Tuesday, February 28, 2012

Real math on bio-bucks….

The LifeSciVC takes a look at the payout rates on pharma partnerships.

We all know that pharma-biotech partnerships & acquisitions usually launch with press releases touting huuuuge potential financial implications, with the eye-popping figures referred to as "bio-bucks" - headline figures that probably won't ever be completely reached. ("Bio-bucks" aren't limited to pharma-biotech partnerships. For example, LIFE bought Ion Torrent for a headline figure of $725M, which amounted to $350M at closing, with $375M contingent on performance. (Of which LIFE might have already made good - though some reports say the milestones are based on future (2012) revenues.))

The link at the top of this post is some very clever analysis of actual versus expected payout since 2005. In summary:

-38% of the announced value is captured up front.

-the remaining 62% of value is split among paid (24%) the amount still possible will ultimately , still possible (40%), and canceled (37%).

-so, $4.3B of a possible $7.0B in milestones have been resolved - either paid or negated, with 40% achieved and 60% categorized as "nevergonnahappen." (Since the deals analyzed reach cover the 2005-2009 period, you could make a strong case that the likelihood of payout on not-yet-achieved milestones is likely much, much lower than 40%.)

-If you optimistically assume that milestones TBD follow this same pattern, $1.1B of milestones will likely be realized, and $1.7 are nevergonnahappen.

Extrapolating this:

38% paid upfront
25% milestones likely to be paid.
37% "vapor," likely nevergonnahappen.

That's actually a LOT better than I expected. To think that most deals are likely to pay out 63% of their headline value is a surprise to me.

Accounting for the time value of money makes for a simple rule for pharma acquisitions ~50% of value realized on a net present value basis, 50% vapor.

(Note: connected to my post of 2 days ago regarding changing business models for early stage biotech, I suspect that the asset-lite, specialized biotech companies being developed may experience a better milestone payout rate, since their specialization would suggest more focus and understanding of milestones in a given therapeutic area. However, a by-product of the specialization is that there are likely to be less deals; more focus = a smaller target market of potential acquirers.)

What I would be curious to know is how milestones fall into the nevergonnahappen category. How much of the milestone failure is related to management of the acquiree taking their eye of the ball post-deal? How much of the milestone failure can be attributed to cultural & communication divisions between pharma and biotech? How much of the failure is related to pharma screw-ups and changing priorities? And finally, how much milestone failure can be explained by pharma being snookered by high expectations into buying crap assets. Any guesses?

Sunday, February 26, 2012

Common Biotech Investor Mistakes

Via the most excellent Adam Feuerstein on The is a link to 18 common mistakes by rookie biotech investors.

The list is somewhat tongue-in-cheek yet educational for all. 

I'd add a few myself:

1) if an new technical theme ("stem cells," "RNAi," "genomics," "gene therapy,") emerges you MUST invest in it now before it is too late. 

(reality: despite all of the hype about how such-and-such technology will change the world, there is always another opportunity to invest later. let the early adopter-investors de-risk the technology.)


2) do NOT miss any possible inflection points for a stock of interest.

(reality: any new technology (or drug) will always have another news event to serve as an inflection point. FDA approval is one inflection point you might not want to miss, but behind that there's "first sale," "first quarter results," first year results," etc.)

3) the market rewards novelty.

(reality: as you can see with the current frenzy of Hep C deals, being 4th or 5th in a de-risked class of drugs is likely more valuable than being first in a novel class of drugs. 

4) ignore Carl Icahn. He's just an agitator, not a biotech investor.

(reality: he's exactly what biotech investing needs: someone less enchanted with scientific potential, and more interested in business reality. If you don't believe this, consider his track record over the last 5 years, with big "wins" in Genzyme, MedImmune, ImClone, and Biogen, with profit in excess of $2B.)

5) the dollar amounts in press releases are money in the bank - your valuations should reflect them.

(reality: when big pharma X enters a half-billion dollar partnership with biotech Z, they've really agreed on just two things: funding for the near term of a specific project, and an understanding of what a "best case scenario" for the project might look like. The only way the biotech gets the press release "bio-dollars" is if everything works out as expected, and it NEVER does. That's why it is science, not manufacturing.

Read this!

Will New Business Models Enhance or Endanger Drug Discovery?

A great thought piece by Stewart Lyman at Xconomy, well worth a read. Lyman analyzes the business models that have generated biotech "wins," and concludes that the current vibe is that VCs are oriented towards creating limited, focused companies (tending towards virtual) instead of the ambition a decade or more ago to built fully integrated drug discovery operations.

This reflects the fact that the end consumer (in this case the pharma companies that buy successful or promising therapeutic programs) wants to buy specific assets and nothing else. Lyman doesn't mention it, but this is as much due to the fact that the public markets are closed for any venture with less than half a billion in valuation. 

(This is mostly due to 2 reasons:

-the fact that Sarbanes-Oxley imposes costs on smallish companies that make it impractical for companies of <$500M to be public. In yet another example of regulation trying to close the barn door after the horse has escaped (see also: Dodd-Frank Financial Reform), Sarbanes-Oxley has killed the US IPO market for small to mid-size companies.

-while $100M-$500M in capitalization for a young company may seem large to you and me, it is a tiny number to Wall Street, making analyst coverage unreasonable, and not profitable enough to justify underwriting efforts.

(end rant))

Since VCs can only get liquidity from pharma acquisitions of their investments, companies are not being built to last, but rather built to flip. At the same time, the size of seed VC investments has risen, so biotech  start-ups need to have a quick use of $5-10M in seed capital AND a clear path to liquidity. Gone will be the days where therapeutic assets slowly incubate via SBIR funding (and other non-profit vehicles.)

(Luckily CROs now enable quicker and less expensive R&D. Young biotech companies don't need to build and staff non-core departments in order to progress a lead compound.)

The problem with this model as I see it (and not emphasized in Lyman's article) is that the smallish, asset-lite "disposable" biotech model now in vogue is absolutely terrible for anyone on the day-to-day team at the biotech company. Sign on to one of these "lite" companies and you take a GIGANTIC career risk. 

Scratch that - it's not a risk if something is practically guaranteed - and unless you believe your compounds and company will smoothly grow and progress from discovery to phase III without a hiccup at any stage, you almost certainly will go through restructuring, replacement, or a reduction of one form or another.

To the VC, each $5M biotech investment is a bet with a 1:20 likelihood of payout, but with a 50X payout with a win. The VC wants to take 40 "shots on goal" with their $200M VC portfolio, with the probabilities suggesting 2 "wins" worth a total of $500M.

To the scientific and business staff, though, that means that there's only a 5% chance that their specific efforts will result in a profit. With these odds, a career in academia, at a big pharma, or at a CRO looks a LOT less risky.

So until someone comes up with a business model for VC investment that ISN"T built to flip, start-up biotech's will have a hard time attacking the talent they need to run rings around big pharma. It seems strange to suggest it, but perhaps VC needs to be mindful of the business case for talent, not just for ROI.

Personal note: my opinion is also based on my experience starting a therapeutic discovery start-up.  It was a great experience, but the risk/reward math is just not favorable for biotech employees, and I won't ever work in early stage therapeutics again, if I can help it.


There's an interesting conversation going on about error rates in DNA sequencing in the Genomics (NGS) group on LinkedIn. Some are wondering if development of DNA sequencing diagnostic applications will be delayed by the experienced error rates (up to 4% on some platforms, including Oxford Nanopore.)

My take: I think the barriers to adoption of sequencing technologies as diagnostics are:

-any error-intolerant application is still likely to rely on RT-PCR for a while to come. (Example: detecting specific BCR-ABL mutations in CML patients.)

If you have a specific gene of interest, or even genes (up to about 10 or 20, depending on who you listen to) 

-PCR still wins the day, because of accuracy, speed, cost, privacy concerns, and the fact that PCR apps have familiar payor and FDA tracks. (Many PCR assays code for reimbursement <$300, so NGS still has a way to go to win on price.)

NGS, on the other hand will be used for broad discovery and in cases where patients are willing to pay out of their own pocket at least until the economics change, and the FDA approves a platform/assay combo such as Foundation Medicine. I'd say that we're at least 2 years away from that, regardless of error rate.    

Two other NGS points, neither worth a dedicated post for now: now that Oxford Nanopore and LifeTech are both promising ~$1,000 genome from new tech platforms:

-what does the future hold for BGI (Beijing Genomics Institute) that has made a name for itself by buying roomfuls of largely Illumina sequencers? I'd like to be a fly on the wall when someone suggests that they put 10's of millions of dollars of Illumina equipment out to pasture and invest further millions in new GridIon or Ion Torrent equipment.

-will Roche drop their Illumina takeover bid? A ~$6B hostile takeover of the former leader makes less sense now. It will also be interesting to see if ILMN's board changes their mind, and sells now. 

Thursday, February 23, 2012

Xcovery blog revisited (state of targeted Rx)

About five years ago I started a blog dedicated to targeted therapeutics, especially kinases inhibitors. The blog was an outgrowth of Xcovery, the kinase discovery spin-out from the Scripps Research Institute that I started and served as EVP of Business Development. 

I was already tracking developments in biopharm so the blog was an outlet for some of basic analysis and a fun way to share my opinion and connect with others in the industry. 

One of the regular bits of analysis was tracking the performance of FDA approved targeted drugs. Just for fun, here's a five year update, with some analysis:


Of note:

  • The 17 approved molecularly targeted drugs accounted for $27B in global sales in 2011. Think about that for a second, then consider that most of these drugs have been on the market for only 5-6 years, and their approved indications are still growing. Consider too that most have not been applied as combination therapies.
  • Even the senior citizen of the group (Herceptin, approved in 1998), has seen prolonged growth, averaging 36% per year over the last five years.
  • With 8 blockbusters and several more close and still growing (Tasigna, Sprycel, etc), almost all of the targeted drugs are either blockbusters, or well on their way. So much for the concern that targeting drugs might limit the market potential.
  • The top 4 (Avastin, Herceptin, Gleevec, and Lucentis) have made a mockery of their projected sales ceilings and are still growing strongly.
  • On the other hand, the only assets that appear to be underperforming expectations are Amgen’s Vectibix, GSK’s Tykerb, and Pfizer’s Torisel (specific sales data isn’t available for 2011, as Torisel is listed under “other oncology,” totaling ~$130M across several drugs.)
  • Vectibix is still playing catch up to Erbitux, and Tykerb hasn’t gained much traction against the Roche juggernaut.
  • I wonder what Amgen’s new CEO will do about Vectibix. It seems that there’s 2 choices: go big (invest in expanding trials for more indications and in comparison with Erbitux) or go home (sell the product to another biopharm.)
  • 4 of the top 6 are Roche drugs, which means that they were discovered by Genentech. Hats off again to the DNA team in South San Francisco for their amazing science and productivity. I wonder if we will ever see any other drug discovery effort be so inventive and productive for a prolonged period.
  • Also: I don’t think anyone is doubting the wisdom of Roche buying the piece of DNA that Roche didn’t own. I haven’t run the numbers, but I’d be shocked if the DNA acquisition wasn’t a resounding financial win for Roche.
  • Unfortunately, OSI’s acquisition of Macugen was a tremendous dud.
  • I am encouraged by the progress since my last analysis in 2006 – an average of two new approvals each year, with most new products addressing new targets or diseases, in contrast to the incremental “me too-ism” in other pharma areas like ED or cholesterol drugs.
A few sweeping generalizations:
  • FDA approval and sales success seem to be connected to corporate resources. Small to mid-cap biotechs have been chasing targeted therapies for ~15 years without much output. (I’m talking about companies such as Exelixis, Vertex (pre-HepC), Ariad, etc., though I don’t mean to pick on specific companies.) With three exceptions (Onyx’s Nexavar, OSI’s Tarceva, and the former ImClone’s Erbitux), the targeted therapies have largely been developed in-house by “old” companies with multi-billion dollar market caps and the resources to match. (You could make the case that Amgen’s Vectibix came from a small targeted effort at Abgenix, but I suspect that it was Amgen’s resources that got Vectibix through FDA approval. Similarly, Sutent started at Sugen, but Pharmacia and Pfizer seemed to have provided the big push.)
  • A gross generalization: the small to mid-caps tend to lack broad biological or disease-specific expertise, instead investing in target-specific expertise, or platform-specific expertise, thinking that broad expertise (ancillary to their target or disease of interest) is expensive overhead. I wonder if the results to date argue for the big pharma discovery model, or just reinforces the need for a broad portfolio to be successful in drug discovery and development.
  • With rare exception (as in Pfizer’s Xalkori and Novartis’ Gleevec), the path to FDA approval has been arduous for these drugs. There are a number of targeted drug developers who hold out hope that their P2 or P3 results will be so clear and strong that their clinical trials will be stopped early and approved quickly. That’s definitely the exception, unfortunately, and even in the positive trials for targeted drugs, the data has tended to be good, not great. I suspect that is a function of the requirements of clinical trial design and comparison to first-line chemotherapies. As a result the “new” drugs are posting smallish survival benefits when compared to the “old” therapies, with no accounting for how certain patient segments have had dramatic benefits. (Thus starting the vicious circular argument that targeted therapies ought to have stratified patient populations in clinical trials, but stratifying patients shrinks the market potential for such drugs, bring the business viability of the targeted therapy into question.) It seems that the FDA could take the Xalkori experience and develop a novel process for rapid approval based on patient stratification without derailing or obviating more broad approval for the drug.
The $27B in revenue in this segment (likely to grow past $50B in 2014) has hopefully served to further de-risk pharma R&D in molecularly targeted therapeutics. Coupled with advancements in medicinal chemistry, we will hopefully see more and better targeted therapies in the future. 

Tuesday, February 21, 2012


Former FDA Commissioner and NCI director Andrew von Eschenbach has a good editorial in the WSJ about how the FDA needs to modernize to help patients and the medical industry.

I was particularly struck by his point that the FDA regulatory responsibility covers $.25 of every dollar in consumer spending - from tobacco products to vaccines. In essence, the FDA's mission applies as much to sprouts (which have been subject to e.coli breakouts) as stem cells.

von Eschenbach does't propose it, but what if the "D" part of the FDA was spun out into its' own agency? With an organization built specifically for regulating modern medicine, we might end up with regulations and processes optimized for 21st century medical innovation.

Monday, February 20, 2012

Great leap for DNA sequencing. Small step for early stage financing?

Wow. Just wow.

Oxford Nanopore went public last week with details of their DNA sequencing platform. It is a stunning advancement for sequencing in terms of access, cost, and performance, and represents some pretty amazing chemistry and engineering advancements.

(Great coverage of the science involved here and here and general coverage here.)

A decade ago, sequencing a single human genome cost a billion dollars and required a warehouse full of expensive machinery. Oxford Nanopore's new platform uses a handheld unit and about 5 machine-hours, at a total cost of ~$1,000 to generate a genome. Other technologies are may be capable of reaching the performance levels of Oxford Nanopore in one dimension (cost, read length, turnaround time, etc.), but no technology is as complete as what Oxford announced.

We will be sorting through the impact of the technology for a long time, but one business implication needs to be promoted in light of Oxford Nanopore's success: how a tiny financial brokerage company with a tiny amount of scientific expertise launched Oxford Nanopore.

University tech transfer offices have a thankless job - maximizing the return on young, immature IP, with little capital available for research to de-risk emerging technologies. This is especially true in the UK, where good science is abundant, but early capital is not.

In the early part of the last decade, Oxford University's tech transfer group struck an interesting deal: it sold a half-interest in all spin-outs from the chemistry department for a decade or so for £20M cash up front (~$37M).

The investor in this deal was a new entity (IP2IPO) founded by a small financial brokerage in London. IP2IPO (since renamed IP Group, and listed here) was a new fund dedicated to investing in university IP, and went public on the AIM on the basis of the Oxford agreement, and not much else. (Though after the Oxford deal, IP2IPO struck roughly similar deals with other UK universities.) IP Group is effectively a publicly traded VC firm.

In 2005, IP2IPO seeded what became Oxford Nanopore. (It is interesting to read the press release - there's zero mention of DNA sequencing, which means that either they were being coy, or weren't aware of the potential application for the chemistry technology.)

At the founding of Oxford Nanopore,  IP2IPO received a ~5% chunk of equity per their agreement with Oxford. They also injected start-up capital boosting their ownership interest. Seven years and a few more financing rounds, including a strategic investment by Illumina IP's share of Oxford Nanopore is still 21.5%.

Today IP Group's market cap is £413M or $654M (US), having jumped 12% (+$70M market cap) following the Oxford Nanopore (ONP) news. (IP Group has ~$30M in cash on hand, so EV= $624M).

Unpacking this for a second: Ion Torrent - a DNA sequencing firm with a very cool platform - was sold last year to Life Technologies for $725M. Given this comparable, plus inflation and ONP's advantages, ONP is probably worth $1B today, making IP Group's interest worth $215M, and suggesting that the OTHER 59 companies in IP Group's portfolio are worth $409M in aggregate.)

I am happy to see that such long-term investing has paid off for IP Group, but I would be curious to know today if IP2IPO, its' investors, or the universities would redo the arrangements if given the opportunity. I think if you could reliably find investors with 10+ year time horizons that the IP2IPO model would work on a greater scale, but a look at IP Group's stock chart (with a stock price about even since its' 2003 debut) suggests that the market is not a fan of the IP Group model, even with the Oxford Nanopore development.

(You also need access to stellar tech centers. It is a low risk bet that Oxford's chemistry department will invent something world-changing over the 10-12 years covered by the IP & Oxford agreement. But how many schools and departments can you say that about?)

For the IP2IPO model to work, the investors' value of the university technology should roughly match the university's determination of the value of cash in the present. But there is an inherent disconnect between the high-beta present value of a long term technology and the certain value of short term cash. Blanket agreements like IP2IPO's reduces risk slightly by spreading the risk across multiple spin-outs across multiple sectors.

Still, there seems to be an oversupply of high-risk capital, at least in the US, when including IT/internet investments. Perhaps the IP Group "product" will take off now that there is an obvious big win in ONP to sell to investors.

One other thought on Oxford Nanopore's news: if the disposable USB MinIon unit really does sell for $900, I can see myself buying one this year just to try it out AT HOME. I can't say that about a MiSeq.

Wednesday, February 15, 2012

Who wins from DNA sequencing? (Multi-target drugs)

First came the notion of specific inhibitors of kinase signaling, and Gleevec was originally the embodiment of the idea of inhibiting just a single gene fusion - BCR-ABL. With the fine targeting came low financial expectations - I recall NVS predicting that Gleevec could have annual revenues of as much as $200M. (Actually Gleevec annual revenues for NVS are ~$4B, both because they had most expectations of the market, and because Gleevec isn't so specific, which is a good thing.)

Then, Exelixis introduced the idea of intentional multi-kinase inhibition, though some wondered if this was less of a design intention, and more of a tolerance of the notion that complete specificity may be impossible.

Last year saw the introduction of FDA approval of inhibitors not just for a single gene target, but a specific mutation of a specific gene (e.g. Zelboraf for BRAF V600E, though it comes with certain problems.)

It appears that the next wave is being unleashed by Foundation Medicine - DNA sequencing to match drug to cancer and suggest mixes of drugs, where appropriate.

The conclusions put forward by Foundation Med are not novel in theory, but a very exciting in practice.

What is also exciting is how use of DNA sequencing may unlock new markets for existing drugs. Big Pharma, I think, has generally worried that personalized medicine may result in lower revenue ceilings for new drugs, thus tilting the economics of drug discovery out of favor. (Because it generally costs about the same to develop a blockbuster as it does a niche drug.)

But if the Foundation Med results are indicative of future broader results, the economics may become even more favorable. Case in point is Pfizer's Sutent, FDA approved in 2006, and a $1B blockbuster as of 2010, based on its' application in renal cell carcinoma and GIST (specific stomach tumors).

Foundation Med's research is suggesting that Sutent could be very effective in about 2% of all lung cancer patients. What's that means to Pfizer?

US annual lung cancer incidences: ~225,000
Worldwide (rough): 675,000
Sutent-beneficial lung cancers: 13,500 (worldwide)
Sutent treatment cost (rough): $40,000 per patient
Sutent lung cancer "niche" market potential: $540,000,000.
Pfizer price/sales ratio: 2.43x
Implied increase in Pfizer's stock value from the new lung cancer "niche:" $1.3B or a stock price about $.17 higher.

Realistically, Pfizer & Sutent can't capture all of that market, but finding another half-a-billion dollar market - with the hope for more - has got to be exciting to Pfizer. It should also be exciting to other targeted drug makers and researchers.

Also exciting is the notion that Foundation's research results are the tip of the iceberg - we can expect tumor DNA sequencing research to reveal more mutations and drug gable opportunities. Let's just hope that the FDA becomes much more flexible in approving novel sequence-specific applications (or at least tolerating widespread off-label use).

Sunday, February 12, 2012

R&D efficiency

Forbes' Matt Herper takes a look at the cost to develop a new drug, and now current estimates put that figure at $1B-$4B.

While the current estimate is newsworthy, folks at places like Tufts have been conducting this exercise for years, and the numbers are always eye-popping (and debatable.)

What makes this particular article interesting is how you can also use the analysis conducted by Herper to compare pharma productivity over the last 15 years. Take a look at the R&D productivity of the top 12 pharmas:

Here's my takeaways:

-There's two tiers of productivity in the analysis: the "productive" cluster (AMGN, NVS, BMS, MRK, ABT, and LLY) all cluster between $3.7B and $4.6B in cost per new drug, while the "less productive" ranged from $5.9B to 11.8B per drug. While half of the companies studied, the "productives" account for 66 of the 135 drugs (49%) these 12 companies introduced in the last 15 years. So you can't say that higher R&D productivity is also a factor of scale - the productive and less-productive companies produced roughly the same number of drugs. 

-The "less-productive" companies tend to be the product of mega-mergers. Each of these companies has done deals to one extent or another, but think of the "biggies" and you're generally thinking of the "less productive" group. Careful, though, when thinking about the time element here - MRK, for example, only did their big SGP acquisition in late 2009. This brings up the question: do mergers depress R&D productivity, or is it mostly companies with declining R&D productivity that have the urge to merge? (My guess: a bit of both, but considering that the 6 most productive companies are generally considered the least involved in the M&A game due to a bias towards internal efforts, it may be a moot point. M&A either distracts from focus, or results in sub-efficient R&D orgs.

(I'm being charitable to NVS, which is a product of a mega-merger (Sandoz and Ciba-Geigy), but that occurred in 1996 - prior to the analysis period. Either NVS did a much better job of integrating R&D, or it takes 15 years to overcome the M&A inefficiencies.)

-I think it would be appropriate to believe that these results also project future R&D efficiency and likely future stock performance.  (e.g. over the next 15 years, AMGN is likely to be much more productive than AZN.) The 15 year period (and $75B in R&D spend) should account for short-term spikes and likely demonstrates which companies have the best R&D people and organizations. I am especially impressed with Novartis (21 products over 15 years) and most disappointed by AstraZeneca (5 products over the same period.) Perhaps this reflects one company choosing easier/harder targets, but I think it more likely reflects capabilities.

-For all of the news and criticism, Pfizer's R&D isn't too bad. The criticism that failures like torcetrapib reflect diminished R&D productivity due to repeated mergers seems misplaced, as Pfizer was almost middle-of-the-pack in R&D efficiency over the last 15 years.

-You might expect that the broadest R&D portfolios would have the smoothest results (success in one area, say cancer, making up for failures in another, say neuroscience.) However, the more productive companies are to me the least broad. Rightly or wrongly, I think of BMS & AMGN biased towards cancer research, while GSK and JNJ are the most diversified. Does this mean that there is R&D value in specialization?

Any other insights to be gleaned from the Forbes analysis?

A couple of caveats to the analysis: 

-The best analysis would weight productivity with resulting product sales. (In other words: you'd accept lower R&D spending efficiency if the output were blockbusters.)

- I can't tell from the Forbes analysis exactly what is included in the figures. I suspect that Roche data includes historical Genentech R&D spending and output. I think DNA has been one of the most efficient AND effective R&D organizations, so I would be very curious to see DNA split out from pre-merger Roche.

Saturday, February 11, 2012

More on Warp Drive Bio

I analyzed the Warp Drive Bio (WDB) launch here (Warp Drive launched with a stunning $125M in financing.)

Even better,  BioIT World has more detail on Warp Drive Bio, including an interview with the CEO.

Interesting to see that the 'put' of WDB to Sanofi is actually formally agreed to - hit certain milestones, and Sanofi has to pay a pre-determined price, so there's more risk on Sanofi's part that I assumed was being carried by the VCs.

Either directly or indirectly, this results in reduced risk for Sanofi, the VCs, and WDB company management - a win all-around - pretty smart. Consider:

-WDB & company management doesn't have as much financing risk as most biotech's - they can concentrate on discovery productivity, instead of chasing next round financing.

-VCs get a liquidity put. There's even less downside, as VC's are providing less than 100% of the start-up capital. (Assuming more than the VC's $75M was required to launch.)

-Sanofi gets exclusive (I assume) access to a novel technology platform, gets R&D expenses off of their income statement, and locks in discovery productivity and the cost of acquiring WDB technology at 2012 prices. As long as SNY's R&D agenda is matched by WDB's, and the value of leads does not go down, this is great.

I think most VCs and company executives would LOVE to do this sort of deal, especially at company founding, but pharma's aversion to risk prohibits most deals of this sort. Big Pharma's usual game plan is to wait to see more data, as they would rather trade potential financial upside for reduced product or program risk. Let's hope that this deal represents Big Pharma's willingness to take a little more risk, especially when a company at start-up has such a great pedigree.

Besides the novel Sanofi partnership, WDB has a very traditional lead discovery value proposition  - their expectation is that their technology platform will generate novel lead compounds quicker/better/or more efficiently.

I'm in no positon to evaluate the technology, but from a business strategy perspective, it is another example of over-valuing lead discovery. (That is, if you believe as I do that preclinical leads are over-valued.)

Consider the typical drug discovery & development timeline, as put forth in Nature:

WDB's value proposition affects only the first two years of the timeline (up to lead selection.) Presumably WDB is more efficient (either in time or cost) during the early stage. Let's say they're 25% more efficient in terms of time, which equates to 6 less months of development over 8 years, assuming that the drugs have the same downstream risks of other R&D programs. (i.e. a WDB-sourced lead is just as likely to succeed in Phase II as any other pharma lead.)

The net effect is WDB's entire discovery advantage is in 1/16th of the total effort required to produce a drug, and does not seem to impact the probability of success. Sure, there's financial value in getting a product to market 6 months earlier, but bringing $250M in revenue forward by six months 7.5 years from now is only worth $31M in present value (25% WACC, 30% OPM).

The same $31M in NPV could be generated just by increasing the probability of a programs success by a small amount. (In other words, quality over quantity.)

For this reason, I'm a fan of investing not in more early leads, but rather any IND leads or technologies, especially if I'm a risk-averse pharma.

Thoughts? Reactions?

FDA on biosimilars

Great WSJ article today summarizing the FDA's new rules for biosimilars.

Included in the rules discussion is this list of the top 10 biologics:

While I knew they were big sellers, I hadn't realized that the big 3 RA biologics accounted for $19.5B in annual sales. That's roughly equal to the GDP of the country of Bolivia. Total sales of biologics are greater than the annual economy of New Zealand. Keep in mind, this entire class of drugs did not exist until 1989. (I'm guessing that the first FDA approved recombinant biologic was Amgen's Epo, in 1989.)

As for the newly announced FDA regulations on biosimilars, they strike me as very fair - the regs acknowledge that the biosimilars have a lower regulatory burden than a "novel" (i.e. not biosimilar) drug, yet are not considered a typical generic. As opposed to chemical generics, biosimilars will need significant data to receive FDA approval, and will not be able to be marketed as exact copies. 

Thursday, February 9, 2012

Interesting deals......

Two transactions from the last month that intrigued me:

Transgenomic (TBIO) raised $22M from a group of investors. Congrats to TBIO, as they attracted new capital equal to about 40% of their market cap including from a very serious investor (RJ Kirk's Third Security.) This financing allows TBIO to rise above the small cap services/genomics/diagnostics crowd, and lets them focus more on business than on financing. Gaining the imprimatur of RJ Kirk isn't bad either.

(Also an acknowledgement of TBIO's very nice 3-yr stock performance.)

What made me curious about the deal is:

1) the size. While one blogger calls the raise too large relative to their $1M/yr cash burn, I'd expect that TBIO has some really good uses in mind for the fresh capital, perhaps to shop around earlier, younger diagnostics plays to plug assays into their sales channel. My perception is that acedemics are asking for stiff terms to commercialize novel diagnostic IP, bargains can be found among capital starved start-ups.

2) the fact that Kirk/Third Security are injecting equity into repay the debt owed to Third Security by TBIO. (TBIO owes ~$8M as part of their prior deal to buy Clinical Data/s (i.e. Kirk's) prior PGx assets.

This isn't anything unscrupulous, like, say Elan's early 2000's Enron-esque equity investments to get R&D expense off of their books while pumping their book value. (Wish I could find a link for this.) Instead, it's an interesting way for Kirk to continue to bet on pharmacogenomics while also returning some value on the investment in the short run. (The definition of "short run" is liberally applied here. Kirk's PGx investment interest goes all the way back to the purchase of Genaissance (2004?)) Kirk & team have turned over a tertiary asset from their Forest Labs/Clinical Data deal into an interesting chunk of a publicly traded company. (albeit OTC BB)

One of these days I'll have to dive deeper into Kirk's activity, particularly Intrexon, his synthetic biology company, and affiliates such as Ziopharm and Adeona.....

The other transaction that caught my eye:

Warp Drive Bio founded with $125M in seed financing.

When I first heard of this deal, I was stunned by its' size. I've come down a bit after learning more details, but I still can't rationalize it. (Never mind the realization that the headline science of Warp Drive combines two absolute graveyard priorities: natural products and genomics. That's a conversation for another day)

It looks like only $75M is committed cash financing. My guess is that Sanofi is contributing $50M in research support, less any research assets contributed. The press release suggests that this will cover 5 years of operations. (Let's ignore that business plans & research agendas change over 5 years.)

If you're an early stage VC, you're targeting a 40% annual ROI, but you won't pull the trigger that doesn't look like a potential 10X return. If the VCs behind the deal expect 10X liquidity in 5 years, then they'd target an enterprise value for Warp Drive in 5 years of $1.25B (158% IRR), but be happy with  5.4X (40% IRR on $675M EV in 5yrs.)

These figures are nuts, but I guess that's how Third Rock (not Third Security) does it - they also started Foundation Medicine with an enormous seed round ($34M last year.)

I really hope this isn't the only way that start-ups will get off the ground in the future. By now it is apparent that there's a big gap between start-up requirements and VC interest - VCs really need to deploy large amounts of capital ($5M chunks minimum, likely in syndicate with other firms resulting in rounds of $10-$20M in new capital. Only deploying capital at this level makes their VC models economical, while most early stage discovery companies think in terms of $1M-$5M rounds, otherwise their interests are diluted to nothing.

If Warp Drive is the rule, rather than the exception, only big ticket discovery efforts with star quality SABs and pharma partners at launch will draw financing, meaning that pre-clinical discovery will slow significantly.

My guess is that Warp Drive and Foundation are the exception rather than the rule, and that their VC parents have the 'curse' of too much capital to manage.

Or at least I hope so.

Monday, February 6, 2012

Well done, Genomic Health!

When writing about the proposed acquisition of Illumina by Roche I mentioned that I didn't think a $6B acquisition of a hardware maker was the best strategy for Roche to bring their molecular diagnostics business into the DNA sequencing era. (Instead I recommended large-scale, aggressive partnering to grow the molecular diagnostics business.)

In contrast, one company with what I think is EXACTLY the right strategy to advance their molecular diagnostics business into the sequencing era is Genomic Health.

Genomic Health's existing product (Oncotype DX) is a 21-gene PCR test to predict breast cancer recurrence, and a similar product for colon cancer is late stage development. Both of these tests may someday "graduate" to a sequencing basis, if either NGS becomes more economical, or additional value is seen in collecting genomic data beyond the 21 genes of interest. 

But Genomic Health understands the need to augment or match product innovation with platform innovation.

For $20M (or about .03% of the Illumina acquisition price) Genomic Health will be launching a wholly-owned subsidiary devoted to developing sequencing-based tests. This is brilliant on so many levels:

-GHDX kept the founding/leadership team in place, while allowing them to pursue new, more exciting fields. The continuity of the team will be important here, while the new venture won't have to invest in some of the infrastructure already covered by GHDX (such as CLIA certification)

-$20M - while a good-sized investment in R&D - is a more smart-sized play when compared to other NGS-diagnostic players, like Foundation Medicine, which launched with an "A" round of $34M, without even a product strategy. (~15 months after founding, Foundation has just won CLIA certification. This is not an insignificant accomplishment, but still represents the company just now 'reaching the starting line.' )

-For GHDX, the $20M represents about 18 months of operating cash flow. It's a serious investment into (potentially) cannibalizing their own business. If you're a fan of Clayton Christensen and his "Innovator's Dilemma" line of thinking, you'd praise GHDX for being willing to take this initiative, where other former market leaders have treated their existing markets as sacred and protected.

-GHDX is banking on the idea that though their R&D investment will crimp earnings in the short term, equity value akin to that seen in Foundation medicine is likely to result. To illustrate this, imagine if Foundation's $34M seed round valued the company at $50M (post-money, without anything more than a business plan.) For $20M, GHDX has essentially generated $14M in net equity value ($50M enterprise value less $34M cash), and I'd argue that GHDX's venture is worth more than Foundation without spending a dime yet.)

(in fairness, some finance types would argue that with GHDX having a P/E ratio of 126x, reducing operating profit by $10M/yr costs something like $1.26B in foregone equity value, but 1) GHDX's market cap is only $850M, and 2) GHDX is down only 5% since their press release announcing the sequencing initiative.)

-many other companies in GHDX's position might realize the opportunity that NGS diagnostics represent, but instead decide to survey the field of start-ups and trade equity to acquire such products rather than invest in R&D to dilute earnings. GHDX's approach insures that NGS will be a core competency for product development, while still maintaining the option to spin out the subsidiary at any  time. (Continuing to riff on the GHDX echoing some brilliant business strategists like Christensen, I'd say that this represents GHDX's commitment to a Jim Collins 'built to last' culture."

Kudos to GHDX!

-finally, one curiosity: in the press release announcing the initiative, GHDX only once used the word "genomics." (Besides in their corporate name.) Many millions of dollars have been flushed over the last decade by start-ups pursuing genomic solutions. For this reason, I think GHDX has spun their news away from genomics.

Thursday, February 2, 2012

What do you expect for $3B?

Five years ago California chartered CIRM - a state body to facilitate spending $3B on stem cell research over a 10 year period. The money for CIRM came from a CA bond issuance (i.e. a self-tax on Californians) and was intended to fund stem cell research to 1) keep California's bioscience competitive with or ahead of the rest of the world, and 2) fund embryonic stem cell research that the US federal government would not fund due to ethical restrictions.

(As context, at the time of the ballot initiative to fund CIRM, California was worried that South Korea, Singapore, and other locations would be more attractive for stem cell research. Also, my impression was that Cali voters were eager to flip Pres. Bush the bird on anything, particularly when his social policies impacted science.)

I commented a year ago on the return on stem cells investment , and now Nature has a good article summarizing CIRM at the five year (half way) mark (with better figures than my estimates.) Since Nature is tied to the science community (including CIRM researchers) they don't go out and say it directly, but there are few tangible results so far from ~$1.5B in spending. (Presumably some great papers (published in Nature) and some shiny new on-campus labs, but other than that, nothing.)

Ordinarily, I would not fault anyone for not dramatically improving human health in just 5 years (even with $1.5B to spend), but as I pointed out on my personal blog in 2005, the stem cell community has a terrible track record of overselling the benefits of its' efforts.

But the lessons here are less about how regenerative medicine is following the same growth curve of revolutionary new technologies before it, where hype runs ahead of reality, until a crash and subsequent rebirth with success (think gene therapy in the 90's).

The lessons here are instead related to business and economic strategy:

1) even in the case of outstanding science, local funding only produces marginal local benefits. Presumably CIRM proceeds have enabled research that has global benefits (through great papers, worker training, and new research tools and methods.) However, knowledge doesn't stay local. Good papers are read around the world, workers are recruited to other labs in other places, and tools are copied. Everyone should probably thank Californians for funding the research, but unless CIRM can claim a few million more tourists to California because of stem cell research, we probably aren't returning value to the state because of CIRM.

2) anyone touting near-term economic or other gains from long-term basic research is either dumb or dishonest. As the Nature article highlights, CIRM has funded only 1 clinical trial (which aborted), meaning that the impact on human health is still a long term proposition, and that aside from some advances in research tools, little tangible economic value has been created. I think much of the excitement of alternative energy ("Green jobs!") is similarly oversold regarding near-term impact.

3) It is an esoteric concept, but no analysis of CIRM or similar efforts is complete without asking "is/was there a better use of $3B instead of stem cells/CIRM, including just leaving the $$$ in voters' pockets?"

The status quo has strong gravity, so California should be praised for considering a bold move like CIRM (whereas with the exception of a few states that invested their tobacco settlement $$$ in life science research, most states never got beyond talking about making a difference), but the truth is, governments and the general populace are ill-equipped to consider alternatives beyond yes/no.

California is massively in debt ($361B as of Feb 1, 2012), so NOT starting CIRM could have been $3B less debt (which is still a lot of money to me), or a minuscule <1% of the problem, depending on your point of view.

In addition to the idea of just pocketing the $3B (which I would advocate, in retrospect), I'm sure that other interest groups could have contributed other higher-returning ideas for state investment - be it green energy, synthetic biology, infrastructure improvements, or whatever.

4) (personal biases showing here:) bioscience needs to admit that no matter which topic or which spin, if you have to rely on convincing the general public to fund your initiative, you should just stop.

I don't think that the California public has conducted a cost/benefit analysis on CIRM, but they (or the newspapers, or whatever) will do so eventually, and it won't be pretty.

Selling the public isn't the hard part. (I'm thinking of the Simpsons' Marge vs. the Monorail episode as a great illustration of this concept). Instead, delivering on the grand promises is what is difficult, and until research becomes predictable (oxymoron - predictable research is then a technology), science will continually over promise and under deliver, likely proving to be a longer term hindrance than a source of short term funding.

(Perhaps this is observable in today's funding climate for therapeutic development. The bioscience investing base is probably smaller today and in the long term than if reality had kept pace with hype, and not instead burnt a great many investors.)