Interesting pharma M&A stat….

From this Bloomberg article: recent pharma acquisitions of >$500M have been at an average 71% premium to their pre-deal market price.

The article suggests that this is driven by the large number of Big Pharma's products going off-patent and therefore needing to be replaced. This is true, but I think there's also the partial explanation of a cost of capital arbitrage.

Pharma companies tend to have a cost of capital just a few points more than the borrowing from the Fed. This figure can be calculated for each pharma company, but let's just assume 8% over the long run, but with today's low interest rate QE2 environment, that might be more like 6%.

Biotechs, - even public biotech's - have a MUCH higher cost of capital. This too varies based on company, disease-focus, maturity, etc., but probably somewhere in the range of 12-18% today, or 2-3X big pharm.'s cost of capital.

Big Pharma companies (generally) trade based on earnings multiples, while biotech's tend to trade on the value of growth, which is risk-adjusted by the biotech firm's MUCH higher cost of capital.

Consider the forward and trailing P/E ratios of the first 7 pharmas that came to mind:

So let's say that you've got a blockbuster ($1B in revenue) at typical pharma margins (27% operating margin - we'll use that as a stand-in for EPS.)

That suggests that on a forward basis, the blockbuster is worth $3.25B (forward P/E of 12 x ($1B x .27)) to the pharma.

But if the blockbuster has sales of only ~$250M at this point, and $1B in revenue is still years off, the discounted (risk-adjusted)  value is much less perhaps half the value of its' forward value under the wings of a pharma company.

This example is pretty much a reflection of the setting of the HGSI-GSK merger talks. HGSI had $130M in revenue (JV revenue) and a market value of <$1.3B immediately before GSK launched their $2.6B takeover offer.

What I've described above - pharma's lower cost of capital relative to biotech driving M&A activities - is nothing new, but with interest rates today low enough that borrowing costs are almost negative for big pharma, it should really only be news if Big Pharma WASN'T buying, irregardless of the oncoming patent cliff.

Thanks to FierceBiotech for pointing out the article.

Sequencing hardware: who's best?

An academic group ran similar experiments on Ion Torrent PGM, Illumina MiSeq, and 454 GS Jr DNA sequencers. And the winner was……….well, there was no clear winner - performance was differentiated by machine - the PGM was the highest throughput, MiSeq most accurate, and the 454 had the longest reads.

I think this is a problem because currently the incremental customers that represent sequencing moving from a niche to a mainstream activity are unlikely to have a full understanding of their needs. For example, while the team at the Broad Institute knows why they'd prefer machine 'A' over machine 'B', a typical pathology lab does not know enough to decide if they would get the most benefits from hardware producing the greatest accuracy or the longest reads? What's acceptable accuracy? I'd argue that the path lab at the University of Whatever can't answer these questions.

Until the answers here are more obvious, customer demand will be for a slice of a shared sequencing resource (a sequencing core) rather than for their own sequencing hardware, thus limiting the growth of the hardware market. (Though this is good news for Oxford Nanopore and other NGS hardware suppliers - the longer it takes for the market to mature, the more prospects who remain uncommitted to any certain hardware platform.)

DNA, RNA, and….XNA?

A UK team synthesized DNA-like and RNA-like chemicals with similar properties, though using never seen-before chemistry to act as the structure for the nucleobase genetic information. (In other words, traditional A's, G's, T's. and C's, but novel structures in place of the ribose or deoxyribose sugar scaffolding. Good scientific over views can be found here or here.)

The resulting molecules are referred to as XNA - xeno nucleic acids. The implications of XNAs are profound, and I'm not even counting the conclusion that it now seems that life need not be based on DNA or RNA. (I can't wait to see how the evolutionists and creationists spin this news.)

The UK team's research represents the dawn of a new research modality or at least a re-definition of the science of biochemistry. XNAs could be a new source of therapeutic compounds or a source of new biomaterials. XNAs could be a key component of quantum computing (it would seem that XNAs could represent organic memory storage).

My first thought, as I contemplate how to explain the significance of XNAs to a non-bio-geek, is to suggest a mainstream analogy: DNA & RNA are traditional operating systems that we have grown up with and almost mastered, like Linux or Windows. The development of XNA is like the establishment of a different but ubiquitous operating system like Java. Like Java, XNA could enable exciting new applications in a breadth of industries or operating systems.

I think XNAs will kickstart a wave of interest in chemistry and synthetic biology research, not just in traditional biochemistry groups, but probably as far afield as NASA (XNAs as an analog for extraterrestrial life?) and Dow Chemical (why synthesize a chemical when you can express it?)

A couple of questions to chew over as a result:

1) while XNAs represent a change in the basics of life's chemistry, is an improvement possible, or has evolutionary biology optimized our chemistry?

2) what does this mean for large synthetic biology ventures like Intrexon? Their existing IP likely just became less relevant (or valuable), but their core capabilities are now more relevant. (I'm probably getting ahead of things - the XNA technology is still a long way from commercialization.)

3) what groups will be the first to incorporate XNA in their grant proposals? Will it be drug discovery groups, who would consider XNA another lead class on the order of siRNA or aptamers or will it be chemical engineers?

4) what can be down to mitigate the inevitable new, larger, louder round of synthetic biology fear-mongering among bioethicists and bio-Luddites, as XNAs could possibly do very bad things - intentionally or unintentionally.


Of course, XNA was not the biggest scientific advance this week. That prize goes to the research team who discovered the cause of brain freeze. I wonder if the research was underwritten by Slupree Corp.

HGSI in play, an era comes to a close

It's been a long, long, long road for Human Genome Sciences, but congratulations are due for their $2.6B buyout offer from GSK at a roughly 50% premium to their previous trading price of $7 per share. HGSI rejected the offer, but it is widely expected that HGSI and GSK close a deal at a slightly higher price ($3B?), though it would be fun to see GSK hold firm on the pricing of their offer - I don't think HGSI is likely to attract higher bids from any other companies.

By way of comparison, over its' history, HGSI raised ~$3.8B in capital.

The buyout is driven by HGSI-developed Benlysta (for Lupus, partnered with GSK) and it's near term pipeline which includes a pretty exciting atherosclerosis drug. Once again, we see big pharma buying a partner who has been substantially de-risked, something to consider as Vertex, Onyx, and others approach this stage.

But HGSI will forever be to me a lesson in buzzword-investing.

Rewind to very late 1999-2000 - the peak of the internet investing bubble and the dawn of the genomic age. Tech investor fervor and the news of the success of the Human Genome Project ran up the stock prices of all things genomic. HGSI peaked at a split-adjusted price of 103 in 2000. (Reminder: GSK's current offer is ~$13 per share.) Here's a crazy chart of HGSI's stock price over the last 13 years:

(Live link to chart)

But genomics shares (including Celera, Incyte, etc.) cratered quickly once the hot money cooled and once the realization hit that genomics products seriously lagged, for a variety of reasons. What followed was a lonely decade for genomics stocks, and I can't help but wonder if the 2000-era fervor was a net negative for genomics. (Did the investing bubble distract management from building a successful long term tech platform? Did the unreasonable expectations of the market poison the well for future genomics companies?)

The genomics bubble was nothing new - remember the gene therapy bubble or the angiogenesis bubble before that? Since the genomics bubble we've seen a stem cell bubble and an RNAi bubble, so clearly the investment community hasn't learned the lesson to ignore or at least devalue hype, but HGSI's sale to GSK shows that post-hype, post-bubble companies can still generate value. 

NOT in biotech's robust future

The main theme of this blog is that massive innovation currently underway in the biotech industry will improve health care globally and create exciting businesses. The hallmarks of this "molecular future" will be personalized medicine, genomics, and broad digitally-enabled technologies, such as DNA sequencing, arrays, and multiplexed assays.

But today - as a follow-on to last week's Top 10 Promising Cancer Drugs post - let's talk about one biotech 'innovation' that won't be powering growth or improving outcomes: cancer immunotherapy.

FierceBiotech collected the comments spawned by their original Top 10 article, and there was a surprising amount of positive commentary in support of cancer immunotherapies. (Sometimes referred to as vaccines.)

As bullish as I am on the "molecular future," I have the exact opposite feeling for cancer immunotherapy - partially due to my experience working at a cancer immunotherapy company in the late 1990's.

The concept of cancer immunotherapy is very appealing - train or otherwise get the patient's immune system to recognize and respond to a cancerous tumor as foreign, thereby empowering a non-toxic immune response. And, indeed, this has been shown to happen in various studies, dating back more than two decades.

An effective cancer immunotherapy could be extremely targeted with limited side effects. But the immune system is far, far more complex than anticipated and frankly humbling to most researchers. It is seductively simple to conclude that all one has to do is pick the right antigen to stimulate an antibody response (as in many immunological disease), but there are apparently many biological holes in this theory special to cancer. (For one, we're learning that cancer tumors are not homogeneous.)

Here's my rationale for immunotherapy skepticism:

1) There is a long track record of failure in this area.
2)  the core thesis is still lacking validation.
3) big pharma has virtually no investment in this research area
4) the regulatory approval path is not optimized for cancer vaccines.
5) cancer immunotherapy research is asset-intensive and effort-intensive. Pursuit of autologous therapies is particularly labor intensive. In contrast, 1 informaticist or 1 medicinal chemist is enough to launch a discovery/development program.
6) what little commercial effort in the area of cancer immunotherapy is being conducted by micro-cap companies. (I don't mean to denigrate any company successful enough to go public, but there is a load of history confirming that companies of this size and scale just don't have the assets/resources necessary to conduct pivotal research.)

In essence, cancer immunotherapy research has the challenge solving of incredibly complex disease biology using the an incredibly complex modality. In effect, cancer immunotherapy equals the complexity of cancer treatment squared, though with less pharma support.


Case in point: CEL-SCI (CVM). While spun out from the very credible Max Planck Institute and built on attractive scientific rationale, CEL-SCI has been chasing an immunotherapy solution ("Multikine") since 1983. Nearly 30 years later, CEL-SCI is a micro-cap, with a market valuation of ~$110M and likely insufficient resources to complete their Phase III trials of Multikine.

I really, really hope that CEL-SCI or the other cancer immunotherapy companies are ultimately successful, but my perspective is that there are more promising oncology technologies for pursuit and investment.






It should be pointed out, though, that there is an FDA-approved cancer immunotherapy - Dendreon's ProVenge for prostate cancer. Dendreon received FDA approval in 2010, but market response to date has been limited. It is unclear if the market's response to ProVenge is driven by technical skepticism, or by the complexities of creating and delivering an autologous vaccine.