To Partner, or Not to Partner: That is the Question

Traditional wisdom holds that biotechnology companies benefit from collaborations with their larger pharmaceutical peers, which can help validate a company’s technology, provide capital to help fund clinical development, and enable access to experienced clinical, regulatory and commercial infrastructure.  While this was certainly true in the early days of biotechnology, the industry has now matured – ushering in a new era whereby executives must carefully weigh the trade-offs between raising capital to go alone [equity dilution] and sharing economics with a partner [asset dilution].  For a comparison between the old and new paradigms in biotechnology collaborations, refer to Table 1.

Table 1. Old Versus New Paradigm in Biotechnology Collaborations

Old Paradigm New Paradigm
Biotechnology company requires validation by large pharmaceutical partner to attract investment Investors are sufficiently experienced to assess the prospects for clinical, regulatory, and commercial success on their own
Complicated drug development paths are best navigated by large pharmaceutical companies Senior pharmaceutical executives have migrated to smaller biotechnology companies, helping level the playing field
Commercial success requires access to the established sales forces of large pharmaceutical companies Perhaps true for primary care targets, but large pharmaceutical company layoffs have created a surplus of experienced sales reps
Biotechnology companies lack requisite manufacturing expertise and facilities Biotechnology companies can outsource to third-party manufacturers and require biologic versus small molecule production

In addition, the negative considerations from large pharmaceutical partnerships are often overlooked, which begs the question: is it better to partner, or go alone?  To help address the topic, this article focuses on the oncology segment of the life science industry – one of the most popular therapeutic areas for partnering and merger & acquisition [M&A] activity.

Luck Vs Skill

Prior to addressing the question of whether or not a small biotechnology company should collaborate with a larger pharmaceutical organization, we solicited investor views regarding the process of corporate partnering.  Some of the feedback indicates there is a lack of transparency.

“As an investor, partnering activity is the most opaque part of our companies’ business,” said David Sable, portfolio manager, Special Situations Life Sciences Fund.  “Every small biotech CEO tries to create an image of limitless interest on the part of big pharma in each of the company’s projects, a dynamic that will inevitably result in a value-maximizing transaction.  Many management teams deliver on these promises; in retrospect, however, at least as many seem to have parked their molecule in the front yard with a ‘For Sale’ sign and hoped for the best.  While we can validate the importance of a molecular pathway, double-check market size predictions, run our own statistics and reality-check pricing assumptions, we have no way to identify talent in business development.”

Left at the Altar

One of the most important negative considerations for biotechnology companies looking to partner is that large pharmaceutical companies often shift resources and the focus of their pipeline development candidates over time, which may put their collaborators at risk.  Although sometimes done for strategic reasons rather than due to new clinical insight, the sudden departure of a large pharmaceutical partner can reflect poorly on an otherwise promising product candidate.

For example, Celldex Therapeutics, Inc. (CLDX) announced in September 2010 that the company would regain full worldwide rights to develop and commercialize rindopepimut [CDX-110] from Pfizer, Inc. (PFE).  The companies had entered into a global development and commercialization agreement in April 2008 for rindopepimut, an experimental therapeutic cancer vaccine that targets the tumor-specific molecule epidermal growth factor receptor variant III in patients with glioblastoma multiforme.  Pfizer informed Celldex that the rindopepimut program was no longer a strategic priority of Pfizer and terminated the agreement despite the fact that the product candidate met or exceeded all pre-determined safety and efficacy objectives across three clinical studies.  Shares of Celldex, which traded as high as $9.49 during 2010, reached a 52-week low of $2.91 on the news.

More recently, Transgene (TNG.PA) announced on February 22, 2011, that Roche Holding (ROG.VX) terminated their 2007 agreement under which Roche had been granted exclusive global development and commercialization rights to TG4001/RG3484, a therapeutic vaccine candidate currently in a 200 patient Phase IIb study to treat notably high grade cervical intraepithelial neoplasia [CIN] lesions [CIN2/3] caused by human papilloma virus [HPV] infection.  While Transgene stated that Roche’s decision to terminate the license agreement was based on strategic reasons and wasn’t data driven, the company’s shares reached a 52-week low on the news.

Hopes and Dreams Vs Revenue Streams

Another potential negative is that by partnering a product candidate, the “hope and dream” multiple of a potential partnership or acquisition may be replaced by the realities of a “revenue stream,” such as milestone payments and future product royalties.  By discounting the economics of a partnership deal for certain risk factors, investors can assign a net present value to the company that may be quite different than the speculative valuation in the absence of a partnership.  Representing a unique opportunity to review the effect of partnering on market capitalization, three separate deals were announced for late-stage product candidates aimed at treating prostate cancer during 2009, while two companies have remained independent [see Table 2].

As the first transaction announced that year, Johnson & Johnson’s (JNJ) acquisition of Cougar Biotechnology for nearly $1 billion in cash in May 2009 initially looked attractive.  However, following approval of Provenge® [sipuleucel-T] in April 2010, the market capitalization of Dendreon Corporation (DNDN) exceeded $7 billion, which demonstrates the potential benefit of remaining independent or retaining worldwide rights.  In contrast, more than a year after partnering their late-stage programs, the market valuations of two other companies, Medivation, Inc. (MDVN) and OncoGenex Pharmaceuticals, Inc. (OGXI), are $605 million and $150 million, respectively.

Using Dendreon’s valuation as an example, it isn’t surprising that Bavarian Nordic A/S (BAVA.CO) announced earlier today that the company is reviewing alternate options to maximize value for shareholders and fund the pivotal Phase 3 trial of its “off-the-shelf” therapeutic vaccine product candidate Prostvac® on its own.  Keeping its options open, however, Bavarian Nordic is exploring opportunities to pursue independent development in parallel with continuing partnership discussions.

Table 2. Late-stage Prostate Cancer Programs

Company Product Partnered /acquired Stage at time of partnership Current market cap (or acquisition price*) Partner/ acquirer(date announced) Upfront payment Additional economics
Dendreon Corporation (DNDN) Provenge® No n/a $4,690 million n/a n/a n/a
Bavarian Nordic A/S (BAVA.CO) Prostvac® No n/a $625 million n/a n/a n/a
Cougar Biotechnology Abiraterone acetate Yes Two Phase 3 trials underway $970 million* Johnson & Johnson(May 2009) $970 million n/a
Medivation, Inc. (MDVN) MDV3100 Yes Phase 3 AFFIRM trial underway $605 million Astellas Pharma,(October 2009) $110 million $655 million, co-promote w/ 50% of profits in U.S., royalties ex-US
OncoGenex Pharmaceuticals, Inc. (OGXI) OGX-011 Yes Entering two Phase 3 trials $150 million Teva Pharmaceutical Industries Ltd. (December 2009) $60 million $370 million, royalties, option to co-promote

A Means to an End

The biggest argument against partnering is the fact that some of the most successful biotechnology companies to date are those that have commercialized their own products, such as Amgen, Inc. (AMGN), Celgene Corporation (CELG), and several others.

“Celgene is a unique example of success by taking a slightly different approach,” said Charles Duncan, managing director and senior biotech analyst at JMP Securities LLC.  “The company built a pipeline and worldwide infrastructure for Revlimid® [lenalidomide] that was funded and supported through its early sales of Thalomid® [thalidomide].”

“We viewed partnering our lead product as a critical strategic decision that would shape the company and significantly impact our vision,” said Sol J. Barer, Ph.D., Executive Chairman of Celgene Corporation.  “We felt that our pursuing the development of Revlimid worldwide alone was the best option consistent with our vision a of becoming a major global biopharmaceutical company over the next few years.  We clearly recognized the short versus long term trade-offs in the decision; nevertheless, our belief in the product and in our ability to manage the product globally was important in our decision not to partner.”

Some companies have also partnered a specific program in certain geographies or disease settings and use the validation and resulting economics to help advance their own pipeline – sometimes even in competitive areas.  For example, Amgen originally developed Epogen® [epoetin alfa], which the company commercialized as a treatment for anemia in dialysis patients and partnered non-dialysis rights with Johnson & Johnson [sold as Procrit®].  Amgen later developed and commercialized Aranesp® [darbepoetin alfa], an erythropoiesis stimulating protein with a longer half-life and increased biologic activity that was not partnered.

Similarly, Oncothyreon, Inc. (ONTY) has granted a license to Merck KGaA of Darmstadt, Germany for the clinical development, manufacturing, and marketing of Stimuvax®.  Oncothyreon is eligible for cash payments based on the achievement of certain process transfer events, regulatory submissions in first and second cancer indications, regulatory approval for first and second cancer indications, and for sales milestones.  Oncothyreon will also receive a royalty based on net sales.  If successful in the clinic, Stimuvax could also help validate another Oncothyreon product candidate, ONT-10, which is a completely synthetic MUC1-based liposomal glycolipopeptide cancer vaccine that could compete with Stimuvax.  Merck KGaA has a right of first negotiation with respect to ONT-10.

Geographically Undesirable

Although selective encumbered assets can still attract buyers, partnering a product candidate in certain geographies with one large pharmaceutical company may preclude an acquisition by another that is only interested in worldwide rights or control of key markets.  On the other hand, some partnerships can later lead to an acquisition – a strategy employed by Bristol-Myers Squibb Company (BMY) on more than one occasion.

For example, Bristol-Myers Squibb and Medarex, Inc. formed a worldwide collaboration in 2004 valued at more than $530 million to develop and commercialize Yervoy® [ipilimumab, MDX-010], which was in Phase III clinical development at the time for the treatment of metastatic melanoma and multiple Phase II clinical trials in other oncology indications.  In 2009, Bristol-Myers Squibb acquired Medarex for $16.00 per share, a 90% premium over the prior day’s closing price of $8.40 per share, for an aggregate purchase price of approximately $2.4 billion.

What started as a lawsuit for infringement of its patents related to fusion protein technology in 2006, ZymoGenetics, Inc. signed a deal with Bristol-Myers Squibb in 2009 worth more than $1.1 billion for PEG-Interferon lambda, a novel type 3 interferon in Phase Ib development for the treatment of Hepatitis C, and its related development program.  The following year, Bristol-Myers Squibb acquired ZymoGenetics for $9.75 per share in cash [an 84% premium to the prior day close] in a transaction valued at approximately $885 million.

While ultimately thwarted by Eli Lilly & Co.’s (LLY) superior offer in October 2008, Bristol-Myers also attempted to acquire its partner ImClone Systems.  Back in September 2001, Bristol-Myers had entered into an agreement with ImClone to co-develop and co-promote Erbitux® [cetuximab, IMC-C225] in the United States, Canada and Japan.

All that Glitters is not Gold

Maintaining worldwide rights and commercializing a product without a partner doesn’t necessarily translate into a lofty market valuation.  Several companies have struggled to commercialize oncology products on their own.

Allos Therapeutics, Inc. (ALTH) developed Folotyn® [pralatrexate injection], a folate analogue metabolic inhibitor, and began commercializing the product in the U.S. for the treatment of patients with relapsed or refractory peripheral T-cell lymphoma [PTCL] in October 2009.  Since the product’s launch, Folotyn sales have been below Wall Street analyst’s expectations and shares of Allos recently reached a 52-week low of $2.64.

Despite an inauspicious launch in the U.S., some analysts believe that Allos may finally be executing on a regional strategy with the recent filing of a Marketing Authorisation Application for European approval and the potential for a partner in Asia as highlighted during the company’s recent quarterly teleconference with investors.

“If Allos gets traction with an ex-U.S. approval and partnership, investor sentiment will most certainly improve as this will provide some external validation on the viability of a regulatory path and market opportunity in PTCL, despite it being a rare disease and there being emerging potential competition from Celgene’s Istodax® [romidepsin],” said Charles Duncan.  “At this point, all but the most patient, value-oriented investors have extricated themselves from the Allos story due to what we believe to be a lack of confidence in senior management, and having another company to shoulder the risk ex-U.S. will provide a much-needed boost to the capabilities and capital needed to profitably market Folotyn.  Perhaps this too could be an example where a collaboration discussion turns into an acquisition, although we anticipate that should such a scenario materialize, it would likely involve contingent-value rights [CVR’s] given the uninspiring early revenue trajectory.”

Summary

Looking ahead, the trade-off between equity dilution and asset dilution represents an important crossroad that many late-stage biotechnology companies will face in the near future [see Table 3 for a select list].  While one size doesn’t fit all, the fact that Dendreon has achieved the largest market valuation of any company in the late-stage prostate cancer segment of the market by commercializing its product without a partner helps support the notion that going alone may provide the highest value to stakeholders.  Such a strategy requires that the company can access resources and capital to develop and launch its product globally.  If not, a selective or global partnership may be the next best options – provided the terms are attractive and that there is a remaining pipeline to be leveraged in the future.  In the end, whether a company proceeds alone or with a partner, there is an attractive landscape of motivated buyers for late-stage and marketed products that may ultimately lead to M&A.

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Table 3. Select Companies with Phase III Oncology Programs Not Yet Partnered

Company Product Stage Indication Market Cap
AVAX Technologies Inc. (AVXT.PK) MVax® Planning pivotal Phase 3 under SPA Melanoma $26 million
Bavarian-Nordic A/S (BAVA.CO) Prostvac® Planning Pivotal Phase 3 under SPA Hormone-refractory prostate cancer $625 million
Biovest International, Inc. (BVTI.PK) BiovaxID® Phase 3 completed Follicular lymphoma $93 million
Cell Therapeutics, Inc. (CTIC) Pixantrone Phase 3 completed Non-Hodgkin’s lymphoma [NHL] $197 million
Celldex Therapeutics, Inc. (CLDX) Rindopepimut Planning Pivotal Phase 3 in H2 ‘11 Glioblastoma multiforme [GBM] $127 million
Cyclacel Pharmaceuticals, Inc. (CYCC) Sapacitabine Enrolling in Pivotal Phase 3 under SPA Frontline acute myeloid leukemia [AML] $61 million
Exelixis, Inc. (EXEL) Cabozantinib [XL184] Phase 3 ongoing Medullary thyroid cancer $1,240 million
Light Sciences Oncology Aptocine™ [talaporfin sodium] Phase 3 ongoing Hepatocellular carcinoma and metastatic colorectal cancer private
Oncolytics Biotech, Inc. (ONCY) Reolysin Phase 3 ongoing Squamous cell carcinoma of the head and neck $420 million
Onconova Therapeutics EstybonT™ [ON01910.Na] Planning Pivotal Phase 3 under SPA Myelodysplastic syndromes [MDS] private
Sunesis Pharmaceuticals, Inc. (SNSSD) Vosaroxin Enrolling in Phase 3 Relapsed AML $86 million

 

Merger Means Billions for Biotechnology?

In March 2009, we asked the question “Where Might Genentech Investors Redeploy $47 Billion?” in response to the news that Roche Holding AG (RHHBY.PK) would acquire the outstanding publicly held interest in Genentech for a total payment of approximately $47 billion in cash.   We hypothesized that investors seeking biotechnology companies of comparable size and liquidity would gravitate towards the 30 largest companies within the NASDAQ Biotech Index (NBI), which we divided into the following three groups:

  • Tier 1: market capitalization in excess of $10 billion
  • Tier 2: market capitalization greater than $2 billion but less than $10 billion
  • Tier 3: market capitalization of at least $1 billion but less than $2 billion

At that time, the 30 companies in these three groups had a collective market capitalization of approximately $240 billion. Assuming that investors reinvested the entire $47 billion in cash they received from the Roche/Genentech transaction into these groups, it would have represented nearly 20% of the total value.  While some of the money may have been reinvested in Roche, such an imbalance between supply and demand could have resulted in relative outperformance from members of the three groups.

Following today’s news that Sanofi-aventis (SNY) is acquiring Genzyme Corporation (GENZ) for approximately $20 billion in cash [plus a contingent value right], we reviewed the performance of our three tiers to determine which companies, if any, benefited the most from the reinvestment of $47 billion following the Roche/Genentech transaction.

From the date that the Roche/Genentech transition was announced [March 12, 2009] through February 15, 20111, the NASDAQ Composite (COMP) was up approximately +97%.  In contrast, the NBI only increased +50% during the period.  Recall that the NBI is calculated under a modified capitalization-weighted methodology, taking into account the total market value of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalization have the highest weighting in the index – making the NBI a good proxy for the performance of larger capitalization biotechnology companies.

Contrary to expectations, the largest biotechnology companies did not appear to benefit from a reallocation of funds from the Roche/Genentech transaction and posted the worst overall performance during the period.  In fact, all six members of the Tier 1 group underperformed the NBI, which includes Genzyme [see Table 1].  The companies in Tier 1 should have been the closest to Genentech with regard to their risk/return profile.

Table 1: Tier 1 Group

Company 3/12/09 close 2/15/11 close % Change
Amgen, Inc. (AMGN) $50.27 $53.84 7.10%
Biogen Idec, Inc. (BIIB) $48.88 $67.09 37.25%
Celgene Corporation (CELG) $47.16 $53.14 12.68%
Genzyme Corporation (GENZ) $55.63 $74.30 33.56%
Gilead Sciences, Inc. (GILD) $44.43 $38.99 -12.24%
Teva Pharmaceutical Industries Ltd. (TEVA) $43.10 $51.70 19.95%
Average 16.38%

With market capitalizations greater than $2 billion but less than $10 billion around the time that the Roche/Genentech transaction was announced, Tier 2 represented the best performing group.  While Tier 2 contained both winners and losers, more than half of the Tier 2 companies outperformed the NBI, including four with triple-digit gains during the period [see Table 2].

Table 2: Tier 2 Group

Company 3/12/09 close 2/15/11 close % Change
Alexion Pharmaceuticals, Inc. (ALXN) $34.71 $90.08 159.52%
Cephalon, Inc. (CEPH) $64.40 $58.99 -8.40%
Gen-Probe, Inc. (GPRO) $43.65 $62.74 43.73%
Illumina, Inc. (ILMN) $36.35 $71.88 97.74%
Life Technologies Corporation (LIFE) $28.82 $54.30 88.41%
Myriad Genetics, Inc. (MYGN) $37.48 $19.39 -48.27%
OSI Pharmaceuticals (OSIP)* $38.26 $57.50 50.29%
Perrigo Company (PRGO) $21.66 $73.55 239.57%
Qiagen N.V. (QGEN) $16.19 $19.77 22.11%
Shire plc (SHPGY) $34.25 $82.85 141.90%
Vertex Pharmaceuticals, Inc. (VRTX) $29.26 $39.49 34.96%
Warner Chilcott plc (WCRX) $7.26 $24.74 240.77%
Average 88.53%
* Acquired by Astellas Pharma in May 2010, price as of 3/31/2009 and the acquisition price, respectively

Tier 3 was the second best performing group.  Half of the Tier 3 companies outperformed the NBI, including four with triple-digit gains during the period [see Table 3].

Table 3: Tier 3 Group

Company 3/12/09 close 2/15/11 close % Change
Acorda Therapeutics, Inc. (ACOR) $26.00 $22.99 -11.58%
Amylin Pharmaceuticals, Inc. (AMLN) $10.06 $15.52 54.27%
Auxilium Pharmaceuticals, Inc. (AUXL) $28.99 $22.14 -23.63%
BioMarin Pharmaceutical, Inc. (BMRN) $11.00 $26.94 144.91%
CV Therapeutics (CVTX)* $19.88 $20.00 0.60%
Endo Pharmaceuticals Holdings, Inc. (ENDP) $16.80 $34.92 107.86%
Isis Pharmaceuticals, Inc. (ISIS) $13.18 $8.69 -34.07%
ONYX Pharmaceuticals, Inc. (ONXX) $28.72 $36.56 27.30%
Regeneron Pharmaceuticals, Inc. (REGN) $13.33 $37.11 178.39%
Sepracor (SEPR)** $14.66 $23.00 56.89%
Techne Corp (TECH) $50.00 $68.51 37.02%
United Therapeutics Corp (UTHR) $31.27 $67.02 114.33%
Average 54.36%
* Acquired by Gilead in March 2009, price as of 3/31/2009 and the acquisition price, respectively
** Acquired by Dainippon Sumitomo Pharma in September 2009, price as of 3/31/2009 and the acquisition price, respectively

In conclusion, the reallocation of funds following a significant merger & acquisition [M&A] transaction for cash doesn’t appear to benefit larger biotechnology companies with similar risk/reward profiles in terms of relative stock performance [Tier 1].  While a comprehensive analysis of the data is beyond the scope of this article, this could result from the reallocation of capital into the acquiring company, sufficient liquidity from larger biotechnology companies to withstand the increased demand, and/or other factors.   However, using history as a guide, those companies with a market capitalization between $2 and $10 billion appear most likely to benefit from reinvestment following the recent Sanofi/Genzyme transaction.

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Biotech Deal Activity a Mixed Bag During Major Conference

Last week, thousands of registrants gathered in San Francisco, California for the JP Morgan Healthcare Conference [JPMHC] to hear 25-minute presentations from 364 life science companies.  For industry executives and investors, deal activity emanating from the annual event typically serves as a good barometer for the rest of the year.

Adding to an already hectic schedule of one-on-one meetings during the week, the success of JPMHC has spawned numerous satellite events, such as Biotech Showcase, OneMedForum, New Paradigms Conference, and China Forum.  The latter event provides further evidence that China is emerging as an important component of the international biotechnology landscape, as 16 China-based life science companies also presented during an inaugural China Track at JPMHC.

In between offsite meetings, we roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored online media commentaries throughout the event.  In general, the plane flights and networking receptions were crowded as usual, industry observers “Tweeted” a sense of optimism, and attendees appeared more upbeat than in 2010.  However, we once again sought to construct a less subjective assessment by analyzing year-over-year statistics from the conference.

Accordingly, we extensively reviewed press releases issued by biotechnology companies during JPMHC from 2009 to 2011, with a particular focus on identifying the number of merger & acquisitions [M&A], licensing & partnering transactions, and financing deals announced each year during the four-day event.

Merger and Acquisitions

 

Back in 2009, several large M&A transactions were announced during JPMHC.  That year, four M&A transactions with an aggregate value of $702 million were disclosed during the first two days of the event.  The largest deal went to Cephalon, Inc. (CEPH), which announced a $100 million option agreement providing the company with an opportunity to purchase all outstanding capital stock of Ception Therapeutics, Inc., a privately held biopharmaceutical company, for an additional $250 million.

Despite ongoing discussions between Sanofi-aventis (SNY) and Genzyme Corporation (GENZ), only one significant M&A transaction was announced during JPMHC in 2011, marking the second year in a row with a paucity of deals.  Finland-based Biotie Therapies Corp., a drug developer focused on central nervous system [CNS] and inflammatory diseases, announced that it is acquiring Synosia Therapeutics Holding AG in an all-share deal that values the private Swiss company at approximately $125 million.  Synosia Therapeutics Holding AG is a biopharmaceutical company focused on developing and commercializing a portfolio of CNS product candidates licensed from Roche Holding AG (RHHBY.PK), Novartis AG (NVS), and Syngenta AG (SYT).

Table 1. Select M&A Transactions Announced During JPMHC from 2009-2011 ($ in millions)

2009 2010 2011
# transactions 4 0 1
$ transactions $702 $0 $125

Licensing and Partnering

In 2009, ten strategic licensing and/or partnering transactions with an aggregate value exceeding $2.4 billion were announced during JPMHC. The transactions included a $1.1 billion deal between ZymoGenetics, Inc. and Bristol-Myers Squibb Company (BMY), a $500 million deal between Peptimmune, Inc. and Novartis AG (NVS), a $396 million deal between Micromet, Inc. (MITI) and Bayer AG (BAYZF.PK), and a $200 million deal between FORMA Therapeutics the Novartis Option Fund to develop inhibitors for an undisclosed protein-protein interaction target in the field of oncology, among others. Interesting to note, Bristol-Myers Squibb later acquired ZymoGenetics Inc. for $885 million in cash during September 2010.

In 2010, there were only six transactions totaling $314 million announced at JPMHC, driven primarily by a $290 million agreement between privately held KaloBios Pharmaceuticals, and Sanofi Pasteur, the vaccines division of the Sanofi-aventis, for the development and commercialization of KB001, an investigational new biologic for the treatment or prevention of Pseudomonas aeruginosa [Pa] infections.

In 2011, three major licensing and/or partnering transactions totaling more than $3 billion were announced during JPMHC, although three-quarters of the total value came from a single agreement:

  • Eli Lilly and Company (LLY) and Boehringer Ingelheim announced a $2.4 billion global agreement to jointly develop and commercialize a pipeline of oral diabetes agents and basal insulin analogues.  The alliance also includes the option to co-develop and co-commercialize Eli Lilly’s anti-TGF-beta monoclonal antibody.
  • Privately held Epizyme, Inc. announced a strategic alliance with GlaxoSmithKline plc (GSK) that could be worth over $650 million.  Epizyme is involved in the discovery and development of small molecule histone methyltransferase inhibitors, a new class of targeted therapeutics for the treatment of genetically-defined cancer patients, based on breakthroughs in the field of epigenetics.  Epigenetics refers to the regulation of genes with mechanisms other than changes to the underlying DNA sequence and such processes are widely believed to play a central role in the development and progression of almost all cancers.
  • Takeda Pharmaceutical Company Limited and Zinfandel Pharmaceuticals, Inc. announced an exclusive, worldwide licensing agreement regarding Zinfandel’s TOMM40 assay as a biomarker for the risk of Alzheimer’s disease, including potential use of the assay in combination with pioglitazone in high-risk older adults with normal cognition.  Pioglitazone is the active ingredient currently marketed in Takeda’s ACTOS® (pioglitazone HCl). Under the terms of agreement, Zinfandel will receive an upfront payment of $9 million and subsequent payments of up to $78 million for development milestones from Takeda.

Table 2. Select Licensing and Partnering Deals Announced During JPMHC from 2009-2011 ($ in millions)

2009 2010 2011
# transactions 10 6 3
$ transactions $2,400 $314 $3,137

Financing

While the quantity of public and private financing transactions announced during JPMHC has remained essentially flat from 2009-2011, the aggregate dollar value increased more than 60% in 2011.  Note that we excluded the $500 million convertible senior note transaction announced by Dendreon Corporation (DNDN), as it occurred after the market closed last Thursday [the last day of JPMHC].

Table 3. Select Financing Transactions Announced During JPMHC from 2009-2011 ($ in millions)

2009 2010 2011
Company Amount Company Amount Company Amount
Acclarent, Inc. (private) $26.00 Cell Therapeutics, Inc. (CTIC) $30.00 NextWave Pharmaceuticals (private) $45.00
Akorn, Inc. (AKRX) $25.00 VentiRx Pharma (private) $25.00 Cell Therapeutics (CTIC) $25.00
Singulex, Inc. (private) $19.00 BIND Biosciences, Inc. (private) $11.00 Civitas Therapeutics $20.00
Chiral Quest (private) $13.00 Cyclacel Pharmaceuticals (CYCC) $7.20 Rib-X Pharmaceuticals (private) $20.00
Mithridion, Inc. (private) $2.90 Rosetta Genomics Ltd. (ROSG) $5.10 Acadia Pharma (ACAD) $15.00
Soligenix, Inc. (SNGX.OB) $2.28 Advanced Cardiac Therap (private) $5.00 Celsion Corporation (CLSN) $9.00
Alseres Pharmaceuticals (ALSE.PK) $1.00 BioLeap, Inc. (private) $5.00 VAXIMM AG (private) $8.00
EntreMed, Inc. (ENMD) $2.50 NeoGenomics, Inc. (NGNM.OB) $3.00
Mithridion, Inc. (private) $1.25
Totals $89.18 $90.80 $146.25

Outlook

At the start of 2009, we provided a positive outlook for the biotechnology industry.  Most of the drivers supporting our favorable view remain intact for 2011, such as the record number of products in clinical trials and annual industry R&D investment, improving access to capital, brisk pace of industry consolidation and licensing transactions, and attractive valuations among many small- and mid-capitalization companies, which we believe should continue to outperform their larger industry peers in 2011.

The +60% year-over-year increase in the aggregate value of financing transactions announced during JPMHC in 2011 supports our improving access to capital thesis, offset in part by the fact that both the quantity and value of M&A and licensing/partnering transactions during the period were below 2009 levels [excluding a single agreement for $2.4 billion in 2011].   Using 2010 as a guide, the mixed bag of activity emanating from JPMHC is simply the pause that refreshes and activity should accelerate throughout the year.

Looking beyond JPMHC, the key risk to our positive outlook in 2011 relates to the number of U.S. Food and Drug Administration [FDA] drug approvals, which declined in 2010 and is more than 50% below the high of 56 new approvals in 1996 despite the fact that legislation passed in 2008 gave the FDA more money and resources.  There is no discounting the negative impact of clinical and regulatory setbacks on the psyche of biotechnology investors, as evidenced by the greater than 10% decline in the NASDAQ Biotech Index in late February 2009 following a spate of high profile disappointments.

Biotech’s Top and Bottom Ten from 2010

At the start of the year, we provided a favorable outlook for the biotechnology industry in 2010 that was based on the same six drivers we proposed for 2009, which included the following:

  • Sector’s defensive characteristics and impact on future economic growth
  • Highest number of annual new product approvals since 2004
  • Record number of products in clinical trials and annual industry research and development [R&D] investment
  • Improving access to capital
  • Brisk pace of industry consolidation and licensing transactions
  • Many small- and mid-capitalization companies remain undervalued

With 2010 officially on the books, it appears an appropriate time to review the sector’s performance along with some of the themes highlighted in our previous articles.

 

Big Versus Small

The twenty-member NYSE Arca Biotechnology Index (BTK) was up 38% in 2010, while the broader NASDAQ Biotech Index (NBI) advanced 15%.  Performance of the NASDAQ Biotech Index was in line with the Dow Jones Industrial Average (INDU), S&P 500 (SPX), and NASDAQ Composite (COMP), which were up 11%, 13%, and 17%, respectively.

Why the huge discrepancy in returns between the two major biotechnology indices?  Unlike the equal-weighted NYSE Arca Biotechnology Index, the NASDAQ Biotech Index is calculated under a modified capitalization-weighted methodology, taking into account the total market value of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalizations, or the greatest values, will have the highest weighting in the index.

During 2010, most of the large capitalization biotechnology companies [greater than $10 billion] underperformed the median return of 11% for the 130 companies in the NASDAQ Biotech Index.  For example, Celgene Corporation (CELG) was up 6%, Cephalon, Inc. (CEPH) was down 1%, Amgen, Inc. (AMGN) was down 3%, Teva Pharmaceutical Industries (TEVA) was down 7%, and Gilead Sciences, Inc. (GILD) declined by 16%.  Bucking the trend of underperformance among large capitalization biotechnology names were Shire plc (SHPGY), along with Genzyme Corporation (GENZ) and Biogen Idec, Inc. (BIIB), both of which were targeted by shareholder activist Carl Icahn [see our August 2009 article “Three Recent Biotechnology Activist Wins by Carl Icahn”].

Accordingly, the relative underperformance of large capitalization biotechnology companies in 2010 masked the fact that many smaller, innovative companies performed well, as evidenced by the fact that 30 of the 130 companies comprising the NASDAQ Biotech Index produced greater than 50% returns during the period.  This performance is consistent with our thesis that small and mid-capitalization companies with positive clinical or regulatory catalysts would continue to outperform their larger industry peers in 2010.  See Table 1 for a list of the top ten gainers from the NASDAQ Biotech Index in 2010.

Noticeably absent from the list of 2010 winners, however, were the staggering quadruple-digit returns witnessed in 2009 [Vanda Pharmaceuticals, Inc. (VNDA) +2,150% and Human Genome Sciences, Inc. (HGSI) +1,342%].

Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2010

Company Name Symbol 12/31/09 Close 12/31/10 Close % Change
Akorn, Inc AKRX $1.79 $6.07 239%
Questcor Pharmaceuticals, Inc. QCOR $4.75 $14.73 210%
Neurocrine Biosciences, Inc. NBIX $2.72 $7.64 181%
InterMune, Inc. ITMN $13.04 $36.40 179%
Jazz Pharmaceuticals, Inc. JAZZ $7.88 $19.68 150%
Caliper Life Sciences, Inc CALP $2.54 $6.34 150%
SIGA Technologies, Inc. SIGA $5.80 $14.00 141%
Idenix Pharmaceuticals, Inc. IDIX $2.15 $5.04 134%
NPS Pharmaceuticals, Inc. NPSP $3.40 $7.90 132%
ARIAD Pharmaceuticals, Inc. ARIA $2.28 $5.10 124%

Last Year’s Laggards Become 2010 Winners

After declining 22% in 2009, shares of Akorn, Inc. (AKRX), a niche generic pharmaceutical company, staged an impressive comeback by becoming the largest percentage gainer within the NASDAQ Biotech Index during 2010.  In November 2010, the company announced that core business revenue is projected in the range of $79.0 million to $80.0 million in 2010, a 76%-79% increase over 2009, and up from the company’s prior guidance range of $71.0-$75.0 million.

In another dramatic reversal of fortune, three of the top ten gainers from the NASDAQ Biotech Index in 2010 made the list of top ten decliners in the prior year.  Questcor Pharmaceuticals, Inc. (QCOR), Idenix Pharmaceuticals, Inc. (IDIX), and NPS Pharmaceuticals, Inc. (NPSP) rebounded sharply in 2010, each posting triple-digit returns due in part to the following:

  • Questcor’s performance was largely due to strong revenue growth from its H.P. Acthar® Gel (repository corticotropin injection), which is indicated for the treatment of acute exacerbations of multiple sclerosis in adults, as monotherapy for the treatment of infantile spasms in infants and children under 2 years of age, and for the treatment of several other diseases and disorders.
  • Despite news in September 2010 that the U.S. Food and Drug Administration [FDA] placed two of the company’s HCV drug candidates on clinical hold, Idenix Pharmaceuticals benefited from its drug candidate for the treatment of HIV/AIDS advancing into a Phase 2b trial by its corporate partner, ViiV Healthcare.
  • Interest in NPS Pharmaceuticals can be attributed to the fact that in early 2011 the company expects to report top-line results from a Phase 3 study of teduglutide, a proprietary analog of GLP-2, in patients with short bowel syndrome who are chronically dependent on parenteral nutrition.

Losers Brought to You by the Letter “A”

Affymax, Inc. (AFFY), AMAG Pharma (AMAG), Arena Pharma (ARNA), Alexza Pharma (ALXA), and Alnylam Pharma (ALNY) were among the top ten decliners from the NASDAQ Biotech Index in 2010 [see Table 2].

Affymax, Inc. (AFFY), which hopes that its investigational anemia drug peginesatide could ultimately compete with Amgen Inc.’s Aranesp® [darbepoetin alfa], posted the largest percentage decline within the NASDAQ Biotech Index for 2010.  Top-line results from the Phase 3 clinical program released in June 2010 showed that the frequency of death, stroke, myocardial infarction, congestive heart failure, unstable angina, and arrhythmia was higher in non-dialysis patients taking peginesatide than those taking Aranesp, which sent shares of Affymax plummeting.   In November 2010, Affymax and partner Takeda confirmed their goal of submitting a new drug application [NDA] for peginesatide for the treatment of anemia in chronic renal failure patients on dialysis in the second quarter of 2011.

AMAG Pharmaceuticals, Inc. (AMAG) launched Feraheme® (ferumoxytol) to treat iron deficiency anemia in July 2009, but anemic sales earned the company a spot in the top ten decliners of 2010.  Net product revenues from Feraheme were $15.1 million in the third quarter of 2010, well below the $500 million to $1 billion in annual sales originally projected by Wall Street analysts.  See our February 2010 article “Iron Safety Hits AMAG Pharmaceuticals.”

Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2010

Company Name Symbol 12/31/09 Close 12/31/10 Close % Change
Affymax, Inc. AFFY $24.74 $6.65 -73%
China Sky One Medical, Inc. CSKI $22.75 $6.97 -69%
Medivation, Inc. MDVN $37.65 $15.17 -60%
Biodel, Inc. BIOD $4.34 $1.83 -58%
XenoPort, Inc. XNPT $18.55 $8.52 -54%
AMAG Pharmaceuticals, Inc. AMAG $38.03 $18.10 -52%
Arena Pharmaceuticals, Inc. ARNA $3.55 $1.72 -52%
Alexza Pharmaceuticals, Inc. ALXA $2.40 $1.25 -48%
Alnylam Pharmaceuticals, Inc. ALNY $17.62 $9.86 -44%
Curis, Inc. CRIS $3.25 $1.98 -39%

Our Top Ten Articles

In the spirit of analyzing statistics from 2010, we reviewed our website traffic to identify the top ten articles from the past year.  The list below is ranked in descending order, starting with the most popular article:

1)              Cancer vaccine therapies: failures and future opportunities (Apr ‘10)

2)              Investment opportunities with five frontline therapies for AML (Sep ‘10)

3)              Cancer immunotherapy to take center stage at ASCO (Jun ‘10)

4)              Monoclonal antibody companies command premiums (Jul ‘10)

5)              Stem cell competition heating up (Aug ‘10)

6)              Buyout buzz at ASH hematology confab preview (Dec ‘09)

7)              Cyclin dependent cancer confab preview (Apr ‘10)

8)              Drug development spotlight: the mTOR’s new clothes (Nov ‘10)

9)              Past pitfalls and potential promise for pancreatic cancer (Oct ‘10)

10)            Five key factors weighing on Dendreon (Jul ‘10)

Interesting to note that despite popularity among readers, companies focusing on cancer immunotherapy, hematological malignancies, monoclonal antibodies, or stem cells did not make the list of top ten gainers from the NASDAQ Biotech Index in 2010.

 

2011 Outlook

Most of the drivers supporting our favorable outlook for the biotechnology industry remain intact for 2011, such as the record number of products in clinical trials and annual industry R&D investment, improving access to capital, brisk pace of industry consolidation and licensing transactions, and attractive valuations among many small- and mid-capitalization companies, which should continue to outperform their larger industry peers in 2011.

The key exception relates to the number of FDA drug approvals, which declined in 2010 and is more than 50% below the high of 56 new approvals in 1996 despite the fact that legislation passed in 2008 gave the FDA more money and resources.  There is no discounting the negative impact of clinical and regulatory setbacks on the psyche of biotechnology investors, as evidenced by the greater than 10% decline in the NASDAQ Biotech Index in late February 2009 following a spate of high profile disappointments.

For Biotechnology in 2010, it’s Déjà vu All over Again

It’s déjà vu all over again” – Yogi Berra

With Opening Day less than a month away, it seems only fitting to reference one of the most quoted personalities of our time to describe our analysis of the biotechnology sector in 2010.  In this article, we review our favorable outlook for the industry, draw comparisons with the prior year, and introduce the results of our recent “Life Sciences Industry Outlook” survey that targeted industry executives, investors, analysts, and members of the media.

Bullish Outlook

Our favorable outlook for the biotechnology industry in 2010, which builds upon many of the same catalysts we proposed for 2009, is based on the following key drivers:

  • Sector’s defensive characteristics and impact on future economic growth
  • Highest number of annual new product approvals since 2004
  • Record number of products in clinical trials and annual industry R&D investment
  • Improving access to capital
  • Brisk pace of industry consolidation and licensing transactions
  • Many small and mid-capitalization companies remain undervalued

In fact, several of these themes were reinforced by the results of our industry survey.

Defensive Sector and Economic Driver

During periods of economic uncertainty, the biotechnology sector is often portrayed as defensive given that disease is relentless in both good economic times and bad.  Despite recent medical advances, there remains a need for quality, innovative products to diagnose and treat a broad variety of diseases such as cancer, central nervous system disorders, cardiovascular diseases, diabetes and infectious diseases.

Beyond its defensive characteristics, the sector plays a critical role in the United States [US] economy.  Innovative new medicines developed by life science companies provide better patient outcomes, improved quality of care, increased life expectancy, and lead to economic gains.

While the strengths and weaknesses of the US healthcare system remain the subject of great debate, we believe new medicines should be viewed as investments in the future, not only in patient health – but also in economic recovery and growth.  For example, as indicated in our October 2009 article “Innovative New Medicines are Key to Economic Growth,” a permanent one percent reduction in mortality from cancer alone has a present value to current and future generations of Americans of nearly $500 billion and a cure would be worth about $50 trillion.

New Drug Approvals

In a repeat of last year, the total number of approvals for new molecular entities and biologic license applications by the US Food and Drug Administration’s [FDA] Center for Drug Evaluation and Research [CDER] in 2009 was the highest since 2004.  Of course, cynics will rightfully call attention to the modest year-over-year increase [25 in 2009 versus 24 in 2008] and that recent performance is still more than 50% below the high of 56 new approvals in 1996.

However, we believe that viewing the number of FDA approvals in the context of new risk evaluation and mitigation strategies [REMS] that were introduced in 2008 and internal resource constraints that have plagued the agency provides optimism going forward.  While legislation passed in 2008 gave the FDA more money and resources, hiring and training hundreds of new employees takes time.  With that process well underway, combined with increased familiarity of the REMS program, we believe the drug approval process should improve going forward.

In terms of therapeutic areas, oncology represented one out of five [20%] approvals by CDER in 2009 according to a recent publication [Nature Reviews Drug Discovery 9, 89-92, February 2010].  Not surprisingly, oncology was our highest ranked survey response with regard to attracting investment and/or business development activity in 2010.  See Table 1 below.

Table 1. In terms of raising capital and/or business development activity, which key therapeutic area do you expect to attract the most interest/visibility during 2010?

Answer Response Ratio*
Oncology (solid tumors) 37.7%
Metabolic disorders (eg, diabetes, obesity) 17.7%
Central nervous system disorders (eg, Parkinson’s disease) 17.7%
Oncology (hematological malignancies) 11.1%
Infectious disease 8.8%
Other 6.6%

* Numbers may not add up to 100% due to rounding

Record Pipeline and Investment

According to the latest report by the Pharmaceutical Research and Manufacturers of America [PhRMA], there are a record number of biotechnology drugs currently in development.  In the US alone, there are 633 biotechnology medicines being developed, including 254 medicines for cancer, 162 for infectious diseases, 59 for autoimmune diseases, 34 for HIV/AIDS and related conditions, 25 for cardiovascular disease, and 19 for diabetes and related conditions.

Annual research and development expenditures by PhRMA member companies also reached a record $50.3 billion in 2008, more than tripling the $15.2 billion level of investment in 1995.

Access to Capital

In 2010, companies at all stages of development will try to attract investors and the competition will be fierce.  However, in terms of access to capital for life sciences companies, our survey indicated that more than 46% of respondents expect favorable conditions in 2010, with modest improvement over 2009.  Another 46% of respondents indicated that they expect access to capital to be about the same as 2009.  Only 4% of respondents expected access to capital to improve markedly with initial public offerings [IPO] possible.

In 2009, venture capital investment in biotechnology declined by 19%, both in dollars and deals, from the prior year according to the MoneyTree™ Report by PriceWaterhouseCoopers and the National Venture Capital Association, based on data from Thomson Reuters.  However, biotechnology was the single largest investment sector for 2009 with $3.5 billion going into 406 deals.

In terms of initial public offerings [IPOs], only three biotechnology companies successfully tested the public markets in 2009.  In 2010, two IPO’s have already been completed, albeit both below the expected offering price, and several others are in queue, including Prometheus Laboratories, Aveo Pharmaceuticals, Trius Therapeutics, Aldagen, Alimera Science, and Tengion.  See Table 2 for recent biotechnology IPO performance.

Table 2. Recent Biotechnology IPO Performance

Company IPO Date IPO Price Raised ($m) Latest Price % Change
Cumberland Pharmaceuticals (CPIX) 8/10/09 $17 $85 $11.60 -31.76%
Talecris Biotherapeutics (TLCR) 10/1/09 $19 $950 $21.94 +15.47%
Omeros Corporation (OMER) 10/8/09 $10 $70 $6.36 -36.40%
Ironwood Pharmaceuticals (IRWD) 2/3/10 $11.25 $203 $13.14 +16.80%
Anthera Pharmaceuticals (ANTH) 3/1/10 $7 $54 $7.00 unchanged

 

In terms of public financings, several companies have already completed offerings in 2010, including Amicus Therapeutics, Inc. (FOLD), BioSante Pharmaceuticals, Inc. (BPAX), Cell Therapeutics, Inc. (CTIC), Chelsea Therapeutics International, Inc. (CHTP), Cleveland Biolabs, Inc. (CBLI), Cyclacel Pharmaceuticals, Inc. (CYCC), Derma Sciences, Inc. (DSCI), EntreMed, Inc. (ENMD), InterMune, Inc. (ITMN), Palatin Technologies, Inc. (PTN),and XOMA Ltd. (XOMA).

Improving access to capital could lead to an acceleration of merger and acquisition activity and licensing deals, as large pharmaceutical companies begin to lose their leverage and company valuations start increasing.

Consolidation

More than 82% of survey responders expected merger and acquisition activity to accelerate in 2010 compared with 2009.  In view of two recent deals, the paucity of merger and acquisition activity and decline in both the quantity and value of licensing & partnering transactions announced during the JP Morgan Healthcare Conference in 2010 appears to have been the pause that refreshes [see “Biotech Deal Activity Declines…The Pause that Refreshes?”].

For example, on February 23, 2010, Cephalon, Inc. (CEPH) exercised its option to acquire Ception Therapeutics, Inc. for $250 million in view of positive Phase 2 data from a clinical study in adults with eosinophilic asthma.  In January 2009, Cephalon paid Ception $100 million upfront for the option.

On March 1, 2010, Astellas Pharma, Inc. offered to acquire all outstanding shares of common stock of OSI Pharmaceuticals, Inc. (OSIP) for $52.00 per share in cash, or an aggregate of approximately $3.5 billion on a fully diluted basis.  The offer represented more than a 40% premium on the closing price of OSI Pharmaceuticals’ common stock of $37.02 per share on February 26, 2010, and shares have subsequently traded above $57 on expectations for a higher bid.

In view of the fact that US pharmaceutical companies stand to lose billions of revenue due to patent expirations from 2010 to 2012, we expect merger and acquisition activity to remain brisk.

Small Versus Large

As highlighted in our “Biotech’s 2009 Stealth Small Cap Rally” article, small capitalization biotechnology companies were among the best performers of 2009.  The relative underperformance of many large capitalization biotechnology companies in 2009 masked the fact that many smaller, innovative companies performed well, with 20 of the 125 companies comprising the NASDAQ Biotech Index producing triple-digit returns during the period.  Vanda Pharmaceuticals (VNDA), Human Genome Sciences (HGIS), and Targacept, Inc. (TRGT) led the way, with stock prices up 2,150%, 1,342%, and 487%, respectively.

Similar to 2009, we expect that small and mid-capitalization companies with positive clinical or regulatory catalysts will continue to outperform their larger industry peers in 2010.

Beware the Ides of March

In our February 2009 article “Chink in the Biotechnology Armor,” we cited the spate of high profile clinical setbacks and regulatory delays during the month as the reason for the sector’s precipitous decline.  The NASDAQ Biotech Index, which traded as high as 772 during the first week of February, traded as low as 605 by the first week of March – losing more than 21% of its value during the 30-day period.

In February and March 2010, there have also been a significant number of clinical and regulatory setbacks.  Consider the following:

  • AMAG Pharmaceuticals, Inc. (AMAG) – Purported safety concerns regarding Feraheme® [ferumoxytol], the company’s marketed product for the treatment of iron deficiency anemia in adult patients with chronic kidney disease, kicked off a 27% decline in shares of AMAG Pharmaceuticals, Inc.  The stock, which traded as high as $45.61 on February 3, 2010, subsequently traded as low as $33.29 despite assurances from the company that the rate of serious hypersensitivity reactions related to Feraheme are consistent with the product’s label.
  • Cell Therapeutics, Inc. (CTIC) – On February 8, 2010, the FDA released its briefing documents for the company’s lymphoma drug, pixantrone, in advance of an Oncologic Drugs Advisory Committee [ODAC] meeting originally scheduled for February 10, 2010.  Shares of Cell Therapeutics, Inc., which closed at $1.06 the prior week, traded as low as $0.53 that day.  Among other issues, the FDA raised concerns about pixantrone’s efficacy in view of the fact that the randomized study was stopped at less than 50% of its planned patient target because of poor accrual.  The ODAC meeting was subsequently rescheduled for March 22, 2010.
  • Isis Pharmaceuticals, Inc. (ISIS) – On February 10, 2010, the company and its partner, Genzyme Corporation (GENZ), announced results from a Phase 3 study of mipomersen in patients with heterozygous familial hypercholesterolemia [heFH].  While the trial met its primary endpoint with a highly statistically significant 28 percent reduction in LDL-cholesterol after 26 weeks of treatment, the results raised safety concerns and apparently fell short of Wall Street’s expectations.  Shares of Isis Pharmaceuticals, which closed above $11 the day before the results were released, traded as low as $8.85 the next day.
  • XenoPort, Inc. (XNPT) – On February 17, 2010, XenoPort, Inc. and its partner GlaxoSmithKline plc (GSK) received a Complete Response letter from the FDA, delaying approval for Horizant™ [gabapentin enacarbil] Extended-Release Tablets, an investigational non-dopaminergic treatment for moderate-to-severe primary Restless Legs Syndrome.   Shares of XenoPort, Inc., which closed at $19.60 the day before the news, hit an all-time low of $6.39 the next day.
  • Novelos Therapeutics, Inc. (NVLT.OB) – On February 24, 2010, the company announced that the primary endpoint of improvement in overall survival was not met in a pivotal Phase 3 trial for advanced non-small cell lung cancer [NSCLC] with its lead product, NOV-002, in combination with first-line chemotherapy.  Shares of Novelos Therapeutics, Inc., which closed at $1.65 the day before the results were released, traded as low as $0.28 the next day.
  • Adventrix Pharmaceuticals, Inc. (ANX) – On March 1, 2010, the company announced that it received a refuse to file letter from the FDA regarding its New Drug Application for ANX-530 [vinorelbine injectable emulsion].  In the letter, the FDA indicated that the data included in the initial submission from the intended commercial manufacturing site was insufficient to support a commercially-viable expiration dating period.  Shares of Adventrix Pharmaceuticals, Inc. which closed at $0.29 the prior week, traded as low as $0.16 that day.
  • Medivation, Inc. (MDVN) – On March 3, 2010, the company and its partner, Pfizer, Inc. (PFE), announced that the investigational drug dimebon [latrepirdine] unexpectedly failed in a Phase 3 trial in patients with Alzheimer’s disease.  Shares of Medivation, Inc., which closed above $40 the day before the results were released, traded as low as $12.55 the next day.

Helping to offset the negative impact of these setbacks, the NASDAQ Biotech Index is market value-weighted, taking into account the total market capitalization of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalizations, or the greatest values, will have the highest impact on the index.  Further, several companies experiencing clinical or regulatory setbacks were not included in the NASDAQ Biotech Index.

In addition, recent merger and acquisition activity may also help mask the effects of the aforementioned clinical and regulatory setbacks.  For example, the NASDAQ Biotech Index closed up 2.7% the day that Astellas Pharma, Inc. offered to acquire OSI Pharmaceuticals, Inc.

Upcoming Catalysts

When it comes to raising visibility and capital, 40% of survey respondents cited general risk aversion in the financial markets as the single greatest challenge facing most life sciences companies in 2010.   Another 28.8% of respondents cited the average market capitalization of life sciences companies being too small and/or lack of liquidity as the single greatest challenge.

In view of the aforementioned clinical and regulatory setbacks, investors will be closely monitoring the following events, as there is no discounting the negative impact of continued clinical and regulatory setbacks on biotechnology investor’s appetite for risk:

  • MannKind Corporation (MKND) – In January 2010, the company announced that the FDA would be unable to complete its review of Afrezza™ before the mid-January Prescription Drug User Fee Act [PDUFA] date in order to complete an inspection of a manufacturing-related facility belonging to one of the company’s suppliers.  Alfrezza is a novel, ultra rapid acting mealtime insulin therapy under review for use in adult patients with type 1 and type 2 diabetes mellitus for the treatment of hyperglycemia.  The company has not been given a new PDUFA date by the FDA.
  • InterMune, Inc. (ITMN) – A Pulmonary-Allergy Drugs Advisory Committee [PADAC] meeting is scheduled for March 9, 2010, to review the NDA for pirfenidone, the company’s investigational drug candidate for the treatment of patients with idiopathic pulmonary fibrosis [IPF] to reduce decline in lung function.
  • Amylin Pharmaceuticals, Inc. (AMLN), Eli Lilly and Company (LLY), and Alkermes, Inc. (ALKS) – Following a weather delay, the FDA has set a new PDUFA action date of March 12, 2010, for its review of the NDA for exenatide once weekly.  Exenatide is being developed in collaboration with Eli Lilly and based on technology from Alkermes, Inc.
  •  Cell Therapeutics, Inc. – The rescheduled ODAC meeting for pixantrone takes place on March 22, 2010.
  • Delcath Systems, Inc. (DCTH) – On February 4, 2010, the company announced that sufficient events have been reached to allow data analysis to begin on its Phase 3 trial for a novel drug delivery platform to deliver ultra-high doses of anti-cancer drugs to the liver while preventing these high doses of drug from entering the patient’s bloodstream.  The 92 patient, randomized, multi-center, Phase 3 trial used the drug melphalan to treat patients with metastatic melanoma in the liver.  Assuming a successful trial endpoint, the company expects to file a new drug application [NDA] with the FDA in April 2010.
  • Dendreon Corporation (DNDN) – A Biologics License Application for Provenge® [sipuleucel-T] for the treatment of men with metastatic, androgen-independent prostate cancer, has been assigned a PDUFA date of May 1, 2010.

Conclusion

While the capital markets remain turbulent, many of the biotechnology industry’s fundamentals, such as the number of products in clinical trials, new product approvals, profitable biotech companies and industry mergers & acquisitions remain favorable.   Combine these positive attributes with yet to be seen benefits from decoding the human genome, an improvement or stabilization in the capital markets, greater resources for the FDA and a novel blending of technology, chemistry and biology and many of the necessary ingredients for The Biotechnology Revolution remain intact.  Or, as Yogi Berra simply said, “You can observe a lot by watching.”

Biotech Deal Activity Declines…The Pause that Refreshes?

* MD Becker Partners reporting live from the JP Morgan Healthcare Conference

This week, nearly 6,500 registrants gathered in San Francisco, California for the JP Morgan Healthcare Conference to hear 25-minute presentations from 338 life science companies.  For industry executives and investors, the annual event serves as a good barometer for the rest of the year.

We roamed the familiar halls of the Westin St. Francis Hotel to assess the mood among participants and also monitored online media commentaries throughout the event.  In general, there was a flurry of activity, the plane flights and networking receptions were crowded as usual, and several industry observers “Tweeted” a sense of optimism for 2010.  However, we sought to construct a less subjective assessment by analyzing year-over-year statistics from the conference.

Accordingly, we extensively reviewed company press releases issued during the JP Morgan Healthcare Conference in both 2009 and 2010, with a particular focus on identifying the number of merger & acquisitions, licensing & partnering transactions, and financing deals announced each year during the four day event.

Merger and Acquisitions

In contrast to the absence of any significant M&A deals announced during the JP Morgan Healthcare Conference in 2010, several large M&A transactions with an aggregate value of $702 million were disclosed during the first two days of the event in 2009 [January 12-15, 2009].  The largest deal went to Cephalon, Inc. (CEPH), which announced an agreement providing the company with an option to purchase all outstanding capital stock of Ception Therapeutics, Inc., a privately held biopharmaceutical company.  Under the terms of the option agreement, Cephalon paid Ception $100 million upfront for the option.  If Cephalon exercises its option, the company will purchase all of the outstanding capital stock of Ception for $250 million along with additional payments related to clinical and regulatory milestones.  Other transactions announced that year included:

  • Medtronic, Inc.’s (MDT) acquisition of privately held Ablation Frontiers, Inc. for an initial payment of $225 million plus potential additional payments contingent upon achievement of certain clinical milestones
  • The Medicines Company’s (MDCO) merger agreement with Targanta Therapeutics Corporation for $42 million in cash and additional regulatory and commercial milestone payments
  • NuVasive, Inc.’s (NUVA) option to acquire Progentix Orthobiology BV, a Netherlands based company focused on developing novel orthobiologics, consisting of an upfront investment of $15 million along with the obligation to purchase the remaining equity of Progentix for $45 million upon accomplishment of certain development milestones [with additional potential payments of up to $25 million upon the achievement of additional milestones and based upon NuVasive’s sales success]

Licensing and Partnering

Kicking off the JP Morgan Healthcare Conference in 2010, privately held KaloBios Pharmaceuticals, Inc. announced a $290 million agreement with Sanofi Pasteur, the vaccines division of the sanofi-aventis Group (SNY), for the development and commercialization of KB001, an investigational new biologic for the treatment or prevention of Pseudomonas aeruginosa [Pa] infections.  KaloBios, which is developing first-in-class human antibody therapeutics that offer advantages over other methods of human antibody creation in terms of immunogenicity, potency, and manufacturing yields, will receive an upfront payment of $35 million, plus development, regulatory and commercial milestones for a potential further $255 million, as well as royalties on eventual product sales.

While other licensing and partnering transactions were announced during the JP Morgan Healthcare Conference in 2010, they were substantially smaller or specific financial terms were not disclosed.  These include:

  • Proteus Biomedical Inc. announced an exclusive worldwide license and collaboration agreement with Novartis AG (NVS) to develop and commercialize pharmaceutical products that incorporate Proteus’ novel sensor-based technologies in the field of organ transplantation along with certain option rights in cardiovascular and oncology product applications.  Under the terms of the agreement, Novartis will make upfront cash and equity investments in Proteus totaling $24 million and Proteus will also receive royalties on worldwide net sales of any Novartis products incorporating its sensor-based technology.
  • Trillium Therapeutics, Inc., a biopharmaceutical company developing innovative immune-based biologics, announced that it has entered into a definitive license agreement with Biogen Idec, Inc. (BIIB), granting the latter exclusive worldwide rights to one of Trillium’s development programs.  Under the terms of the agreement, Trillium will receive an upfront payment and is eligible to receive milestone payments based on achievements of specified clinical, regulatory and commercial accomplishments.  Trillium will also receive royalties on global product sales.  Biogen Idec will be solely responsible for clinical development, regulatory approvals, manufacturing and commercialization.
  • MedGenesis Therapeutix Inc., a biopharmaceutical company developing and commercializing innovative treatments for patients with serious central nervous system [CNS] diseases, announced an agreement with Amgen, Inc. (AMGN) that provides MedGenesis with an exclusive, worldwide license for glial cell line-derived neurotrophic factor [GDNF] protein in CNS and non-CNS indications.  As part of the license agreement, Amgen now holds a small equity stake in MedGenesis.  In parallel, Biovail Corporation (BVF) and MedGenesis concluded an agreement to collaborate on the development of GDNF in Parkinson’s disease and potentially other CNS indications.  GDNF is a naturally-occurring growth factor capable of protecting and promoting the survival of dopamine producing nerve cells.
  • AstraZeneca Plc (AZN) and CrystalGenomics announced a research collaboration to discover and develop a novel anti-infective for use as a potential antibacterial agent.  Under the terms of this agreement, Korea-based CrystalGenomics will receive research funding from AstraZeneca for two years.  CrystalGenomics will also be eligible to receive future milestones and royalty payments associated with development and commercialisation of a drug candidate.
  • AnaptysBio, Inc., a privately-held therapeutic antibody platform and product company, announced it has signed an agreement with Roche (RHHBY) for the development of novel antibody therapeutics.  Under the terms of the agreement, AnaptysBio will be responsible for generating novel antibodies using its proprietary somatic hypermutation platform and Roche will receive a worldwide license to develop and commercialize antibodies optimized by AnaptysBio.  In addition to a signing fee paid by Roche, AnaptysBio will be eligible to receive milestone payments and royalties upon product sales.

The six transactions announced during the JP Morgan Healthcare Conference in 2010 with reported financial terms totaling $314 million pale in comparison to the ten deals reported at the meeting during 2009 worth more than $2.4 billion in aggregate value.  These included a $1.1 billion deal between ZymoGenetics, Inc. (ZGEN) and Bristol-Myers Squibb Company (BMY), a $500 million deal between Peptimmune, Inc. and Novartis AG, a $396 million deal between Micromet, Inc. (MITI) and Bayer AG (BAYZF.PK), and a $200 million deal between FORMA Therapeutics the Novartis Option Fund to develop inhibitors for an undisclosed protein-protein interaction target in the field of oncology, among others.

Financing

The quantity and aggregate dollar value of public and private financing transactions announced during the JP Morgan Healthcare Conference were essentially flat in 2010 compared with the prior year as reflected in the table below.

2009 2010
Company Name Ticker $ Million Raised Company Name Ticker $ Million Raised
Acclarent, Inc Private 26.00 Cyclacel Pharma CYCC 7.20
Mithridion, Inc Private 2.90 Advanced Cardiac Therap Private 5.00
Singulex, Inc. Private 19.00 VentiRx Pharma Private 25.00
Soligenix, Inc SNGX.OB 2.28 EntreMed, Inc ENMD 2.50
Akorn, Inc AKRX 25.00 BioLeap, Inc Private 5.00
Alseres Pharmaceuticals ALSE.PK 1.00 Cell Therapeutics, Inc CTIC 30.00
Chiral Quest Private 13.00 BIND Biosciences, Inc Private 11.00
Rosetta Genomics Ltd ROSG 5.10
TOTAL $89.18 TOTAL $90.80

 

Outlook

At the start of 2009, we provided a positive outlook for biotechnology, citing the sector’s defensive characteristics, favorable technical aspects, and improving fundamentals, such as the number of new product approvals, products in clinical trials and the brisk pace of industry consolidation and licensing transactions.  The latter was quickly reinforced by M&A transactions with an aggregate value of $702 million and licensing & partnering deals worth more than $2.4 billion in aggregate value announced January 12-15, 2009, during the JP Morgan Healthcare Conference.

While we believe that a positive outlook for 2010 is once again warranted, and the first two weeks of the year don’t necessary indicate a trend, hopefully the paucity of M&A activity coupled with the decline in both the quantity and value of licensing & partnering transactions announced during the JP Morgan Healthcare Conference in 2010 is simply the pause that refreshes and the action improves throughout the year.

2009: Biotech’s Stealth Small Cap Rally

On the heels of the Dow Jones Industrial Average (DJIA) logging its worst annual performance since 1931 and the NASDAQ Composite (COMP) having its worst year since inception in 1971, it may have seemed counter intuitive to provide a bullish outlook for the biotechnology industry in 2009.  Nonetheless, at the start of the year we provided a positive outlook for biotechnology, citing the sector’s defensive characteristics, favorable technical aspects, and improving fundamentals, such as the number of new product approvals, products in clinical trials and the brisk pace of industry consolidation and licensing transactions.

With 2009 officially on the books, it appears an appropriate time to review the sector’s performance along with some of the themes highlighted in our previous articles.

Big Versus Small

The twenty-member NYSE Arca Biotechnology Index (BTK) was up 46% in 2009, while the broader NASDAQ Biotech Index (NBI) was only up 16%, underperforming the Dow Jones Industrial Average (INDU), S&P 500 (SPX), and NASDAQ Composite (COMP), which were up 19%, 24%, and 44%, respectively.  Why the huge discrepancy in returns between these two major biotechnology indices?  Unlike the equal-weighted NYSE Arca Biotechnology Index, the NASDAQ Biotech Index is market value-weighted, taking into account the total market capitalization of the companies it tracks and not just their share prices.  Accordingly, companies with the largest market capitalizations, or the greatest values, will have the highest weighting in the index.

During 2009, large capitalization biotechnology companies [greater than $10 billion] dramatically underperformed their smaller peers.  For example, Celgene Corporation (CELG) was essentially flat, Amgen, Inc. (AMGN) was down 2%, Gilead Sciences, Inc. (GILD) declined by 15%, and Genzyme Corporation (GENZ) dropped 26% [earning Henri Termeer the coveted Nance Trophy for worst biotech CEO of 2009 by TheStreet.com’s Adam Feuerstein].  Some of the reasons for this poor performance include concerns over generic competition and pipeline progress – ironically some of the same issues that have plagued big pharma.

Accordingly, the relative underperformance of large capitalization biotechnology companies in 2009 masked the fact that many smaller, innovative companies performed well, with 20 of the 125 companies comprising the NASDAQ Biotech Index producing triple-digit returns during the period.  In fact, two biotechnology companies were among the largest percentage gainers in the NASDAQ Composite with their staggering quadruple-digit returns: Vanda Pharmaceuticals, Inc. (VNDA) +2,150% and Human Genome Sciences, Inc. (HGSI) +1,342%.  See Table 1 for a list of the top ten gainers from the NASDAQ Biotech Index in 2009.

Table 1. Top ten gainers from NASDAQ Biotech Index (NBI) in 2009

Company Name Symbol 12/31/08 Close 12/31/09 Close % Change
Vanda Pharmaceuticals Inc. VNDA $0.500 $11.250 2,150%
Human Genome Sciences, Inc. HGSI $2.120 $30.580 1,342%
Targacept, Inc. TRGT $3.560 $20.900 487%
Dendreon Corporation DNDN $4.580 $26.280 474%
Hi-Tech Pharmacal Co., Inc. HITK $5.540 $28.050 406%
BioCryst Pharmaceuticals, Inc. BCRX $1.370 $6.460 372%
Spectrum Pharmaceuticals, Inc. SPPI $1.490 $4.440 198%
Santarus, Inc. SNTS $1.570 $4.620 194%
Salix Pharmaceuticals, Ltd. SLXP $8.830 $25.390 188%
Impax Laboratories, Inc. IPXL $5.000 $13.610 172%

 

Oncology: Prostate Cancer Spotlight

Driven by positive Phase 3 results from Dendreon Corporation (DNDN) regarding its prostate cancer vaccine study, investors gravitated towards biotechnology companies working in the field of prostate cancer treatment as noted in our May 2009 article.  This enthusiasm only increased when Johnson & Johnson (JNJ) announced in May 2009 that it would acquire Cougar Biotechnology, Inc., a development stage company with an oral prostate cancer treatment being studied in two Phase 3 clinical trials, for approximately $1 billion.

While not a member of either major biotechnology index, shares of Oncogenex Pharmaceuticals, Inc. (OGXI) started the year around $3.00 and ended above $22 for a 643% return.  Oncogenex is developing OGX-011, which is designed to inhibit the production of clusterin, a protein that is associated with cancer treatment resistance, and has completed Phase 2 clinical trials in prostate, lung and breast cancer.  OGX-011 received Fast Track designation from the FDA for the treatment of progressive metastatic prostate cancer in combination with docetaxel.  Shares of Oncogenex had traded higher than $42 in August 2009, but the stock price declined following a license agreement with Teva Pharmaceutical Industries (TEVA) for OGX-011 that apparently did not meet investor’s expectations.

Not all biotechnology companies working in the area of prostate cancer were as fortunate as Dendreon, Cougar, and Oncogenex.  Shares of GTx, Inc. (GTXI) were the second largest industry decliner for 2009 due to a complete response letter from the Food and Drug Administration [FDA] that cited clinical deficiencies regarding the company’s New Drug Application [NDA] for toremifene 80 mg to reduce fractures in men with prostate cancer receiving androgen deprivation therapy.  See Table 2 for a list of the top ten decliners from the NASDAQ Biotech Index in 2009.

Shareholder Activist Wins

In view of past major coups with MedImmune and ImClone, in August 2009 we reviewed Carl Icahn’s biotechnology holdings as reported in SEC filings and identified three companies that significantly underperformed the NASDAQ Biotechnology Index over the past five years, but with recent successful shareholder activist outcomes that could positively impact future performance.  In particular, we noted that Alexander Denner, who has served as Managing Director of entities affiliated with Carl Icahn and as a director of ImClone, had recently been elected as a director at each company.

During 2009, those three companies, Biogen Idec, Inc. (BIIB), Amylin Pharmaceuticals, Inc. (AMLN), and Enzon Pharmaceuticals, Inc. (ENZN) produced positive returns of 12%, 31% and 81%, respectively.  While Biogen Idec underperformed the sector, it notched the highest return among large capitalization biotechnology companies.

In other shareholder activist news, holders of Vanda Pharmaceuticals (VNDA) are likely pleased that the company’s Board of Directors spurned a request by Tang Capital Partners, LP to liquidate the company in February 2009.  Shares of Vanda were up 2,150% for the year [see Table 1] following FDA approval in May 2009 to market the company’s Fanapt™ [iloperidone], a novel antipsychotic for the acute treatment of adult patients with schizophrenia, and a subsequent marketing agreement for the product with Novartis AG (NVS).

CNS: Developments for Parkinson’s Disease

Vanda Pharmaceuticals wasn’t the only company working in the area of central nervous system [CNS] disorders to make news.  Shares of Impax Laboratories, Inc. (IPXL), which were trading around $7.50 at the time we published our August 2009 article titled “Treating Parkinson’s Disease: Investment Opportunities and Challenges,” continued to reach new 52-week highs and ended up 172% for the year [see Table 1].  Impax recently initiated the second of two Phase 3 studies designed to support marketing approval of its IPX066 product candidate for the treatment of Parkinson’s disease.  IPX066 is an investigational extended release carbidopa-levodopa product intended to rapidly achieve and then sustain effective blood concentrations of levodopa, potentially improving clinical symptom management.

Gastrointestinal Disease: 3 Hits, 3 Misses

First, the good:

Both Salix Pharmaceuticals, Inc. (SLXP) and Santarus, Inc. (SNTS) appear in the list of top ten biotechnology gainers for 2009 with triple-digit returns due to favorable regulatory progress reported during the year [see Table 1].  In September, Salix announced the successful outcome of two Phase 3 trials to evaluate the efficacy and safety of Xifaxan® [rifaximin] for the treatment of non-constipation irritable bowel syndrome.  Salix is planning an NDA submission for the first half of 2010.  In December, Santarus announced that the FDA approved the company’s New Drug Application [NDA] for its prescription tablet product for all of the indications being sought, including for the treatment of heartburn and other symptoms associated with gastroesophageal reflux disease.

While not a member of either major biotechnology index, shares of Soligenix, Inc. (SNGX.OB) increased 317% during 2009.  In January, the company reached agreement with the FDA on the design of a confirmatory, pivotal Phase 3 clinical trial evaluating its lead product orBec® for the treatment of acute gastrointestinal Graft-versus-Host Disease [GVHD].  The following month, Soligenix announced a potential $30 million North American partnership agreement with Sigma-Tau Pharmaceuticals for orBec and in October 2009 initiated patient enrollment in the confirmatory Phase 3 trial that is expected to complete with clinical data available in the first half of 2011.

Next, the bad:

As discussed in our December 2009 article “Graft Versus Host Disease: Failures and Future Opportunities,” Osiris Therapeutics, Inc. (OSIR) recently reported preliminary results from two Phase 3 trials evaluating its Prochymal product candidate for the treatment of acute GVHD.  Unfortunately, neither trial reached its primary endpoint, sending shares from $14 to a 52-week low of $5.35 by November 2009, earning the company a spot in the top ten decliners for the year [see Table 2].

The other two casualties working in the area of gastrointestinal disease and appearing in the top ten decliners for 2009 are:

  • Progenics Pharmaceuticals, Inc. (PGNX), which announced in October 2009 that the company regained worldwide rights to Relistor® [methylnaltrexone bromide] for the treatment of opioid-induced constipation from Wyeth Pharmaceuticals.  Global net sales of Relistor for the third quarter of 2009 were a mere $3.3 million, as compared to $3.2 million in sales for the previous quarter.
  • In the absence of any negative clinical or regulatory news, NPS Pharmaceuticals, Inc. (NPSP) stated it remains on track to reach full patient enrollment before the end of the first quarter of 2010 for a confirmatory Phase 3 trial with Gattex™ (teduglutide), the company’s proprietary analog of naturally occurring human glucagon-like peptide 2 [GLP-2], for the treatment of short bowel syndrome [SBS].  NPS believes that positive results from the trial, expected to complete in October 2010 according to ClinicalTrials.gov, will enable the company to seek U.S. marketing approval for Gattex.

Table 2. Top ten decliners from NASDAQ Biotech Index (NBI) in 2009

Company Name Symbol 12/31/08 Close 12/31/09 Close % Change
Sequenom, Inc. SQNM $19.840 $4.140 -79%
GTx, Inc. GTXI $16.840 $4.200 -75%
MiddleBrook Pharmaceuticals, Inc. MBRK $1.500 $0.510 -66%
Idenix Pharmaceuticals, Inc. IDIX $5.790 $2.150 -63%
Osiris Therapeutics, Inc. OSIR $19.160 $7.140 -63%
Progenics Pharmaceuticals Inc. PGNX $10.310 $4.440 -57%
Questcor Pharmaceuticals, Inc. QCOR $9.310 $4.750 -49%
NPS Pharmaceuticals, Inc. NPSP $6.210 $3.400 -45%
Discovery Laboratories, Inc. DSCO $1.120 $0.628 -44%
The Medicines Company MDCO $14.730 $8.340 -43%

 

2010 Outlook

The capital markets remain turbulent and there may be casualties along the way among undercapitalized companies, but many of the biotechnology industry’s fundamentals, such as the number of products in clinical trials, new product approvals, profitable biotech companies and industry mergers & acquisitions remain favorable for 2010. Similar to 2009, small capitalization companies with clinical or regulatory catalysts should continue to outperform their larger industry peers in the year ahead.

What is your outlook for the biotechnology industry in 2010?  Take a moment to complete our survey, which is only ten questions long and will take just minutes to complete.  The results of this important survey along with our industry outlook will be communicated in early 2010 through a future article.  Take the survey now by clicking here.