Prix Galien USA
Alexandria Center for Life Science – New York City – September 27, 2011
The Galien Award is given out each year by the Prix Galien Committee, a distinguished body of scientists, including seven Nobel Prize laureates, in recognition of products and agents that improve the human condition. Awards are given for Best Pharmaceutical Agent (i.e. small molecule), Best Biotechnology Product and Best Medical Technology approved by the FDA in the past ten years. Prix Galien was created in France and has been introduced all over Europe and North America. It is the most prestigious award of its kind in eleven countries.
This year I was privileged to attend the 2nd Annual Galien Forum at the Alexandria Center for Life Sciences in New York City on Sept. 27, 2011. At the forum, the session I attended was on Funding Innovation – New Trends in the Healthcare M&A Landscape. In addition, I assisted the panel during moderation and was able to speak with each of the distinguished panelists. Below I will share my notes from this panel, which covers the impact of FDA clinical trials on M&A, biomarker/therapeutic combinations, orphan drugs, the patent cliff, medical device deals, exit strategies and M&A deal structures.
The panel was moderated by Kimberly Ha, Global Editor of Biopharm Insight, part of the a Financial Times Group.
Les Funtleyder, MPH, Healthcare Strategist and Portfolio Manager, Miller Tabak Health Care Transformation Fund
Hunt Henrie, Managing Director at Ferghana Partners, a specialist investment banking group
Paul I. Rachlin, Partner, Proskauer
Jonathan Silverstein, Partner, OrbiMed Advisors
Jide Zeitlan, CEO, Keffi Group
Leading Life Science business executives, investors and advisors in the biomedicine field discuss trends and developments in the healthcare M&A landscape, including today’s best exit strategies and the pros and cons of partnership versus an M&A deal. What impact will these different strategies have on the continued development of company pipelines?
FDA Clinical Trials and Biomarkers
The panel began with the a discussion of FDA clinical trials and the necessity of working with the FDA to plan strategically and effectively. The panel agreed phase II trials have not been a reliable indicator of success. It’s not just a matter of the FDA being a bureaucratic agency, but from a M&A standpoint, trails often need to be redone for various reasons i.e. dosing issues. The speaker emphasized the importance of doing these trials correctly at the early stage to avoid penalties later on. This is a tremendous challenge for early-stage/VC backed companies. When doing diligence, investors have found that at least 1/3 of companies have cut corners to save cash i.e. trial not powered enough. On the sell side, when selling the company to big pharma, the investor risks pharma asking your company to start over and go back to square one in order to repeat the clinical trial. Those on the buy side are always skeptical that not all M&A points have been covered. One way to improve this process is by making trials more efficient, which had given rise to an explosion of biomarker deals. For example, the partnership of Qiagen with Pfizer on diagnostic-therapeutic combinations. One panelist expects to see a trend of big pharma acquiring diagnostic corporations. Roche also has history of pairing drugs with diagnostics (see 1, 2) which will help aid trial design as diseases can be monitored. Will this lead to a crossover of M&A transactions? Despite this biomarker perspective, another panelist remarked that we will not be seeing pharma buy diagnostic companies, but will be looking to partner instead. There is not shareholder support for these acquisitions. Regarding the big picture, I also wanted to point out that the panel remarked that emerging markets were looking good, while the EU and US were looking pretty bad. They were interested in Asia’s reimbursement strategies. I think these remarks have become especially prudent since September, as the European economies have been shuddering causing extreme market volatility which was just in it’s early stages when this panel convened. I would personally be slightly more optimistic on the US market, though it does seem our results are tied to the outcome of the EU debt crisis.
The conversation quickly turned to orphan drugs, and companies which market products in this space have rapidly been on the rise this decade for several of reasons. One company that garnered considerable mention was Alexion, which rose to profitability in one year. Since the panel, Alexion obtained drug approval in the EU (see 3) for the treatment of atypical hemolytic uremic syndrome (aHUS), though recently its share have been down (see 4,5) perhaps making it a good buy for 2012 if you like the company. Alexion was mentioned especially in reference to the discussion on clinical trials design, and the trend towards smaller trials for early stage drug candidates, as Alexion published a study of 37 patients. This is leading doctors and scientists to find additional indications for their orphan drugs – a very critical business move, as once a drug is approved by the FDA for one indication, it is more more straightforward to get approval for additional indications (since the drug has already been demonstrated as safe). Several deals which were mentioned at this point included Sanofi’s acquisition of Genzyme, Endo buying AMS, and Varian acquiring Calypso. The Sanofi deal is the second largest biotech deal ever, which was consummated for $20.1b in order to gain access to Genzyme’s Enzyme Replacement Therapy. The deal was reached at $74 per share cash and hinged on the offer of a tradable contingent value right (CVR) whose value will depend on Genzyme’s experimental multiple sclerosis drug Lemtrada. The CVR was a critical tool in bridging the difference in value perceived by the two companies and will essentially trade like an option. Genzyme was one of the first specialty pharmaceutical manufacturers who demonstrated that profits could be made in the orphan disease space. In the past year Endo has acquired HealthTronics (urology), Penwest (nervous system disorders), Qualitest (OTC products) and American Medical Systems (AMS, pelvic health) poising themselves for long term growth. Their purchase of AMS for $2.9b cash, or $30 a share, is intended to diversify Endo’s therapeutic health areas and products includings drugs, devices and services (2011 Credit Suisse Healthcare Conference Transcript). Finally, the $10m Varian deal for Calypso stirred some mutters on the panel. Just in January Calypso had taken in $6.4m in funding, though I’m not sure what the company was valued at that time. It was my interpretation from the panelist’s discussion that investors had believed Calypso to be worth alot more not too long ago and that this was a good deal for Varian. Calypso System features GPS for the Body technology and Beacon electromagnetic transponders that continuously track tumor location to improve precision of prostate cancer treatments. The transponders are implanted into the prostate tracked with the 4D localization so that beams can be precisely delivered during radiotherapy and radiosurgery (see Calypso website). In summary, these types of deals for mature technologies indicate a general lack of innovation in the healthcare field, or at least the lack of innovative technologies making it to market.
Over the next 2-3 years, the greatest number of patents critical to the pharmaceutical industry are expiring. Lipitor, made by Pfizer, the number one and two selling drug in 2009-2010 was bringing in $5 billion a year in sales went off patent on Nov. 30, 2011 giving rise to a fury of generics from abroad. In preparation, Pfizer has been slashing costs saving $1-2b a year and laying off 20-30k people, resulting in a 5% increase in stock price. One may wonder why Pfizer’s stock rose after such announcements. The logic is that investors want Pfizer and other big pharma to buy their way out of the patent cliff by acquiring approved products. In general large pharma is not getting any credit for innovation. Some deals which were noted included Johnson & Johnson’s agreement to purchase Synthes for $21.3B, the largest purchase of the 125-year old company’s history. Synthes, a device, spine and biomaterials company based in West Chester , PA and trades on the Swiss stock exchange specializing in bone fractures and trauma, will provide J&J with a leading device company and has caused its shares to rise 8% since April when the deal was first announced. This is a deal which has nothing to do with innovation. Another deal mentioned involved Cordis. Cordis was bought in 1996 by J&J but retained its name and specializes in catheters, haemostasic values, percutaneous transluminal coronary angioplasty (PTCA) guiding catheters and PTCA balloons using nylon material.
Medical Device Companies
As mentioned, J&J has been branching into devices and diagnostics. The panelists were not holding their breath for device companies to begin expanding into pharma. Instead, medical device companies have been looking M&A for innovation, and pharma will take over this role. One deal which generated discussion was the acquisition of Ardian by Medtronic. Ardian is known for their catheters for treating chronic drug resistant hypertension. The Symplicity HTN-2 clinical trial was an international, multi-center, prospective, randomized, controlled study of the safety and effectiveness of renal denervation in patients with uncontrolled hypertension. Ardian was bought for $800m cash upfront and had the single best exit for a medical device company with a 20x multiple, according to the panel. A study of the Medtronic annual report shows a focus on drug/device combinations. It will be easier for pharma to move into the device sector, and harder for device companies to take on the traditional pharma role. In general, the panel agreed on shorting Medtronic as they are not known for quality deals. For example, the Infuse BMP (Bone Morphogenic Protein) product was used off label inappropriately and in the wrong physiological location – off label usage in the cervical spine had inflammatory side effects while the drug was only approved for lumbar spine procedures (FDA Alert can be found here). That being said, analysts at seeking alpha as of October rated Medtronic as a long term buy for its solid 3% yield and new management.
The panels conversation on exits proved to be one of the most insightful and interesting discussions of the afternoon. Several main points were laid out as fundamentals: Always have enough cash on hand, and never have a milestone event scheduled within 6 months of exiting. Investors do not like binaries. At this time, buyers are in the stronger position, putting down only 10% followed with up to 50% when milestones are passed. One panelist remarked that you are “selling dreams, and son’t want to wake up too soon”. Always advise clients on the following points things: 1) Be realistic on timing, sometimes the process takes very long. Avoid interim data. 2) Educate yourself on deal structures, many various possibilities. For example, while it may be nice to get a large slump sum up front, it may not be possible, so have contingencies. 3) Be flexible in terms of expectations- structure, amount and timing. 4) There are buyers everywhere – go far and wide to find the best buyer for you i.e. India, Asia, Scandinavia. Every good deal was born from alternatives. It is critical to make sure you are well financed. Many companies try to run right down to their cash limit, while buyers are looking for ways to push off commitment. What would provoke a buyer to do a deal now? It is so much easier to sell when two companies are bidding for you. Make sure you have professional advisers, who are focused on executing the plan. Don’t rely on a M&A transaction – show investors you have choices. “Lack of choices are the death knell for companies”. Contingent value rights have been playing an increasingly important role, for example in the Sanofi/Genzyme deal. Essentially, at specific milestones the company gets an earnout – its similar to a basic royalty transaction.
The panel agreed that they have been seeing M&A at much lower valuations. Deals have been more structured, with earnouts based on contingencies to shore the risk in some fashion. Companies aren’t going to be forced into deals now, they are pushing clients to do deals where the company stays involved and not just throwing the company ‘over the wall’ to pharma. It has been becoming harder and harder to make a complete exit – this is leading to a collapsed tail which is affecting buyers. One of the panelists was a major holder of Genzyme. Those involved in the deal thought the price was too low or too high depending on whose side you were on. In all, he felt the price was good and they were really paying a fair value and that the deal seemed to have a nice balance. In the pharma sector the percentage of upfront money gas gone down by 1/3 with a large increase in future payments. Several deals were cited here, as lessons learned. The big one was the acquisition of Protez by Novartis, in which Novartis paid $100m upfront then dropped the Protez product program entirely. The decision to halt PZ-601, an experimental antibiotic, due to high rate of adverse events in patients with skin infections, costing Novartis a pret-tax charge of $152m. Another deal mentioned which saved a company money was an Eli Lilly deal that only paid post-approval. The drug was rejected by the FDA and Lilly saved a few hundred million dollars. There was also mention of the inevitable law suits, and the inability to hold back money in escrow if you are sued. Larger device companies have decided not to move as fast on these types of transactions. Small companies are now taking exits at 2.5x instead of 5x since they can’t generate enough leverage over the buyer. 50% of M&A is taking place in marketed products. Pharma is spinning off to VC with buyback rights. Another trend is waiting for a company to fail at marketing their product, then buying the company for 10x the price, then throwing 1,000 sales reps behind the product. CVRs again became a big part of the conversation, in terms or deal structure as well as independent securities. Milestones were at one point described as “just a future litigation because so few of them come true”. I found these remarks quite shocking and interesting. In the biotech industry, you are often left with milestone payments that are essentially worthless, as there are just do many factors that can affect a company’s success. Recently, one of the speakers closed on a $600m fund for structured finance and royalties. People are getting more conservative. There is less and less money available, especially in the venture business. One panelist predicted that alot of VC funds would go out of business in the next 2-3 years, though I am not sure why he reasoned that- perhaps it would follow a collapse of the markets, loss of institutional investors or dearth of successful prospects on the sell side? M&A is leaning towards more defensive acquisitions. For example, Amgen had considered strategic purchases to acquire companies which own patents that may infringe on their blockbuster product Epogen. In addition, there are royalty streams on Epogen, and companies can pool their royalties to leverage against that very drug.
The Future and Final Comments
These remarks are a loose collection of the panelists final thoughts. As the assistant moderator, I handled the microphone during the Q&A session, so was just about finishing up my note taking. These are the final words of the panelists, which proved to be some of the most interesting remarks. The future will see a plethora of biomarker/companion diagnostics. Alliances will form around the drug. There will be a reduction in the pool of VC money available. There is a need to be creative in seeking financing. VC’s risks are spiraling out of control. Many of these technologies do not have a clear pathway. Venture capital will undergo Darwinian selection, though there has been some positive trends for VC. The economic situation in the US and abroad is making things difficult, and it is clear the economy has an impact on healthcare. No one was particularly optimistic about the next 3-4 Quarters. It is not clear how personalized medicine will work in the EU. Companies in Texas have been getting substantial money. If possible, it is advantageous to avoid going to capital markets to raise money. Companies are becoming more focused, efficient and virtual. There are less companies moving in the diabetes, cardiovascular and obesity space – the traditionally largest markets. While one panelist sees several hundred companies a year, only 2-3 are in the diabetes, cardio or obesity space. Corporate investors have finally become interesting in the vaccine space – even stem cells. Two to three years ago these were viewed as the devil, “dreamy”, now they are finally gaining attention. A recently ophthalmology company had only 2-3 buyers when it went for sale – you rather have 28 buyers. The financing model they used to see was $5m pre, $5m post, $10m series A and $10m Series B. Now Series A is only attracting $8m,5m, sometimes only $3m.