Life Science Digest» genentech

Merger Means Billions for Biotechnology?

MD Becker Partners — Wed, 16 Feb 2011 19:09:19 +0000

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.

NEW – Click here to view this article in PDF format.

Bayer’s Bold New Bet Fails to Rain on Spectrum Pharmaceuticals

MD Becker Partners — Thu, 03 Sep 2009 21:08:28 +0000

Despite recent progress and the availability of novel therapies, radiation is still an effective tool in the war against cancer – as it has been for more than a century. The original and still predominant mode of administration is via external methods wherein a radiation source is directed at the intended target or region. Unfortunately, this “outside in” approach has the drawback of causing collateral damage to healthy organs and tissues that lie on either the path between the source and the target or beyond the intended target on the “exit” pathway.

In the 1990s, the U.S. Food and Drug Administration [FDA] cleared for marketing the first intravenously delivered, particle emitting radionuclides for the treatment of pain arising from the spread of cancer to bone. Termed Systemic Targeted Radionuclide Therapy (STaRT), this new approach offered the promise of selectively irradiating disease sites while sparing normal tissue. Metastron® [strontium-89 chloride injection] was introduced in 1993 and Quadramet® [samarium-153 EDTMP] was later introduced in 1997.

In 2003, the FDA cleared for marketing two different radioactive labeled monoclonal antibodies for the treatment of patients with relapsed or refractory, low-grade or follicular B-cell non-Hodgkin’s lymphoma [NHL]. Both of these STaRT products utilize monoclonal antibodies that target an antigen expressed by certain normal and malignant B-cell lymphocytes. However, Zevalin® [ibritumomab tiuxetan] employs yttrium-90 as its therapeutic payload, while Bexxar® [tositumomab] uses iodine-131.

Despite great promise and STaRT’s established safety and efficacy, a July 14, 2007, article in the New York Times stated that only 10% of patients who are suitable candidates for the drugs ever receive treatment. Spectrum Pharmaceuticals, Inc. (SPPI) reported that U.S. sales of Zevalin were $11.4 million in 2008; while a similar non-radioactive product Rituxan® [rituximab] is a top-selling cancer drug by Genentech and Biogen Idec, Inc. (BIIB), with reported U.S. sales of $ 2.6 billion in 2008.

The lack of commercial success for existing STaRT products may be due to a mixture of clinical and commercial factors, including the following:

Clinical considerations
- Half-life, or the amount of time required for a given amount of radionuclide to lose 50% of its strength or activity
  - In general, a half-life of 10 days or less is considered optimal, as longer half-lives may create waste management issues and clinically, are more likely to show toxicity problems.
- Particle range
  - Higher particle ranges may result in greater damage to surrounding normal tissue, leading to side effects such as myelosuppression.
- Specificity
  - Some radionuclides, such as strontium-89, have general disease-targeting properties, while others are conjugated to antibodies or other carriers to reach the intended target.
Commercial considerations
- Production
  - Radioisotopes utilized for STaRT are produced commercially in nuclear reactors, cyclotrons or linear accelerators, and radionuclide generators, the selection of which can impact the cost-effectiveness of manufacturing.
- Shipment
  - Radionuclides that have very short half-lives or that require extensive shielding as a result of high-energy gamma ray emissions [eg, iodine-131] create logistical issues for shipment and handling and may even require a local production unit close to the treatment center.
- Administration
  - Marketers often assume that oncologists’ decisions about therapy are driven purely by the scientific data. While medical oncologists are the key prescribing audience for marketed STaRT therapies, most aren’t licensed to administer radiopharmaceuticals – resulting in patient referrals to radiation oncologists and/or nuclear medicine physicians. Therefore, these physicians may not be economically incentivized to prescribe products that they are not paid to administer.
- Reimbursement
  - Reimbursement by the Centers for Medicare and Medicaid Services [CMS] and private insurance carriers is critical to the commercial success of any product. In a letter by GlaxoSmithKline plc (GSK) to CMS regarding changes to the Hospital Outpatient Prospective Payment System [HOPPS], the company indicated that the proposed 2008 payment rate for Bexxar “results in a reimbursement rate that is approximately 50% below hospitals’ actual acquisition cost for the therapy.”

While some commercial considerations, namely administration and reimbursement, still need to be addressed, “next-generation” STaRT product candidates appear to address many historical clinical considerations and could ultimately fulfill the promise of this therapeutic class.

For example, Algeta ASA (OSE: ALGETA) is developing Alpharadin, the first in a new class of STaRT therapies based on the alpha-emitting radionuclide radium-223. Phase 2 studies in patients with hormone-refractory prostate cancer [HRPC] have already demonstrated that Alpharadin can prolong patient survival, improve quality of life and offer a benign safety profile. A Phase 3 trial is underway to confirm Alpharadin’s efficacy and safety as a targeted treatment for bone metastases in patients with HRPC.

Radium-223 appears to offer the perfect mix of clinical characteristics (see table 1 for a comparison of STaRT products). It has an 11.4 day half life, which is significantly shorter than the 50.6 day half-life for strontium-89, but not too short to create logistical issues with shipment. Further, radium-223 has an extremely short particle range of 0.04 millimeters, which is equal to approximately 2-10 cell diameters. This likely explains Alpharadin’s benign toxicity profile.

Table 1: comparison of STaRT products

Year Introduced	Product	Indication	Radioisotope	Half-life	Max Particle Range in Tissue
1993	Metastron®	Treatment of bone pain arising from cancer	Strontium-89	50.6 days	8.00mm
1997	Quadramet®	Treatment of bone pain arising from cancer	Samarium-153	1.9 days	3.00mm
2003	Bexxar®	Treatment of non-Hodgkin’s lymphoma	Iodine-131	8.0 days	2.00mm
2003	Zevalin®	Treatment of non-Hodgkin’s lymphoma	Yttrium-90	2.7 days	12.00mm
Phase 3 trial underway	Alpharadin	Treatment of bone metastases in hormone-refractory prostate cancer	Radium-223	11.4 days	0.04mm

Lending credibility to the future of next-generation STaRT products, Algeta today announced an $800 million global agreement with Bayer AG for the development and commercialization of Alpharadin. In view of the fact that Bayer currently markets Zevalin outside of the U.S., this news could be interpreted as either good or bad news for investors betting on an acquisition of Spectrum Pharmaceuticals.

The bullish case is that Bayer is making a fresh $800 million investment in the field of STaRT, which could lend support to a consolidation of Zevalin marketing rights by Bayer. However, the bear case is that Algeta has already demonstrated in vivo the potential of linking alpha-emitting radionuclides to existing monoclonal antibodies, including rituximab, which could ultimately pose quite a competitive threat to earlier-generation STaRT products like Zevalin. In view of recent 52-week highs for Spectrum Pharmaceticals, however, it appears for now that investors are opting for the bullish thesis.

# # #

About MD Becker Partners LLC

MD Becker Partners is a boutique management and strategy consulting firm focusing on both public and private companies in emerging growth industries, such as pharmaceuticals, biotechnology, medical devices, and cleantech. The firm’s mission is to bring experience-based insights gleaned from the three independent disciplines of investor relations, strategic advisory and operational improvement together and apply them to carefully conceived and expertly enacted strategies that help companies increase visibility, unlock value and access resources to grow their business. For more information, visit the website: http://www.mdbpartners.com/

Disclaimer: This article contains the author’s own opinions, and none of the information contained therein constitutes a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. To the extent any of the information contained in the article may be deemed to be investment advice, such information is impersonal and not tailored to the investment needs of any specific person.

Keryx: Another beneficiary of the ASCO-effect

MD Becker Partners — Tue, 02 Jun 2009 19:45:51 +0000

In my prior article, I highlighted the “ASCO-effect,” which relates to the fact that biotechnology companies working in the field of cancer can experience double or triple-digit stock price increases from the end of April through the American Society of Clinical Oncology (ASCO) annual meeting. Beyond the names previously mentioned, investors also appear to be quite interested in oncology companies developing therapies that inhibit key targets along the PI3K-AKT-mTOR signaling pathway.

Investor enthusiasm may be warranted, as this pathway is mutated or amplified more frequently than any other pathway in cancer. Activation of the PI3K-AKT-mTOR pathway is associated with cell survival, malignant transformation, tumor invasiveness, and resistance to chemotherapy, radiation therapy and other agents.

In terms of hierarchy, PI3K is at the top, AKT in the middle, and mTOR resides furthest downstream in the pathway. Generally speaking, activation of PI3K results in activation of AKT, which ultimately leads to activation of mTOR in a sequential manner.

Helping to validate the pathway, earlier this year Novartis (NVS) received Food and Drug Administration (FDA) approval for Afinitor® (everolimus), an oral inhibitor of mTOR, for patients with advanced renal cell carcinoma after failure of treatment with Pfizer Inc.’s (PFE) Sutent® (sunitinib) or Nexavar® (sorafenib) by Bayer HealthCare Pharmaceuticals, Inc. and Onyx Pharmaceuticals, Inc. (ONXX). Afinitor® is expected to generate several billion dollars in annual sales, as Phase 3 trials are underway to explore potential of the product in treating multiple additional cancers.

Unfortunately, it has previously been demonstrated (Cancer Res. 2008 Sep 15;68(18):7409-18) that inhibition of downstream targets such as mTOR can activate upstream targets such as AKT through various feedback mechanisms, which may eventually counteract the anticancer efficacy of mTOR inhibitors. In other words, although mTOR inhibition may initially treat the disease, it ultimately turns on a part of the pathway that leads to enhanced tumor survival.

Accordingly, the apex of the pathway (either PI3K or AKT) might be a more effective target and less susceptible to the effects of feedback loops associated with mTOR inhibition. This may explain why Sanofi-aventis (SNY) recently entered into a collaboration with Exelixis, Inc. (EXEL) that could be worth more than $1 billion for the discovery of inhibitors of PI3K for the treatment of cancer. Under the agreement, Exelixis receives an upfront payment of $140 million and guaranteed research funding totaling $21 million over three years.

The Sanofi-aventis/Exelixis collaboration appears consistent with other recent PI3K transactions. In April 2008, Roche acquired Piramed Limited, a privately-owned UK company focusing on therapeutics targeting PI3K, for approximately $175 million in cash. Back in November 2005, Piramed entered into a collaboration with Genentech, Inc. (now Roche) for the development of compounds targeting PI3K for the treatment of cancer. Under the terms of that agreement, Piramed received an undisclosed upfront payment and was eligible for milestone payments during development and on product approval up to a potential aggregate of approximately $230 million.

So it is not surprising that Keryx Biopharmaceuticals, Inc. (KERX) became yet another major beneficiary of the ASCO-effect when the company announced positive data from a Phase 2 combination study of its novel AKT inhibitor (KRX-0401, also known as perifosine) for the treatment of advanced metastatic colon cancer. Keryx also presented positive single agent Phase 2 data of perifosine in the treatment of advanced metastatic renal cell cancer – especially in patients that had previously failed treatment with mTOR inhibitors (either everolimus or temsirolimus). The company’s stock, which was trading around $0.25 at the end of April 2009, recently traded as high as $1.45 on the news. However, even with the recent increase, Keryx has a current market capitalization of just over $60 million.

The stock of AEterna Zentaris Inc. (AEZS) also rose on the news. AEterna licensed North America perifosine rights to Keryx, but kept the rest of the world rights and is seeking partnerships for Asia.

# # #

About MD Becker Partners LLC

Where Might Genentech Investors Redeploy $47 Billion?

MD Becker Partners — Sun, 15 Mar 2009 20:09:00 +0000

Following a spate of high profile clinical setbacks and regulatory delays that sent the sector into a tailspin during the final week of February 2009 (see prior column), investors shrugged off further disappointing clinical news as merger and acquisition activity helped biotechnology stocks stage a partial recovery last week. The NASDAQ Biotech Index (NBI) gained nearly 9 percent during the period, slightly lagging the broader market’s advance as evidenced by the 10.7 percent increase in the S&P 500 Index.

Last week, Genentech (DNA) and Biogen Idec (BIIB) reported that a Phase 3 study of Rituxan® failed to meet the primary endpoint as a treatment for patients with a form of lupus. This was the second setback for patients with lupus in less than a month, as La Jolla Pharmaceutical (LJPC) recently announced that the Independent Data Monitoring Board for its Riquent® Phase 3 study in lupus completed the first interim efficacy analysis and determined that continuing the study is futile.

Also during the week, Human Genome Sciences (HGSI) announced that Albuferon® met its primary endpoint of non-inferiority to peginterferon alfa-2a in a Phase 3 clinical trial for patients with chronic hepatitis C. Unfortunately, investors apparently had higher expectations for the study and sent the company’s stock to an all-time low on the news. Recent clinical setbacks in the area of lupus also likely weighed on Human Genome Sciences. The company is investigating LymphoStat-B®, a human monoclonal antibody that inhibits the biological activity of B-lymphocyte stimulator, in two Phase 3 superiority trials for patients with systemic lupus erythematosus (SLE). Human Genome Sciences expects to have the first Phase 3 data available for LymphoStat-B® by mid-2009, and all Phase 3 data to support regulatory filings available in fall 2009.

Putting disappointing clinical updates aside, last week’s big news came from Roche (ROG.VX) and Genentech, which announced a merger agreement under which Roche will acquire the outstanding publicly held interest in Genentech for a total payment of approximately $47 billion in cash. This positive development fueled speculation as to where investors might redeploy their proceeds (see related article by Thomson Reuters).

Seeking biotechnology companies of comparable size and liquidity, investors will likely gravitate towards the larger companies among the 135 members of the NBI that we divided into the following three groups using data obtained through Gridstone Research:

Tier 1: market capitalization in excess of $10 billion (6 companies)
Tier 2: market capitalization greater than $2 billion but less than $10 billion (12 companies)
Tier 3: market capitalization of at least $1 billion but less than $2 billion (12 companies)

The 30 companies in these three groups had a collective market capitalization of approximately $240 billion at the end of last week. Assuming that investors reinvested the entire $47 billion in cash they receive for their Genentech shares into these groups, it would represent approximately 20 percent of the current value. Of course, it is unlikely that the entire $47 billion will return to the biotechnology sector, as index funds and other Genentech holders may reallocate their proceeds to other industries. Nonetheless, it is reasonable to assume that the majority of funds will be reinvested within the biotechnology sector.

Tier 1 consists of Amgen (AMGN), Biogen Idec (BIIB), Celgene (CELG), Genzyme General (GENZ), Gilead Sciences (GILD), and Teva Pharma (TEVA). Not surprisingly, this group performed exceptionally well during the past week. Year-to-date laggard Celgene (CELG) benefited the most and advanced 17 percent during the period.

Tier 1 Graph

Tier 2 consists of Shire plc (SHPGY), Life Technologies (LIFE), Vertex Pharmaceuticals (VRTX), Cephalon (CEPH), Illumina (ILMN), Myriad Genetics (MYGN), Qiagen N.V. (QGEN), Alexion Pharmaceuticals (ALXN), Warner Chilcott (WCRX), Gen-Probe (GPRO), OSI Pharmaceuticals (OSIP), and Perrigo (PRGO). In addition to possibly benefiting from the reallocation of Genentech proceeds, Tier 2 includes some of the sector’s best performing stocks year-to-date, including Myriad Genetics, Life Technologies and Illumina.

Tier 2 Graph (partial list)

Tier 3 consists of Endo Pharmaceuticals (ENDP), Techne (TECH), ONYX Pharmaceuticals (ONXX), Sepracor (SEPR), United Therapeutics (UTHR), Amylin Pharmaceuticals (AMLN), CV Therapeutics (CVTX), Isis Pharmaceuticals (ISIS), Auxilium Pharmaceuticals (AUXL), BioMarin Pharmaceutical (BMRN), Regeneron Pharmaceuticals (REGN), and Acorda Therapeutics (ACOR). Tier 3 represents a number of companies that have been rumored as takeover targets themselves, including ONYX Pharmaceuticals, Amylin Pharmaceuticals, and Acorda Therapeutics. Just last week, Gilead Sciences and CV Therapeutics announced the signing of a definitive agreement pursuant to which Gilead will acquire CV Therapeutics for $20.00 per share, which topped an unsolicited proposal from Astellas Pharma Inc. to acquire CV Therapeutics.

Tier 3 Graph (partial list)

The brisk pace of merger and acquisition activity along with licensing transactions is central to the bullish outlook for biotechnology proposed at the start of 2009. However, new product approvals and positive clinical trial results are an equally important theme. As such, investors will likely be closely monitoring near-term events, such as results from the first Phase 3 trial of Human Genome Sciences’ LymphoStat-B® for lupus in mid-2009, AMAG Pharmaceuticals (AMAG) obtaining approval for Feraheme™ to treat anemia, final results from Dendreon’s (DNDN) Phase 3 trial of Provenge® for prostate cancer expected in April, and results from Genentech’s Phase 3 study of Avastin® plus chemotherapy in adjuvant colon cancer expected in mid-2009.