia compared to an active control agent and develop a MedGuide for patients including new information on the potential risks of rosiglitazone.

GSK must be popping champagne right now as this was the best possible outcome for the company considering the situation. Check out the timeline for the randomized trial: the final protocol for the study is due by July 31, 2008; the study is expected to start by November 30, 2008; and the final study report of full results is due by the end of March 2014. The first patents for Avandia expire in 2011, with some running until 2017, according to FDA’s Orange Book.

In other words, the company just bought seven years of continued marketing for Avandia.

FDA says the public will know more about the drug before the end of the study. “There would be interim data probably,” Woodcock added. “It isn’t as if we’re going to be clueless until 2014.”

Nevertheless, there is no doubt that there was a chasm-like split over keeping Avandia on the market or removing it. In the end, the Office of New Drugs’ opinion carried the day.

You can read our in-depth takes on the Avandia debacle and fallout in The RPM Report and IN VIVO here and here.

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Where's the Love?

Medical device VCs, when asked what sectors and technologies intrigue them the most, often cite aesthetics and neurostimulation among the two more fascinating and game-changing opportunities.

But IPO buyers don't appear to be as fascinated by the potential, at least not yet.

Over the past day, we heard of the EnteroMedics Inc. disappointing IPO and Reliant Technologies Inc. reluctance in trying to go public at all.

EnteroMedics is developing an implantable device to stimulate (or modulate) the vagus nerve to suppress a person's appetite. The technology has other gastrointestinal applications as well, but the combination of obesity AND neurostimulation convinced VCs to invest $45 million in the company just last year.

The proceeds of the IPO--now only $46 million--will go toward funding clinical trials to prove the device works. So public investors might be pardoned for backing off an early-stage company without a product to sell.

But Reliant Technologies is selling its Fraxel laser systems. It's got FDA clearance to treat several skin conditions from lesions to wrinkle reductions. The company reported total net revenue of $57.5 million in 2006, albeit with a net loss of $20.9 million. In 2005, the company reported a net loss of $18.2 million on total net revenue of $33.8 million. The company had hoped to raise $62 million through the sale of 4.7 million shares.

It's always difficult to understand the appetites of IPO buyers, but these aren't the only disappointing stock stories in these sectors. Shares in Thermage Inc., another aesthetics company, still hover below the $7 price tag buyers paid in its own IPO last November. Thermage shares did spend a few winter months in the double-digit neighborhood earlier this year before sinking back down.

Meanwhile, shares in Northstar Neuroscience Inc., one of the more ballyhooed neurostimulation companies, sunk back into the single digits, partly due to some disappointing communications with the FDA over its cortical stimulation device that might someday help people recover from stroke.

Northstar shares did go out at $15 in its May 2006 IPO, but they haven't been able to hold onto that value. The news that the company will have to delay its PMA filing by a couple of quarters isn't going to help things.

No doubt, VCs have to consider longer horizons than those folks buying into IPOs, and the potential in neurostimulation and aesthetics markets is huge. But it will be nice when (and we suppose if) public markets could give just a little of validation to their belief in these two promising sectors.

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Why Doesn't Pharma Hire from Biotech?

At this week’s BIO-Europe meeting, Vaughn Kailian asked his panelists: why don’t biotech’s most innovative executives ever join pharma? But they do, argued back panelist and Merck VP Barbara Yanni: look at Peter Kellogg, who joined the company from Biogen-Idec.

Irrelevant, countered Kailian. Counting money in biotech or in pharma: same thing. What about research?

In fact, biotech CFOs could probably contribute some innovation to Big Pharma, in particular perhaps Kellogg will begin applying some of the lessons of biotech finance to Merck – like figuring out some alternative strategies for financing a broader pipeline.

But Kailian is mostly right.*

The key contribution biotech's management can make to Big Pharma is in R&D -- but by and large Pharma doesn't really go after biotech's R&D stars. While big-name academics regularly join Big Pharma – Merck has made a habit of plucking its research bosses from academia (like Peter Kim, Ed Scolnick and Roy Vagelos) – rarely do biotech’s research poo-bahs.

Sometimes they get there by acquisition, like J&J’s research chief Paul Stoffels – Janssen to Tibotec-Virco and back, via purchase, to J&J. Or Harlan Weissman, who stayed at J&J following the purchase of Centocor. And yes, every once in a while there appears in Pharmaburg a Corey Goodman (ex-Stanford and Berkeley, then Renovis CEO, now running Pfizer’s new Biotherapeutics center). But biotech’s innovators are vanishingly rare in the top echelons of pharma.

Mostly they don't get asked to join. Big Pharma likes to promote from within. Fewer square pegs in round holes. And leaders of large research organizations, goes the argument, need experience in running large research organizations. Which in turn perpetuates the problems of large research organizations.

Talk to the top researchers in biotech and what you’ll hear is that they don’t want the Big Pharma jobs. Maybe. But we know of a few who ended up in biotech because they didn’t get the top jobs in Pharma. And most would probably at least like to be asked. Some might even say yes.

So should Pharma go after biotech for their R&D bosses? Yes, and for the same reasons it should probably go after their CFOs: a sense of creative urgency. Paul Stoffels, we understand, is forcing his research executives to submit business plans, not budgets (the latter permits spending; the former posits results). And he tapped J&J’s top biz dev guy (a lawyer—no scientist)—Tom Heyman—to run J&J’s discovery (and force into the open arguments about the relative quality of internal vs. external projects).

We don’t know whether Stoffels will be any more successful than his recent predecessors (J&J’s research has been manifestly unproductive). But at least he’s thinking differently. And that’s a good start. [UPDATE: J&J is shaking things up at the top as well.]

*OK, OK, we admit: we had to say that because Kailian is also a director of Windhover Information, whose employees churn out this blog. But we swear on a stack of SEC filings, we would have said the same thing even if he were, well, not on Windhover’s board.

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Dicerna Announces Series A, Nastech Announces Spin-Out of MDRNA

As we wrote about two weeks ago here, the new RNAi play Dicerna has closed its Series A, which was led by Oxford Bioscience Partners with participation from Skyline Ventures (which coincidentally concluded its own fundraising recently, which it announced today and VentureBeat reports on here). As anticipated, Dicerna brought in $13 million to advance its dicer-substrate RNAi projects. The full description of the Dicerna deal and its IP and technology is available in this month's Start-Up.

And, as we also pointed out back on Hallowe'en, Dicerna's IP, licensed exclusively from City of Hope, is nevertheless not quite 'exclusive.' Nastech Pharmaceutical coincidentally said yesterday--and elaborated on in a conference call today--that it would be spinning out its own RNA interference assets, also built around a license to that same Rossi/Behlke IP, into a newco called MDRNA Inc.

Nastech chairman/pres/CEO Steven Quay, MD, PhD, said on today's conference call that the current plan was to seek a private investment in MDRNA from institutional investors or VCs, followed by a Nasdaq listing for the firm.

Beyond the company's core IP and ongoing RNAi programs at Nastech that will be transferred to the newco, relatively little is known about MDRNA. Quay offered no details on who will manage the company, who will advise it and who will comprise the board--though "the boards are being built as we speak," he said.

Nastech's hard luck, (most recently) dominated by the decision of partner Procter and Gamble to give up on the companies' nasal-delivery osteoporosis project and documented here by the WSJ's Health Blog, has led to predictable restructuring. That restructuring--also announced last night and discussed today on Nastech's call--either forced the company's hand in disclosure of the spin-out or perhaps more likely led to the decision to offload the assets in the first place, which will save the company $20 million in 2008 and shift approx 40 of its employees (70 positions are targeted in the restructuring).

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Ventana Plays Ball

Chris Gleeson, the CEO of Ventana, must be one heck of a poker player. After rebuffing Roche's hostile $75-a-share price offer four times, his company announced in after hours trading that it had accepted a confidentiality agreement from the Swiss pharma, giving the drug giant access to the non-public information.

The hope, of course, is that once Roche execs get inside Ventana's data room that they will come to their senses and realize how grossly inadequate--insulting,even--was their original offer. Or as the press release states:

Ventana's Board believes that the due diligence conducted by Roche and related discussions that will accompany the due diligence process will allow Roche to recognize the significant additional value inherent in Ventana's business.

But that doesn't mean the company believes Roche's original offer was in any way fair. The release goes on to say:

Ventana’s Board of Directors reiterated that Roche’s $75 offer is grossly inadequate and not an appropriate starting point for negotiations as reflected by that fact that Ventana’s share price has consistently traded well above Roche’s offer and our stockholders have overwhelmingly rejected that offer four times. Furthermore, the Board continues to believe Roche’s offer does not appropriately compensate Ventana’s stockholders for the inherent value of the Company or its synergistic value to Roche.

The news of a confidentiality agreement comes at an odd time. After all, in mid-October, the company reported a 28% increase in its third quarter revenues, widely beating analyst expectations, thanks to strong sales of its tissue-testing products. And even if Roche hasn't seen the light, the company's shareholders have converted: according to an October 29 press release, less than 0.2% of the Ventana's 35 million outstanding shares had been tendered to Roche after the third extension of the original hostile offer. Which leads this IN VIVO blogger to wonder: why bother playing nice at all?

Maybe because the company can't afford not to. Despite strong revenues, Ventana's third-quarter net income was tiny--just $263,000 or 1 cent per share. Compare that to last year's third quarter results, where the company reported net income of $7.8 million, or 22 cents per share. Listen to the webcast of the company's earnings call and it's not hard to find the reason for the drop: $12.5 million in special charges that included hefty legal fees to fight off Roche's takeover bid. Clearly that fight is starting to take a financial toll--a scenario we partially envisioned back in August.

And with no end to the fight in sight, no White Knight emerging, and a direct hit to the bottom line, Ventana's board must have seen the writing on the wall. Continue to resist and risk continued hits on earnings--a scenario which could drive investors away and the send the share price on a downward spiral that would put pressure on them to accept Roche's original offer. (Roche's strategy, by the way, is outlined in this IN VIVO piece from this past summer.) Their best hope, then, of convincing Roche to sweeten the pot was to show them why Ventana is worth the money--and that means giving them access to the data room and the people inside.

In other words, you should listen to your mother. You can catch more flies with honey than vinegar.

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