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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