While You Were Biden Your Time

For those of you expecting us to pay homage to Usain Bolt, we apologize, but we've moved on. As Beijing passed the torch to London, we bid zai jian to the Bird's Nest, the Cube, and the smog, and say 'ello luv to pub food, double decker buses, and East Enders. And we're pretty sure famed Leona Lewis didn't lip sync her version of 'Whole Lotta Love'.

Meantime Americans were treated to a new phase in a longer and potentially more grueling event than the decathlon--the 2008 election. The Dems finally have a ticket as the party convention gets underway in Denver this week.

But what about the wide world of health care?

• The auction for Elan's drug delivery technologies business continues apace, with Ireland's Sunday Times reporting that Warburg Pincus has entered the fray, joining other private equity players like TPG and Bain Capital (via Reuters).
• MGI Eisai and Helsinn Healthcare received approval for their oral formulation of the nausea and vomiting drug Aloxi over the weekend. The drug, used to treat nausea and vomiting associated with chemotherapy or surgery, is already available as an injection.
• Pfizer has discontinued testing of PF-03187207 for glaucoma in Asia after Phase II results of the NO-donating prostaglandin analog failed to impress. Ex-Asia development was similarly halted earlier this year based on Phase II results in the US. Partner NicOx said this morning that it was in discussions with Pfizer to regain the worldwide rights to the compound, which it felt still had "certain commercial potential which should be realized."

DotW: Going For Gold

Congratulations, Michael Phelps, on your sixth gold medal. We can only imagine the adrenaline rush as we tune in periodically from our own cube. (Kind of like the high we get writing these posts. NOT.)

But Phelps wasn't the only one turning in medal-worthy performances this week. Genentech certainly deserves at least a bronze for its neatly worded--some might even say restrained--reply to Roche's nearly $44 billion July 21 offer, which noted that the Swiss pharma "substantially undervalues the company." Go figure.

But lest you think there are hard feelings between the two companies, fear not. Charles Sanders, chair of the independent committee evaluating the offer, extended this olive branch to Severin Schwan and company: "In addition, we look forward to the company maintaining its successful relationship with Roche, regardless of ownership structure." (Certain politicos in Russia and Georgia might want to take note.)

As our sister publication The Pink Sheet Daily reports (subscription required), Genentech's response means Roche can now begin bargaining in earnest. Most analysts and industy experts expect Genentech will ultimately score gold (as in a lot more coinage). To seal the deal, Roche may have to offer upwards of $100-a-share to gain its biotech goose. The question is: can the Swiss giant still afford to feed the animal given the high cost? Or will the high price tag necessitate cost-cutting efforts that damage the high-flying culture Roche claims it's intent on preserving?


Speaking of getting air, in the high jump competition, keep your eyes on Oxford Biomedica, up more than 20% today after the beleaguered gene therapy company rejected a second takeover offer from GeneThera, and German generics play Stada, which rose 12% today on rumors of a buyout by always-acquisitive Teva Pharmaceuticals. Protherics could be the favorite to medal here, as the UK biotech was up a whopping 44% earlier in the week after it announced it was in talks with unidentified potential acquirers.

Olympic athletes know that speed isn't everything. Stamina is important too. (Imagine having the staying power to eat Michael Phelp's 12,000-calorie-a-day diet.) In our industry, the medal for stamina has to go to our favorite activist shareholder, Carl "oh yes, I can" Icahn, who bought up more shares of Biogen Idec after that biotech's stock price slipped on negative news associated with its MS drug Tysabri. Icahn's move suggests he may not be finished with the Massachusetts biotech, despite not being able to force a sale of the company roughly one year ago. (Meantime another Icahn holding, ImClone, also looks to be going for (more) gold. The company hasn't officially rejected BMS's $4.5 billion bid, but a NY Times story published August 5 suggests execs at the biotech are likely to oppose the sale at the current price.)

Your IN VIVO Blog team has stamina too. And someday we might even get a medal for the analysis we bring you week in and week out. (It won't be for the humor.) Until then, it's time for another edition of ...

AstraZeneca/Abbott: Carpe diem, says AstraZeneca’s Crestor group. It’s got a great opportunity to step-up its commercial attack on Lipitor (down about 10% in new prescription growth from a year ago) and, perhaps more importantly, Vytorin – down about 40% from a year ago, thanks to negative-sounding, albeit equivocal, data out of the ENHANCE trial and, more recently, similarly disturbing results from SEAS. Problem: AZ’s US business is sputtering, so now is not the time to add infrastructure. Meanwhile, Abbott’s big new launch, Simcor (Niaspan plus simvastatin), hasn’t tracked with expectations. So it's a perfect time for the partners who, since 2006, have been developing combinations of Crestor with Abbott’s new-generation fenofibrate (called TriLipix), to use a Crestor co-promotion to iron out, before the big test, some of the likely kinks in the joint commercialization of TriLipix/Crestor.

CSL/Talecris: Private equity took gold in this week's top bio-bucks deal. Cerberus Partners and Ampersand Ventures announced Tuesday that they were selling Talecris Biotherapeutics to the world's top maker of blood plasma products, Australia's CSL Ltd., for a hefty $3.1 billion. In addition, CSL will assume over $1 billion in debt amassed by the North Carolina player, which was started in 2005 when Ampersand and Cerberus snapped up Bayer AG's plasma products from Bayer's Biologics Products Division for $590 million. Talecris, which currently operates 56 plasma collection centres and two manufacturing facilities in the US, posted $1.2 billion in sales last year. The move by Talecris's backers has apparently been in the offing for months. Indeed Talecris may have been sniffing out M&A exits as early as last July, when it filed to go public. We've noted previously that many companies are now adopting a twin-tracking approach, entering preliminary talks with potential buyers while simultaneously filing for an IPO. Certainly given the stock-market turmoil and the lack of investors' appetite for risky IPOs, M&A was the quicker and more lucrative exit for Ampersand and Cerberus. By buying Talecris, CSL is betting the combined company will be able to capture a bigger share of the expanding market for plasma-based medicines, now a $7 billion-a-year market.

Schering-Plough/Shanghai Schering-Plough Pharmaceutical Co.: Schering-Plough caught Olympic fever, announcing this week that it has expanded its presence in China by acquiring shares of its former joint venture partners and folding them into a wholly-owned operation based in Shanghai. (Beijing is definitely too smoggy.) Financial details were not disclosed. (Clearly the Chinese already get S-P's corporate mantra: "earn trust, every day.) China has long been a focus of major pharmaceutical companies, of course. As drug pricing comes under tighter control in western countries and looming patent expiries will lower sales, the companies are looking for ways to expand into valuable developing markets such as China where an economic boom has created a thriving middle class eager to access Western medicines. AstraZeneca is among the leaders, with its Innovation Centre China, an R&D center based in Shanghai, and its strategic partnership with Peking University 3rd Hospital to open establish a Clinical Pharmacology Unit (CPU). In 2007, it took top selling honors from Pfizer in the country, increasing sales of its drugs from $85 million in 2001 to $423 million last year according to the WSJ.

Barr/BI: Barr Labs is busy showing us why Teva decided to plunk down nearly $9 billion (in cash, stock and assumed debt) to buy out its generics rival back in July. On Tuesday Barr announced agreements to settle its Mirapex (for Parkinson’s) and Aggrenox (an anticoagulant) patent challenges with Boehringer Ingelheim. Those drugs pulled in more than $700 million combined in the twelve months through May 2008, according to Barr. Not only has Barr nailed down early dates on which it can start to market its first-to-file generic versions of BI’s two drugs (2010 and 2015—10 months and 18 months earlier than the drugs’ challenged patents officially expire, respectively), it also inked a co-promotion deal with BI on Aggrenox. Barr’s Duramed division will co-promote the anticoagulant with its specialist women’s health sales force starting in March 2009 (BI will train them up in the interim), in exchange for undisclosed royalties. The two deals come not too long after Barr’s June victory in US District Court in the Mirapex litigation. That ruling found that BI had double-patented the Parkinson’s therapy, and likely forced the German company to enter into serious negotiations with Barr while it considered its appeal. Of course authorized generics deals have always seemed a bit sketchy in the eyes of Congress and the FTC, among others, so expect a thorough review.

Pfizer/Cytos: Swiss vaccines (jab-elin?) play Cytos Biotechnology this morning said it added Pfizer to its list of R&D partners. The Big Pharma is paying CHF10 million upfront and up to CHF140 million in milestones to access Cytos’ Immunodrug technology to develop vaccines against a set of predefined disease targets. Cytos will also receive research funding and potential royalties; Pfizer takes over development of any products at the preclinical stage. For Pfizer the move is the latest in a string of vaccines deals stretching back to the acquisition of PowderMed in late 2006; more recently the Big Pharma has bought Coley and inked a licensing deal with Avant for a brain cancer program in its efforts to beef up its vaccines efforts.

Thanks to Chris Morrison and Roger Longman, who pitched in with some additional reporting.

Higher Tax, Fewer Deals?

The IN VIVO Blog has been somewhat mum on the carried interest debate. Frankly, this topic is being covered to death elsewhere (The link goes to PE Hub but there's no shortage of discussion.)

This topic is important, no doubt, crucial even, but Mom always told us if you don’t have something fresh and interesting to blog about than it’s better not to blog at all. (Well, she would have said that.)

So we’ve been asking around a bit, trying to get a sense from our VC community on the potential impact of these changes. To be honest, the change put forth by the Democrats didn’t really sound the alarm bells in our virtual hallways. But the same apparently isn’t true in the actual hallways of VC firms investing in life sciences. IN VIVO Blog expected VCs to answer queries with a “Congress will be Congress” attitude similar to the one put out when discussing changes at the FDA or CMS.

But there’s some genuine concern here. No question, much of that concern most likely has to do with a diminished paycheck. But there’s some fear surrounding the impact these changes could have on the availability of capital.

An email from one West Coast VC:

I really believe that these proposed new taxes will make it so that some new companies will not get funded. These taxes essentially raise the cost of capital and if the returns are not there to the GPs then they will not get funded eliminating many high risk or sometimes questionable deals. One has to remember that often deals look promising and then don’t make it while the opposite is true as well but maybe not to a greater extent. If the cost of capital is high then those marginal/high risk deals won’t get done.

It is the same concept as lower interest rates and lower borrowing hurdles allowed the housing market to boom. If the cost of capital rises then it eliminates those who are at the margin. The same is true in our business. Those on the margin lose—fewer jobs and lower growth.

The suggestion that this could eliminate “many high risk or sometimes questionable deals” rings true and does sound an alarm. After all, doesn’t that describe most biopharma deals and a good deal of device companies as well.

Could this change in taxation have a particularly detrimental impact on the life sciences industry, pushing VCs even further away from funding true start-ups? Even worse, would this aggravate the diversion of dollars away from smaller, venture capital firms looking to do these deals. Or perhaps, as A VC Blog suggests, the best VCs will just invest their own money, forget the institutional dollars.

A VC Blog also had what I thought to be a very thoughtful position later on.
Mom did teach us not to covet other people's stuff, so the "Tax the Rich" crowd won't get a sympathetic ear here. Still, the suggestion that the GP's carry on "other people's money" goes beyond that simplistic idea. The idea that this income should be taxed as salary isn't that far out (or far left) as some would like it to appear.

We’ll update with interesting points of view as we continue to talk to folks. But don't feel like you need to wait for a phone call. Consider this an open invitation to opine on what impact the suggested changes will have on the life sciences industry.

Private Equity: Muscling in on Big Pharma at Biotech's High Rollers' Table

Talk about co-dependency. Pharma needs biotech’s products; biotech needs pharma’s cash. Oh, they say they need other things, but when it comes down to it – that’s about the equation.

So if biotech had a different source of cash (or Pharma had a different source of products), well – this marriage would turn open.

That’s why private equity has become such an interesting game changer. PE firms, stuffed with too much cash as it is and incentivized with management fees to stuff themselves still further, are all chasing the same buyout opportunities, throwing ever greater sums at owners and managers in order to get into the deals.

Biotech, which certainly needs cash, doesn’t return money on anything like a PE firm’s preferred timeline. But biotechs are also relatively unmined territory. Therefore cheap. That’s why you’re beginning to see major private equity players doing things private equity rules say they shouldn’t do.

Consider this progression. In 2004, KKR put something like $200 million into Jazz Pharmaceuticals—a theoretically stable, spec pharma-ish kind of investment. The financing underwrote Jazz’s takeover of the commercial-stage Orphan Medical, so KKR at least got some cash flow, which PE investors like to see. And there was no discovery risk—but certainly development risk. (Not that it's worked out brilliantly, so far. See our recent post.)

Two years later, New Mountain enables the Ikaria/Ino deal – creating a theoretically self-financing company (like Jazz, it has a commercial organization providing the requisite cash flow) but it nonetheless depends for its success on the crapshoot of discovery.

And now The Invus Group is putting $205 million into Lexicon, with the potential to add another $345 million down the road. They’ll get a minimum of 40% of the company and could end up owning far more. But now the whole thing is based on discovery – and not just me-too discovery, but Lexicon’s novel-target, novel-compound approach (see our upcoming article in the July/August IN VIVO).

In short, private equity is moving into pharma territory, funding companies the way only pharmas once could. The whole point is to build organizations of such size that a biotech can do its deals on relatively equal terms with pharma – which means that if it doesn’t get its deal price, it can walk away and do its own development and commercialization, continuing to increase its assets’ value.

The theory underlying this game is that biotechs are still leaving way too much value on the negotiating table. That’s the value the PE investor needs to retain in order to counterbalance his basic disadvantage as a purely financial, not strategic, buyer. That strategic buyer—Big Pharma--can pay more for particular assets because they can do more with them (like shoring up a fading portfolio or keeping profitable and busy a sales they don’t want to lose). Can PE use its money to extract that strategic premium biotechs on their own can’t? It’s an interesting gamble: both biotech and Big Pharma need to get to know the new dice-throwers at the high-rollers’ table.

Playing Through

This has absolutely nothing to do with pharmaceuticals or devices.

But if you’ve never been to Sand Hill Road and you’re wondering how KKR spends its hard-earned management fees (or if you’re intensely interested in the future of media and need to know whether Roger McNamee’s right fist represents audience or content) then Kara Swisher's visit to Elevation Partners is worth watching.

Although she's a tad unkind to VCs for our taste, kudos to Swisher, of the WSJ’s All Things Digital, for the pre-interview tour. (IN VIVO Blog has to get one of them fancy cameras in the budget.) And a big giant nod to VentureBeat directing us to the video.

McNamee’s somewhat famous co-managing director was out of the office doing something.