The NYT reports on Google's interest in working with life science data.
In the article a Google Ventures exec floats a trial balloon about the potential opportunity for GOOG which got me excited: "“In a given year, you have 200 million pathology slides. If that gets online, it is a Big Data problem.”
In other words, the company that has a huge effort underway in digitizing and sharing books could take on the same role in specimen data. Imagine how research might accelerate if the problem of accessing and curating specimen data became as easy as searching on Google, and if the accessible sample data population were to multiply at no cost.
This is very exciting. I don't see a viable business model yet (beyond NIH funding), but then again I don't really see a business model for GOOG's book scanning project. Perhaps someday GOOG will see your pathology data and play a role in reaching a diagnosis?!?
Thursday, April 12, 2012
NIH to repurpose failed leads?
(Let's call them "shelved" leads instead of the pejorative "failed." Some of the leads just lacked the organization will, expertise, or budget necessary to justify the risk of further investment.)
I find Collins' idea VERY interesting for a few reasons:
- this seems like a good role for government DD investment - the NIH can provide some very worthwhile assets & expertise, especially as leads may be repurposed from one disease class to another. (say, cancer to allergy application.) No pharma company has the breadth of expertise that the NIH does across their Institutes.
- this looks like a high leverage role for the NIH - theoretically, a small incremental investment in a shelved lead that is already proven safe in humans could have a HUGE return. However, the nature of the quest says that there will be ALOT of failure along the way, so much failure that pursuit of this mission by the private sector isn't economical.
-Politics: Any clinical success can make the NIH's mission more tangible to those who fund the NIH. The NIH does some great research, but since it is heavily biased towards early, basic research, not a lot of it can be used as a 'trophy' to gain more funding. Also, from the NIH perspective, a "win" from repurposing can come a lot sooner than a "win" from de novo drug discovery by NCATS, and by the nature of the repurposing work, the NIH can't step on any toes. If a pharma has shelved a program, how can they object to the NIH building off their earlier work? (I think we all know how pharma execs run from failed programs like cockroaches when the lights are turned on.)
-Also, while I'm not in love with the idea of the NIH taking a formal role in translational research, this seems like a smart way to dip a toe into drug discovery. Perhaps the NIH's DD experience to come from repurposing will help improve the DD regulatory process.
The devil is in the details, and in this case, it's the IP. What happens if a chemical patented by Company A for Disease X is found to be effective in Disease Y? Who owns the resulting IPR? There's no shortage of failed/shelved leads for the NIH to consider, so might they only pursue leads off patent or nearly off-patent?
The only question that I'd ask the NIH is "why does the NIH believe they have a higher probability of success with the "shelved" leads than the originating pharma team?" I can think of a few reasons, but I'd like to hear their rationale from them.
Wednesday, April 11, 2012
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.
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.
Behavior + environment + epigenetics > genetics
A clever study by Bert Vogelstein & team of the impact of genetics on health outcomes was released last week. The study found that generally two people with the same genome (i.e. twins) were not significantly more likely than average to suffer from diseases with a genetic explanation. (n= 53,000 x 24 diseases.)
For some reason, the study's conclusion was trumpeted as revelatory, but I think this is overblown - we have long known that genetics does not dictate general health outcomes, but rather describes a general and remote tendency. We've also known that your "regular" genome does not equate to your "diseased" genome.
We've known for ~50 years that behavior and environment can have a tremendous impact on health outcomes (if you're a heavy smoker or work in a coal mine, your probability of lung cancer skyrockets regardless of your genome), and we're beginning to understand how other 'codes' such as the ribosome code and also epigenetics 'controls' DNA (though we're still far, far away from completing that understanding), so it shouldn't surprise that genetics is only a part of the health equation. If anything, the study above confirms once and for all that genetics - while part of the equation - isn't a majority explainer or even a plurality of the explanation. (Except for genetic disorders (like Tay-Sachs disease.) This isn't examined by the study.)
What I'm taking away from the Vogelstein study is that many of the public policy/privacy fears related to genomics are overblown - there are legitimate reasons to control access to your DNA - but in most cases, your insurance company learning that you have a gene that increases your likelihood of colon cancer by 10%, is less important than the insurance company knowing that you work at the Springfield nuclear plant.
Another good point here by Eric Topol: our current genetic understanding is based on a few dozen whole genome studies. It might be wise to wait until the 'n' = 1,000,000 or more profiles.
For some reason, the study's conclusion was trumpeted as revelatory, but I think this is overblown - we have long known that genetics does not dictate general health outcomes, but rather describes a general and remote tendency. We've also known that your "regular" genome does not equate to your "diseased" genome.
We've known for ~50 years that behavior and environment can have a tremendous impact on health outcomes (if you're a heavy smoker or work in a coal mine, your probability of lung cancer skyrockets regardless of your genome), and we're beginning to understand how other 'codes' such as the ribosome code and also epigenetics 'controls' DNA (though we're still far, far away from completing that understanding), so it shouldn't surprise that genetics is only a part of the health equation. If anything, the study above confirms once and for all that genetics - while part of the equation - isn't a majority explainer or even a plurality of the explanation. (Except for genetic disorders (like Tay-Sachs disease.) This isn't examined by the study.)
What I'm taking away from the Vogelstein study is that many of the public policy/privacy fears related to genomics are overblown - there are legitimate reasons to control access to your DNA - but in most cases, your insurance company learning that you have a gene that increases your likelihood of colon cancer by 10%, is less important than the insurance company knowing that you work at the Springfield nuclear plant.
Another good point here by Eric Topol: our current genetic understanding is based on a few dozen whole genome studies. It might be wise to wait until the 'n' = 1,000,000 or more profiles.
Monday, April 9, 2012
Carl Icahn: net positive or negative for the biotech industry?
I can't decide if Carl Icahn's activism in the biotech sector is a good thing or a bad thing. On one hand, his insight, activism, and capital drives stock appreciation in the biotech sector. (And even just his interest in the sector is a good thing.)
On the other hand, no one is more responsible for making mid-cap biotechs an endangered species.
I first looked at this five years ago on the Xcovery blog (Wanna scare a CEO? Just say these 7 words: "Mr. Icahn is holding on line 2.") At the time, Icahn was agitating for the sale of MedImmune, and had recently bagged ImClone. Since then, he's a had a big influence in the sale of Genzyme, and made runs at Biogen and Forest Labs. BIIB and FRX raids did not conclude with a company sale, but both companies had bumps in stock values due to Icahn, and a big profit for Icahn.
Now Carl Icahn is chasing Amylin.
On my old blog I listed 10 reasons why Icahn's interest may be a net positive, and they're worth another look:
1. Interest by corporate raiders validates the biotech industry as viable businesses, rather than a collection of high-risk experiments.
2. Raider interest will attract other sources (non-alternative investments) of capital sends the message that biotech may be volatile, but not necessarily risky. (As opposed to the current notion that biotech is risky, but not necessarily volatile.)
3. Corporate raiders will keep biotech more slim and agile versus big pharma. (Though I've heard rumblings that some hedge fund could take down a pharma one of these days, so maybe this edge won't hold for long.)
4. Raiders force target companies to focus on "what's next," rather than complacently focusing on the sales and marketing of existing products.
5. Raiding will bring about needed consolidation among mid-sized biotechs, as the raiders view the overhead for companies at this size as a bad investment.
6. Raiders will increase the amount of business discipline within the industry. (And likely instigate management turnover, which could also be management evolution.)
7. Raiders will increase attention on the biotech industry.
8. Biotech has (and probably will always be) a game of capital raising. Raiders will bring more capital to the biotech industry, though the capital will tend to be higher-velocity.
9. Attention to financial returns by biotechs will increase among industry folks, as raider interest is in part related to the very high margins earned by biotechs. The high margins decrease risk for raiders, and can generate large amounts of incremental cash to justify raider transactions, if the margins are believed to be improvable.
10. Raiders (and other private equity types) may innovate new vehicles to finance biotech. One of these 'innovations' is quite old, but new to the biotech industry: dividends. (Icahn, in particular, often presses target boards to increase their dividend to drive stock prices.)
In retrospect, I think the label "raider" is harsh and inaccurate - Icahn certainly has high short term expectations, but I think he's also well-intentioned, trying to find the best home for at-risk, underperforming assets. He's not squeezing companies to cut staff to take more cash out of a target, or leaving behind half-dead Zombie companies, but rather hastening the process of smaller company selling out to big.
However, as a result, there are less small-to-mid biotech's left, meaning there's a "lost generation" of companies that could aggressively or reasonably re-invest in early-stage biotech, thus having the knock-on effect of impeding early biotech. (Historically, mid-cap companies have been less risk-averse than big pharma when it comes to partnering with smallish/early biotech. Plus, focusing on fending off Icahn's advances takes attention and capital away from planting partnership "seeds," and may make a mid-cap less attractive to a potential partner.)
The counter-argument that Icahn might make is that capital gains from his activities generate more capital to be invested in the biopharma sector at all stages. I think, though, that the law of supply & demand trumps all: reducing the number of potential "buyers" of early stage tech (i.e. GENZ, IMCL, etc.) drives the prices down on such tech/leads.
There's one other way to look at this that is very much to Icahn's credit: economic impact. Since selling MEDI to AZN, MEDI's footprint in Maryland (MEDI's home) is much, much larger, as they've become AZN's biologics center of excellence (CoE), and it seems that GENZ is also likely to similarly expand in Boston as a CoE for Sanofi. If Icahn's activism provided purely return on capital (rather than labor or assets), you'd see talent and IP sucked up into the corporate parent, and a diminished physical presence as the acquirer cut costs. This was pretty much the case with IMCL, but that might be a factor of Lilly's management style, as much as anything else. (An entrepreneurial NYC company and a starchy midwest giant don't make for a great pairing.)
Ultimately, your opinion of Icahn's impact in the biotech world likely depends on who you are. If you're a shareholder at a target company, you like him a lot. If you're an executive at a target company, you definitely wish he'd go away.
Finally, while this post is centered on Carl Icahn, it is important to note who else has been a key player on Team Icahn, and now on his own: hedge fund manager Alex Denner, who is credited with generating $2B in profits (or is it value?) while chasing under-appreciated biotech stocks, mostly with Icahn.
related: Amylin (AMLN) management: BUSTED!
On the other hand, no one is more responsible for making mid-cap biotechs an endangered species.
I first looked at this five years ago on the Xcovery blog (Wanna scare a CEO? Just say these 7 words: "Mr. Icahn is holding on line 2.") At the time, Icahn was agitating for the sale of MedImmune, and had recently bagged ImClone. Since then, he's a had a big influence in the sale of Genzyme, and made runs at Biogen and Forest Labs. BIIB and FRX raids did not conclude with a company sale, but both companies had bumps in stock values due to Icahn, and a big profit for Icahn.
Now Carl Icahn is chasing Amylin.
On my old blog I listed 10 reasons why Icahn's interest may be a net positive, and they're worth another look:
1. Interest by corporate raiders validates the biotech industry as viable businesses, rather than a collection of high-risk experiments.
2. Raider interest will attract other sources (non-alternative investments) of capital sends the message that biotech may be volatile, but not necessarily risky. (As opposed to the current notion that biotech is risky, but not necessarily volatile.)
3. Corporate raiders will keep biotech more slim and agile versus big pharma. (Though I've heard rumblings that some hedge fund could take down a pharma one of these days, so maybe this edge won't hold for long.)
4. Raiders force target companies to focus on "what's next," rather than complacently focusing on the sales and marketing of existing products.
5. Raiding will bring about needed consolidation among mid-sized biotechs, as the raiders view the overhead for companies at this size as a bad investment.
6. Raiders will increase the amount of business discipline within the industry. (And likely instigate management turnover, which could also be management evolution.)
7. Raiders will increase attention on the biotech industry.
8. Biotech has (and probably will always be) a game of capital raising. Raiders will bring more capital to the biotech industry, though the capital will tend to be higher-velocity.
9. Attention to financial returns by biotechs will increase among industry folks, as raider interest is in part related to the very high margins earned by biotechs. The high margins decrease risk for raiders, and can generate large amounts of incremental cash to justify raider transactions, if the margins are believed to be improvable.
10. Raiders (and other private equity types) may innovate new vehicles to finance biotech. One of these 'innovations' is quite old, but new to the biotech industry: dividends. (Icahn, in particular, often presses target boards to increase their dividend to drive stock prices.)
In retrospect, I think the label "raider" is harsh and inaccurate - Icahn certainly has high short term expectations, but I think he's also well-intentioned, trying to find the best home for at-risk, underperforming assets. He's not squeezing companies to cut staff to take more cash out of a target, or leaving behind half-dead Zombie companies, but rather hastening the process of smaller company selling out to big.
However, as a result, there are less small-to-mid biotech's left, meaning there's a "lost generation" of companies that could aggressively or reasonably re-invest in early-stage biotech, thus having the knock-on effect of impeding early biotech. (Historically, mid-cap companies have been less risk-averse than big pharma when it comes to partnering with smallish/early biotech. Plus, focusing on fending off Icahn's advances takes attention and capital away from planting partnership "seeds," and may make a mid-cap less attractive to a potential partner.)
The counter-argument that Icahn might make is that capital gains from his activities generate more capital to be invested in the biopharma sector at all stages. I think, though, that the law of supply & demand trumps all: reducing the number of potential "buyers" of early stage tech (i.e. GENZ, IMCL, etc.) drives the prices down on such tech/leads.
There's one other way to look at this that is very much to Icahn's credit: economic impact. Since selling MEDI to AZN, MEDI's footprint in Maryland (MEDI's home) is much, much larger, as they've become AZN's biologics center of excellence (CoE), and it seems that GENZ is also likely to similarly expand in Boston as a CoE for Sanofi. If Icahn's activism provided purely return on capital (rather than labor or assets), you'd see talent and IP sucked up into the corporate parent, and a diminished physical presence as the acquirer cut costs. This was pretty much the case with IMCL, but that might be a factor of Lilly's management style, as much as anything else. (An entrepreneurial NYC company and a starchy midwest giant don't make for a great pairing.)
Ultimately, your opinion of Icahn's impact in the biotech world likely depends on who you are. If you're a shareholder at a target company, you like him a lot. If you're an executive at a target company, you definitely wish he'd go away.
Finally, while this post is centered on Carl Icahn, it is important to note who else has been a key player on Team Icahn, and now on his own: hedge fund manager Alex Denner, who is credited with generating $2B in profits (or is it value?) while chasing under-appreciated biotech stocks, mostly with Icahn.
related: Amylin (AMLN) management: BUSTED!
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