Tuesday, March 27, 2012


In two cases over the last week, the US Supreme Court substantially clarified the IPR related to genes. (Good summaries here (NYT). The outcomes in both cases were decidedly anti-gene patent holders, and the biotech world is FREAKING OUT! 

The fear is that the court has greatly reduced the incentive to develop gene-based medical advances, since neither the gene-focused test or the gene-related intelligence (diagnosis or prognosis) can now be patented.

I'm 100% in disagreement with this point of view - I think the court rulings are spot on, an overdue realization of reason, and great news.

The practical impact of these decisions is that:

1) the developer(s) of therapeutics will have to take on more of the burden of gene-focused testing/diagnosis/prognosis. It will be in the best interest of any pharma to promote gene tests to include or exclude particular patients.

2) developing and rolling out personalized medicine just became a LOT easier. Imagine if a tech platform could generate heaps of patient-specific, gene-specific actionable data. (This could be a sequencing platform, a gene expression platform, or even a multiplexed PCR approach.) No longer will the platform company (or its' customers) have to cross-license heaps of gene-specific IP holders just to get their assay to market.

3) The expected value of passively held gene-IP has dropped to zero. (Sorry, patent trolls.) If you were holding Incyte or HGSI stock just for the residual value of their gene IP generated a decade ago, you were just zeroed out.

Ultimately, there are two takeaways:

1) in business, it doesn't really matter what formal granted IP you have, it matters what you do with what you know, and how you use it to meet a customer need. (I've said often (but not on this blog) that IPR is massively overrated in the biotech world.)

2)  the court established that genetic medical knowledge is no different than say temperature sensitive medical knowledge. (In the Prometheus decision, Prometheus wanted to patent the knowledge that presence or absence of a metabolyte would guide more or less application of a drug. Likewise, a patient with a temperature of say 96 degrees requires a different medical response than one with a temp of 102 degrees.) Somehow, medicine has advanced this far without being able to patent temperature diagnoses.

(Incidentally, I'm not one to regularly contribute to the ACLU, but being in agreement with their stance on gene patenting, I have contributed in a small way since 2008.)

Interesting new research

1) A sign of research advances to come: a research team used DNA sequencing to find effective uses of approved cancer drugs in new cancer applications.

Study details
target disease indication: colon, lung. (CRC & NSCLC)
core technology: exome sequencing
genes of interest: RET and ALK.
Nutshell: Nexavar, Sutent, and Calpresa ("N,S&C") are each multi-kinase inhibitors approved for other cancers, but they happen to also inhibit RET in addition to their effectiveness against other primary targets (VEGFR). The researchers - backed by Foundation Medicine - found unexpected RET fusion genes in a small subset of samples, and found N,S&C effective in vitro against the cancers with RET expression. The kicker is that neither of the diseases in this study are approved applications for N,S or C. The problem is that the RET or ALK incidence was in only ~2% of the ~600 samples studied.

(Presumably the ALK findings would similarly advance the cause of PFE's Xalkori, and ALK inhibitor.)

This is the type of personalized medicine progress that we've been on the cusp of for awhile, so it is nice to see the promise of personalized medicine become tangible. I expect that we'll see many more studies like this just this year, and each one will advance treatments (and the market for therapeutics) by a tiny bit (in other words, bunt singles, not home runs), but that collectively they'll add up to a big impact, if clinicians can keep all of the findings straight, and if the FDA can fast-track approval for these minor extensions to existing drug approvals. If so, the makers of N,S&C just got a little more valuable and outcomes for patients with CRC or NSCLC just got a little better.

2) new class of anti-cholesterol drugs look tremendously effective. Anti-PSKC9 drugs from Amgen (Phase I) and Regeneron (P II) dramatically cut LDL by using a new way to interdict a known pathway. (The same one targeted by statins.) The AMGN drug is a biological delivered by monthly injection, which makes me wonder: what delivery method has higher effective compliance, a single monthly shot, or daily pills like Lipitor?

Given how early the findings are, though, I don't think we'll see either AMGN or REGN drug on the market until late 2016 at best.

(disclosure: I own a tiny amount of AMGN stock.)

Tuesday, March 20, 2012

"The gravy days are over." (WSJ)

This just in: financing for biotech companies is scarce.

The WSJ article reporting this has in-depth analysis and loads of figures. Depending on your view, any and all of the following are responsible for a general decline in biotech financing:

-big pharma being more selective
-FDA intransigence
-trouble getting liquidity/the difficulty of IPOs. (Due to Sarbox.)
-better options for investors in other industries, especially the internet
-generics and the threat of biosimilars.
-economic difficulties (and US budget pressures) are increasing pressure on basic R&D budgets.

The truth is, with a few very rare exceptions (1999-2000), biotech financing has almost always been scarce, and to think otherwise, or plan otherwise is just plain stupid. There's a high technical barrier to entry for investors, long turnaround times for investments, and enormous technical risk with any drug development effort. Revenue-generating companies - which more investors understand, and therefore have an expanded pool of investment capital for them - take 7-10 years to build in this industry.

This is a sector that SHOULD have a high cost of capital, and probably an undersupply of capital.

But I'd say that this is just about the best time to have a great idea to develop, because:

  • pharma's need for new products has never been higher, and the aging US & European populations are increasing demand for pharmaceuticals
  • start-up and operating costs have been driven down by outsourcing & virtual operations.
  • the abundance of specialized CROs & consultants lets smallish companies rapidly access expertise and capacity.
  • with big pharma continually restructuring, there is an abundance of talent and facilities available.
  • the current FDA & NIH administrations are trying to streamline the regulatory burden. Also: more regulatory paths are opening. I've heard of plans to gain approval first in China by some companies.
  • increasing globalization makes it easier to collaborate. (Design a molecule in the UK, synthesize in the USA, screen in China, on a faster AND more efficient basis than if you had a fully integrated operation at one site.)
  • increased genomic understanding and lower sequencing costs are enabling more effective R&D.
  • China, China, China: increasing the supply of capital, talent, ideas, and lab assets. And not just in China: I've been told by US & EU academics that it has never been easier to find talented, financially-supported post-docs, from China for their American or EU labs.
  • a growing generation of successful firms and alumni to incubate, mentor, and lead new ideas. (Guys like Patrick Soon Shiong (Abraxis founder, among other ventures) Henri Termeer (ex-Genzyme CEO), and RJ Kirk. (Not that this is exclusively a new development (think Alejandro Zaffaroni), but their numbers are growing. I can't wait to see what emerges from the Genentech alumni in years to come.)

If anything, biotech may suffer from an abundance of good - new drug targets, under-validated lead compounds, and interesting but not bulletproof diagnostic technologies are very easy to find these days. Just walk into any university's tech transfer office - they probably have some promising target IP just waiting for the right investor/believer.

The scarcity of investment capital is probably a good thing, culling the herd such that (on average) only the best ideas go forward.

This is all small consolation to the team at a small company struggling to raise their next round, but it definitely seems that better days are ahead, and it'll be a Molecular Future.

California & Stem Cells (CIRM)

The stem cell debate has had me fascinated for years now, and the related subject of stem cell economic and business development - as best embodied by California's initiative to raise and spend $3B has gotten a disproportionate share of my posting attention.

So, I can't resist linking to a very good Washington Post article discussing how CIRM is at a crossroads. (CIRM is the resulting California agency to nurture stem cell science.) 

(Nutshell: half-way into it's funding, there is debate about whether the initiative has been worthwhile, and if there should be a subsequent multi-billion dollar bond issuance to further support CIRM. Read the WaPo for a very even treatment of the issue.)

I think the CIRM initiative has generally been a dud - a product of real estate bubble-era thinking mixed with an urge by Californians to snap back at federal policy makers - but is it ever smart to go into debt for economic development in a scientific area? 

Whether CIRM winds down or is given new life (and funding), California has a lot of new lab space because of CIRM, and a lot of additional research PI's who will all be aggressively pursuing NIH and other grant funding. It hadn't occurred to me until now, but if you forget the promises of amazing stem cell developments perviously made by CIRM backers, you could attribute the merit of the $3B bond offering to pumping up California's academic community.

All California needs to do then, is to generate increased annual non-California research support by an modest figure to economically justify the CIRM initiative. Let's say the $3B raised resulted in $4B in new lab construction. (Much of the construction of CIRM-sponsored facilities required matching commitments from the sponsor institution.)

If the interest rate on the CIRM bonds is 5% (a reasonable assumption), annual interest payments are ~$150M. I'm simplifying the tax and economic dimensions, but if the $4B in new labs generate $800M in annual ex-California research support (i.e NIH, etc.), you could argue that between direct tax benefits to California's treasury and indirect employment, the annual return is break-even.

guess: 50% of annual research ultimately being salaries @ 10% avg payroll tax = $40M in direct taxes

Using E&Y's biotech job multiplier of 2.9x yields another $1.16B in annual California payroll, and another $116M in annual revenue to California's treasury. 

Total annual tax revenues: $156M. Annual bond interest: $150M. 

Not to suggest that the system is perfectly virtuous, with the biotech investment paying for itself on a jobs created basis - there are economic leakages at many levels, but the kicker here is that the research centers will be inventing new IP that will result in substantial capital gains over time, and therefore increased tax revenues for California.

Consider Pharma's average ratio of market value to annual R&D of 18X, which suggests that $800M in annual R&D in California institutions could generate $14.4B in market value, though that the spin-out process is less efficient at converting R&D to market value, and that smaller entities have lower ratios. (But…..pharma is arguably less efficient at R&D than biotech.) 

If taxable entities in California own 10% of the $14.4B in annual value generated, that's another $140M in annual capital gains tax revenue for California.

This analysis is all built on spurious assumptions, and there has always been a gigantic gap between economic development expectations and reality, but the point here is that CIRM - or any other biotech-focused economic development could be defensible strictly on an economic basis.

(postscript: it looks like California might do something like this again - there is a proposition to raise cigarette taxes to fund cancer research.)

Friday, March 16, 2012

NCATS' vs. Calibr (public vs. private translational medicine)

The NIH's National Center for Advancing Translational Sciences - has been controversial since first promoted a year ago by Francis Collins, head of the NIH. The controversy is due, in essence, because the NIH isn't the right vehicle for drug discovery. (See Derek Lowe @ In The Pipeline for a very sharp, accurate, extended opinion.)

As NCATS is still being formed, there hasn't been a lot of news or action taken on their stated strategy, but they announced their initial partnership this week: NCATS and Eli Lilly will work together to profile almost 4,000 compounds either FDA approved or under investigation. The main goal seems to be to establish other possible applications for these compounds (What does this compound for kidney cancer do in CV models?)

As a first deal, the NCATS-Lilly partnership is a solid one, as disseminating the resulting info in the public will add to the characterization of existing drugs, and hopefully the development of new therapeutic applications, very possibly at a high speed, as many of the drugs in the NIH database will have already received she level of clinical scrutiny.

As an indication of NCATS' direction, however, this deal is underwhelming. It's an easy extension of NIH assets and activities that doesn't justify the dedicated infrastructure of NCATS. The partnership could have been undertaken by the existing extensive NIH compound profiling efforts (the NCI-60, for example), or externally as grant funded research.

(Given that some partnerships take more than a year to negotiate, one could wonder if the idea for the NCATS-Lilly partnership actually pre-dates NCATS.)

With the announcement of NCATS last year, the NIH announced the termination of the NCRR (National Center for Research Resources - I'd never heard of it either), and in principle, I like the idea of taking a look at current NIH missions and assets and restructuring when ideal. (Science changes regularly - shouldn't the NIH change with it?) However, I still don't see what the NIH is bringing to drug discovery/translational medicine that doesn't already exist. I hope NCATS' next deal proves that they are not a solution looking for a problem to solve.

(btw: congrats and thanks to Janet Woodcock and others at the FDA who are similarly progressively looking for opportunities to restructure the drug approval process. The current FDA/NIH leadership is to be commended for their commitment to progress and regulatory process improvement.)

In marked contrast is the just-announced private, not-for-profit translational medicine institute sponsored by Merck, Calibr (short for California Biomedical Research). There is a huge need for somebody to shepherd along promising molecules between their discovery in a basic research environment (universities) and when they are "ripe" for commercial development by a pharma/biotech company, and while NCATS is a step by the government to address this need, I think it is much more the responsibility of for-profit life science stakeholders.

Merck is seeding Calibr with $90M (likely feeling to Merck like a ~$60M expense, after accounting for the tax deduction), and will receive a right-of-first refusal for resulting technologies. The investment by Merck will also be leveraged by government grant funding of Calibr R&D. I'm sure Merck could put more exact numbers to it, but they'll probably get the benefits of say $120M in R&D over the next few years, for a $60M investment. This makes TONS of sense, and to any economic development folks out there, this also results in lots of new US jobs.

In contrast, NCATS' budget in 2012 will be $722M, with $553M to come from retitling existing programs. (In effect, NCATS = ~ $169M in incremental translational programs, less start-up costs).

Anyone want to bet which is ultimately more productive, per dollar, NCATS or Calibr?

(BTW: to make my criticism more constructive, what I'd instead nudge the NIH more towards is post-approval research. I think there's a need for impartially-sponsored Phase IV testing, and also a need for simply more Phase IV testing. As an example, consider a new compound approved for a particular solid tumor cancer. Post-approval, the pharma concentrates on marketing the new cure, and clinicians begin experimenting on off-label uses on an ad hoc basis. The NIH could better organize this research, expand upon it by scaling, and mitigate the inherent conflict of pharma-run Phase IV trials.

Alternatively, I'd be in favor of taking the NCATS $$$$ and using it to re-restablish R&D at an abandoned Pharma site. (Such as the old Parke-Davis/Pfizer campus in Ann Arbor, MI.) There's plenty of R&D talent, experience, and assets already available, with a big bang-for-the-buck.)

Wednesday, March 14, 2012

India in the news (x2)

It seems like China makes news in the pharma industry about 10X as often as India, even crediting India for each appearance in the press with negative connotations, like both of this week's stories.

1) Pfizer and Biocon cancel their agreement to co-market biosimilar insulin produced by Biocon. This might be a case - as claimed in the press release - of Pfizer exiting non-core businesses in order to focus on their core branded pharmaceutical business, but if you're devoted to any kind of activity in biosimilars, insulin is a great place to start - it's a very large volume product, and currently served by basically a duopoly (Novo and Lilly.) Pfizer has some institutional knowledge in diabetes (remember the inhaled insulin introduced by Pfizer last decade?), so they must have understood the market opportunity. Pfizer wasn't shy when the agreement with Biocon was launched - it covered most of the world, and they've always been interested in huge markets needing a broad sales force. (As opposed to niche products.)

For Biocon, Pfizer would have provided big, big, big scale for their biosimilar insulin, and allowed the company to focus on manufacturing, rather than to start-up sales and distribution operations in America. Pfizer was a dream partner for Biocon, with their scale and the appeal to Biocon of learning sales & marketing from the best. I can't imagine that they pulled the plug unilaterally, or without trying to save the relationship.

As consolation for the cancellation, Biocon gets to keep a lot of cash from Pfizer (which would fund the development a pretty good US salesforce, though I imagine their next action will be to find another US partner to replace Pfizer.

I'm guessing that this news is a manifestation of strategy differences between former Pfizer CEO Jeff Kindler and his successor Ian Read finally reaching the surface. I don't buy the notion that strategic priorities 'just changed' and that while Pfizer's shifting strategy made biosimilar insulin unattractive, but all other biosimilars still of interest to Pfizer. (I think you're either "in," with Insulin as a cornerstone product for a biosimilars business, or you're "out" of biosimilars.)

The other interpretation that makes some sense is that Pfizer is re-evaluating their business with Indian and Indian companies, and less interested in becoming enmeshed in a country hostile to Pfizer's core business, as manifest by news story #2.....

2) India robs Bayer of Nexavar rights.

The only question here is if this should be called coercion with prejudice, or outright theft.

India's patent court ruled that because Bayer's Nexavar pricing put the drug so far out of reach of Indians, Bayer should be compelled to license Nexavar to an Indian generic drug maker.

India was quoted as saying "Thanks for all of that R&D and stuff, Bayer. We hope your millions invested in R&D pay-off in other countries, but not here, because we are going to free-ride on the rest of the world, as our country-wide economic mismanagement leaves us unable and unwilling to pay."

As a result, Nexavar will be manufactured and sold in India at ~1/35th of Bayer's proposed price.

Nexavar is definitely an expensive product, with a net benefit to cancer patients of about an additional six months survival time, but Bayer had suggested Nexavar pricing to India that was a fraction of "first world" pricing as a concession to India's economic status.

(Similarly, Novartis has been embroiled in similar discussions about Indian access to Gleevec, though no court finding in this case has occurred yet.)

At this point, what do you do if you're Bayer? You can either give in to India's theft, or you can close all operations in the country and presumably let Indian health suffer by not selling their medicines in the country.  (At which point the Indian generic manufacturer will start making Nexavar, without remitting royalties to Bayer.)

Neither is a good option, but after both Bayer was robbed, it is probably a matter of time before a big pharma company skips or ignores India. While I do not look forward to the poor health outcomes that would likely (temporarily) result in India should a pharma company skip India, I would like to see how India & Pharma could establish a constructive relationship one day, and foregoing India is probably the only step for pharma to take to reach those ends.

The kicker to India's decision is that the Indian court's ruling is legal under WTO rules. Other countries could copy India's approach and expropriate pharma IP at will. I highly doubt that the expropriation of Nexavar in India will be the last.

Tuesday, March 13, 2012

Uh-oh. (New cancer biology understanding to negate targeted RX?)

A NEJM article coming in 3 days is reported to prove that cancerous tumors are not monolithic in their genomic profile - to the extreme that multiple samples of the same patient's tumor express different genetic mutations, with only limited commonalities among samples from the same tumor. (Early news coverage here (WSJ), here (Bloomberg), and here (FierceBiotech).)

Implications: this is going to turn some worlds on their heads Here's my quick guesses at implications:

  • Cancer just became even harder to solve. Think chess is complex? How about 3-D chess? That's pretty much the leap in complexity that cancer researchers just experienced. 
  • Possible boon for DNA sequencing: demand for multiple sequences per patient may make DNA sequencing a bigger market faster. The NEJM study suggests that sequencing a tumor longitudinally (i.e. at a regular schedule, during treatment) will guide multiple treatment decisions, which may differ based on new expression patterns or mutations. Does this also mean that each tumor will be sampled many times in different sites at diagnosis? If so, we may move from 1 sequence/patient to dozens of sequences per patient. (Good gosh that's ALOT of data. 1 terabyte per sequence is hard enough to handle. 20 TB/patient? Wow.)
  • Anyone working on hazily predictive PGX might be wise to give up. The idea of a single analyte for a single disease, or a number of analytes against a number of diseases probably only targets one portion of a given disease. In other words, if your predictive test isn't 100% predictive, you are only explaining a fraction of the disease, and therefore of negligible utility.
  • This might be the death of Affymetrix.  I can't see much value from a highly variable 1-dimensional expression profile, unless they invent a way to generate multiple expression profiles from a single sample at roughly the sample price point.
  • This news might actually boost sales of targeted therapies in the near term. Why test for HER-2 status? Even if a patient is tested HER-2 negative, an oncologist wouldn't be out of line to still treat with Herceptin, knowing that the HER-2 negative status may only apply to a portion of the tumor.
  • Along the same lines, the NEJM finding may give a boost to combination therapies. For example, Sutent, Nexavar (VEGFR and PDGFR) and Raf kinases), Torisel (mTor), Votrient (VEGFR-1, VEGFR-2, VEGFR-3, PDGFR-a/β, and c-kit), and Inlyta ( VEGFR-1VEGFR-2VEGFR-3,platelet derived growth factor receptor (PDGFR), and cKIT (CD117).) are each sold for RCC (kidney cancer) but each seem to be only marginally effective. They have different inhibitory profiles though - could combining them produce a better outcome? Roche would seem to be in the best position to gain if combinations are successful.
  • Would a need for combination therapies be the straw that breaks the camels's back on the American health care system or even the USA? If treatment with a single targeted therapeutic may be $30,000 per month, would a combination therapy be $100k/month? I can't imagine Medicare and private insurers are ready to pay these sums. If they are, Medicare is already a multi-trillion dollar liability. Wanna go for quadrillion dollar liability?
  • This may be a boon to systems biology researchers, like Lee Hood and his team at the ISB. Hood has for a long time seen cancer not as a product of a single mutation, but rather a cascade of biological signals which in total result in cancer. 
  • Expect more attention to early detection and treatment. Cancers are FAR less complex in their earlier stages of development.
  • Just a guess on my part: more surgical biopsies, less needle biopsies if more tumor material is needed?
  • The result: we need more different cancer meds to mix and match patient profiles. Could the FDA loosen up a little on approval requirements, or would this make it even more difficult, as any new targeted drug for a given disease would need to succeed or fail in combination with other targeted therapies? (i.e. more false negatives a false positives from combinatorial effects.)
  • Good news/bad news. Bad news: every single clinical-stage targeted therapy just became less valuable. That drug targeting gene "X" is less valuable, now that gene "X" explains less of the disease. Good news: targeted drugs that narrowly failed late stage trials might be resurrected. Maybe the drug didn't fail because it wasn't effective against the target, but rather because the target explains less of the disease than previously believed.

Ultimately, this news dampens the optimism for personalized medicine, but because of cancer's proven ability to mutate, most of us knew that cancer would not be beaten by single silver bullets.

Friday, March 9, 2012

$1,000 genome a BAD idea?

So postulates Ezra Klein, policy wonk extraordinaire, in the Washington Post.

Klein worries that cheap sequencing could harm the health insurance industry:

"Those with a clean genomic result might go for a cheap catastrophic plan, while those with a high risk of developing pricey illnesses will opt for more comprehensive insurance…….The result would be, in insurance terms, an 'adverse-selection death spiral,' as the healthy opt out of expensive insurance, the sick opt into it, and premiums spin out of control."

Klein also argues that cheap sequencing guarantees an eventual individual mandate.

I call bull-feathers to all the above. Here's my reasoning:

-Our genome is not our pre-destination. (especially what epigenetics research keeps telling us).

-I suspect that even if it were, our health care costs have more to do with our behaviors than our pre-disposition. (Does someone's pre-disposition to Alzheimer's have a greater cost than their really bad diet and sedentary behavior resulting in diabetes?)

-You'd have to believe that treatment guided by sequence is a bad thing, because someone who lives longer ultimately costs more. If you've read any of the early impact stories from clinical sequencing, you see how detecting and treating childhood genetic diseases have the opposite and hugely positive impacts - both in terms of lives and $$$.

As for Klein's point about the necessity of individual mandates: Like a good wonk, Klein intends to see everything in healthcare in black or white - you're either fully covered, or you're not. I've argued for a long time that health insurance should be broken into 2 products "everyday, regular health insurance," and "catastrophic care insurance."

Everyday insurance is targeted towards things like broken bones, torn ACLs, delivering babies, or even diabetes treatment. Some would want to just pay "everyday" costs out of pocket, but if not, this insurance product would be VERY affordable, and the 'free rider' problem would be minimized.

The bulk of healthcare costs are driven by "catastrophic care." (I think the stat is that more than half of healthcare spending is for the last 6 months of life, or something equally eye-popping.)

If you're convinced that your predisposition to Alzheimer's means you don't have to worry about cancer, then you need not buy catastrophic insurance (likewise if you had neither predisposition), but I think most would buy some form of catastrophic insurance.

No matter, even with future health clarity driven by genomics, most would want at least one of the 2 insurances, greatly mitigating the adverse selection problem and obviating the need for an individual mandate.

Very positive development for financing on the horizon…..

From A VC comes news that there's a bill in Congress to greatly loosen reporting and regulatory requirements for smallish and youngish publicly traded companies. Sort of a partial & temporary rollback of Sarbanes-Oxley for companies with <$1B in revenue.

I knew one publicly traded life science company with ~$200M in revenue who gauged their Sarbox compliance costs at $3M annually. Most of this money went to outside accountants and compliance experts who created more paperwork, but little extra comfort for shareholders. (And certainly less than for shareholders than if the $3M had instead been spent on R&D.)

The change under consideration would make IPOs more viable for virtually all private biotech companies (since no biotech company has ever busted $1B in revenue in their first 5 years public. Perhaps Intrexon could do it someday, if RJ Kirk decided to keep the company to himself long enough, but they'd be the exception, rather than the rule.) More financing viability = more liquidity for the life science sector. Also: more public issues = healthier financial markets.

In a perfect world we'd just rollback the entire Sarbanes-Oxley law - it doesn't solve any problems, but creates massive reporting and regulatory burdens for all public companies. It is widely acknowledged that Sarbox would not have stopped Enron or Worldcom from happening, and post-Sarbox, we've had Madoff and mortgage fraud, so I don't think it is any less risky for investors because of Sarbox.

So you need some DNA sequencing? (pt 3 conclusion.)

I've stretched this topic out farther than intended, so I'll conclude directly:

-from looking at the map, there seems to be 4 types of sequencing centers, each with different strategies and hardware needs:

1) medium-large installations (Broad, BGI)
2) fee for service centers
3) genomic (academic) centers with a commitment to genomic research (5-10 sequencers.)
4) academic centers with a small exposure to genomics (1 or 2 sequencers.)

Each of these will have different rates of adoption of NGS technologies. Here's how I'd characterize each of these centers future behaviors:

#1) medium-large centers: all about throughput and cost, with less regard for specialized instruments or needs, these centers also already have a substantial investment in hardware and informatics, so the winning hardware providers will be the ones that plug in best into the existing hardware and informatics. It will be a whole lot easier to integrate the latest generation of Illumina technology than to pivot 90 degrees to integrate a novel technology.

I expect that the number of medium-to-large centers rises, as the cost/sequencer falls and the start-up cost of a new sequencing center falls. I don't know if research demand for such centers is here yet, but I think several institutions will launch ~$10M fundraising efforts for a new genomic research center, as much for their economic development/headline value as their scientific value. (Example: the former Ignite Institute, which landed at Fox Chase.)

2) fee for service centers: I selected the first 5 US service providers that I could think of (Asuragen, Beckman Coulter, Cofactor, Expression Analysis, Seqwright), and was surprised to see their total capacity was 26 sequencers among them. The absolute number could be outdated or inaccurate for a number of reasons, but the point is that the service centers aren't big consumers of technology. (I'd guess, though, that they run at higher capacity utilization than most academic sequencers.)

The fee-for-service centers also tend to have more than one technology platform in-house.  As demand grows, the fee-for-service centers will add capacity in a nimble, savvy, but serial fashion, spread among whichever technologies are requested by their customers, and which provider has the best performance/value proposition at any given time.

3) academic genomic research centers. much of the research at the genomic centers will be tied to clinical trials, so this group will be very sensitive to FDA approval of a sequencing device, and not very sensitive to throughput/performance though turnaround time may matter if the clinical trials are looking for the sequencing data to guide treatment. I'd expect this group to hang with the Illumina technology for the foreseeable future. They're the most likely platform to receive FDA approval. (Unfortunately, this isn't likely to happen soon, if the FDA approval of microarray platforms is any indication. As a forerunner to sequencing, Affy got their microarray platform approved by the FDA (in 2009?) for clinical diagnostic use, but I've heard that it wasn't easy, and the approval is not too broad.)

#4) small-time centers: the largest market in number but smallest in $$$. This market won't grow significantly until clinical adoption of DNA sequencing becomes widespread, and even then the biggest customer may be the pathology labs, not the bench researchers. In this case, I'd expect this category to largely adopt either the nanopore or Ion Torrent technology, as much for simplicity as for throughput and cost.

After this analysis, I am surprised that the opportunities for new platforms such as Oxford Nanopore are not as obvious. The newcomers may still be a success, but I think we're still a few years away from the inflection point in the growth of sequencing hardware.

Thursday, March 8, 2012

UK company buys US company that's really a Chinese company.

Abcam bought Epitomics this week for $155M. These two companies are very good at what they do, and this seems like a good combination, though a bit rich in price.

Part of the reason why Epitomics fetched such a premium is that there is real antibody IP behind the company, as opposed to most reagent companies.

This deal also firmly establishes Abcam on the ground in China, as 2/3rds of Epitomics' employees are based in China.

Acquisition multiples:

6.3X ttm revenue
20.4X ttm EBITDA

While there are several reagent companies leveraging low cost production in China, Epitomics is arguably the most significant and with the greatest IP base, so this represents Abcam buying "Tiffany" assets instead of trying to just buy Chinese access on the cheap. I think this is the smart way for non-Chinese companies to leverage China. Abcam will win not only adding the production capacity, but Epitomics' Chinese operations should help Abcam sell more product into China.

So, while the Epitomics multiple of revenue is high, think about it as the regular acquisition of a reagents company at 4X sales, plus operating synergies, plus the purchase of novel IP, plus the expense of opening a 170 person facility in China so de-risked that it will be earnings positive a year after the deal closes. If you call the operating synergies worth $15M, the IP worth $15M, and the Chinese operation worth $30M, Epitomics is a good bargain for Abcam even at a headline 6.3X sales. (Provided that Abcam retains the Chinese personnel. It wouldn't be that hard for the Epitomics-China team to raise capital and start a competing operation. Or to be recruited to a competing entity like Origene.

The other good thing about this deal: it reminded me to take a look at Abcam's stock. I've only skimmed their 2011 results (published Monday), but so far it seems a solid company fairly priced. The big question: what's the endgame for Abcam? Would LIFE or TECH or another big player (GE?) be interested in scooping up Abcam in a few years at a premium to current valuations?

I think the answer to that question depends on Abcam's ability to expand into further value-add areas beyond reagents, like IVDs or drug discovery assays.

Wednesday, March 7, 2012

So you need some DNA sequencing? (pt 2.)

Following up Sunday's post based on the most-excellent Next Generation Genomics: World Map of High-throughput Sequencerslet's try the same experiment on an international basis.

(But first, a caveat: after spending more time with the map, it is pretty clear that the census is really of non-profit academic institutions & service providers. There's really no incentive for a for-profit R&D to report their sequencing capacity.That said, shouldn't commercial DNA sequencing activity track academic efforts, or are some countries biased towards (or against) for-profit R&D?)

DNA sequencers by country:

USA: 827
China: 216
UK: 140
Germany: 112
Canada: 73
Spain: 56
France: 36 (and very well dispersed geographically)
Japan: 35 (there's much consternation that Japan is falling behind in sequencing.)

Italy: 31
South Korea: 29
Taiwan: 28
Switzerland: 27
Sweden: 25 (rest of Scandinavia (DEN, SWE, FIN, NOR: 30))
India: 23
Singapore: 16
all of South America: 18
all of Africa: 12 

Undeniably in LAST place: Indonesia. Human population: 237M (4th most populous country) DNA sequencer population: 0


-Even I'm surprised at how dominant the USA is in sequencing. A quick glance suggests that half of all sequencers are located in the USA. As a policy point, this is worth exploring in another post of its' own (US healthcare model vs. socialized medicine, anyone?), but for now, let's just debate the drug discovery implications. Is there any reason to believe that at least half of the RX & DX innovations won't come from the USA? And if so, is there any reason to believe that countries with socialized health systems aren't free riding on innovation funded by the US system? (Oops. Sorry. That last question just slipped out.)

-As nice as it is to have a large lead in hardware, keep in mind this also means that the USA will led the world in stranded assets and hardware depreciation. Just to illustrate, if the average American sequencer represents a $300k investment, there's a quarter billion dollars of value depreciating quickly.

-wouldn't it be great if LIFE or ILMN donated a few sequencers - even used/last generation - and a supply of reagents to a few universities in Africa? Maybe LIFE could use the US tax code to sell more Ion Torrent machines to existing sequencing centers by facilitating tax write-offs of SOLID equipment donated to universities in Africa or South America? (Company X donates $150k in SOLID equipment to the University of Witwatersrand (Nobel Laureate Sydney Brenner's alma mater). Company X then uses their $50,000 in tax savings to buy a new PGM.) (Does such a program already exist?)

-I'm kind of surprised at the modest presence of the Gulf States. 4 sequencers in Qatar, zero in Bahrain/Dubai/the Emirates.

-I stated that the map listed BGI as having only 15 sequencers in my Sunday post. Turns out that the bulk of BGI's sequencers (166) are in Shenzhen. Apparently even the Beijingers outsource to lower-cost parts of China.

Next up: a look at what this all means.

Tuesday, March 6, 2012

The M&A game….

…..featuring Illumina + Roche again and an addendum to my post last week about the Affymetrix-eBioscience non-deal. What do these 2 deals have in common?

Luke Timmerman @ Xconomy has a good piece this week with 5 reasons why the Roche + Illumina deal isn't right for Illumina. I shared reason #6 in the comments:

  • "…..because the touted “total solution” provided by a Roche + Illumina combination is a fairy tale. Illumina sells equipment. Roche sells drugs and diagnostics. What tiny bit of equipment that Roche sells (454) hasn’t done well. I don’t see how selling Illumina equipment makes Roche’s drug or diagnostics businesses any better. What “total solution” becomes enabled by the combo that isn’t possible by Roche just buying a roomful of Illumina (or someone else’s) sequencers?" 

What the ILMN-Roche and AFFX-eBiosciences deal have in common is that both deals are now an exercise in game theory. Consider ILMN's options:
  1. Accept Roche's bid. (notgonnahappen. Roche's offer is ~$6 below the current price) 
  2. Adjust the terms: wrestle for a higher bid from Roche or find another bidder to up the price. 
  3. No deal. Win a proxy fight by making the stand-alone scenario more real and financially attractive. 
Likewise, consider eBioscience's options:
  1. Accept AFFX's likely revised downward terms, though still rich, in order to allow AFFX to win debt financing of the acquisition. 
  2. Adjust the terms by selling to another suitor, likely at a lower price than AFFX's rich offer. 
  3. No deal. No liquidity for investors. 
Timmerman argues Illumina shareholders should vote to remain independent for largely qualitative reasons. Unfortunately, I think the decision to be made by shareholders is much more cold and quantitative: what's the better risk-adjusted net present value?
  1. Roche's $44.50/share bid, (again, notgonnahappen.) 
  2. a sweetened bid, or 
  3. the capital gains in future years from selling ILMN shares after the company stock re-appreciates. 
Putting some #'s to #3. Using round figures, ILMN is at $50/share, and had a previous high of $80/share. Holding ILMN stock for 2 years to see $30 in appreciation would require an annual return to equity holders of 26.5% - a not unreasonable scenario, particularly in such a growing industry. The problem is, the $30 gain offered in the future (over two years) can be made a lot less relevant with a sweetened bid 'now' by Roche.

What if Roche offered an additional $2B, which would raise the ILMN offer to $60/share, or about a third of the 2-year gain upfront? This might be hard for ILMN shareholders to turn down, especially if the offer is cash-heavy.

To me, and likely to both ILMN shareholders and Roche management, the outcome is determined largely by your appraisal of ILMN's NGS technology. If you think ILMN is in danger of being passed by Ion Torrent or Oxford Nanopore, you take a sweetened offer from Roche. If you think ILMN has the tech to stay on top, you probably hold your shares (or, if Roche, increase your bid.)

All of this says to me that we should be on the watch for a public unveiling of ILMN's future NGS tech, or their roadmap as such. (Via a press conference or an analyst day, or the like.) ILMN is currently touting NGS prices of ~$5,000 per genome. If they can demonstrate a technology (or path) that drives this number down into ONP's ballpark (~$1,000), expect ILMN to stay independent. If not, ILMN will take Roche's best offer.

Roche has already played their role in this game, as they played the "you know you're not the only fish in the sea" card - even though the whole world knows that there isn't an equivalent alternative NGS investment available. (Unless you think PACB or GNOM make for good back-up plans.) I interpret this as Roche saying that they're open to paying a bit more for ILMN - otherwise, they'd play either the "take it or leave it" card.

Nearly six weeks have passed since Roche's hostile bid and yet Illumina hasn't shown off any reason for shareholders to expect ILMN stock to pop as an independent company. Be on the lookout for either a sweetened Roche bid or a big ILMN tech exposé.

While ILMN is looking for paths to increased valuation, eBioscience must be looking for how to avoid too much decrease in valuation. It looks like AFFX can't do the current $330M deal, as lenders are pulling their financing. They could seek another bidder, but presumably they held an auction before accepting AFFX's bid, and know the possible range of offers. At 4.7X trailing revenue, the AFFX offer is very rich.

As a mostly-commodity provider, eBioscience probably still wants to get a deal done, even if AFFX can't honor the proposed terms. (btw: there are differing reports on whether AFFX's offer is all-cash or 50/50 cash/equity.) Would eBioscience rather take a tweaked deal from AFFX at say 90% of the value, or - as they are a growing company - sell a year or two later to someone else at a reduced multiple? (say $80m in 2012 revenue x a 3.75X multiple (=$300M.)) Chances are, this offer from AFFX represents the best and most lucrative chance for liquidity for eBioscience shareholders that they are going to see for a while.

The best outcome here for eBiosciences is to negotiate a sale at a point between their best alternative purchasers' price and the $330M, or to alter some deal terms to slightly reduce the value of consideration from AFFX. eBioscience could keep the same headline number, but accept a mix heavier on equity than cash, for example. Or, eBioscience shareholders could provide the debt financing themselves, in the form of an earn out or milestone payment from AFFX.

Unlike ILMN, I don't think that eBiosciences has to worry that their suitor will have a change of heart. If the financing gap can be bridged, the deal will happen. At this point, it seems to be a matter of how much less lucrative terms eBioscience is willing to accept and whether this figure works for AFFX's bankers.

Sunday, March 4, 2012

So you need some DNA sequencing? (pt 1.)

There's an absolutely brilliant map and website devoted to taking a census of DNA sequencers around the world, and through it, you can monitor the tug of war between the placement of instruments in large DNA sequencing centers, and in individual labs (or core labs) on a onesie-twosie basis.

(The map may be a little dated - it shows only 15 sequencers @ BGI, for example - but the brilliance of the map is in how the data was generated. Do a little web surfing for the WWII spy technique that spawned the map.)

Anyway, a VERY interesting story is told when looking at the USA map (select USA under the country pull-down. Unfortunately, I can't link to this specific page.) The sequencer census really indicates who and what are on the edge of the genomic revolution.

A rough read of who's ahead by sequencer placement:

Boston: 129 (Broad Institute = 104)
St. Louis: 85 (includes 11 at Monsanto)
San Francisco Bay Area: 58
Washington, DC area: 51 (with an additional 23 in nearby Baltimore and Frederick, MD.)
NYC area: 47 (includes 18 @ CSHL on Long Island.)
RTP, NC: 37
Houston: 35 (driven by MD Anderson.)
Toronto: 33
Southern California (LA + SD): 27
New Haven, CT: 23 (birthplace of 454 and IonTorrent.)
Philadelphia: 22
Albuquerque, NM: 19 (Sandia)
Montreal: 18
Memphis: 12
Seattle: 5

most other US metropolitan areas and universities had 1-5 DNA sequencers listed.

(Note: some of the math above is fuzzy, as figures change slightly depending on how far you drill down on the map. Plus, the math is skewed by self-reporting and non-reporting. For example, there is a paucity of hardware listed in 'PharmCountry' (NJ & eastern PA) and there's virtually no privately owned sequencers in the Bay Area, but you can be sure that both Big Pharma and Genentech have some sequencing hardware on campus.

What does this all mean:

-you can see which cities are in position to lead the genomic revolution, and which are likely to be laggards. For example, according to the map, there is only 2 DNA sequencers in the city of Chicago. There's roughly 25X more genomic activity on the i-270 corridor outside DC.

  • I was surprised by the strong figures in St. Louis and RTP. Both locations have strong ag-bio efforts, so you might be able to extrapolate that the earliest exciting NGS uses will come from ag-bio, and not cancer genomics.
  • Anyone else as surprised as I am that NYC was in the top 5? Certainly there is great science at places like Rockefeller, MSKCC, and such, but I wouldn't have guessed top 5. With some announced initiatives, NYC should stay near the front.

-you can see funding philosophies in action (if you squint). There is a tremendous amount of hardware in Canada relative to population, representing governmental support skewed towards hard assets rather than funding annual research. (And the good work of bodies like Genome Canada.) However, with the rate of technological innovation in sequencing, hardware represents a quickly depreciating asset. Maybe the better use of the funds was to pay for outsourced sequencing. (Perhaps this was the case in California, where the inverse was present - less hardware than you might expect.)

-if I had to bet which institution will lead in the adoption of DNA sequencing in patients, MD Anderson would be my first bet. My quick survey suggests that they're the practicing center with the most NGS hardware. Yale isn't far behind.

-on the other hand, some NCI comprehensive cancer centers were extremely lame, including my hometown University of Virginia, Northwestern U, and OHSU. 1 sequencer each? Lame!

Tomorrow I'll do some analysis based on the type of hardware, and take a guess at what this means for adoption. I'm especially interested in analyzing the question of what the distribution in sequencing is likely to be between CRO/service providers and sequencing with internal assets.

Friday, March 2, 2012

Quick hits….

  • 23andme & Muhammad Ali are partnering for Parkinson's research. I'm not an Ali fan (I think he is a product of some excellent p.r. over the years, covering up the fact that he was a tremendous a$$ when active as an athlete), but I'm very excited about any initiative that draws the general public's attention to genomics.
  • Apparently the Affymetrix-eBioscience deal might not be happening. It looks like AFFX's disappointing 4Q2011 financial results is making the merger financiers think twice about underwriting the transaction.  (Tell me if this makes sense: acquirer AFFX enterprise value: ~$215M. target eBioscience purchase price: $330M (all cash). Debt financing required for the deal: $190M.) I still think this deal is driven by AFFX's desire to dilute their reliance on the microarray business and to buy some sales growth, as there's still only a tenuous topical connection between Affymetrix & eBioscience respective businesses. Such a deal makes sense at a bargain price, but it looks like the lenders are realizing it's actually a premium price. (Notice the roster of lenders are more merchant lenders than traditional bankers.) Also: if you're eBioscience intending to cash out @ a very rich 4.5X sales, you've got 2 questions to consider: 1) would you be willing to give a little on the terms to get the deal done? (I would), or 2) would you be interested in buying AFFX?