DotW Strategies

As 2010’s days grow shorter, the pharmaceutical industry’s larger players face fundamental challenges, both in how they invest in internal research and how they ensure continued growth commercially for their medicines in the face of increasing scrutiny from regulators and payers. An analysis of Elsevier’s Strategic Transactions database in the October IN VIVO shows that, to date, most companies have adapted with a three-pronged strategy that places an emphasis on externalization, emerging markets, and unmet medical need.

This week’s edition of deals of the week doesn’t stray far from these established themes. (Poison ivy was apparently considered optional.)

Sanofi-Aventis’s alliance with Harvard University illustrates the ongoing allure of academic relationships, as drugmakers look to identify innovative new medicines ever earlier in the development cycle. Meantime, Glaxo’s tie-up with two Italian foundations in the development of a gene therapy to treat a disorder affecting only a few hundred people worldwide shows that no disease is too rare to attract Big Pharma’s interest--as long as the unmet medical need is high. Finally Pfizer’s deal with Indian biotech Biocon, illustrates drugmakers’ growing interest in both diabetes AND emerging markets.

GlaxoSmithKline/Fondazione Telethon & Fondazione San Raffaele: Big Pharma’s interest in rare diseases shows no signs of waning. This week’s rare disease pact – it seems like one a week is now pro forma for DOTW – aligns GlaxoSmithKline and two Italian foundations. On October 18, GSK announced plants to pay Fondazione Telethon and Fondazione San Raffaele €10 million upfront (about $14 million) for worldwide rights to a Phase I/II stem cell-based gene therapy for ADA-SCID, also known as "bubble boy disease." ADA-SCID, a single-gene defect which prevents the body from producing the enzyme adenosine deaminase, afflicts about 350 children worldwide, with about 14 EU patients and 12 U.S. patients born each year. (Thus, this isn’t simply GSK investing in a rare disease; ADA-SCID counts as one of those “ultra” orphan indications, a valid term even if it makes industry and advocacy groups squeamish.) Beyond the ADA-SCID program, the two foundations will partner with GSK on clinical programs in Wiskott-Aldrich Syndrome and metachromatic leukodystrophy, as well as four additional programs, all currently in preclinical development. In addition to the upfront payment, the foundations could earn specified development milestone payments for each program. In a same day business presentation, GSK’s Global Head of Rare Diseases Marc Dunoyer offered additional color about the rare disease unit’s strategic intent. The pharma intends to address 200 rare diseases with a focus in four primary areas: metabolism and inherited disorders, central nervous system and muscle disorders, immuno-inflammation, and rare malignancies and hematology. It continues to build its portfolio via dealmaking, including ongoing collaborations with Isis, Prosensa, and JCR Pharmaceuticals.—Joe Haas

Genentech/Biogen Idec: The longtime Rituxan partners have amended their co-development terms for next-generation anti-CD20 compounds. Biogen now gets slightly higher royalties on sales of the still-experimental compounds ocrelizumab and GA101, and their introduction will not trigger lower Rituxan royalties, as was previously outlined in their agreement. The firms squabbled for years over rights to what comes after Rituxan, and an arbiter ruled last year that Biogen had the right to participate in all anti-CD20 program development decisions. Historically Biogen has received 30% of the first $50 million in US and Canadian operating profits, then 40% of everything over $50 million, a threshold passed by Rituxan in the first quarter in each of the last three years, according to ISI Research analyst Mark Schoenebaum. Commercialization of ocrelizumab will no longer reduce Biogen's share of Rituxan profits, but certain regulatory and sales milestones of GA101 will. Also, Genentech will pay for all ocrelizumab development in multiple sclerosis, with Biogen receiving between 13.5% and 24% of US sales. With GA101, which in 2008 Genentech licensed from Glycart -- itself wholly owned by Roche -- Biogen will now pay 35% instead of 30% of US development costs and receive between 35% and 39% of profits based on certain sales milestones. GA101 is in advanced development for CLL and NHL. Ocrelizumab is in Phase II for multiple sclerosis but is no longer being tested in rheumatois arthritis. -- Alex Lash

Pfizer/Biocon: Pfizer and India's biotechnology flag-bearer Biocon finally -- after months of speculation -- announced a comprehensive global commercialization pact to bring to market a range of insulins including analogs of medicines marketed by Sanofi-Aventis, Novo Nordisk and Eli Lilly. Pfizer is doling out $200 million in upfront payments to Biocon, with the Indian biotech eligible for further milestone payments of up to $150 million. Biocon will also be entitled to additional payments linked to Pfizer's sales of its four insulin biosimilar products across global markets. As part of the deal, Biocon will take up clinical development, manufacture and supply of the biosimilar insulin products and regulatory activities needed for approvals in various geographies. Pfizer has told analysts that the deal will be "incremental," not "instrumental" to its strategy in emerging markets, biosimilars, and established products. Pfizer will be responsible for commercializing the products, while Biocon will develop and manufacture them. "Pfizer's participation in this market does raise the bar for the major producers of insulin over the long term," Leerink analyst Seamus Fernandez wrote in a same-day note. But it won't have a near-term impact because Pfizer brings little to the table beyond marketing muscle and the biggest opportunity lies in developed markets, where some of the products are patent protected for several more years. Sanofi's Lantus, for example, doesn’t lose exclusivity until 2015. – Vikas Dandekar

Romark/Intercell: Romark Laboratories and Intercell said they will collaborate on their hepatitis C programs by conducting trials on a combination therapy that will include Romark’s anti-viral drug nitazoxanide and Intercell’s HCV vaccine, IC41. The combination will seek to improve on the standard of care by adding IC41’s immune-boosting properties to nitazoxanide’s ability to slow cell replication without inducing mutations. The drug pairing will be studied side-by-side with the currently used combination of Pegasys (peginterferon alfa-2a) and Copegus (ribavirin), as well as a three-way combo of nitazoxanide, IC41, and Pegasys in a European Phase II trial slated for the first half of 2011. Nitazoxanide, an anti-infective agent in the drug class known as thiazolides that appears to activate protein kinase R, is already marketed to treat diarrhea caused by viral infections. It has been studied in conjunction with peginterferon and ribavirin as well. Tampa, Fla.-based Romark and Vienna-based Intercell did not announce financial terms of the deal.—Paul Bonanos

Sanofi-Aventis/Harvard University: Technically the tie-up between Sanofi and Harvard is a deal of last week, but with so much industry activity--and playoff mania--IVB somehow overlooked a deal that ought to be seen as a sign of the times. On October 14, Sanofi and Harvard announced they were joining forces in a broad translational alliance that gives the French pharma an early look at cutting edge science that could be important future pipeline substrate. Deal terms were not disclosed, but the collaboration is designed as a grants program, with a joint steering committee from both entities awarding funding based on scientific merit and “the potential to generate translational insight and value to biomedical research.” The boon for Harvard: scientists get access to flexible and rapidly available funding without spending hours – it’s really more like weeks or months – writing up government grants. Sanofi, in turn, has the opportunity to develop diagnostic, therapeutic, and prognostic applications of any discoveries made under the collaboration. Partnerships with academia have shown a marked uptick in number in 2009 and 2010 compared to years prior. According to Elsevier’s Strategic Transactions, the number of industry-academia partnerships jumped from 6 in 2007 to well over a dozen thus far in 2010. Nor are these the typical outsourcing relationships of yore; most are structured as true partnerships that aim to share both risk and reward. Notable recent examples: AstraZeneca’s alliances with University College London and Cancer Research Technology to create stem cell therapies for ophthalmic diseases and novel cancer medicines, respectively.--EFL

GE/Clarient: With cancer diagnosis and characterization in the vanguard of molecular diagnostics development and investment, it’s no surprise that GE Healthcare chose the area for its first major external investment in molecular test content. On Friday it announced an approximately $580 million tender offer for Clarient, which provides laboratory tests using important clinically validated cancer molecular markers including BRAF, EGFr, and KRAS. The deal, at $5 per share, is roughly a 25 % premium over its closing price yesterday of $3.77. Clarient hit profitability earlier this year, taking in $28.7 million for its testing services in the second quarter ending June 30. It utilizes most of the standard cancer testing technologies including immunohistochemistry, flow cytometry, FISH, and imaging. GE, working through its subsidiary in the UK (the former Amersham, which it acquired in 2003), expects to combine Clarient’s chemistry and molecular platforms with its own diagnostic imaging expertise, which would give it a full suite of triage and cancer diagnostic capabilities. In a sense, the link to imaging brings Clarient full circle. It originated as ChromaVision, a developer of digital microscopes, then morphed from an equipment maker into a service provider. Safeguard Scientifics, a 26% owner of Clarient going back to its ChromaVision days, said it will net approximately $145 million in the deal.-- Mark Ratner

St. Jude Medical/AGA Medical: St. Jude Medical’s announcement on Monday that it would pay $1.3 billion ($20.80 per share, a 43% premium) for AGA Medical, which had sales in 2009 of just $199 million, likely caused jaws around the industry to drop. Pick your chins off the floor, people. The transaction makes sound strategic sense, driving growth in key areas where St. Jude has significant resources but slower growing products. Case in point: St. Jude’s atrial fibrillation business grew by only single digits in the past year in the US, and the cardiac rhythm management sector is forecast to grow on a global basis by only 3% in the coming year. In contrast, AGA, operating in structural heart disease--a product segment that includes heart valves and various closure devices--enjoys double digit growth thanks to its leading share of the $250 million market for PFO closure. AGA also offers a number of new product areas to drive growth for St. Jude, including a next-generation vascular plug technology to replace embolic coils and a proprietary mesh-braided nitinol platform that will enhance the big device maker's product pipeline. In the company’s recent third quarter conference call, St. Jude Chairman and CEO Daniel Starks described the acquisition as a bolt-on to its cardiovascular franchise; the company is keeping on AGA president and CEO John Barr as head of the 550-person division. St. Jude’s recent deal flow indicates the company is trying to enter new markets via the business development suite. In September, the cardiovascular giant invested $60 million in remote monitoring company CardioMEMS, developing an implantable sensor for AAA and congestive heart failure monitoring. Early this year St. Jude also acquired intravascular imaging company Light Lab Imaging Inc. for $90 million.--Mary Stuart

Image courtesy of flickrer Neil Boyd used with permission via a creative commons license.

Financings of the Fortnight Looks for Its Shadow

We are always on the lookout for leading indicators, no matter how faint the signal. If you tend an herb garden on your back porch, you might prefer the "green shoots" metaphor. Ever hopeful that the second law of thermodynamics isn't really the guiding principle ruling our lives, we humans also imbue natural events and public rituals with significance. Earthquakes as divine punishment! The groundhog's shadow! That said, we should say right off the bat that Genmark Diagnostics is no Punxsutawney Phil.

Yes, Virginia, there was an IPO last week, and its name was Genmark. But it wasn't the sort that necessarily means a damn thing. An obscure UK diagnostics firm formerly known as Osmetech that creates a US subsidiary, reverse-merges into it to reach US shareholders -- and only pulls in $28 million after shooting for as much as $45 million, for that matter -- is only that. An N of one.

Yet it came at a time when we were already thinking about diagnostics, and funding, and the funding of diagnostics. The low-profile offering, tucked just in front of the long holiday weekend, was also sandwiched between two conferences that opened different windows on the application of genetic information. At a consumer genetics show in Boston this week, funding strategies weren't explicitly on the menu, but as our correspondents noted, it's becoming ever more clear that cost breakthroughs in sequencing will lead to identification of medically significant genetic variations in patients. The question then becomes, what do you do with them?

That was the topic last week at the C21 venture conference in California's Napa Valley, where the diagnostics panel drew an eager crowd looking for ways to put money into -- buzzword alert! -- low-cost innovation. (That is, really cool stuff that doesn't cost a lot to make.)

And as our colleague Mark Ratner noted in his recent IN VIVO feature, despite the early days of most genetic research, a trio of well-known VCs -- Kleiner Perkins Caulfield & Byers, Mohr Davidow Ventures, and TPG -- have spread their diagnostic bets further, particularly into cardiology, after hitting the jackpot with breast-cancer test maker Genomic Health. Genmark isn't in their portfolios, but as we've seen on the drug side, any IPO activity after the long dry spell of 2008-2009 is worth scrutiny, not just as an indicator for current portfolio companies but for investors looking to jump in. One of the keys to diagnostics is getting pharma's attention in a variety of ways, such as using tests as a marketing tool when a drug rep is out detailing. We'll let Ratner explain:

The raison d'etre of new molecular tests is to significantly add to the information available to physicians to enable or change critical clinical decision-making. Especially at a time when the pace of new drug introductions is slowing and the opportunities to meet face-to-face with physicians therefore diminishing, as molecular diagnostics moves into new and broad markets like cardiology and metabolic disease, pharma could use this opportunity to its advantage in many settings.

In the case of a specific cardio test called Corus CAD, Ratner writes, "There's sufficient novelty and interest in genetics and genomics associated with coronary disease that [drug reps] could start a dialog with a physician about Corus CAD and at some point change to their drug-oriented message."

Diagnostic brethren such as LabCorp, Roche and Qiagen make splashy acquisitions; pure-play pharmas probably won't, though some are keeping their options open. Other deals will come from industrial giants such as General Electric and Procter & Gamble. But with massive hoards of cash to spend, any sign of pharma opening its coffers for diagnostics deals could mark a big change in the way VCs invest, which despite a few high-profile deals hasn't been that stunning. According to the Elsevier Strategic Transactions database, investment in diagnostics, over $1 billion annually for most of the past decade, is trending lower this year with $273 million through May.

Then again, life-science investing is down across the board this year. Have no fear, there's always plenty of material to bring you...



Tetraphase Pharmaceuticals: The antibiotic developer pulled in a $45 million Series C round to push its lead candidate into Phase II trials later this year, marking another step toward filling what public-health officials say is a ever-growing need: next-generation treatments to fight drug-resistant Gram-negative bacteria, as noted by our colleagues at START-UP. Tetraphase starts with a tetracycline backbone and then modifies the molecule at multiple positions to create an extremely large library. These molecules then can be screened for both their anti-infective properties and their potential to cause off-target toxicities. The lead compound, the intravenous TP-434, will likely focus initially on intra-abdominal infections. The Series C cash will also help push two more compounds -- TP-2758, for complicated urinary tract infections and TP-834, for the treatment of community acquired bacterial pneumonia -into Phase I. Excel Venture Management, a new investor for the biotech, led the round joined by existing backers: CMEA Capital, Fidelity Biosciences, Flagship Ventures, Mediphase Venture Partners and Skyline Ventures. Steve Gullans, managing director of Excel Venture Management, will join Tetraphase's board of directors. -- Carlene Olsen

NormOxys: The developer of small-molecule oxygen-enhancing drugs to treat a variety of diseases announced on May 24 a $17.5 million Series B financing. In addition to existing backer Index Ventures, Care Capital participated in the most recent financing round, with partner Argeris "Jerry" Karabelas joining the start-up's board of directors. It brings the firm's total funding to $30 million. With its novel platform technology and top-notch scientific pedigree, NormOxys has raised a sizeable but not extraordinary amount of additional cash from A-list backers and avoided too much dilution. It can now also aim for a more lucrative big pharma partnership -- whether it's a licensing deal or acquisition -- once the lead molecule, and thus the company's platform, have been derisked. The lead molecule is OXY111a, which the firm calls an "oxyren," for its oxygen-releasing capabilities. It changes the offloading capacity of hemoglobin so that more oxygen can be delivered to tissues where needed. If all goes to plan, it shouldn't result in excess oxygen delivery to normal tissue, which can cause damage because of free radical production. Equally important, say officials, is that the molecule triggering the actual physiological changes is oxygen itself, not the oxyren. Thus, potential off-target side-effects that have scuppered artificial blood substitutes such as Biopure's Hemopure, Northfield Laboratories' PolyHeme, and Baxter Healthcare's HemAssist, should be less problematic. OXY111a is entering Phase I trials with a later goal of testing it against chronic heart failure and an undisclosed cancer indication. -- Ellen Foster Licking

Exelixis: The San Francisco Bay Area public biotech is no stranger to all kinds of financing deals, and now it's turned again to debt to help expand the late-stage development of lead candidate XL184. Exelixis said June 3 it has secured loans worth $160 million from two lenders at an aggregate cost of capital under 10%. Part of the cash will pay back a loan from GlaxoSmithKline, a remnant of the firms' broad, six-year license-and-option deal signed in 2002. It will also fund XL184, which should enter Phase III trials for second-line glioblastoma by the end of 2010, with more Phase III trials possibly coming in 2011. XL184 was rejected by GSK before the six-year deal expired in late 2008, but Exelixis pivoted into a lucrative deal with Bristol-Myers Squibb, which pays 65% of XL184 development costs. It is currently in Phase III for medullary thyroid cancer and earlier-stage trials for glioblastoma. Exelixis is tapping Silicon Valley Bank for $80 million with a seven-year term loan at 1% interest. It's also borrowing $80 million from Deerfield Management, a five-year term with a maximum principal of $124 million. Interest is $6 million a year. Exelixis opened a line of credit with Deerfield in 2008 that, at the time, officials said they hoped never to draw down from. But with a 40% cut in staff in March the firm is shifting resources to late-stage development, which is still expensive even with big-pharma partners footing much of the bill. -- A.L.

Constellation Pharmaceuticals: Epigenetics pioneer Constellation added a corporate venture backer, GlaxoSmithKline's venture arm SR One, in a $22 million Series B financing announced June 2. In addition to SR One, previous investors Third Rock Ventures, The Column Group, Venrock Associates, and Altitude Life Science Ventures, which led the company’s $32 million Series A in 2008, all participated in the round. SR One’s cash should help Constellation keep pace with its main competitor, Epizyme, which obtained backing from Amgen Ventures and Astellas Venture Management in its own $40 million Series B last fall. Neither company has reached the clinic. Both are focused primarily on cancer, but Constellation of Cambridge, Mass. hopes to move eventually into diabetes, autoimmune, inflammatory and neurological diseases. Epigenetics focuses on chemical modification to chromatin, the proteins that package DNA, to create therapeutics that influence gene expression. Two classes of such drugs already are on the market: Celgene’s Vidaza and Eisai’s Dacogen, both DNA-methylation molecules approved for myelodysplastic syndromes, and Merck’s Vorinostat, a histone deacetylase (HDAC) inhibitor for T-cell cutaneous lymphoma. At least two other HDAC inhibitors are in late-stage development for oncology indications. -- Joseph Haas

Extra thanks to Mark Ratner for help with this week's post. Photo courtesy of flickr user avmaier.

Notes from BIO: Positive Message from Anti-Infective Development

Cempra closed a $46 million Series C funding in mid-May. Any fund-raising in biotech these days is noteworthy, but there is an extra layer of significance to this one as a vote of confidence in anti-infectives drug development.

Capital is hard to come by for anyone, but the ability of an anti-infective development firm to raise capital from at least six private funding sources sends as strong signal that the uncertainty in anti-infective development stemming from regulatory delays experienced by projects like telavancin and ceftobiprole may be fading into the background.

Prabhavathi Fernades, the CEO of Cempra, told a BIO breakout session today that FDA's recent work on anti-infective development guidelines is starting to send a clearer message. The objectives and targets for anti-infectives are going to be tougher, she thinks, and skewed towards more serious disease, but that is adding a sense of clarity to development projects. The clarity is what is important.

Fernandes, who has extensive experience in antibiotic development at Bristol-Myers Squibb and Abbott (where she took a lead role in the regulatory development of Biaxin) prior to starting Cempra, also said that developers have learned some harsh lessons on accountability and keeping close control on clinical trials based on the non-approvable and complete response letters from FDA during the past 18 months.

Cempra's CEO thinks that sponsors were getting a little lax and failed to follow up on issues such as big geographical differences in efficacy in clinical trials. From that perspective, the reaction from FDA is not a full-stop to anti-infective development, just a reminder to sponsors to pay closer attention to the details of their applications.

To Fernandes and her backers, it looks like the period of regulatory uncertainty at FDA may be coming to a close. Cempra has a macrolide-ketolide compound, CEM-101 (oral and IV) headed into Phase II trials this year. With bacterial resistance and pandemic influenza alternating for headlines, it might just be a good time to be developing a new generation of anti-infectives -- especially with clearer guidance from FDA and a new public health-oriented team leading the agency.

Basilea to J&J: See You in Court

Johnson & Johnson might want to phone Philadelphia Phillies GM Ruben Amaro, Jr.

No, the diversified health care giant probably isn't looking for a utility infielder or a starting RHP. But it does find itself in a situation Amaro has quite a bit of recent familiarity with: dealing with players (in J&J's case, a partner) seeking arbitration.

This off-season the (World Series Champion) Philadelphia Phillies and GM Amaro have avoided arbitration proceedings with all ten players who were eligible--locking up stars like Cole Hamels and Ryan Howard to multi-year deals. Johnson & Johnson just has one arbitration hearing to worry about right now: Basilea Pharmaceutica's claim filed today related to delays in approval of the companies' ceftobiprole antibiotic in the US and EU. (Of course J&J has a little institutional experience with arbiters too ... with EPO.)

Basilea watchers woke up to a flurry of announcements today beyond its planned annual results--not least the news that the antibiotic's EU approval process has been delayed so that good clinical practice (GCP) inspections could be carried out by EMEA. The EU's committee for medicinal products for human use (CHMP) has already recommended the drug for approval, but that recommendation must now be revisited post-inspections, and the delay could put potential approval well into next year.

Meanwhile Basilea is burning through its roughly CHF293 million cash balance and the estimated CHF100 million payments related to EU approval are for now out of reach. Anticipating approval and gearing up for a commercial launch--it had planned to co-promote the drug in the US and areas of the EU--will further add to the firm's costs. Adding insult to injury on today's call management had to deal with disgruntled shareholders annoyed with the company's shares' precipitous drop.

This is just the latest delay in ceftobiprole's commercialization. In the US, where J&J is also the drug's sponsor with FDA, an NDA was submitted in May 2007. But in March 2008 the companies received an approvable letter and in late 2008 FDA's complete response letter identified further data integrity and study conduct issues, and requested a new audit plan for CRO monitoring.

Basilea has been careful to say that it is pleased with the data from the drug's pivotal studies, saying that the problems were instead related to monitoring and quality assurance, and that issues related to the data and the process of monitoring the data were distinct. "The issues that have been brought up ... indicated that [regulatory authorities] had questions about the monitoring of the trial, the quality assurance program ... these are questions about how the trials are monitored and run and this has caused a delay," said CFO Ron Scott on Basilea's earnings conference call this morning. "The mechanism we have to address that delay is the arbitration process."

Presumably the arbitration process isn't the first port of call when a dispute like this arises, indicating an unsurprisingly frazzled relationship between the partners. So what does Basilea want out of arbitration? "Certainly we have not received our milestone payments yet," and the value of the opportunity lost not having ceftobiprole on the market in Europe and the US, noted Scott. Essentially, "compensation for the impact of the delay on Basilea," he said.

That impact is far from fully measured right now--and Basilea declined to disclose when arbitration will begin, only saying that typically these types of arbitration procedures might take one to two years, regardless of what is stipulated in a contract about a timeline for the process. Barring a settlement, the ruling will be in the hands of the Netherlands Arbitration Institute.

Basilea's move to take J&J to court is rare, and should make for an interesting dynamic at joint steering committee meetings. But the ingredients for further disputes--higher regulatory hurdles, increased out-sourcing of clinical trials, and more biotechs than ever facing ostensibly life-or-death FDA or EMEA decisions--are abundant.

Hey J&J: Amaro's office is at Citizen's Bank Park, Pattison Ave., Philadelphia.