Wednesday, December 7, 2011

John Lechleiter: 'The Biomedical Century' -

Amidst all of the doom and gloom of patent clifts, global economic crises, falling medicare reimbursement rates, and until recently, low FDA approval rates, I found this interview with the CEO of Lilly to be uplifting. Good to be reminded of the potential of biomedical research, and good to hear a positive message from an industry CEO?

Saturday, April 2, 2011

My biotech experience as a patient (Genzyme's Carticel)

I've been away for a bit because I have undergone some knee surgery (as detailed on my personal blog, fwiw.)
Turns out, the surgery represents a new involvement for me in biotech: as a patient.
The surgery involved the harvesting of a chondryle cartilage sample. The sample was sent to Genzyme, which is growing up autologous replacement cartilage (i.e. Carticel.)
The journey so far has been illuminating. Here's a few observations from my experience, as related to the business of biotech and medicine, admittedly based upon my own n=1.
1) The health care rationing system in the US works. Carticel is both expensive ($20-40k) and rarely prescribed (~10,000 patients in ~ 10 years). From my experience there was very effective screening to get to the point of electing this treatment option. I definitely had the feeling from both the physician and insurance company sides that this treatment was well-rationed, and my financial obligation is significant.
2) Traditional comparative healthcare stats don't tell the whole story. Carticel is only available in the US, UK, and Germany (as far as I can tell online), so relative to all other comparable countries (France, Japan, etc.) I represent a huge expense, though this procedure only improves my quality of life, not longevity. In the non-Carticel countries I'd be a 40-year old dealing with early onset osteo-arthritis, whereas my goal (post treatment) is to return to my triathlon-competing, baseball playing self. Is the USA a better place if I can run again? No, but my world is, and to me, my treatment is a good investment (that is, a co-investment with my insurance company.)
The flipside of this investment is that the total financial investment probably equates to about 1 full-time job (say $50k between physical therapists, insurance admin, medical procedures, etc.) Pundits freak out about how health care represents 18% of our GDP, but I'm not certain that it is bad for the economy in this way.
3) Delivery via diffused specialists is the best approach to healthcare. State-driven (or, if you like "socialized" medicine) has an inherent bias towards centralization and generalization. It is believed that economies of scale improve health care economics, and that specialists - when necessary - should be centralized to maximize utility. (Made up example: in western Canada, it is better to concentrate heart specialists at say the province level in, to better triage cases and avoid duplicating equipment. Also, if the province needs say 8 heart surgeons, it is better to concentrate the 8 surgeons, rather than diffusing them broadly, leading to oversupply in some areas and undersupply in others.)
Since developing my knee symptoms, I haven't had any interactions with my GP, or been in any of the local hospitals, nor do I expect to do so. My x-rays were in my specialists' office, my MRI through a standalone operation, and surgery in an out-patient center. Each were under competitive pressures not present in the centralized model. My experience suggests to me that specialization should be encouraged, whereas the current trend is increased regulation to reduce specialization. (Best example: regulators and larger hospitals using "Certificate of Need" regulations to eliminate or reduce the competition by specialists. (Nutshell example: group of local heart surgeons try to open a stand-alone heart center, which studies show deliver better results at lower costs (due to specialization.) Large existing hospital refuses to "sign" the certificate of need certifying that the area needs this medical facility, thus defending their existing capacity and reducing competition.)
This practice is in effect cartelization, and ALWAYS leads to higher consumer costs.
4) As if this weren't already a given among readers of this blog, but biotech treatments such as Carticel represents the tremendous innovation and value in the US biotech industry. My therapy was impossible ~15 years ago (and, I suspect, will be obsolete 15 years from now due to advances in stem cell therapies). The research and development that resulted in the Carticel product was wholly US-based, and really could only happen in the USA.
 As I understand it, Carticel R&D began as a spin-off from Genzyme's R&D in hyaluronic acid (which itself resulted in the Synvisc (knee lubricant) product.) Genzyme got involved in hyaluronic acid R&D as a result of their interest in winning NIH funding in this area, which would finance the construction of Genzyme's first lab.
I can only guess at the cost of Carticel R&D, but it is highly likely that this was a high-risk investment by Genzyme, far beyond the risk-tolerance of large pharma companies. This was also only possible through access to the large and lucrative US health care markets and the relative availability of risk capital to fund Genzyme's R&D (though both VC and public markets). (As is the risk-tolerance of Genzyme's management team.)
I just don't believe that Carticel could have been developed in any state-driven health care system or anywhere else but the USA. (Though 2 German companies have engineered successor technologies.)
(The counter argument is that through US R&D funding and high health care prices other countries get a free-ride on USA-based R&D. It's true, but the R&D financial investment required is typically based only on sales in the US market.)
5. The health care financial model works here in the US. Genzyme trades @ 4.4X sales, while the median of the 3 largest hospital companies trades at .4X sales, suggesting that my (roughly ) $50k total cost (to me, revenue to others) might create $138k in shareholder value. (Blended 60/40 to yield a 2.77 (Yes, there are problems with this approach in the abstract, but the example is illustrative.)
To someone worried about the cost of US healthcare, I represent $50k of value destruction - i.e. $$ that can't be saved from the system. Truth is, the earnings (or, in the case of this analysis, revenues) represent capital creation, especially if the recipients (i.e. healthcare providers) can further leverage the capital.
In contrast, in state-driven systems like the NHS in the UK, there is no equity value from patient spending - a patient spending is an operating cost, and unlike in the US, these operating costs can not be leveraged to fund further R&D, or other investment uses of the cash flow, such as seeding new ventures.
As part of the Carticel therapy I'll have another operation in a few months to implant the lab-grown replacement cartilage. I'll be sure to post additional thoughts as they occur.

Monday, March 14, 2011

"It's the greatest success of western medicine in our lifetime, and the success of HIV drugs is leading to its own demise."

...says Jacob Lalezari, an HIV clinical trials expert.

No rigorous analysis here, but I thought it worthwhile to post this story speculating that the efficacy of today's HIV drugs may impeded advances in fighting HIV.

I wish we having the same problem in all therapeutic areas!

Well, we have in at least one: CML (Chronic Myelogenous Leukemia). Gleevec is a very, very effective treatment, though not always effective against certain mutations (T315), and it seems that many patients may eventually relapse years later with a mutated form of the disease.

Still, Gleevec is to CML what Gilead's suite of HIV drugs are to HIV - very good treatments, not cures.

But, if CML is a guide, there is much to hopeful for among the HIV community. Even though Gleevec is an effective CML treatment, and addresses only about 5,000 new patients per year, two next generation drugs have been approved, with others in the pipeline. (NVS' Tasigna and BMS' Sprycel approved for second line use, even as researchers theorize that they may generate quicker responses than 1st line Gleevec.)

Considering Gleevec's total annual market is ~$2B, I would expect that there will be plenty of efforts to develop a cure for the $15B HIV market.

Oncology-related stocks with profits and no R&D risk? Yes, please!

I can't give much of a recommendation on their choices, but SeekingAlpha puts forward a list of stocks related to oncology that are also profitable.
Take a read here.
Their choices are Quest (DGX), Genprobe (GPRO), and Genoptix (being acquired by Novartis.) I'd also nominate Genomic Health (GXDX), Myriad Genetics (MYGN), and Qiagen (QGEN).

Each of these companies are squarely in the diagnostics space, so they offer the stability of selling a product, rather than the ups and down of product development (as in drug discovery/development ventures), while, in many cases, having the same IP moat as the drug disc/dev companies, as the diagnostic technology or target IP is often patented, or the 510K FDA approval rserves as a barrier to entry for competitors.

It is generally perceived that diagnostics offer less upside than drug disc/dev companies, but if you consider how aggressively young biotech companies partner away risk (and upside), you wonder if the diagnostics companies offer the same upside, with much less risk.

Consider 3 companies:

Exelixis (EXEL), a biotech founded in 1994. Market cap: $1.2B
Myriad Genetics, a molecular diagnostics company founded in 1991. Market cap: $1.7B
Genomic Health, a molecular diagnostics company founded in 2000. Market cap: $725M.

There's a huge amount of selection & survivor bias in this analysis, but if you assume that each company was seeded with $20M in equity at founding, you would see the following CAGR in valuation:

Exelixis: 27%
Myriad: 25%
Genomic Health: 38%

This is not to say that these companies have generated internal rates of return (IRR) at these levels, as each company had a different financing strategy. Very light analysis indicates that Exelixis was much less capital efficient than either Myriad or Genomic Health

Exelixis:$1.11B in paid in capital 
Myriad: $580M paid in capital
Genomic Health: $255M in paid in capital

Without knowing the exact dates and amounts raised by each of these companies, a precise rate of return can't be calculated, but simple observation (compare today's market caps to the amounts previously invested) suggests that not only were the diagnostics companies much lower in inherent risk, they are also higher in investment returns.

So, before buying into a drug discovery/development stock, consider following SeekingAlpha's advice, and look at profitable and growing oncology stocks like those listed above.

Saturday, March 12, 2011

Big speed bump on the way to the stem cell revolution

A report this week indicates that induced pluripotent stem cells (IPS), the technology whereby adult stem cells (ASCs) are used to create novel stem cell lines may be inherently flawed, as the resulting cells and cell lines have been found to have important mutations.

Adult stem cells in this case are more appealing than embryonic stem cells (ESCs), which come with ethical/moral challenges. So - assuming the research is confirmed - we're back to the core conflict with stem cells - do we use morally complicated ESC technology, or potentially flawed ASCs.

The news this week will be used to aggressively promote the still controversial ESC research over ASC, but I suspect that with research we will become very comfortable with the known mutations in certain applications, but not without time and additional research.

I mention all of this because - like most emergent life science technologies - stem cells have been substantially hyped and oversold.

I just took a look at the timeline of some of the hype involved. Christopher Reeve led a big PR campaign in 2001, and California passed Proposition 71 in 2004, which raised $3B to be spent by CIRM over 10 years on stem cell research in California.

We're in year 7 of CIRM, and presumably 70% of the bond proceeds ($2.1B) have been allocated and spent. Along with annual Federal (NIH) spending - estimated at $1.1B in 2010, state funding (estimated at $400M/year) other academic basic research, and billions by pharma (hard to track) we may be spending $2B/year on stem cell research, and likely >$15B since 2001. Funding doesn't seem to be the problem.

What does this tell us:

-we should be EXTREMELY cynical in evaluating expectations for new life science technologies. It is not unreasonable to double estimated costs and timelines.

-technologies should be measured and advanced on the basis of their disease impact. The stem cell crusade in the 2000's was an effort to advance basic research as a whole. The better basis would be on a more accountable disease-basis, which would emphasize that stem cells would be one therapeutic tool among many.

-we should do whatever we can to keep technology development from being a political issue. I still believe that the kerfuffel over embryonic stem cells in the early 2000's was as much about a tug of war for $$$ (and pushback against the notion that politicians should have a voice in research agendas) as it was a morality debate. Ultimately, I do not know conclusively if the debate helped or hurt stem cell research (my guess is helped with funding, net), but it certainly drew a great deal of intellectually dishonest speculation.

-just plain don't invest in public companies at the front of a technology wave. Stem cells will ultimately have a commercial impact, but as anyone who bought Geron shares in 2000 at a price >$60 per share, investing too early represents dumb money. (10 years later, Geron is now trading for one 12th of the price ten years earlier.)

Of course, one might have been able to say the same thing about genomics (take a look at the HGSI valuation over time (peak of ~$25B in value, now worth $5B, after the approval Benylista), so let's hope that the billions spent on stem cell research have brought research to the tipping point.

Tuesday, March 1, 2011

Plexxikon: was it worth it?

Congratulations to Plexxikon, acquired today by Daiichi for up to $935M. (And unlike most reported deals, where the eye-popping total value number is based on contingent bio-dollars, the vast amount of the $935M is cash upfront ($805M).)

Plex has been a model of efficiency, raising only $67M in capital over nine years. The result is an outstanding-looking B-Raf inhibitor in P3 trials for melanoma. The potential for this product is in the realm of Onyx's Nexavar and provides an interesting valuation comparable.

ONXX's market valuation is $2.2B, based on their half-interest in Nexavar (a B-Raf inhibitor), which is on pace to break $1B in revenue in 2011. (Quirk: the bulk of Nexavar's revenues are recorded by Onyx's partner Bayer, but ONXX still booked $324M in gross profit from Nexavar in 2010.)

So, if a half-interest in a billion dollar (and growing) B-Raf inhibitor is worth $2.2B, it would seem that Plex got a decent price for its' late-stage product.

(All of this analysis ignores the valuation of other programs and regular items like cash balances, etc.)

So Plex is promising, management drove a good deal, and Daiichi now has a potential blockbuster. But I have to ask, was it worth it? (Not to pick on Plex, because I ask this question of all drug discovery ventures.)

When you consider the prospects of Plex's lead program and the capital efficiency during the company's lifetime, most every aspiring biotech and every drug discovery VC would today trade places with Plex. But, did Plexxikon create or destroy value?

It's a pretty close call.

Mining press releases for financing info reveals 3 rounds:

A: $8.3M in 2001
B: $27M in 2002
C: $32M (year undisclosed, but for purposes of analysis, assumed to be 2007.)

I plopped those figures - along with the $805M pay-off and a risk-adjusted value for the $130M in contingent payments - into a quick NPV calculation. The result: The $67M in investment probably created about $10M in net value.

(Key assumption: a 40% cost of capital. I know some risk-tolerant investors use 30% for a private drug discovery operation, but I think 40% is much, much more reflective of the inherent risk. Other folks will use 50% as a discount rate.)

The conclusion is so close that I took a look at the breakeven cost of capital: 44%. (Gosh, I love the goalseek function in Excel.)

This analysis is no way intended as criticism of Plexxikon or Daiichi, but rather the wisdom of the biotech model. Plex is in the top 5% of biotechs in terms of outcomes, yet only marginally of net value.

You can't argue with how Plex invested their capital. To generate a blockbuster lead in late stage development for <$233M ($67M in financing plus $170M in partnering revenues) is very, very impressive. I think every Pharma wishes that their R&D was that efficient.

I've already mentioned how I think Plex got a fair price on the sale, so if their net spend was efficient, and they got the best deal they could, the only way to increase the value created would be to do the drug development more quickly.

To me, the only possible way to accomplish this would be to keep the technology (leads/chemistry) in a non-profit (academic) setting as long as possible. In other words, future Plexxikons will be more attractive if the leads can be more greatly incubated in an academic setting.

Unfortunately, today there's no capital available within most universities to accomplish this (nor the expertise or risk-tolerance.) It seems a new model is needed and perhaps new institutions. Francis Collins at the NIH seems to have a good idea in the form of their Translational Medicine Institute, but this alone won't increase the odds of success or the ROI of efforts like Plexxikon's.

The only other levers are for pharma to shoulder more R&D risk (which is the opposite of current trends), or for non-profits (and their grant funding) to shift emphasis from basic research to applied research. I don't know how this is likely to change in the future. Until then, we'll celebrate infrequent victories like Plexxikon.

Monday, February 28, 2011

Genzyme: one less hope for a biotech to graduate to big pharma status

Add Genzyme to the list of biotech companies that made it to scale, and could have ultimately "graduated" to big pharma status. While I am happy for GENZ shareholders (and employees), GENZ's fate further confirms that all biotechs - even the successful ones - are due to be acquired by big pharma.

Genzyme joins Genentech, MedImmune, ImClone, and OSI, as operating companies with revenues in excess of $1B that have been absorbed by Big Pharma.

Why this matters? Because building a company to be acquired and building the best company are two different strategies. Given the developments with the companies above, one could question the wisdom of adopting any strategy but building to sell.

Who's left:

Amgen - there were loud rumors about PFE buying AMGN 3-4 years ago after reimbursement for Amgen's Epo was reduced. The emergence and success of D-Mab (osteoporosis drug) has kept Amgen an independent company - and there is still hoped for sales growth from personalizing Vectibix, but there doesn't seem to be either another exciting late stage product in development, nor much talk of AMGN acquiring companies or drugs to build and diversify their portfolio.

One factor surprisingly prominent in driving M&A discussions is the age of the selling CEO (GENZ's Termeer is 64), and AMGN's Kevin Scharer turns 63 on Wednesday, Mar 2. CEOs generally don't put their companies up for sale because they hit a certain age, but rather they are a little more receptive to acquisition overtures and because CEOs on the metaphoric "back nine" of their careers don't hold acquisitions hostage to demands for a significant role in the resulting merged company.

Biogen - which has previously been put in play by Carl Icahn, so you can't expect it to stand-alone for too long.

Celgene - I think the one to watch. They have the resources (i.e. cash flow) to reinvest in expanding the product portfolio, their CEO is hungry, and they might not be viewed as attractively by acquirers simply because Celgene is not the product of a novel technology platform. (Revlimid is a fantastic drug, but it's technical roots go back to the 1960's.)

Cephalon -  Strong with almost $3B in annual revenue, CEPH has the added advantage of a diverse business. The company has a new CEO as of December 2010 following the death of their founder and CEO, so I'd assume that the new CEO will want to stay independent for the immediate future, while the company climbs a steep growth curve from a number of new product releases over the last 2-3 years. As of now, CEPH lacks a blockbuster drug, which often drives acquisition interest.

Gilead - made further steps towards the big leagues by buying Calistoga last week, which not only adds scale, but also gets the company into a new, large market (oncology.)

Onyx - no way they're independent 3 years from now. Either Nexavar's growth continues and their partner Bayer decides to buy them, or Bayer's follow-on (son of Nexavar) makes the company put themselves up for sale.

Vertex - The company of "Billion Dollar Molecule" fame has lived many lives, and probably rebuffed many suitors, but the future of this company is completely tied to it's late-stage HepC drug. The drug, a potential blockbuster, is partnered with JNJ ex-US, meaning one of 3 things is likely to happen to VRTX:

1) The drug is a smashing success - JNJ decides to buy VRTX to get 100% of the growth, especially since they'll have a great view of sales performance, as they distribute the drug in Europe and elsewhere.

2) The Hep C drug is a middling success, but ultimately shares the market with one or more of the competing emerging HepC drugs. In this scenario, VRTX becomes valued at whatever option value the market perceives JNJ to place on VRTX, at least until VRTX gets another non-HepC product to the late stage.

3) drug not approved, Vertex leaves a big, smoking crater. (Clinical data released so far indicates the drug is strong and that this scenario isn't likely.)

Keep in mind: VRTX's current $9B valuation is ~5% of JNJ's valuation. To an acquisition-driven company like JNJ, VRTX would be a snack.

Are there any other candidate companies that could grow into multi-billion dollar competitors to big pharma?

Tuesday, January 11, 2011


Welcome to the Molecular Future blog - a blog devoted to celebrating the future of molecular medicine, analyzing the strategies used to create 21st century medical businesses, and bridging the gap between  technical and not-so-technical folks. My goal is to generate insightful analysis for the industry professional and describe molecular medical advances, promise and technologies for the layman.

A few years ago I started Xcovery, a blog devoted to all things kinase-ish, along with some general pharma commentary. I had a great time doing it, but I was asked to shut it down after 6 months as there was concern that critical (or even not so critical) blog comments (mine or commenters) regarding the industry could indirectly damage the partnering prospects for the company that I worked with at the time.

Since then, I have rolled from therapeutics to diagnostics (professionally), and blogging has become widespread, so I now have more blog content and ideas.

I am launching this new blog to serve as my creative outlet, a listening post, and hopefully a contribution to the life sciences industry in some small way. If you like the blog, please let me know, and please come back often.