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.

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