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.

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 Clinicaltrials.gov 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.

AMGN & AZN get creative

Suspicions are often aroused when two of the biopharma "big boys" partner up. Is the company originating the technology trying to hedge their bets and take some money off the table? Is the 'buying' partner inadvertently saying that their R&D efforts are inferior to their new partners'?

I would ignore the doubts in the case of last week's announced partnership between AZ and AMGN. The 2 companies will work together to develop 5 different anti-inflammation biologics, splitting costs and program responsibilities. The prospective costs and benefits are measured in billions.

Abbott's Humira (anti-inflammation biological) is a $9B product. No need to be greedy with a market that big. Both AZ and AMGN increased the chances of gaining a slice of that market, with the risk & costs roughly halved. Where some analysts are sour on the tie-up, I think it is good risk management, and I'd like to see more deals like these rather than less. (I also think this is very creative. More of that too, please!)

I like the deal a lot, but I'm not too sure that Wall Street does. Here's a quick look at how both stocks have performed in the <2 weeks since:

(Link to dynamic GOOG finance chart.)

So, AMGN is down with the market, AZ up 1.2%, so perhaps the Street thinks this is a win for AZ, and nothing new for AMGN.

I think the stakes for these two companies are higher than most recognize. For AMGN, this deal preserves their independence for a half of a decade. Without a partner, AMGN would either be betting the company on their inflammation program, or pruning the five programs just to save cash (or both.)

For AZ, they've just fattened their pipeline with high leverage R&D assets. If you believe that the cost of getting a drug to market is largely static independent of market size, AZ just gained some mid-stage leads that only cost half as much as usual to bring to market and while they only get half of the upside, halving a ginormous market 9X larger than a 'basic' blockbuster while halving the costs is a GREAT trade.


(Side note: I wonder how it would look if we similarly evaluated pharma pipelines not for risk adjusted expectations, but instead as a ratio of upside$ per R&D investment $. I'll put a little more thought into this, as my quick guess is that GENZ's rare disease approach would rank dead last in terms of upside per R&D dollar, even though we know it is a great business for them.)

biotech VC economics illustrated

HIG announced that they've raised another $268M fund to support drug development investments. (Congrats to them - the squeeze is on in VC, and most believe that VC limited partners are likely to concentrate their investments in 'survivor' VC funds. In other words, it's survival of the fittest, and having a number of LPs in follow-on funds means HIG is fit.)

Separate, Amgen announced the acquisition of KAI Pharma for $315M. (Congrats to them, as well.)

Seeing these two unrelated transactions, I wondered how many KAIs does HIG have to create to provide a worthwhile return to their LPs. (This is intended as general analysis, unrelated to HIG or KAI's specific performance or history, except that I'm using their numbers & press releases as representative of their industries.)

First, a bit about HIG's fund: according to the press release, the fund will support HIG's investment in 12-15 companies, with each investment to receive up to $20M, and liquidity targeted 4-6 years post-investment.

KAI, meanwhile, was launched in 2002, and has received $63M in venture funding over 10 years. So, using really simple terms, KAI generated a 5X return, or (on average) a 17% annual return. (This very simple analysis ignores the fact that the $63M invested in KAI was made a different times and valuations, and that some of the KAI equity is held by employees, not investors. You could assume that employee ownership was ~10% of the shares, but these are certainly common shares, vs. preferred for investors, meaning only that all of my figures could vary if you knew specifics of the KAI story.)

Any biotech that creates liquidity in excess of invested capital is automatically in the top half of all bioventure investments, but unfortunately, the 17% annual return is likely no better than half of the investors' expectations. There's some debate about what the discount rate should be for an early stage biotech - I've always used 40% at a minimum, so would argue this could be lower, particularly for later stage private investments. LP expectations for a biotech fund is for fund returns somewhere in the 20-30% (annual) range overall, which is the net of some positive returns and unfortunately some number of absolute failures.

Using 40% as the target IRR, and six years as HIG's average time to liquidity, the average new HIG investment would need to generate a 7.5X return in 6 years (40% annual IRR.) Overall, HIG needs to turn $268M into ~$2B in 6 years, though more and sooner would always be appreciated by the LPs.

So let's say that HIG funds 13 investments from this fund, and results are distributed as such:

4 x complete duds x $13M avg investment, zero return
4 x small return on original capital x $18M investment, 2X return
4 x modest return x $18M investment, 5X return (roughly equal to KAI's outcome.)
3 x big wins x $23M investment, 20X ROI

Here's what the total fund value becomes with these assumptions:

You can argue with my distribution of investments and ROIs (every VC would), but I've played with the numbers, and can't make it work - I can't come up with a plausible macro scenario for a drug development investor to turn $268M into ~$2B.

(One other observation: this analysis confirms the notion that VC fund success or failure is determined by the amount and magnitude of the big winners. One more or less 'big wins' makes the VC fund either a screaming success or honking failure.)

I tried one other approach to validate the VC drug development model: it is widely stated by Windhover that an anti-cancer compound in Phase 1 trials is worth ~ $100M. Assuming a cost of $5M per program from discovery to Phase 1, HIG would need to generate 20 of these programs, and they'd have enough capital to support ~40 targeted tries (after accounting for the friction of fund salaries, overhead at portfolio companies, etc.) Is there any reason to believe that HIG (or any other VC firm) could bat .500 in their attempts to generate phase 1 programs?

I'd disagree with any program IND success rate expectation of >25%, so my answer is no, though you could convince me that through the use of outsourcing maybe you could get the cost/program down from $5M, thus, reducing the required success rate.


In short, I can't see how the traditional biotech VC model could work, without abnormal success in portfolio companies or sooner or greater liquidity for portfolio companies. I'd say that KAI and other bioventures that have reached liquidity like Plexxikon - while representing above average success relative to the industry, show that the VC model is busted. (In biotech at least.)

I don't think this is a product of macro trends (Sarbox, competition from generics, medicare price cuts, etc.) but rather a by-product of the inefficiency of early stage drug discovery. For example, much of the earliest stage lead discovery is best described as a shotgun approach rather than rifle shots. Part of this is driven by how hard and imprecise drug discovery is, and partially by asset investment (if you spend millions on an HTS lab, you're biased towards quantity over quality).


postscript: just a reminder that this analysis isn't intended as a critique of HIG or KAI. I'm just using their #'s to illustrate.

Quick hits

Ho-hum, another $1B oncology product for Roche. Despite the mild reception in the business press, this is HUGE news: Roche is about to receive approval for T-DM1, a drug that combines the targeted therapy of Herceptin with the benefit of chemotherapy. Perhaps Herceptin is old news (approved in 1998), but this is a story where everybody wins: Roche gets a product with a "fresh" patent clock and an advantage over any biosimilar Herceptin clones, patients get better outcomes with fewer side effects, and the drug design & drug delivery folks now have another validated approach to beating cancer. Combos are the future!

This just in: science is hard! A research team at Amgen tried to duplicate the research behind 53 important cancer research advancements published in leading journals. They were successful in duplicating the original findings in only 11% of of their experiements. Let's hope that there's some selection bias in Amgen's research, or some other explanation - I'd hate to think that 89% of all cancer research is wrong - though this most likely reflects the pressure to publish among academics.

First setback for a PI3K inhibitor. PI-3 kinase targets have been in vogue for about 4 years, with several of the top 20 pharmas with active discovery programs addressing multiple isoforms of PI3K. The first Phase III clinical trials of a PI3K inhibitor - by Keryx & Aeterna have concluded, with negative results. This might, however, not be a reflection of the merit of PI3K as a target, but rather a reflection of how unlikely microcap drug developers are to successfully develop cancer therapeutics, and another lesson for investors that if a biotech's lead compound can't win a partnership with a big pharma company, you probably shouldn't put your capital behind it either.

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.)

Xcovery blog revisited (state of targeted Rx)

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

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

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

 

Of note:

• The 17 approved molecularly targeted drugs accounted for $27B in global sales in 2011. Think about that for a second, then consider that most of these drugs have been on the market for only 5-6 years, and their approved indications are still growing. Consider too that most have not been applied as combination therapies.

• Even the senior citizen of the group (Herceptin, approved in 1998), has seen prolonged growth, averaging 36% per year over the last five years.

• With 8 blockbusters and several more close and still growing (Tasigna, Sprycel, etc), almost all of the targeted drugs are either blockbusters, or well on their way. So much for the concern that targeting drugs might limit the market potential.

• The top 4 (Avastin, Herceptin, Gleevec, and Lucentis) have made a mockery of their projected sales ceilings and are still growing strongly.

• On the other hand, the only assets that appear to be underperforming expectations are Amgen’s Vectibix, GSK’s Tykerb, and Pfizer’s Torisel (specific sales data isn’t available for 2011, as Torisel is listed under “other oncology,” totaling ~$130M across several drugs.)

• Vectibix is still playing catch up to Erbitux, and Tykerb hasn’t gained much traction against the Roche juggernaut.

• I wonder what Amgen’s new CEO will do about Vectibix. It seems that there’s 2 choices: go big (invest in expanding trials for more indications and in comparison with Erbitux) or go home (sell the product to another biopharm.)

• 4 of the top 6 are Roche drugs, which means that they were discovered by Genentech. Hats off again to the DNA team in South San Francisco for their amazing science and productivity. I wonder if we will ever see any other drug discovery effort be so inventive and productive for a prolonged period.

• Also: I don’t think anyone is doubting the wisdom of Roche buying the piece of DNA that Roche didn’t own. I haven’t run the numbers, but I’d be shocked if the DNA acquisition wasn’t a resounding financial win for Roche.

• Unfortunately, OSI’s acquisition of Macugen was a tremendous dud.

• I am encouraged by the progress since my last analysis in 2006 – an average of two new approvals each year, with most new products addressing new targets or diseases, in contrast to the incremental “me too-ism” in other pharma areas like ED or cholesterol drugs.

A few sweeping generalizations:

• FDA approval and sales success seem to be connected to corporate resources. Small to mid-cap biotechs have been chasing targeted therapies for ~15 years without much output. (I’m talking about companies such as Exelixis, Vertex (pre-HepC), Ariad, etc., though I don’t mean to pick on specific companies.) With three exceptions (Onyx’s Nexavar, OSI’s Tarceva, and the former ImClone’s Erbitux), the targeted therapies have largely been developed in-house by “old” companies with multi-billion dollar market caps and the resources to match. (You could make the case that Amgen’s Vectibix came from a small targeted effort at Abgenix, but I suspect that it was Amgen’s resources that got Vectibix through FDA approval. Similarly, Sutent started at Sugen, but Pharmacia and Pfizer seemed to have provided the big push.)

• A gross generalization: the small to mid-caps tend to lack broad biological or disease-specific expertise, instead investing in target-specific expertise, or platform-specific expertise, thinking that broad expertise (ancillary to their target or disease of interest) is expensive overhead. I wonder if the results to date argue for the big pharma discovery model, or just reinforces the need for a broad portfolio to be successful in drug discovery and development.

• With rare exception (as in Pfizer’s Xalkori and Novartis’ Gleevec), the path to FDA approval has been arduous for these drugs. There are a number of targeted drug developers who hold out hope that their P2 or P3 results will be so clear and strong that their clinical trials will be stopped early and approved quickly. That’s definitely the exception, unfortunately, and even in the positive trials for targeted drugs, the data has tended to be good, not great. I suspect that is a function of the requirements of clinical trial design and comparison to first-line chemotherapies. As a result the “new” drugs are posting smallish survival benefits when compared to the “old” therapies, with no accounting for how certain patient segments have had dramatic benefits. (Thus starting the vicious circular argument that targeted therapies ought to have stratified patient populations in clinical trials, but stratifying patients shrinks the market potential for such drugs, bring the business viability of the targeted therapy into question.) It seems that the FDA could take the Xalkori experience and develop a novel process for rapid approval based on patient stratification without derailing or obviating more broad approval for the drug.

The $27B in revenue in this segment (likely to grow past $50B in 2014) has hopefully served to further de-risk pharma R&D in molecularly targeted therapeutics. Coupled with advancements in medicinal chemistry, we will hopefully see more and better targeted therapies in the future. 

R&D efficiency

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

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

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

Here's my takeaways:

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

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

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

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

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

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

Any other insights to be gleaned from the Forbes analysis?

A couple of caveats to the analysis: 

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

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

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

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

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

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

Who's left:


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

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


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


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


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


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


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


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

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

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

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

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


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