Pharma deals for February 2012

In this regular review of deals we focus on transactions announced during February 2012.  As usual for this series of articles we focus on those deals where financial terms are disclosed.

M&A
During February, Illumina issued a statement rejecting Roche's hostile $5.7bn bid saying that it undervalues Illumina's industry-leading position and growth opportunities.  Illumina is a technology platform company specialising in DNA, RNA and protein analysis and claims to have 60 per cent of the next-generation sequencing market. Roche is interested in the company because it believes it would be able to accelerate the transition of sequencing into routine and companion diagnostics that could be used in personalised medicine.

The offer by Roche of $44.50 per share represented a 64 per cent premium over the December 21 share price prior to the announcement. In contrast, Gilead paid a share price premium of 89 per cent for its acquisition of Pharmasset, potentially influencing a target for the Illumina directors.

M&A and licensing
The other large M&A deal in the news this month was the acquisition by Biogen Idec of the privately owned company, Stromedix, for up to $562.5m consisting of an upfront fee of $75m with the remaining amount paid depending on development and approval milestones across a number of indications. Stromedix's lead product is a MAb that demonstrates anti-fibrotic activity which is about to start phase II.

The structure of the deal and size of upfront fee is more akin to a licensing deal than an acquisition. Apart from the acquisition of a R&D pipeline, perhaps the reason for an acquisition not a licensing deal was the historic relationship with Stromedix's CEO (he led Biogen's research during 2000 to 2005) and perhaps investors' desire for an exit.

As mentioned last month, there certainly seems to be a trend towards acquisition rather than licensing deals of small biotech companies, particularly those that are privately-owned. For example, the acquisition of the privately-owned Neuronex, with its diazepam nasal spray, by Acorda Therapeutics reads like a licensing deal: $2m upfront; some R&D payments; $18m development and $105m sales milestones; and a “tiered royalty-like earn-out”. 

Licensing
Turning to licensing, there have been four important big pharma deals this month involving Abbott, Merck KGaA, Novartis and GSK.  The deal with the largest potential value ($1.3bn) is between the Dutch company, Galapagos, and Abbott under which Abbott secured global rights to a phase 2 JAK inhibitor for treatment of rheumatoid arthritis. Galapagos receives an upfront of $150m, a further $200m at the end of phase II, if the studies meet certain endpoints, and up to $1bn in additional milestones plus tiered double-digit royalties.

As is often the case with biotech companies, a co-promotion theme comes into play, with Galapagos retaining co-promotion rights in Benelux - not exactly a major market but somewhere to start… perhaps.  This deal is transformational for Galapagos and subject to a successful phase II should secure the company's future for a number of years.

The traditional late stage licensing deal is the co-development and commercialisation deal between the NASDAQ-quoted company Threshold and Merck KGaA for TH-302, a small molecule hypoxia-targeted drug in phase III for soft tissue sarcoma and phase II for advanced pancreatic cancer. Threshold receives a respectable $25m upfront, plus potential development milestones of $280m and sales-related milestones of $245m plus tiered double-digit royalties. Threshold's operating cash outflow during 2011 was $25m so with the $20m cash at year end plus $25m upfront and R&D payments from Merck, its future at least for the next two years seems assured.  Needless to say, as a biotech company, Threshold has retained co-promotion rights in the US.          

For the third month in succession there has been a major deal relating to treatments for hepatitis C.  In December Gilead paid $11bn for Pharmasset, in January BMS paid $2.5bn for Inhibitex and now Novartis has jumped on the bandwagon with a $440m licensing and collaboration deal with the privately-owned US company, Enanta Pharmaceuticals. The deal consists of an upfront of $34m and milestones of up to $406m plus tiered double-digit royalties.  Oh and guess what… Enanta has retained co-promotion rights in the US.   

Rare diseases
The interest in drugs to treat rare diseases is still gaining pace. GSK's foray into the market for drugs to treat rare diseases has been further reinforced by the collaboration with the Canadian company, Angiochem to develop lysosomal storage disorders.  The headline value of the deal is $300m, of which up to $31.5m in fees is paid to AngioChem for access to the technology. 

This month Shire and Retrophin also announced deals in this area. For a $13m upfront and undisclosed milestones, Shire has licensed from the US company Sangamo access to its DNA-binding technology to develop products to treat haemophilia. The technology may also be applicable to lysosomal storage disorders so Shire and GSK may end up competing in a very small market. The key to success may well be speed to commercialisation. 

Retrophin's deal with Ligand, gives it access to dual acting receptor antagonists (DARA) of angiotension and endothelin receptors for treatment of orphan indications of severe kidney diseases. Ligand had acquired DARA in 2008 as part of the acquisition of Pharmacopeia which had included contingent value rights (CVR) payable by Ligand if DARA was licensed or sold to a third party.  Conveniently for Ligand, the CVR expired at end 2011 and DARA was licensed out two months later. Retorphin is a new privately owned biotech company and so the financial terms of the deal are back-loaded, with a modest upfront of $1m and milestones of $75 and a 9 per cent royalty.

Commercial deals
The usual raft of commercial deals in February included the acquisition of US rights to Zomig by Impax for $130m payable in 2012 plus royalties.  The fee will probably be covered by gross profit arising from the $163m current sales so in effect there is no significant cash impact on Impax.  On a similar note, the drug delivery company IntelGenx has announced that a new company, Edgemont, has been appointed to commercialise its buproprion formulation in the US.  As with many drug delivery deals the initial fee and development milestone values are modest ($1m and $4m respectively) with the majority of the value in sales related milestones ($23.5m) and royalties. 

The continuing difficult issue of biotech funding is reflected in the $124m deal where Nektar has sold its future royalty stream on two products to reduce its convertible debt of $215m. 

Western companies' investment in countries in Africa, Asia and South America is continuing with Par's acquisition of Edict, an Indian generic company (nine months after the initial announcement); Paladin's investment if Litha, a South African distributor; and the Swiss company Actelion's foray into commercialisation in Brazil and Mexico. 

Perhaps the most surprising deal of the month was by Vernalis. The company is paying $5m upfront and development milestones up to $13m for each product (plus royalties) for Tris to develop, at Tris' cost, up to 6 NDAs for the US prescription cough/cold market. The reason this deal is surprising is because Vernalis is fundamentally a biotech company developing products for companies like Servier, GSK and Novartis.

The CEO explained that the deal “is fundamental in transitioning Vernalis into a diversified and self-sustaining pharmaceutical company.”

But it does make you wonder how a cutting edge high-tech biotech company will fare commercialising extended release liquid cough medicines in a highly competitive market in the US.  There may be an argument for other biotech companies with access to funds to follow this business model rather than trying to secure co-promotion rights which they may never exercise.

The Author
Roger Davies is a consultant at Medius Associates.