Life Technologies Said to Be in Takeover Talks- Bloomberg

This article smells like it was planted to chum the waters for a deal.

I think that LIFE is generally fairly valued by the markets, so they're going to have to get one of the corporate buyers (Roche, Danaher, etc) excited enough to overpay.(I don't see that happening in the case of very-disciplined Danaher, or most of the other companies named, but then again, I was shocked at what Merck KgA paid for Millipore.)

Also, as I've mentioned before, the decision of whether or not to put a company up for sale very often is solely a question of whether or not a CEO wants to move on. (This is especially true in banking M&A), so I guess Greg Lucier is ready to move on to his next challenge. I wish more Boards in that event would decide to turn the company over to a new CEO internally sourced rather than  undertaking a sale. 

Life Technologies Said to Be in Takeover Talks- Bloomberg

by Cristina Alesci, bloomberg.com
January 18th 2013 11:01 PM
Life Technologies Corp. (LIFE), a maker of DNA-sequencing equipment and laboratory materials, is in discussions with private-equity firms and health-care companies about a potential sale of the company, according to people familiar with the process.

Blackstone Group LP (BX) and KKR & Co. (KKR) are among four private- equity firms weighing bids, said two people, who asked not to be named because the discussions are confidential. Health-care companies also have expressed interest in a takeover and potential suitors have until late January to submit offers, the people said. Life said yesterday it had hired Deutsche Bank AG and Moelis & Co. to assist in a strategic review of the company.

The Carlsbad, California-based company has a current market value of about $10.5 billion, after shares rose yesterday to their highest-ever price based on takeover speculation. Life may sell for about $13 billion, with a buyout fund writing an equity check of $4 billion to $5 billion for the deal, one of the people said.

Life's "valuation has been relatively depressed," Ross Muken, an analyst with ISI Group, said in a telephone interview. "They've had an ongoing battle in terms of messaging, positioning and capital deployment."

Life trades at about 15 times estimated earnings, compared with about 33 times for Illumina Inc. (ILMN), its competitor in DNA- sequencing machines.

Life's shares rose 11 percent to $60.79 at the close yesterday in New York, the biggest single-day gain in almost four years and the highest value since shares started trading publicly in February 1999.
The company's board retained Deutsche Bank and Moelis "to assist in its annual strategic review," Life said in a statement. "The board of directors has not decided on any specific course of action."
The company's statement implies Life has "potentially received an offer from an acquirer, is contemplating a LBO or is potentially in the process of shopping the company for a strategic buyer," William Quirk, an analyst with Piper Jaffray & Co., wrote in a research note. He cited Roche (ROG) Holding AG, Thermo Fisher Scientific Inc. and General Electric Co. (GE) as potential strategic buyers.
Gene-sequencing companies such as Life and San Diego-based Illumina are attractive takeover targets because their technology can be used to provide a blueprint of a person's DNA, information that may eventually be used to diagnose disease, identify the risks of certain conditions or better target medicines.
Roche, the world's biggest maker of cancer drugs, failed last year in a hostile bid for Illumina. Life is more diversified than Illumina, with "slow-growth research consumables" dominating its portfolio, said Quirk. For that reason, "we believe an acquirer interested in the faster- growing next-gen sequencing business has better options."

ISI Group's Muken put the possibility of a leveraged buyout at 10 percent, pegging the price at $55 to $65 a share. He said a sale to a strategic buyer, such as a large pharmaceutical firm or equipment company like Danaher Corp. (DHR), may have a 40 percent chance of occurring, at $60 to $70 a share.

Roche backed away from its $6.7 billion bid for Illumina last year after investors asked for a higher offer. Roche doesn't comment on rumors or speculation, Daniel Grotzky, a spokesman for the Basel, Switzerland-based company, said by e- mail in response to a question about Life.
Seth Martin, a spokesman for GE, said the company doesn't comment on rumors or speculation. Ron O'Brien, for Thermo Fisher, declined to comment. Matt McGrew, chief of investor relations for Danaher, couldn't be reached for comment.


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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.

biotech as fantasy baseball

Luke TImmerman @ Xconomy compares bio-pharma to fantasy baseball in an interesting way. Since baseball DOES explain life (and vice versa), here's a few more bio-baseball analogies:

Bryce Harper = Intrexon. Harper - an outfield prospect for the Washington Nats - is arguably the game's greatest prospect, though it has cost a huge amount of money to sign and develop Harper to this point. Likewise, Intrexon, with great prospects in synthetic biology, has required a huge amount of capital investment to date. Both Harper and Intrexon are anticipated to be very productive, but neither is assured of being a net positive.

C.C. Sabathia = Genentech. Sabathia in Cleveland and Genentech on their own had prodigous success, but both have joined much larger 'empires' in the last few years in the form of the NY Yankees and Roche, respectively. Both Sabathia and Genentech have carried on their success in their new uniforms.

Jamie Moyer = GPCR research. Ancient by current standards, both Moyer (49 years old, and new starting pitcher for the Colorado Rockies) and GPCR research keep delivering.

A-Rod = Pfizer. Both are cash-rich giants of their respective industries, and based in NYC, but both have delivered only marginal results over the last few years, perhaps getting by on reputation.

David Freese = Biogen. Both are known for two big hits in particular (Freese in the 2011 World Series, Biogen with Tysrabi and Rituxan). Both really need to deliver in 2012 in order to stay in the big leagues.

Andrew Friedman = _________ (position open.) Friedman, the creative and successful General Manager of the resource-poor Tampa Bay Rays has through innovation and smart deals made Tampa competitive with teams with payrolls twice their size. Bio-pharma badly needs a few Andrew Friedmans to adopt innovative business models and generate R&D success far beyond what a meager budget might suggest.

Average college baseball player = average RX or DX IP from an academic center. Both are really, really, really far from major league success. The only difference is that the college ballplayer knows it.

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.

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

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

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

• Cancer just became even harder to solve. Think chess is complex? How about 3-D chess? That's pretty much the leap in complexity that cancer researchers just experienced. 

• Possible boon for DNA sequencing: demand for multiple sequences per patient may make DNA sequencing a bigger market faster. The NEJM study suggests that sequencing a tumor longitudinally (i.e. at a regular schedule, during treatment) will guide multiple treatment decisions, which may differ based on new expression patterns or mutations. Does this also mean that each tumor will be sampled many times in different sites at diagnosis? If so, we may move from 1 sequence/patient to dozens of sequences per patient. (Good gosh that's ALOT of data. 1 terabyte per sequence is hard enough to handle. 20 TB/patient? Wow.)

• Anyone working on hazily predictive PGX might be wise to give up. The idea of a single analyte for a single disease, or a number of analytes against a number of diseases probably only targets one portion of a given disease. In other words, if your predictive test isn't 100% predictive, you are only explaining a fraction of the disease, and therefore of negligible utility.

• This might be the death of Affymetrix.  I can't see much value from a highly variable 1-dimensional expression profile, unless they invent a way to generate multiple expression profiles from a single sample at roughly the sample price point.

• This news might actually boost sales of targeted therapies in the near term. Why test for HER-2 status? Even if a patient is tested HER-2 negative, an oncologist wouldn't be out of line to still treat with Herceptin, knowing that the HER-2 negative status may only apply to a portion of the tumor.

• Along the same lines, the NEJM finding may give a boost to combination therapies. For example, Sutent, Nexavar (VEGFR and PDGFR) and Raf kinases), Torisel (mTor), Votrient (VEGFR-1, VEGFR-2, VEGFR-3, PDGFR-a/β, and c-kit), and Inlyta ( VEGFR-1, VEGFR-2, VEGFR-3,platelet derived growth factor receptor (PDGFR), and cKIT (CD117).) are each sold for RCC (kidney cancer) but each seem to be only marginally effective. They have different inhibitory profiles though - could combining them produce a better outcome? Roche would seem to be in the best position to gain if combinations are successful.

• Would a need for combination therapies be the straw that breaks the camels's back on the American health care system or even the USA? If treatment with a single targeted therapeutic may be $30,000 per month, would a combination therapy be $100k/month? I can't imagine Medicare and private insurers are ready to pay these sums. If they are, Medicare is already a multi-trillion dollar liability. Wanna go for quadrillion dollar liability?

• This may be a boon to systems biology researchers, like Lee Hood and his team at the ISB. Hood has for a long time seen cancer not as a product of a single mutation, but rather a cascade of biological signals which in total result in cancer. 

• Expect more attention to early detection and treatment. Cancers are FAR less complex in their earlier stages of development.

• Just a guess on my part: more surgical biopsies, less needle biopsies if more tumor material is needed?

• The result: we need more different cancer meds to mix and match patient profiles. Could the FDA loosen up a little on approval requirements, or would this make it even more difficult, as any new targeted drug for a given disease would need to succeed or fail in combination with other targeted therapies? (i.e. more false negatives a false positives from combinatorial effects.)

• Good news/bad news. Bad news: every single clinical-stage targeted therapy just became less valuable. That drug targeting gene "X" is less valuable, now that gene "X" explains less of the disease. Good news: targeted drugs that narrowly failed late stage trials might be resurrected. Maybe the drug didn't fail because it wasn't effective against the target, but rather because the target explains less of the disease than previously believed.

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

The M&A game….

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

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

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

What the ILMN-Roche and AFFX-eBiosciences deal have in common is that both deals are now an exercise in game theory. Consider ILMN's options:

1. Accept Roche's bid. (notgonnahappen. Roche's offer is ~$6 below the current price) 
2. Adjust the terms: wrestle for a higher bid from Roche or find another bidder to up the price. 
3. No deal. Win a proxy fight by making the stand-alone scenario more real and financially attractive. 

Likewise, consider eBioscience's options:

1. Accept AFFX's likely revised downward terms, though still rich, in order to allow AFFX to win debt financing of the acquisition. 
2. Adjust the terms by selling to another suitor, likely at a lower price than AFFX's rich offer. 
3. No deal. No liquidity for investors. 

Timmerman argues Illumina shareholders should vote to remain independent for largely qualitative reasons. Unfortunately, I think the decision to be made by shareholders is much more cold and quantitative: what's the better risk-adjusted net present value?

1. Roche's $44.50/share bid, (again, notgonnahappen.) 
2. a sweetened bid, or 
3. the capital gains in future years from selling ILMN shares after the company stock re-appreciates. 

Putting some #'s to #3. Using round figures, ILMN is at $50/share, and had a previous high of $80/share. Holding ILMN stock for 2 years to see $30 in appreciation would require an annual return to equity holders of 26.5% - a not unreasonable scenario, particularly in such a growing industry. The problem is, the $30 gain offered in the future (over two years) can be made a lot less relevant with a sweetened bid 'now' by Roche.

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

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

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

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

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


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

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

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

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

NGS & DX?

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

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

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

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

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

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

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

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

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

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. 

Well done, Genomic Health!

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

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

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

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

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

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

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

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

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

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

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

Kudos to GHDX!

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

Illumina - Roche

I am having a hard time rationalizing the Roche bid for Illumina. Not that Illumina isn't a great company (it is) or that Roche isn't a great company (it is too), but the Roche press release announcing the hostile merger rationalized the potential Illumina acquisition as to "enable the discovery of complex new biomarkers improving drug discovery and the selection of patients most likely to respond to a targeted treatment with high clinical relevance. In addition, by building on Illumina’s capabilities Roche will be able to use its scale, global distribution and diagnostic test development expertise to develop new diagnostic tests that serve patients and customers even more effectively.”


I read that as "we (Roche) want to transform our diagnostic presence in "old" technologies (like IHC assays) into way-cool sequencing-based molecular diagnostics, and the best way to do that is to buy a hardware company that is just now being usurped by LIFE's Ion Torrent sequencing solution."


This doesn't make sense to me, as Roche could probably get such biomarker & diagnostic discovery expertise for 1% of the price of acquiring Illumina by striking 100 x $600k partnerships with biomarker/diagnostic focused companies.

One other problem: Illumina doesn't do any biomarker/molecular diagnostic  discovery/development. 


As of Ilumina's July SEC filings, 94% of Illumina's revenue is derived from hardware or consumable sales. The other 6% is service revenue, largely revenue from companies like 23andMe that contract with Illumina to perform very standard genotyping on their behalf.


(Incidentally, molecular diagnostics and DNA sequencing represents ~4% of Roche's business, by revenue.)


Illumina may be the best in the world at building, selling, and servicing genome sequencers (though LIFE's Ion Torrent technology may have just leapt ahead. For now.) However, because Illumina doesn't compete with their customers, they don't do biomarker discovery, development of diagnostic tests, or performance of FDA-approved clinical diagnostics. 


(I believe that Illumina has gotten their hardware platform certified by the FDA, facilitating the development of clinical diagnostics by their customers, but no specific tests approved by Illumina or their customers.)


I could understand Roche's pursuit of Illumina if they were looking to augment or replace their 454 sequencer business. 454's pyrosequencing platform is widely perceived to be past peak and far behind Illumina and LIFE's sequencing platforms (and also behind Complete Genomics and PacBio's platforms in terms of value). However, hardware is a low-margin business compared to Roche's drug & diagnostic business, and Illumina's sales growth has run full speed into a wall, as of the most recent quarter, falling about 20% short of analyst revenue expectations.


Roche has offered $44.50/share for Illumina, but the market has already upped ILMN's stock to $51, valuing Illumina at a crazy level:


66x P/E
6X price/revenue
2.5X PEG ratio
19X enterprise value/EBITDA
18X EV/OCF


So Roche is willing to pay a high price to grab ILMN. If it is not for biomarker/diagnostic discovery expertise, why in the world is Roche interested? Here's my guesses:


-Roche's 454 technology is cooked, and it is better to spend $6B to buy $1B in new revenue to "pave over" the future financial hole that the 454 business represents. But Illumina's sequencing technology  while an improvement over 454, is still behind the leader, Ion Torrent (LIFE).


-Roche is "skating to where the puck is going to be" w/r/t NEXT next-generation sequencing (Nngs), as they (Roche) like ILMN's positioning for Nngs (Likely nanopore sequencing.) Possible, but not likely, since as a hostile offeror, Roche hasn't had a look at ILMN's R&D. Plus, Roche cut their own nano pore technology deal last fall


-Roche already has biomarker/diagnostics discovery talent & expertise (especially from the old Genentech), and they really just need hardware and sequencing talent. Makes sense, except there's no reason to spend $6B to get access to hardware, especially when the technology is changing so fast. Roche could buy 100 sequencers for 2% of the acquisition price, or just partner with a sequencing provider like BGI.

Or, most likely: following the earnings & revenue stumble by ILMN in the 3Q, in spite of the resulting valuations, Roche is trying to buy low on the apparently mis-priced ILMN asset.

This would make sense to me, and I think it would be acceptable rationale for a press release, but Roche has not taken that tone. Perhaps this is to dissuade other potential suitors, like GE. (GE might say when considering an Illumina bid "nice asset, but we don't have any therapeutic or diagnostic expertise.")

If not Roche looking to get a deal on Illumina, I can't buy into other rationale, unless I am missing something. If I am, please let me know in the comments section.