Wednesday, May 30, 2012

What a biotech hedge fund thinks of coming regulatory decisions.

Required reading:

1. from Adam Feuerstein of 22 Biopharma Stocks With Breakout Potential in 2012 detailing regulatory news likely to break through the remainder of 2012.

2. Baker Bros portfolio activity for 1Q2012. Baker Brothers Advisors is arguably the leading small/mid-cap biotech investor. You can see their entire portfolio here.

So what do these two articles have in common? It's pretty interesting to see what Baker is doing in the names that have events still to come in 2012.

Observations from Baker's holdings:

-it looks like they don't really like any small cap names that have been around for a long time (Geron, Nektar, etc.) The only exception is Arqule.

-they REALLY believe in Auxilium, going from $0 to $124M in holdings.

-though Baker has positions in 55 companies, one third of their fund is invested in 4 names: Seattle Genetics, Incyte, Genomic Health, and Pharmacyclics.

VRTX: "Oopsie!"

Uh-oh. VRTX's recent CF data (previously covered here) isn't as positive as the company announced three weeks ago. VRTX stock lost $1.5B in value as a result, but that's only half the story, as VRTX is going to be sued out the wazoo by shareholders who bought this month and aren't in the money.

The consequence for poor reporting of results has been set in the finance industry - if you mis-report your quarterly or annual financials or otherwise deceive the shareholders, someone (the CFO) gets booted. It's a bit different with scientific data as in this case, but at a minimum, I'd like to see Vertex's Chairman/CEO/President Jeff Leiden relinquish his Chairman and/or his President title - this episode suggests that more oversight is needed up there in Cambridge, MA.

Tuesday, May 29, 2012

Celldex's triple-negative breast cancer progress

Triple-negative breast cancer (TNBC) is a nasty form of the disease that does not respond to receptor-targeted therapeutics (Herceptin or Tamoxifen), as the receptors of interest (estrogen (ER), progesterone (PR), or HER-2) are not found in TNBC. The only marginally-effective treatments against TNBC are general chemotherapies, but overall response and survival rates are much lower in TNBC versus other breast cancers.

Celldex (CLDX) released P2B results from a clinical trial using their drug (CDX-011) in TNBC. Results suggest that the Celldex drug works against triple-negative cancers that overexpress a protein known as GPNMB. Celldex reports that 36% of patients with TNBC and high GPNMB expression responded to CDX-011, while zero patients in the equivalent control groups responded to standard chemotherapies. (N=11 and 3 respectively, so let's not overreact.)

(Also: NON-TNBC patients with high GPNMB expression showed a response to CDX-011. (32% response vs. 13%. N=25 and N=8, respectively.

Adding these two groups together yields a response in 15 of 36 patients (42%!) with high GPNMB expression treated with CDX-011, with 1 responder of 11 in the control group. (i.e. not treated with CDX-011.)

This data is encouraging for Phase 2B, and warrants a Phase 3 trial AND a large pharma partner, something I would expect to see Celldex close on by the end of 2012. (TNBC sometimes responds to EGFR treatment, so I'd expect Celldex's partner to be a company with an EGFR product interested in prescribing a combination of products. (Hello, AMGN, and Roche!)

(Speaking of combination, CDX-011 uses Seattle Genetics' antibody linked technology, whereby the antibody with affinity to GPNMB delivers a chemo payload to the cancerous cell. I need to take another look SGEN soon.)

CLDX Financial overview, as of 5/28/12:
Market cap: $264M (even after popping ~10% on the tnbc trial news
Cash on hand: $92M, burning ~$40M/yr.
Enterprise value: $172M
ex-CDX-011 enterprise value: $35M-$50M, as CLDX receives $9M/year in license income from successful outlicensing.
CDX-011 value (roughly): $130M ($172M less $42M in ex-CDX-011 enterprise value ($42M= midpoint of $35M-$50M valuation.)

What's the value of CDX-011?

CDX-011 Market math:
CLDX asserts that 35% of all breast cancer patients could benefit from CLDX-011, which suggests:

Annual US breast cancer cases: ~180,000
% of breast cancer that is TNBC: 15-25% via various sources. Let's say 20%.
US TNBC market: 36,000
GPNMB overexpressers as a %age of TNBC patients: 12% of TNBC, or 4,320

US GPNMB market:27,000
non-TNBC patients overexpressing GPNMB: 15% of all breast cancers
US market for GPNMB overexpressors (w/o TNBC): ~27,000 
Likely US GPNMB+ market: 31,320 annually, and therefore,
Total annual world market for CDX-011: between 80,000 and 120,000 patients worldwide.

Assuming $20k revenue/patient ($50k/patient revenue, but only 40% penetration at peak), CDX-011 would then peak at ~$2B/yr in revenue, and therefore peak product value of ~$12B (equivalent to Celgene's 6X sales valuation.)

Risk-adjustment of CDX-011 value: let's assume the following:
-that FDA approval is 2 years away,
-peak revenue is 4 years post-approval
-25% discount rate
-CDX-011 has a 40% chance of successful P3 trials....

Based on peak market value of $12B for CDX-011, you could then project that CDX-011 has a present value of $1.25B, or, with a current valuation for CLDX of $172M, that the market thinks that there is only a 14% chance that my scenario above becomes true. Either way, the likelihood that Celldex is undervalued is high.

(btw: is use the value of CLDX and CDX-011 interchangeably. While CLDX does have other products in the pipeline, 99% of CLDX valuation will depend on CDX-011.)

(CLDX says that 35% of breast cancer patients could benefit from targeting GPNMB with CDX-011. It's probably a rosy-case press release figure, but even if you chop this number in half, the resulting NPV for CDX-011 3.6X today's valuation.)

Factors for Celldex:
1) Few, if any, other GPNMB programs in existence, so it is a seller's market (when it comes to partnering) for Celldex.
2) There's plenty of reason to expect CLDX to partner CDX-011 soon, and it's an ideal time to partner - P3 trials costs are significant and therefore better shared with a partner, plus partnering now allows the Big Pharma partner to influence trial design.
3) CDX-011 clinical responses exceed the 30% hurdle rate and in P2B trials have a wide advantage versus the control arm. (I'm always skeptical if the response rate and advantage versus control group outcomes is <=20% and <=10%, respectively.)
4) Good sized market, not currently served.

Factors against Celldex:
1) small-cap biotechs NEVER successfully get drugs to the market by themselves.
2) ultimate FDA approval may be conditional for GPNMB+ only, and also could depend on the development of a gene-specific test.
3) lack of partner to date could represent Big Pharma skepticism over either GPNMB's target biology or Celldex's capabilities.
4) Limited ability to raise equity financing.
5) small sample size in P2B results.
6) time to FDA approval of ~2yrs limits the ability to buy call options for CLDX.

Ultimately, the value of CLDX is driven by 1) CDX's long term outlook, and 2) the size and timing of a partnership with a big pharma to commercialize CDX-011. Outlined above is one long-term scenario representing a win for CLDX, and for the other point (partnership value), I can easily see CLDX doubling the company's valuation this year after consumating a big pharma partnership centered on CDX-011. (Guess: $50M cash @ closing, $50M in equity purchased by the pharma partner, with $1B in milestones possible; also: $50M in easily achievable milestones to land in the first 12 months. (example: $25M payment at initiation of P3 trials.)

Here's hoping that CDX-011 lives up to the P2B results, and that finally we'll have a weapon against TNBC.

Disclosure: at the time of writing, I DO hold a tiny position in Celldex.

Monday, May 28, 2012

New biopharma hero: Sen. Rand Paul

Suspend for a moment whatever political party allegiance you may have (D or R for most US readers), and let's celebrate an injection of common sense into the FDA's regulatory regime by Kentucky Senator Rand Paul.

Recently the US Senate passed an FDA-centric bill which allows the FDA to consider clinical trial data sourced overseas outside the FDA's typical authority. (I believe that you can currently use data sourced outside the USA, but only with strict application of FDA rules to the ex-USA trial sites. The new law would allow the FDA to accept data from well-structured trials conducted outside of the auspices of the FDA (but under trials run by other responsible regulatory agencies, such as those in the EU or Japan.) We're not talking about quicky clinical trials in Zimbabwe gaining equivalence to US trials the way a Las Vegas quicky marriage is to weddings elsewhere in the US, but rather acknowledging the competence of other regulators around the globe, and the fact that there may be more than just the FDA's way to run a "good" clinical trial.

Another reform pushed by Paul is the elimination of weapons carrying by FDA enforcement agents. Paul's point here is two-fold: we don't need as many armed bureaucrats when the FBI already exists to handle armed enforcement of Federal law, and 2) it is silly that the FDA conducts raids of any sort against small producers, such as on milk farmers. Seriously, the FDA DOES conduct armed raids on farms to enforce food safety laws. The laws are necessary and enforcement is important, but really, are the guns necessary? Are they for the cows or the milkmaids? Likewise, are weapons necessary to raid the offices of a biopharma company?

(Unfortunately, Paul's amendment ending armed enforcement failed to pass the Senate, likely because his amendment also called for the loosening the rules around advertising of health products..)

We need more common sense in our food and drug regulation. I've previously called for the "D" in the FDA to be spun off into its' own agency, and I think Paul's ideas make a ton of sense.

Hat tip: the very excellent Marginal Revolution blog pointed out this story originally.

Wednesday, May 23, 2012

Unexpected win for Amgen (& NCATS?)

Along with the acquisition of Immunex in 2001 - mostly to gain rights to Enbrel, which DID turn into a ginormous blockbuster - Amgen acquired a hodgepodge of early and mid-stage leads in the Immunex pipeline.

In most acquisitions like this, it seems like there is little value placed on the early leads of the target company - most of the attention is on the flagship, late stage product (Enbrel, in this case), and even then, the incoming programs & leads have to compete for resources with the incumbent R&D programs. Since these early stage leads have little data accumulated, and may involve new biology, little ever becomes of the "bonus" leads. (Also, after a merger, the acquiring company becomes even more of a "product" company, and also needs to cut cash costs post-merger to meet the financial expectations justifying the merger.)

Hats off to Amgen, though, for sticking with a lead sourced from Immunex, as today it was disclosed that an antibody targeting HGF (for cancer) has enough anti-MET activity that it generated strong response in certain gastric cancers.

(The Amgen antibody is referred to as either AMG 102 or rilotumumab. An excellent press release with lots of technical details is here, including the survival data. (11.1 months overall survival WITH AMG 102 versus 5.7 months without for patients with high MET expression.)

This story is really exciting for a reason beyond the notion that we might have another weapon in the war on cancer, and the notion that Amgen is a great research organization.

Searching leads me to believe that this trial is the one that generated today's good news. If so, note that the trial was launched nearly four years ago, and there is NO mention of MET protein or biomarkers in the trial design.

It seems to me, then, that some astute Amgen researchers - after the trial started and likely after Amgen had already concluded that AMG 102 wasn't effective enough to continue development - decided to sift through the results on a patient by patient basis to see if there was a genomic commonality with the responders. The researcher (or team) then used either a shotgun profiling approach to identify a biomarker to stratify the patients or decided to specifically assay for MET expression. I'd guess that the first approach was used, but either way, Amgen boldly applied genomic technology to do something oft-rumored but seldom seen - a biomarker-driven compound rescue.

(And even if I'm wrong, and Amgen was onto MET stratification all along, it is still an impressive finding.)

To temper the excitement somewhat, the clinical trial found only 27 of 82 (32%) gastric cancer patients in the trial had over-expressed MET protein, so it is likely then that the FDA label for AMG 102 - like Xalkori - will be very targeted and linked to a companion diagnostic. However, as discussed here before, MET is a hot target with likely broad applicability, so AMG 102 might someday reach blockbuster status.

Also, due to its' origins back in Immunex's labs, 11 or more years of the patent life of AMG102 may have already lapsed. I would guess that someone within Amgen has just been tasked with conjugating AMG 102 with something interesting in order to boost efficacy and reset the patent clock. (Immunomedics: make sure someone is manning your phones!)

The other possible winner here: Francis Collins & his NCATS initiative. Amgen's work on '102 reinforces that there is value in rummaging through pharma programs to find new applications.

AMG 102 is another manifestation of the Molecular Future hypothesis, and more proof that targeted therapy is effective. It sure seems like targeted therapies have a higher-than-average clinical success rate once safety has been demonstrated in a Phase I trial. (And maybe those targeted therapies that haven't succeeded just need the right biomarker.)

ADDENDUM: on reflection, I do not believe that Amgen's results are predictive of success for NCATS. My understanding now is that NCATS is less about further qualifying a lead through advanced technology (genomics, etc.) than about starting de novo development in new applications for drugs that have previously made it into clinical trials. Other than the fact that the compounds under consideration are likely safe for humans (i.e. the leads had successful Phase I trials), the NCATS approach provides no running start or any reason to anticipate better than average discovery success. (In fact, I'd argue that a bureaucratic organization like the NIH is LESS likely to have discovery success.)

On a positive note, let's hope that Amgen's success can be similarly applied to the rest of the bio-pharma industry.

Tuesday, May 22, 2012

Nexavar misses. But did it really?

News today that Nexavar flunked its' Phase III trial in lung cancer. (NSCLC)

I'll be curious to see the data present at ASCO, because I'm not sure that they really failed. While Nexavar missed the primary endpoint (overall survival (OS)), there was an improvement in the secondary endpoint (progression-free survival(PFS.))

(I've yet to see the relevant figures. All I can go on are news reports.)

Also: every patient in the Nexavar trials had failed at least two previous (standard) therapies, with some having failed three. For NSCLC, you're talking about surgery, radiation, and chemo (2 or 3 of the 3 therapies) before being treated with the experimental targeted drug.

NSCLC is a huge market (~250,000 annual cases in the US alone) but has not yet been broadly cracked by a targeted therapeutic. (Iressa had approval, and Xalkori has approval for use in a very small %age of patients. Tarceva and Avastin both have approval, but clinicians are skeptical and the economic argument is suspect.)

But we have every reason to believe that NSCLC can be impacted by targeting EGFR and/or VEGF - Sutent (Pfizer's competitor to Nexavar) is also in late stage NSCLC trials, and a variety of not-yet-approved targeted therapies are also likely to try to impact NSCLC. Because of the large number of annual cases, and the need to audition as a thrid-line therapy, perhaps we're just setting the the bar too high or setting these trials up for failure.

(please pardon the upcoming rant)

Independent of the judgement on Nexavar in NSCLC, I am very disappointed at the FDA mandate of a placebo arm for oncology trials using late-stage, terminal patients such as the Nexavar trial discussed above. I fully appreciate that to run the most scientifically bullet-proof trial requires a control arm, but what is the humanity in dosing late-stage cancer patients with a placebo? Not only are you potentially generating false hope for the patient and their family, it seems utterly wasteful. With nearly a million cases of NSCLC every year, and decades of data tracking patient outcomes, don't we know by now what the OS and PFS are for NSCLC patients at a given stage?

I'd like to see an FDA/NCI-led project to calculate baseline survival expectation across the most lethal cancers, with these standards to serve as stand-ins for placebo arms. I'm not suggesting relaxing approval standards (I will in a minute), but instead normalizing for humanitarian reasons and economic reasons. Even better, such an FDA/NCI study would be a springboard to genomic-level understanding of outcomes.

Eliminating the placebo arm of trials of late-stage cancer patients would immediately double the base of trials-eligible patients - something very important as on of the hardest things of trial design is recruitment. (The Nexavar NSCLC trial was based on ~700 patients recruited at ~150 locations. Imagine what a pain it is to manage numbers like this, and how much $$$ could be saved if ~350 patients were not needed.)

The two reasons that the use of placebo arms continue (other than seeking perfection in experiments) are that

1) for many drug/disease combination, the survival benefit may be tiny (4.5 months versus 3), to the point of being very difficult to detect.

2) regulators have a negative biased (against approval), mostly for CYA reasons. No one ever got fired at the FDA for being too picky with approvals, while a sure way to get fired at the FDA is to be too permissive.

Combining these two arguments raises the bar for drug approvals. To obviate this, I would make the survival standards generated by the FDA/NIH (discussed above) a simple hurdle - if a drug clears the baseline hurdle survival rate or just ties it, approval is automatic, in contrast to the current approach of requiring placebo arms in order to demonstrate the statistical significance of the trial outcomes.

(Yes, I did just argue against a fundamental aspect of data analysis, but we're talking about cancer here. We need more shots on goal, and more importantly, more learning. We don't really learn anything from a placebo arm patient when we already have millions of data points in our databases.)

(end rant)

This just in: biotechs with pharma VC $$ are more likely to IPO or be acquired

OK, this news from Burrill & Co isn't exactly revolutionary, but it is interesting to see numbers applied to common sense.

Burrill analysts looked at ~2,900 companies that received venture funding. ~10% of those companies received financing from the VC arm of a Big Pharma company (such as Lilly Ventures, SR One, etc.)

Burrill sees the Big Pharma VC $$$ as a differentiator in outcomes. Consider these outcomes from Burrill's study:

Venture WITH big pharma VC                                  Venture WITHOUT big pharma VC
           ~25%                 % companies ultimately acquired                  ~15%
           ~50%              % companies w/pharma partnership                ~30%
           ~12%                     % companies that IPO'd                             ~8%

Combining acquisition and IPO outcomes to say "who got liquidity," you'd see that ~37% of biotechs with Big Pharma VC got liquid, while only 23% of biotechs without Big Pharma achieved liquidity.

(I'm surprised the figures are that high, and ultimately likely higher, as additional companies from the studies IPO or are acquired. Given another year or two, I wouldn't be surprised if the respective liquidity figures reach 50% and 33% respectively. Who thought that 50% of all pharma $$ backed drug discovery biotechs achieve liquidity? I'd naively guess that these figures are higher than what is experienced in internet/IT/software investing.)

So, based on Burrills analysis, attracting big pharma VC boosts by 50% or more your odds of partnering, IPOing, or being acquired. 

The big question is: does Big Pharma investment make a company better, or is big pharma better at picking winners?

I'd argue strongly the latter - that Big Pharma picks winners - for the simple reason that for every biotech, the ultimate customer is Big Pharma, not patients or attending clinicians. In that respect, biotechs attracting Big Pharma VC are by definition doing a better job of understanding the customer (Big Pharma) and are 'pre-selling' Big Pharma during investment discussions.

What I found surprising was that the Big Pharma VC investment IS NOT predictive of acquisition by the Big Pharma that made the investment.

What this all means:

for investors: the participation of a Big Pharma VC is obviously a stamp of quality, and likely more important than the identity of the non-pharma participating investment funds.

for biotechs: not all VC $$$ is equal. Getting SR One, or Pfizer Ventures, or the Novartis Option Fund to invest is likely much more valuable than taking VC $$$ even from traditional industry VC. Hmmm. Between this news, and other recent analysis about VC outcomes, you wonder if maybe traditional VCs ought ought to return to their roots in incubating companies, not scaling companies.

Monday, May 21, 2012

Good news, bad news for Europe's molecular future

This week's BioCentury has an interesting analysis of European biotech - both public and private. A tidbit worth amplifying: (All figures from BioCentury.)

-Good news: the number of private European biotech companies with clinical activities is higher than ever, up 8% in 2011 to 235 companies. These companies are likely to need total financing to support clinical development of $5.7B through 2014.

-Europe's private biotechs raised $1.2B in new capital in 2011.

Bad news: given the demand for funding to support onward development, and the likely supply of capital, there's an approximately $1B funding gap between now and 2014. In addition, public European biotech's have an annual capital appetite of approximately $1.8B.

European biotech's tend to have more readily available government support/financing, but given the financial crisis in Europe, I'd say that it's time to get your checkbooks out, Big Pharma. (At least it should be a buyers market.)

A more dim view might be that there's going to be billions worth of headcount reductions in Europe's biotech's.

Exelixis: all-in on cabo

Luke Timmerman @ Xconomy has an excellent preview of ASCO - definitely worth a read.

What really surprised me in Luke's article is how leveraged Exelixis is on Cabozantinib ("Cabo"), with 9 Cabo presentations at ASCO addressing 7 tumor types. At this point, EXEL is a pure-play gamble on Cabo, with no other pipeline products close to the same maturity. If Cabo fails, so does EXEL.

From the Exelixis web site, here's the clinical status of Cabo trials:

Cabo (a.k.a. XL184) is a dual-selectivity tyrosine kinase inhibitor, targeting MET and VEGFR - two very relevant drug targets. (Please withhold snickering that dual selectivity may equal non-selectivity all you med chemists!) 

What makes Cabo potentially great is that it attacks cancers on multiple fronts, with anti-angiogenic activity (like Sutent) and anti-metastatic activity (by targeting MET.) EXEL also suggest that the compound is also cytotoxic ("tumoricidal") 

EXEL's financials look OK. Market valuation: $717M. Cash on hand: ~$240M, burning ~$14M/quarter on an operating basis, so there should be enough cash to fund the advancement of Cabo in multiple indications. One problem, though: it looks like EXEL some significant debt to repay, cutting into the cash hoard.

But most importantly, is Cabo any good? Here's what's posted at Wikipedia:

"Positive data from clinical trials indicate cabozantinib is particularly beneficial in metastatic advanced prostate cancer. 97% of patients either had stabilization or improvement in bone malignancies. The median time to disease progression was 29 weeks.[2][3]
One US trial reported in May 2011 : The best results were seen in patients with liver, prostate, and ovarian cancer: 22 of 29 patients with liver cancer, 71 of 100 patients with prostate cancer, and 32 of 51 with ovarian cancer experienced either partial tumor shrinkage or stable disease. Fifty-nine out of 68 patients who had bone metastases had their metastases shrink or disappear during the trial.[4]"
(And no, I don't use the Wikipedia to evaluate compounds, but it is a nice succinct summary.)

3 possible explanations:

1. Problems @ BMS
2. Problems @ EXEL
3. Inconclusive or weak early data.

There's an argument for each of these reasons. BMS withdrew from a partnership after only 2 years and having spent ~$250M on XL184. That should set off alarms, but EXEL pressed on, even with other products in the pipeline and after a leadership change at EXEL. Also, as of 2010, the most significant data was from a Phase II trial in a very small disease (MDT, still EXEL's lead application.)

Here's the EXEL investment risks as I see them, besides the standard cancer drug development & regulatory risks (i.e. traditional fractional rates of success at any given stage of development.) 

1. Cash/liquidity risk - as demonstrated by their early 2012 financing, there's not a lot of additional liquidity available to EXEL.

2. Timing: in spite of the broad clinical agenda, it might be years before Cabo would receive approval in some of its' most exciting indications (such as lung cancer, now in Phase II.)

3. Competition: a lot is happening in prostate cancer. Even with FDA approval in this area, could EXEL trump offerings in this area from big (JNJ) to small (Medivation)? (This might not be a risk, as interest in this area could spur a pharma partnership/acquisition.)

4. Commercialization risk: can a small company like EXEL successfully bring Cabo to market without a partner? (I don't think this is EXEL's strategy - they should partner immediately following ASCO, but it wouldn't surprise me if Big Pharma waited until data or FDA approval in a larger application became available.)

5. Skepticism due to both EXEL's track record to date, and standard small biotech caution - as Adam Feuerstein at often points out, small, single product companies have a TERRIBLE FDA approval track record. 

6. (Update) Clinical trial design. Adam Feuerstein explains it best: history and competition suggest that approval in prostate cancer may be farther off than EXEL thinks.

On the other hand, here's the positives:

1. Upside. If FDA approved for even half of its' intended applications, Cabo would have peak revenues in the $1B-$2B range, equating to equity value of $3B-$12B. (EXEL's current enterprise value is ~$500M, equating to a 6X to 24X return, though this could be inhibited or perhaps amplified by a partnership with a Big Pharma. If an investment is made via call options, the leveraged return could be again boosted by 10X.)

2. No target biology risk - both MET and VEGFR2 are well known oncology targets, with clinical success. (Though I can't think of an approved MET inhibitor right now. Arqule's is in P2, I think.)

3. Negligible downside. (OK, not really a positive.)

4. Pipeline value: it's pretty clear that the market is not valuing the rest of EXEL's pipeline. One reason for this is the notion that EXEL is all-in on Cabo to the exclusion of the rest of the pipeline (which is true), but there are enough interesting early leads in the pipeline that any of these could eventually be partnered to unlock value.

5. Compound de-risking. Clinical efforts in so many different indications suggests that 1) there is an abundance of positive health, safety, and efficacy data, and 2) either the management team is suicidal, or has good reason to bet the company on Cabo.

Ultimately, I think EXEL is at an inflection point with their appearance at ASCO - if the data in one or more indications for Cabo is compelling, a pharma partnership in 2012 is likely, which would boost value and decrease risk. If no pharma partners emerge, that's a strong statement that Pharma is still skeptical about Cabo, because pharma desperately needs to add to its' pipeline. (I am ignoring the possibility that EXEL management might value Cabo too highly to partner - they need to do a deal ASAP, or they will lack the resources to bring Cabo to market and the Street will lose faith in EXEL.)

(I could be wrong, as EXEL stock barely moved with last weeks publication of the ASCO abstracts.)

So, EXEL is a high-leverage biotech casino, with a high likelihood of either complete boom or complete bust. I kinda wish more small-caps would take the same approach with their development efforts (all-in!) Of course, it is easy to say this as an outsider - investors can hedge risk in other ways - but for EXEL employees and management, there's no way to hedge an all-in bet.

btw: another company with a lot riding on ASCO is Onyx, which I reviewed last month.

Bonus idea: for being so leveraged to Cabo, shouldn't EXEL change their name to "The Cabo Co." and their stock ticker to CABO? Who knows, maybe they'd attract some investors thinking that CABO is a Mexican real estate portfolio.

Disclosure: as of the time of writing, I own NO shares of EXEL.

Friday, May 18, 2012

Dako acquired by Agilent

Deals are getting done in the tools & content space, and valuations are jumping as shown by the Agilent-Dako tie up this week at 6X trailing revenues!!!* (and also the Gen-Probe acquisition by Hologic, at roughly the same valuation multiple.)

For perspective, the just re-done AFFX-eBioscience deal was at a ~4X multiple. So how is Dako 50% more valuable on the basis of revenue multiples? (Or ~7X more valuable on a gross valuation basis.)

-a bias towards higher value products in the sales mix. Per this article, reagents are only ~15% of Dako sales, while 85% is attributed to the anatomic pathology market. (Slippery, as much of the purchases for the path market are reagents in value added packaging (kits, etc)). The lesson here for life science tools companies: climb the value curve - even if just a step or two - and put a new label on your company. You're not a reagents company - you're a clinical diagnostics or molecular diagnostics company, even if none of your products have 510K approvals from the FDA.

-clinical lock-in. Once a clinician or pathologist learns to rely on a pathology product, momentum and familiarity are more important to follow-on sales than price.

-IP. Dako's assays and components are proprietary whenever possible, and quite likely patented in a minority of cases. (With trade secrets being more important than formal IP protection in most cases in this field.)

Note: the acquisition ISN'T driven by cutting edge technology. Much of Dako's products are related to immunohistochemistry (IHC) - a very standard, widely used assay technology. I suppose you could start an argument over whether or not Dako is a molecular diagnostics company - their pathology products help target molecular medicines on a by-patient basis, but these diagnostic assays are not particularly 21st century, relying on protein detection.

Also driving this deal: as noted in this story, Agilent's $4B cash hoard - half of which they are using to do this deal - is largely offshore. Agilent's choice was either to repatriate the profits and pay a huuuuuge tax to the US government (newsflash: the US has the highest corporate tax rate in the world), or re-invest the proceeds in overseas assets, like Dako. It sure would have been nice if that capital could have been re-invested in US life science companies.

The quick reaction from financial analysts is that Agilent paid full-price for Dako, but the deal will be immediately accretive to earnings, and, since Agilent used off-shore funny money to fund the deal, probably could have and would have paid more. (Plus, sizable companies in the clinical diagnostics space for acquisition are becoming scarce.)

I'd say this is a good buy by Agilent, and hope that no one mistakes the huge celebratory party Dako's Danish and Swedish owners are throwing (surely with copious amounts of aquavit, Tuborg, and Absolut), as anything other than just the way the Scandinavians roll. (Speaking from personal experience. Hei skål!)

* note that the Agilent press release refers to 2010 revenues for Dako at $340M. I bumped up Dako's sales by 10% to reflect 2011 revenues.

Intrexon In-trouble?

Ever used Google Alerts? They're a great way to keep tabs on interesting companies without the press appeal of, say, Apple or Pfizer. One such company that I follow is Intrexon - a company that aims to be to synthetic biology what Microsoft or Google are to software or the internet - broad, dominant, and in certain regards the 800-pound gorilla of the sector.

Usually my Intrexon alerts are full of Halozyme and Ziopharm references - they're small-cap partners of Intrexon and never shy about touting their connection to Intrexon and RJ Kirk. This weeks' alert, though, linked to a message board post from an Intrexon employee who's position was being eliminated in a bad way. Not a huge deal, but it did prompt me to check the Intrexon management page and some LinkedIn connections. Turns out  there's been leadership turnover and layoffs at the extremely well funded company. At least two long-term leaders at the company have been booted (COO who was formerly CEO, and the head of the AgBio division), and the number of open positions on their career page has been reduced to a trickle.

Intrexon is highly secretive, so what has happened will probably never reach the press. I'll guess, though, that somebody realized that a time-out was necessary since 1) the company probably has/had a seven-digit monthly burn rate, while intentionally foregoing revenues, and that 2) the company's core technology is over a decade old. Other guesses might be that an expected partnership didn't materialize, or, possibly the Prometheus, Myriad, and other legal cases prompted doubt over whether Intrexon's synthetic biology IP strategy was defensible.

One other possibility: the realization has taken hold that synthetic biology is just a new name for cool(er) genetic engineering, and that a category-killer company in this segment just isn't in demand.

Wednesday, May 9, 2012

More damning VC performance data - the model is broken

Two weeks ago I pointed to a study suggesting that there are structural problems with venture capital. A larger, more damning study is now in the news, confirming low industry returns, and diagnosing more problems with VC.  

I highly, highly recommend clicking through to read Felix Salmon's reporting and analysis on the
matter. Money quotes:

"During the twelve-year period from 1997 to 2009, there have been only five vintage years in which median VC funds generated IRRs that returned investor capital, let alone doubled it," and

"the VC industry, as a whole, is being incredibly successful at extracting rents from dumb institutional investors."

In a nutshell, a study by the Kauffmann Foundation concludes that:

-It is debatable whether or not VC is a worthwhile investment. "78% of the funds that Kauffman invested in (i.e. those in the study) have failed." Not only does the mean VC fund destroy capital on a risk-adjusted basis, recently these funds have had negative IRRs on a gross basis!

-Quality matters: "If you can’t get into one of the best funds — and everybody knows which funds those are — then there’s really no point investing in venture capital at all."

-LPs really don't hold VCs accountable enough: "once you strip out the top-performing 29 funds, the rest — more than 500 — collectively invested $160 billion, and managed to return $85 billion to investors." Shakeout, anyone?

-incentives are misaligned: VCs are invented to raise more and larger funds, as that's where the compensation is. This also incents goosing early year returns to help with fund-raising, meaning all of that VC chatter about long term investing is bull.

-smaller, more experienced funds are more likely to have outsized positive returns.

It's time to change the life science VC industry approach. Here's a few humble suggestions from my quick reaction to the Salmon article and Kauffman study:

1. Full disclosure. Between intense VC fund secrecy and discretionary allocations of costs and returns among funds, VC investors (LPs) really can't get definitive, transparent performance accounting. It's time for quality VC firms to be proactive in publicly disclosing deal-by-deal and expense by expense fund accounting. The message from LPs needs to be "if you're not transparent, we'll assume you're hiding something."

2. VCs: Climb the risk curve. The data suggests that VC has a problem finding alpha (return). The most immediate way to goose alpha is to take on more risk by investing in earlier stages. In other words, if a VC firm says that they don't invest until B rounds, they ought to stretch into A rounds. (And likely STOP investing in later ('D') rounds. An earlier investment carries a bit more risk, but it is more or less the same type of risk seen in the later stages. (In other words, if the primary risk for an investment is target biology or lead chemistry, it still takes the same understanding/risk tolerance whether investing in round A or C. Only the size of the risk changes.) I think VCs get paid for their ability to manage risks, so if a firm's core competency is vetting lead chemistry, getting in earlier plays to their strengths, and might in fact "train" the firm to better assess and handle those risks.

3. Less therapeutics, more enabling tools and platforms. Investing in therapeutics has a more or less binary outcome - success or failure, with not much in between. One way to minimize the downside for VCs is to invest in operating companies - their ceilings aren't as high as a winning therapeutics investment, but their terminal value is, well, >$0.

4. Create smaller funds, with VC compensation tied even more to performance. Typical compensation for a VC is 2% of the amount invested every year, plus 20% of the downstream gains. If it were up to me, I'd get rid of the 2% annual fee - make the funds invest their own $$$ in annual expenses.

5. More specialized funds. The old investing true-ism is that 80% of investing returns are generated through asset (sector) allocation, not through the selection of individual securities. The suggestion then would be to hyper-specialize. A large fund that invested in "therapeutics" is less likely to deviate from traditional poor returns than a fund specializing in "oncology," though I'd postulate that a fund that hyper-specialized in "kinase inhibition in cancer" would have crushed both, and wasn't that difficult to predict 10 years ago. (Easy for me to say.)

6. Use secondary markets to generate valuations and gain liquidity, lessening short term thinking and attracting Big Pharma investment dollars. New markets like Second Market have made a splash with internet companies for their ability to provide selected liquidity and to unlock equity value for employees. I'd like to see biotech embrace these alternative markets. Earlier pseudo-liquidity would attract more investment capital in general (including from Big Pharma. It would be great to get more of their capital in the game,) provide more transparency, clarify signaling, and likely facilitate consolidation among private companies. There might be some resistance among VCs as alternative markets might disinter mediate them, but they might on net reduce the investing risk for VCs and facilitate earlier liquidity.

7. Begin a 5-year moratorium on pandering to the government to increase funding for young companies and technologies or to reform some regulatory requirement of securities law. If the Kauffman study is representative of the life science industry, then clearly the problem isn't the level of government support, but rather the commercialization efforts that VCs back. VC keeps destroying capital with bad bets, not because there aren't enough ripe, de-risked technologies, or non-equity funds to incubate promising technologies.

8. Fund businesses, not technologies, science projects, or lottery tickets. Sure, the business case for an investment may hinge on Big Pharma buying you out once the leads make it to Phase ___, but if investments aren't businesses first and foremost, you're either ultimately 1) disappointing your Big Pharma customers, and 2) trying to build a skyscraper on a foundation of mud.

Unfortunately, I don't have a lot of confidence in the VC industry adapting. It is way, way more likely that instead of changing the industry's foundation, VC will further squeeze valuations and term sheets for incoming investments in order to try to lift returns.

'One in six cancers worldwide are caused by infection'

Cancer as a communicable disease? Whoah!

We've known that the HPV virus (really the HP virus, but that sounds strange) causes cervical cancer, but I definitely didn't appreciate how large of a proportion of cancers are caused by infections (17%). Given that there's a lot about cancer that we don't know, plus stories like the one quoted above from the BBC, and the current story of the Tasmanian Devil facial tumors being spread through infections, one has to wonder if the much more than 17% of cancers are caused by infections.

The counter point is that cancer rates tend to be higher in the first world, and the first world tends to have more cleanliness/less communicable disease, and therefore likely less instances of the spread of infectious disease. Hmmmm.

The good news here is that there are effective vaccines for two of the infectious cancer-causers (HPV and HBV.) Perhaps this is another argument for Bjorn Lomborg's point of view that in lieu of investing in anti-global warming measures, we'd make the world a much better place by investing instead in global health.

Called it (Affymetrix-eBioscience)!

There's not much less interesting to read on a blog than a blogger giving themselves a pat on the back, but abandoning caution, here's mention that what I predicted would happen between Affymetrix and eBiosciences has come to pass, as AFFX and eBio have adjusted the purchase price downward in order to get their merger financed.

I predicted two months ago that their stalled merger would go forward with eBiosciences lowering the price slightly. Lenders financing the deal saw AFFX's performance slip enough in 2011 to make them wonder if the deal was dangerous. I stated that both AFFX and eBio lacked better alternative than a slightly lower price.

The previous deal - valuing eBio at $330M has been redone at $315M. A 5% price reduction doesn't seem like much (and indeed it won't bother eBio shareholders much), but annual debt service on the "extra" $15M for AFFX probably would equate to an additional annual interest expense of $1M. With $1M more cash flow at the $315M price, the lenders can sleep better.

I like the new deal, and so does the market -AFFX is up ~10% since the announcement, effectively meaning that AFFX added ~$45M in value ($15M price reduction, plus ~$30M in increased market cap.)

Based on the AFFX press release, pro forma 2011 for the combination of AFFX and eBio might look like this:

Revenue: $338M
EBITDA: ~$5M (swinging to a positive)

Make no mistake, AFFX wants/wanted eBioscience to pave over their declining genomics business. The deal extends the period for AFFX to turn this business around (I still think there's plenty of life left in Affy genomics hardware & consumables), and if so, multiples expansion (sales or EBITDA) will lift the stock substantially. Still, I predict that AFFX in a few years will be known more for their consumables business than their genomics business, and that's probably a good thing.

MDx pure-plays: exception, not the rule

After writing about Gen-Probe's acquisition the other day I wondered how many stand-alone molecular diagnostics (MDx) companies were left. Here's the entire list of independent MDx companies that have reached critical mass (>$1B valuation):

1. Myriad Genetics

(You could make a strong case for Qiagen or Cepheid as well, but the majority of their businesses are still reagent supply, and hardware, respectively. Genomic Health (GHDX) just misses as their valuation is ~$125M short for now, but there is every reason to believe that GHDX will graduate to "critical mass" with time.)

There's a lot of MDx business addressed by subsidiaries of large companies (Roche Diagnostics, Abbott, or Clarient, for example), micro-cap MDx companies (Response Genetics or Diagnocure for example), or general clinical testing companies (Quest Diagnostics, LabCorp, etc.) so the lack of pure-plays isn't reflective of market interest. Instead, it reflects how in molecular diagnostics, good distribution and good capitalization are more important than good science and IP.

I think it is also reflective of the fact that success in the diagnostics field can not be driven by one or a small handful of diagnostic products or technologies, but instead by a broad catalog of assays, markets, and technologies. (The exception is Genomic Health, with a single product - OncoType DX - generating 100% of its' ~$200M in annual revenue.) This is really unfortunate for the dozens of single-product micro-cap diagnostics companies (Trovagen, Diagnocure, Response Genetics, etc.) Their two choices are either: hyper-specialize to dominate a market niche and hope to be acquired by a bigger player, or wait around to be steamrolled by a much bigger company with better distribution when the big company decides to enter the same space. 

Unfortunately, most small MDx companies overvalue their technology and their niche market, and overestimate how high the barriers to entry are in their market. These small MDx companies don't realize that they're often just re-selling time on their lab equipment, rather than building a defensible, sustainable business. Case in point: MolecularMD.

How can you tell if an MDx company is special or is just renting time on their equipment: look at the gross margins. Myriad Genetics has an 87% gross margin. Response Genetics: 48% gross margin.

It is also likely that the message the markets are making is that successful diagnostic companies need not be tech-centric, meaning that differences between genomic and protein technologies are an artificial, meaningless distinction. No clinicians will really care if a diagnosis is generated using PCR or protein arrays, and payers care only about efficacy and cost.

With the MDx opportunity widely dispersed among small and large diagnostics companies and clinical labs, there is a BIG opportunity for some well-capitalized venture to collect the niche assays dispersed among smallish MDx companies (buying at a price driven by a small multiple of net cash flow), and building a broad, specialized sales & distribution network with better operating margins collectively than apart. This is also the sort of space ideal for a VC fund that believes in MDx but wants to make a larger, lower-risk investment in the field.

Monday, May 7, 2012


Fantastic article today by The Street's Adam Feuerstein labeling Vertex as the next Gilead after VRTX revealed good early data on their cystic fibrosis therapies Kalydeco and VX-809. He's absolutely spot-on, which makes me both happy and sad, as I'm a fan of VRTX, but sold out of VRTX stock some time ago based on their Hep-C approval, so I missed an opportunity, as VRTX stock is up 55% today.

(Here's a news story on the VRTX CF news.)

Vertex added about $4B in market cap based on the news, but this probably understates the potential for VRTX, as Feuerstein postulates that the VRTX CF therapies could contribute $6-7B in annual revenue once approved. By way of comparison, GILD is worth about $38B, while VRTX is worth about $12B today.

I'd predict that VRTX never makes it as high as GILD, with an acquisition by a big pharma to take place before then, but VRTX has been steadfastly independent throughout its' history in spite of being an attractive target for many periods of its' history. In fact, the CF news - which transforms VRTX from a 1-dimensional company to a multi-dimensional company* probably insures that JNJ won't want to/be able to buy-out VRTX in the near term based on the success on Telapivir, their partnered Hep C therapy.

The next thing to watch for is the FDA reaction to the VRTX CF data. You can never predict an early or accelerated approval, but the current FDA administration seems more open to green lighting clinical success that might have a broad impact. Right now, I'd bet on an earlier than expected approval, but not one in 2012, as the CF data is only from a Phase II study. It will take some time to design and initiate the Phase III trial, but we could get approval after analysis of PIII interim data (2014?), or perhaps a very limited conditional approval for use in patients with a very specific mutation (F508del.)

Oh, btw: I'm a little late on this, but I just noticed that in 2011,  VRTX achieved positive operating cash flow, - one more reason to love the company and perhaps they won't even need to raise equity to support the commercialization of the CF developments.

* just to be clear: the label "1-dimensional" isn't meant to be pejorative. Having "only one" blockbuster is still an absolutely screaming corporate success, and even that label downplays the rest of the company's research programs and existing products.

To boost global health research, cut US federal global health R&D

According to a new report by a Washington, DC advocacy group,  "the US Government each year contributes around 45% of all investment in global health R&D and 70% of all government investment worldwide." 

Also from the same report: “The US government’s investment in early basic (global health) research is so great that it now provides nearly two-thirds (62%) of global funding in this area,”

The report put out by the Global Health Technologies Corporation (GHTC) seems to define "global health" as communicable disease (and not, for example cancer or diabetes), so I'm a bit suspicious that the math behind the conclusions may be cherry-picked, but just accepting the figures my first reaction is that the high level of government support is BAD news for global health, and that the best thing that could happen would be for the US government to step back. Here's why I think that:

-Global health R&D is intended to benefit poor 3rd world patient populations, yet the bulk of the global health research is targeted to very a commercial market. According to the report, HIV R&D constitutes 57% of the global health R&D budget, as monitored by GHTC, so parsing the numbers would lead to the conclusion that there is already significant private sector research in HIV, just as there are very significant therapies having been discovered and commercialized by the private sector.  Indeed, while the largest patient population for HIV therapies may be among very poor in Africa, this seems to me to be as much a distribution/manufacturing problem, and not an R&D challenge so much. If private sector HIV research were leading the way, the global health resources could be devoted to other research areas (cancer, etc.) and non-R&D assets like USAID could assume a bigger role in HIV treatment, especially in delivering HIV therapies.

-I don't like the idea that global health research strategy is largely driven by one large customer (the US Government.) Not to knock the people and funding process of the NIH/DoD/etc - and I know their research strategy isn't monolithic - but I would much, much rather see global health research strategy driven by a plurality of voices. Science doesn't progress as fast when one R&D catechism is dominant. Historically, much of our progress in life science is due to researchers with quirky or contrarian strategies swimming against the majority of researchers. No government body is very flexible in this regard.

(The best example I can think of here is Dr. Judah Folkman's pursuit of anti-angiogenesis. Once cast into the wilderness of cancer research by the cancer research establishment, Folkman's strategy is now an integral part of cancer therapy, as embodied by drugs such as Sutent and Avastin.)

-Likewise, unfortunately US global health policy is in part driven by politics, at least as significantly as the best scientific rationale or the aim of the most significant scientific impact. I'd rather more wise people steer global health R&D than the jokers in Congress. 

-I favor global health R&D being driven by the private sector, with the government as a ultimate backstop, with the goal that global health R&D could be more market-oriented, but in an untraditional way. Market-oriented would traditionally be defined as financial demand tied to the patients' (or other payers) ability to pay. In the case of global health R&D, I think market-oriented would reflect (non-financial) patient demand, to include the amount of charity resources being devoted to a particular disease. I think by weighting R&D by this metric, we're more likely (for example) to place greater weight of clean water than TB, as the number of people with poor health due to a lack of access to clean water is many times greater than those at risk for TB. (The fact that clean water may be less of a biotech R&D issue and more of a civil engineering challenge underscores the point that the US government tends to mis-allocate R&D assets.)

-Finally, I'm annoyed by the idea that much of the first world is free-riding on America. The US accounts for ~27% of World GDP, and with US government being approximately 1/3rd of US GDP, this means that roughly 9% of world GDP funds 45% of global health R&D. I'm pointing the finger here at other first world powers to pull their weight. Unfortunately, to react to this point by cutting US federal global health R&D to equalize efforts puts others in jeopardy, but I highly doubt that other governments will spontaneously decide to pull their own weight in this area. 

Thursday, May 3, 2012

Cash-equity equivalence for pharma.

Pfizer says they're looking for acquisitions around $4B. They've had a bit of success buying assets of that size, but that buyout space is becoming crowded - every big pharma would be happy to acquire meaningful but not humongous assets of that size to pave over their patent cliff.

But why is it that PFE or any other big pharma is willing to splash out billions for acquisitions when internal R&D budgets are under pressure? Here's why big pharmas have more incentive to buy innovation externally than fund it internally:

1. Risk/reward & timing: An investment in internal R&D might pay-off in ~5 years, whereas acquiring assets (particularly approved products) are a "sure thing." Until R&D becomes more predictable or higher reward, pharma will always be oriented to lower-risk, shorter term rewards.

2. Financial expectations: all big pharmas are sensitive to the almighty EPS (earnings per share.) An investment in internal R&D has a current cost to EPS and uncertain rewards, while an acquisition often has (understated) current costs and overstated future rewards. (Depending on synergy, more broad distribution, etc.)

3. Access to excellence: No offense to (internal) pharma researchers, but by buying assets, big pharma can buy from the top research efforts in the world. An acquisition likely has a tremendous concentration of focused expertise - be it in the target or disease of interest. Who knows more about diabetes, BMS, or Amylin, or who knows more about transgenic expression systems, Protalix or Pfizer? Internal R&D efforts can of course be high-quality, but most are very, very broad, and by definition somewhat dilute.

4. Internal inefficiencies. Pharmas have expensive structures and high legacy costs. Take another look at this chart from my February post "R&D Efficiency," indicating that pharma spends ~$5B in R&D per FDA approved drug.

In contrast, every biotech big or small is targeting a cost per drug approval in the hundred of millions, not billions, indicating their efficiency advantage. (As an example, Amylin - rumored as an acquisition target of BMS for ~$4B - probably spent between $500m and $750m in developing Bydureon, suggesting that they, if representative, are ~8X more efficient than BMS' historical internal efforts.

5. M&A accounting: this is the big one - our tax laws have a massive preference for equity-based M&A. Pfizer has ~$70B in cash on hand and generated an additional $20B in operating cash in 2011, while investing ~$10B in R&D (which includes cash payments to development partners, so this figure is not entirely internal R&D.) PFE has ~7.5B shares outstanding

Consider 2 scenarios for PFE:

-PFE increases cash R&D spending by $10B/year.

Financial result: EPS falls by about $1 per share.(-80%). (Assume $10B more in R&D is offset by $2.5B less (ballpark) in taxes.)

-PFE buys 2 companies (such as 2 x Amylin) for $5B in PFE stock. (Each.)

2 x Amylins would contribute ~$1.3B in new revenue (using 2011) figures, and while Amylin loses a small amount of money, Pfizer would likely assert that they would cut some overhead, and increase sales using PFE's sales force, eliminating the annual operating loss in the short term. Longer term, PFE grows sales (@ a profit margin in excess of 90%), and cuts Amylin overhead and R&D by $750M per year.

To fund the deal, PFE issues 442,000,000 new shares at current prices, or a roughly ~5% increase in shares outstanding, slightly diluting EPS in the near term. However, the acquired assets could  increase PFE's annual earnings by $1B roughly in the second year (assuming ~20% increase in revenues, with the costs detailed above, making the deal quickly accretive (=~12% EPS). Also: post-merger accounting may lead PFE to write-off half ($5B) of the M&A value as "goodwill." This is a hit to book (GAAP) earnings, but has, in effect, a cash benefit, as corporate taxes are reduced by the write-off of goodwill. End result: small near-term share dilution, medium term EPS increase due to the acquired assets and a lower tax bill, without spending much/any cash.

M&A is even more advantaged by the tax rules that reward share repurchases. If PFE repurchased $10B in stock (tax-free) instead of spending the same amount on R&D, EPS would be increased as the denominator shrinks.

My original goal was to calculate an equivalence between cash and equity ("$1 cash = $10 in equity spent in M&A," or something like that, but it seems that the ratio is more like $1 to infinity., advantage M&A.

With math like that, and the other advantages outlined above, it is almost surprising that Big Pharma does ANY internal R&D.

Wednesday, May 2, 2012

Transgenic (& biosimilar!) FDA approval!

Congrats to Protalix and Pfizer for receiving FDA approval for Elelyso, a drug to treat Gaucher's disease. The Protalix product will compete with the insanely expensive Genzyme product, Cerezyme.

What makes this approval especially noteworthy is that Elelyso is produced in carrots, making it the first FDA-approved transgenic drug.

Transgenics have been in development for two decades, but the challenges of the science have been significant, as has been reluctance on the part of regulators and payers, as they wondered if transgenics could really be bio-identical.

Also interesting, but not noted in the article: Elelyso may have also broken ground as the first biosimilar approved by the FDA. In this case, the resulting molecule is the same, though the expression system is obviously very different. I wonder if we'll see biosimilar makers trying this backdoor approach as well.

Now that Protalix has burst both the transgenic and biosimilar dams, it will be interesting to see the industry response. For starters, I think we'll see Genzyme cutting their price on Cerezyme to match Protalix/Pfizer, in spite of all of their previous protestations that the current price of $200,000/year is justified.

Personally, I'm happy to see this transgenic enzyme for Gaucher's disease receive approval. Approximately 15 years ago I was mildly involved with a research team trying to do the same thing using tobacco as an expression system, with the same goal of a massive price reduction for Gaucher's patients. We never succeeded, for a variety of reasons, but I've always been hopeful that someone else would.

Tuesday, May 1, 2012

Back-seat driving AstraZeneca

Just for fun, here's some quick thoughts on how AZ can get back on track after the reign of CEO David Brennan, who announced his early retirement last week while being water boarded by the AZ BoD:

(btw: I really wanted to label Brennan's tenure as disastrous, but that's not fair. Compared to the return on the S&P 500 and PPH (a big pharma ETF) over Brennan's reign (Jan '06 to now), AZN was very bad, but not atrocious. Take a look:

During Brennan's tenure, (as of the day of Brennan's retirement announcement,) AZN was down 5.5%, vs +11.4% for the S&P and +6.8% for PPH. I expected the AZN relative performance to be much worse.

Comparable figures since the Astra-Zeneca merger in 1999:

AZN: -10.3% (total)
S&P: +8.2%
PPH: -14.4%

So, you could say that the AZN merger didn't destroy (relatively) as much value as the pharma industry did over the same time period, but I still can't bring myself to say that it was a worthwhile deal.

In case you're wondering, AZN is <5% of the composition of PPH.

Back to the backseat driving. Here's 8 ideas to get AZN back on track:

1. R&D strategy: go big, or go home. AZ's annual R&D spend is $4.5B, which is only ~40% of the amount AZ annually spends on SG&A. For all of AZN's problems, they still have $11B in cash on hand and throw off nearly $8B in annual operating cash flow. It is time for AZ to either double down on their R&D, or dismantle it.

Everyone knows AZ's pipeline is thin. If it is because the $4.5B of R&D is unproductive, shut down/shrink R&D.

For the last decade the trend in pharma has been to shrink R&D, but the only way that AZ is going to reverse their fate is swim against the tide and massively expand the R&D budget. This option is especially attractive to AZ because of the European R&D assets shuttered over the last decade, and now available for a song. For example, AZ could re-open Pfizer's former R&D facility at Sandwich, UK, attract a very talented team, and likely win government financial assistance in doing so.

There are two counter-arguments to "going big" in R&D - the fact that payoff from the increased R&D is years off, and the fact that EPS would take an immediate hit. I'd argue, though, that the benefit of the increased R&D investment would be felt pretty quickly, as much of the investment would be in downstream clinical development, and not necessarily in basic discovery.

As for EPS, yes, it would take a hit, though not as bad as the gross increase in R&D, as the tax authorities would be paying roughly a third of the gross increase. I'd also argue that perversely, the R&D spend would INCREASE the amount of economic value added annually by AZ, as you'd be replacing the meek interest income from the $11-19B cash on hand with (hopefully) dynamic returns from R&D.

2. Sell Iressa to NVS or another interested party. Iressa (EGFR inhibitor) probably never got enough corporate attention once it landed in regulatory limbo. There's still value to Iressa to to unlock, though, and I think NVS could make the most of the product amidst their other successful targeted cancer therapeutics. (Of which they lack an EGFR inhibitor.) I also think having a new set of eyes to look over Iressa's clinical results would be beneficial.

3. Focus the MedImmune/biotherapeutics group on biosimilars. The combined MEDI and Cambridge Antibody assets are formidable though underutilized engines, both in terms of capabilities and capacity. Why not leverage both in pursuit of biosimilars, as Pfizer is doing with some of their bio-production assets? This is an area where AZ could take the lead, based on their MEDI investment, and an area with a modest capital demand. It would certainly be cheaper to spend another $500M on additional MEDI R&D to develop saleable products than to spend $5-6B in capital to acquire Amylin - a good, though one-market (diabetes) company that doesn't match well with AZ's existing portfolio.

4. Seek more big-big partnering, as exemplfied by the deal with AMGN. (See "AMGN & AZN get creative.") Points #1 and #3 are all about refilling the product pipeline with internally developed "upside." Another route to the same outcome is to buy large chunks of upside to augment the weak AZ pipeline. Combining points 1, 3, and 4 would diversify the R&D risk for AZN and fatten the pipeline, with good cost control.

5. Avoid the urge to make late-stage acquisitions to fill the pipeline. Congrats on the Ardea deal, but please don't think a string of acquisitions is the cure for what ails AZ. Any acquisition right now would represent paying full price, as every other pharma company is shopping hard for late stage products. AZ isn't big enough to outbid PFE, not specialized enough to win many niche acquisitions, and is too desperate at this point to NOT overpay sooner or later. Instead:

6. Climb the risk curve and make early (-er) product development partnerships. Whereas EVERY big pharma has the financial wherewithal to make a bid for a late-stage clinical candidate, many pharmas are too risk-averse to pursue partnering early programs. This represents an opportunity for a big pharma willing to take on more risk AND represents the best return on R&D dollars. Why spend $5-6B on an acquisition like Amylin or $1.2B on a late-stage deal like Ardea when AZN can probably sign and fund 10 early stage partnerships for a fraction of these amounts?

One other consideration: AZ's new CEO probably has 3-4 years to make an impact at AZ, which is enough time that a Phase I lead gained through partnership now can become an exciting Phase III product.

7. Recognize that there is a historically massive opportunity for AZ, and concurrently cut the dividend. There has never been a better time to be in the drug discovery & development business. Incomes are rising around the world while populations are aging. At the same time, medical knowledge has exploded over the last decade, and emerging technologies (e.g. in silica screening) are making drug discovery easier, less costly, and less risky.

It has been a long time since AZ or most any pharma was a growth stock, but with the context above, why wouldn't you want to transform AZ into a growth stock, and increase investment in R&D, as funded by reducing or eliminating the dividend? Yes, changing the dividend will set off alarms in the financial community, but better to do it proactively as part of a growth strategy than reactively once everything goes off patent.

8. Quit pretending that AZ decisions aren't heavily influenced by geography and political concerns by relocating corporate HQ to……….Dubai. AZ's HQ is in London. Except R&D, which is based in Sweden. And except UK R&D, based in NW England. And except biologics, based in Maryland. And except their biggest office in their biggest market, in Delaware.

Some tech companies see geography as a competitive necessity, such as the growing big pharma labs in Cambridge, MA (PFE, MRK, NVS….) AZ goes so far in the other direction, that you wonder if they are intentionally avoiding tech hotspots. UK R&D in Cheshire, UK instead of Oxbridge? Swedish R&D not near the Karolinska Institute? Weird.

You just know that decisions aren't made at AZ solely on their merits and without considering the geo-political ramifications. One way to negate this is to relocate corporate HQ to a "neutral" territory, and publicly commit that future UK & Swedish investment will be tied to leading academic locations. I'm not saying that AZ's weak R&D productivity is due to their location in NW England, but I believe that one way to boost the R&D productivity is to gain more exposure to leading labs in Oxbridge and the Karolinska. Watch AZ's R&D be reinvigorated.

Dubai is a silly answer to "what's a neutral country roughly equidistant to the UK and Sweden?" but I'm sure Dubai or other countries would provide a huge economic incentive to support the corporate relo. Not only would Dubai or others pay a bounty for the influx of meaningful jobs, but you could probably find a country that would be convinced to pay BIG $$$ so that AZ could become the cornerstone of their nascent pharma industry. If Boeing could relocate their corporate HQ from Seattle to Chicago, AZ sure could move to Dubai, or Singapore, or Bangalore.

(not to mention that there could be a substantial savings in corporate taxes for AZ.)

So there's my quick, under-informed ideas to get AZ back on track. Unfortunately, to make real backseat driving recommendations, you have to ignore certain realities, such as the holiness of the EPS expectations, and the tax advantages of filling the pipeline via acquisitions rather than increasing the R&D cash expense. But, you read this far, which means that there's some value in my backseat-driving recommendations…….