2008 Deals Of The Year

Each week, "The Pink Sheet" presents commentary on some of the most interesting new business deals, contributed by the editors of the IN VIVO blog. As 2008 came to a close, the editors nominated the following transactions as their top deals of the year. Feeling moved to weigh in with your own favorite? ¹ Full write-ups of each deal and IVB's poll can be found at: http://invivoblog.blogspot.com/search/label/DOTY

Alnylam/Takeda: In late May, Alnylam announced a non-exclusive licensing deal for its RNA interference technology with Takeda Pharmaceuticals, one of 2008's most active dealmakers. Takeda paid Alnylam $100 million in upfront cash and $50 million in near-term technology transfer payments for rights to its RNAi platform in oncology and metabolic disease. Moreover, Takeda also granted the biotech first right of negotiation on any project Takeda decides to shop in the U.S., as well as opt-in rights for 50/50 co-development/co-commercialization deals in the U.S. on up to four Takeda programs of Alnylam's choosing (² (Also see "Join The Club: Alnylam Signs On Takeda In RNAi Platform Deal" - Pink Sheet, 27 May, 2008.)).

This is a non-exclusive deal: Alnylam can re-license those same therapeutic areas again at any point. That said, on the call announcing the deal, Alnylam CEO John Maraganore essentially laid down some ground rules. "We wouldn't do a platform license for a double-digit upfront payment," he said. "Given the opportunity cost of enabling a partner, we have to and will be very discriminating in how we value these kinds of partnership alliances."

In these cash-constrained times, the deal allows Alnylam to end 2008 with approximately $500 million in cash. It also makes Takeda the sole big RNAi player in Japan (though Japanese rights to Alnylam's Phase II ALN-RSV01 product were not included in the deal and later licensed to Kyowa Hakko) (³ (Also see "Kyowa Hakko Enters Antibody Space With Alnylam RNAi RSV Therapy" - Scrip, 25 Jun, 2008.)).

The deal also sets up RNAi pioneer Alnylam for pipeline building down the road, marking the biotech's move from simple-yet-unprecedented platform monetization into the kind of technology-for-product-rights deal that could see it gaining access to others' development candidates (⁴ ).

Daiichi Sankyo/Ranbaxy: Daiichi Sankyo announced its cash/debt bid for a controlling interest in Ranbaxy on June 11 in a deal worth $4.6 billion (⁵ (Also see "Japan’s Daiichi Sankyo In “Transformational” Deal to Buy Majority Stake In India’s Ranbaxy Labs" - Pink Sheet, 11 Jun, 2008.)). Analysts then lauded Daiichi's move, calling it "bold and entirely out of character." But in the ensuing months, rumors spread that the deal might not come to fruition, given the Department of Justice investigation into the Indian firm and the Securities and Exchange Board of India's October rejection of the deal (⁶ (Also see "Daiichi Sankyo’s Deal With Ranbaxy Hits A Snag" - Scrip, 16 Oct, 2008.)).

Daiichi needed to do something bold with its $6 billion cash reserves. Like its Japanese brethren, Takeda and Eisai, which face patent expirations on crucial drugs, Daiichi has pipeline worries. Its Web site lists just three Phase III compounds, including prasugrel, whose approval by FDA remains an open question. (FDA announced Dec. 31 that its Cardiovascular and Renal Drugs Advisory Committee will review prasugrel on Feb. 3.) To remain competitive, the firm needed to ink a major transaction to extend its reach beyond the stagnant Japanese market, where annual government-mandated price cuts on drugs and a slower regulatory approvals process make for a tough business climate.

Unlike other Japanese pharmas, Daiichi chose to invest in a company focused primarily on generics and geographically situated in an important emerging market. This desire to diversify is a trend other Big Pharma are pursuing as well: examples include Sanofi-Aventis' purchase of a stake in Zentiva and GSK's acquisition of the South African generics play Aspen Pharmaceuticals this year, as well as Bristol-Myers Squibb's Pakistani and Egyptian mature products divisions (⁷ (Also see "GSK Takes Pay-As-You Go Approach In Aspen Branded Generics Deal" - Pink Sheet, 28 Jul, 2008.), p. 13).

Eli Lilly/TPG-Axon/NovaQuest: It's not just cash-poor biotech firms that need the occasional helping hand to finance their drug development efforts. In this tough financial climate, even Big Pharmas want to hedge pre-market risk, when cash is becoming more expensive and clinical development and regulatory affairs more uncertain. Bristol-Myers Squibb pioneered the concept in 2007 with forward-thinking co-development/co-commercialization arrangements with AstraZeneca and Pfizer (⁸ (Also see "Pfizer Deal Highlights Bristol's Biotech Swagger" - In Vivo, 1 May, 2007.)).

In July, Lilly took a page from BMS' playbook, announcing an agreement with TPG-Axon Capital and Quintiles' NovaQuest partnering group under which Lilly's partners will pay up to $325 million in development funding for its two lead Alzheimer's disease compounds, a gamma secretase inhibitor and an A-beta antibody, each ready to begin Phase III testing (⁹ (Also see "Lilly Taps Investment Firm To Help Fund Phase III Alzheimer’s Trials" - Pink Sheet, 24 Jul, 2008.)).

In exchange, TPG, which provided the bulk of the capital, and NovaQuest, which contributed 10 percent of the funding and strategic development advice, stand to receive success-based milestone payments and mid to high single-digit royalties on future sales of the two compounds. Quintiles' CRO arm will act under a traditional fee-for-service contract. To sweeten the deal and hedge the risk shouldered by TPG and NovaQuest, both partners will get an added undisclosed royalty on another unidentified product that Lilly out-licensed to a third party.

FDA/Amgen: At a time when regulatory challenges, reimbursement hurdles and the general political climate are top concerns, one of the most important deals of 2008 was struck between industry and government.

On July 30, the FDA announced updated safety labeling for Amgen's Aranesp (darbepoetin) to resolve concerns about potential tumor-promoting effects of the agent. In the particularly one-sided deal, the agency insisted on two specific provisions that Amgen opposed: restricting use of the product to cancer patients undergoing chemotherapy where a cure is not the expected outcome and warning against use when hemoglobin levels are above 10 g/dL (¹⁰ (Also see "FDA Flexes New FDAAA Muscle With ESA Safety Labeling - And May Help Tone Up Amgen’s Franchise" - Pink Sheet, 30 Jul, 2008.)).

Aranesp was a striking case in which FDA has used its new power - obtained under the 2007 FDA Amendments Act - to order sponsors to make specific labeling changes.

Labeling "negotiations" always have been something of a misnomer, since, from industry's perspective, it never was exactly a level playing field. Still, at least in theory, the manufacturer wrote the label and FDA approved it. True, FDA essentially could write new labeling by declining any alternative language, but only at the cost of leaving an existing label in force while "negotiations" continued.

FDAAA now gives FDA explicit authority to dictate labeling in response to a safety issue. And Aranesp is a case study of what FDA can do with that enhanced leverage.

What does the FDA action mean? Either $3 million or $30 million per week. Amgen estimates the new restrictions reduced weekly sales by $3 million. But Aranesp still generates $30 million weekly in revenues, a number that could be much lower if FDA had demanded the withdrawal of the oncology indication or even withdrawal of the product itself. (Before FDAAA, withdrawal of Aranesp might have been FDA's only alternative.) Labeling negotiations will never be the same.

Genzyme/Isis: January 2008 started out with a bang, with the largest licensing deal of the year. Allegedly vying against 10 other bidders, Genzyme agreed to pay $325 million upfront and more than $800 million in development and regulatory milestones for Isis' mipomersen, a Phase III, once-weekly injectable that targets low-density lipoprotein (¹¹ (Also see "Genzyme, Isis Partner On Lipid Lowering Treatment Based On Antisense Technology" - Pink Sheet, 7 Jan, 2008.)).

But days later, data from the ENHANCE study called into question whether lower LDL actually leads to better cardiovascular outcomes - apparently undermining the entire premise on which statins, and mipomersen, are based (¹² (Also see "Vytorin Fails To Show ENHANCEd Benefit Over Simvastatin In Plaque Reduction" - Pink Sheet, 14 Jan, 2008.)).

Deal terms were updated in June, following a delay to the drug's development timeframe thanks to a skittish FDA (¹³ (Also see "Genzyme/Isis’ Mipomersen Development Outlook Pricier And Riskier After FDA Weighs In" - Pink Sheet, 25 Apr, 2008.)). Genzyme squeezed another $50 million of development funds out of Isis, bringing its total contribution up to $125 million. Isis receives certain milestones early but also must share development costs until the program becomes profitable (¹⁴ (Also see "Genzyme, Isis Retool Mipomersen Deal" - Pink Sheet, 24 Jun, 2008.)).

Even with the revised terms, the deal is still 2008's big licensing money winner. Moreover, Big Pharma's growing interest in products such as mipomersen - which requires a pyramid-style expansion from an orphan indication to a broader market with an orally-available follow-on - appears to be the new model for blockbuster creation.

GlaxoSmithKline/Actelion: GlaxoSmithKline's July deal for Actelion's Phase III orexin receptor antagonist almorexant is one of those rare partnerships in which the biotech calls the shots, and the Big Pharma is happy to let it do so. The reason: it keeps the risk under control and the Big Pharma may learn a trick or two from its partner.

According to deal terms, Actelion remains fully in charge of the sleep drug's clinical program and bolsters internal ambitions to create a commercial infrastructure by borrowing an appropriate GSK drug for a short time (¹⁵ (Also see "Actelion Accepts Payoff Risk In GSK Deal For Phase III Insomnia Drug" - Pink Sheet, 14 Jul, 2008.)).

As the financial crisis deepens, it's a sure bet that 2009 will mean more such risk-sharing type deals. In the case of GSK/Actelion, GSK is funding only 40 percent of the development costs of Actelion's first-in-class, primary care product for insomnia. It won't book sales, just 50 percent of profits. And while the $148 million upfront money for the Phase III candidate isn't bad, it's not a blowaway. Nor are the slightly-less-blue-sky pre-commercial milestones of $408.6 million (¹⁶ (Also see "GSK/Actelion: Phase III Value Is in the Eye of the Beholder" - In Vivo, 1 Jul, 2008.)).

But there could be tremendous upside for Actelion if almorexant lives up to its billing: it could lead to the rise of a new, primary care-focused European pharma that has sufficient fuel to think about long-term investment in its pipeline.

GlaxoSmithKline/Sirtris: If GSK hedged the risk associated with Actelion's almorexant, it was all in when it came to its spring acquisition of sirtuin-focused start-up Sirtris Pharmaceuticals. GSK paid $720 million for the biotech's pipeline of sirtuin activators, making it one of the most expensive target-focused deals ever. The deal also underscored Big Pharma's interest in accessing en masse technologies and human resources that may allow a rapid leap forward (¹⁷ (Also see "GSK Sees Much More In Sirtris Than Meets The Eye – IN VIVO Blog" - Pink Sheet, 23 Apr, 2008.)).

Sirtuins are a seven-member family of proteins long implicated in the aging process. Sirtris has focused in particular on Sirt1, mostly in type 2 diabetes and oncology, but other sirtuins may play roles in other diseases of aging, including neurodegeneration and muscle wasting. Sirt2, for example, in recent years has become a notable potential target for Parkinson's disease.

The field had captured the imaginations of pharma execs, and GSK had been in off-and-on partnering discussions with Sirtris for some time (¹⁸ (Also see "Sirtris Satisfies GSK's M&A Appetite" - In Vivo, 1 May, 2008.)). Partnering turned to M&A discussions after Sirtris published a November 2007 paper in Nature showing the chemical structure of one of its next-generation compounds.

Infinity/Purdue and Mundipharma: Just months after Roche decided to end the most successful Big Brother relationship in pharmaceutical history by bidding to buy out Genentech, Infinity signed the latest incarnation of that idea: a tie-up with the two Sackler-family owned private companies, U.S.-focused Purdue Pharma and European-focused Mundipharma (¹⁹ (Also see "With Innovative Purdue Deal, Infinity Finds Shelter From The Storm" - Pink Sheet, 20 Nov, 2008.)).

In return for what could be nearly 38 percent of its stock and the vast majority - ex-U.S. - of its pipeline, Infinity bought probably five years of freedom from worrying about Wall Street, garnering enough money for both its discovery and clinical programs, while retaining, like Genentech, the entire U.S. market in which to create a commercial presence.

The most advanced compound in this enterprise: Infinity's Phase I hedgehog cell-signaling pathway inhibitor, originally developed in a deal with MedImmune, then returned following that company's purchase by AstraZeneca (²⁰ (Also see "AstraZeneca Accelerates Biologics Strategy With Acquisition Of MedImmune" - Pink Sheet, 23 Apr, 2007.)).

Despite the freedom this deal gives Infinity, it's unlikely the transaction will be much copied by other biotechs looking to tie-up with pharmas. As Genentech has been with Roche, Infinity will remain a completely separate operation from its new affiliate.

That's a rare situation for most companies that can afford a deal of this size (up to $75 million in equity by early 2009; another $200 million to $400 million in R&D support; and a potential $72.5 million to $100 million in warranty conversions). Indeed, one reason Roche is buying out Genentech is because it feels it now can do pretty much what Genentech can do - so why bear the costs of maintaining an independent R&D and commercial infrastructure?

Moreover, since Purdue and Mundipharma are privately owned, the only investors who matter are the Sacklers, who clearly prefer the tax breaks from the R&D expense to a nicely upward sloping earnings-per-share line.

Novartis/Alcon: As the industry struggles to identify new business models, one gaining favor is diversification (²¹ (Also see "Diversify Or Focus On Innovation: CEOs Strategize The Widening Revenue Hole" - Pink Sheet, 6 Oct, 2008.), p. 26). Already one of the most aggressive diversifiers, Novartis moved even further through its $11 billion play for Alcon (²² (Also see "Pharma's Strategic Divide: Focus or Diversify" - In Vivo, 1 Sep, 2008.)).

Alcon's largest and fastest growing business is in largely self-pay surgical products, which make up 45 percent of its total revenues. The consumer side of ophthalmology makes up another 15 percent - the rest is specialty eye drugs. Novartis aims to minimize the problems of a pharmaceutical company managing a device business in part through the structure of its deal: for now, Novartis is merely taking a 25 percent stake in Alcon, and plans to increase its holdings to 76 percent by 2011 (²³ (Also see "Novartis To Acquire Majority Stake In Alcon" - Pink Sheet, 7 Apr, 2008.)).

Once it owns a majority of Alcon shares, Novartis can consolidate Alcon's double-digit growth sales and earnings without the headache of actually running the business. And with Alcon trading independently, investors still should be able to follow and profit from its progress.

The deal sharply contrasts with Bristol-Myers Squibb's spin-off of 10 percent to 20 percent of its consumer nutritionals business, Mead Johnson. With that deal, Bristol opened up Mead for investor examination, freed its own managers to focus all their attention on the pharma business, and got paid for offloading a non-core business.

Overprotecting Therapeutic Classes in Medicare: When the Medicare outpatient prescription drug benefit began three years ago, CMS told plans that they must cover essentially all drugs in a handful of big therapeutic categories, the now famous six protected classes - antidepressants, antipsychotics, anti-epileptics, anti-neoplastics, immunosuppressants and HIV therapies. The Medicare agency concluded the need to protect access for vulnerable enrollees trumped plans' need to be able to exclude medicines in an effort to extract deeper discounts from manufacturers.

One company hit hard by the news was Forest. CMS told plans there was no need to cover Forest's antidepressant Lexapro (escitalopram), as long as they covered Forest's closely related generic Celexa (citalopram) (²⁴ (Also see "Medicare Part D Formularies May Omit Lexapro Or Celexa, CMS Says" - Pink Sheet, 20 Jun, 2005.), p. 21).

Forest ultimately was able to get the Lexapro language removed from CMS policy and also managed to get Lexapro on most plan formularies, but at the cost of deeper discounts than anticipated.

That history explains why a seemingly insignificant clause slipped into a hard-fought compromise on Medicare funding in 2008 may turn out to be the biggest deal of the year.

When Congress codified the CMS policy over the summer, it gave the agency broad authority to define any classes as protected. It also made it much more onerous for CMS to create exceptions to those protections within classes. Call it the Forest clause (²⁵ , p. 14).

Thus, there is nothing to stop the next CMS chief from expanding the list to include, say, Alzheimer's therapies or antidiabetics as protected classes.

There is no reason to think the officials who created the six protected classes would expand the list just because Congress says they can, but they won't be calling the shots come Jan. 20, 2009.

Manufacturers may laud the recent legislative decision, but would be wise not to gloat. That's because the Medicare Part D legislation, signed in 2003, is one of the most unlikely deals of all time. It came about in large part because drug companies and their long-time political adversaries, the managed-care plans, joined forces to support an untried concept: stand-alone prescription drug benefits.

The program works only if plans are able to do what politicians historically cannot: potentially deny access to medicines in order to contain costs.

The alternative? A program that allows broader access to medicines - but with more direct government intervention in prices.

So when the new Congress turns to health proposals in 2009, remember the deal struck in 2008. If that small, seemingly noncontroversial deal helps break up the coalition that made Part D possible, it would be a very big deal indeed.

Pfizer/Ranbaxy: In some circles, Nov. 30, 2011, has its own acronym: LLOE - Lipitor Loss of Exclusivity. That's the date Pfizer and Ranbaxy recently negotiated for the U.S. launch of Ranbaxy's authorized generic version of the New York pharma's statin juggernaut Lipitor (atorvastatin) (²⁶ (Also see "Pfizer Settlement With Ranbaxy Delays Generic Lipitor Entry" - Pink Sheet, 23 Jun, 2008.), p. 22).

This deal gives certainty to both Ranbaxy and Pfizer. More importantly, it provides closure. In an era when product expirations - either through the lifting of exclusivity or the weight of safety problems - seem more common than product launches, this deal is an example of how Big Pharma can try to take its primary care jumbo jets in for soft landings.

With the lawsuit behind them, both Ranbaxy and Pfizer can focus on what's next. For Ranbaxy, it is resolving manufacturing problems and figuring out how to be a regional growth engine for Daiichi Sankyo.

For Pfizer, the question is how to learn to love being a drug maker again (²⁷ (Also see "As Pfizer Faces Brand Drug Challenges, Management Pushes Cost Cuts" - Pink Sheet, 21 Oct, 2008.)). CEO Jeffery Kindler may not have all the answers to that one yet, but by acknowledging the end of the Lipitor relationship, he's moving in the right direction.

Takeda/Millennium: Takeda's $8.8 billion purchase of Millennium, like Daiichi's buy-out of Ranbaxy, shows the determination of Japanese pharmaceutical companies to morph into global biopharmaceutical players. But the Takeda/Millennium deal also underscores another major theme at work in the industry: Big Pharma's apparently insatiable appetite for oncology products.

In the past six months, Pfizer restructured to place greater emphasis on oncology and Eli Lilly spent $6.5 billion on ImClone in order to obtain Erbitux (cetuximab) plus a pipeline of primarily early-stage oncology products (²⁸ (Also see "Pfizer's Increasingly Specialist Focus" - In Vivo, 1 Nov, 2008.)).

From a deal-making perspective, Takeda has become the deep-pocketed player of the cancer world. In 2008, it inked handsome - some might argue excessive - agreements with Amgen, Cell Genesys, Millennium and Alnylam to boost its abilities in oncology.

But the acquisition of Millennium, which gives Takeda the marketed product Velcade (bortezomib)plus 10 other molecules in early-stage clinical trials, has to be considered the most significant - and perhaps strategically transformative - deal in Takeda's history.

Analysts widely criticized the deal for being too expensive. But six months later, it looks to have been a smart move. Velcade's approval in June as a first-line therapy for multiple myeloma dramatically has increased sales of the drug above the $1 billion mark, and additional clinical trial data released at the American Society for Hematology meeting suggest the drug will remain an important cornerstone of myeloma treatment for years to come (²⁹ (Also see "ASH Data Give Millennium’s Velcade A Boost, Raise Bar For Competitors" - Pink Sheet, 15 Dec, 2008.), p. 11).

And the truth is, Takeda's emerging cancer franchise is the company's lone bright spot. Takeda's two biggest money-makers, Actos and Prevacid , will go generic in 2013, at which time analysts expect profits from those drugs will drop 35 percent and 26 percent respectively. But thanks to missed PDUFA dates for Prevacid follow-on TAK390MR and the DPP-4 inhibitor alogliptin, there's little beyond Velcade to make up the revenue gap (³⁰ (Also see "Takeda Copes With FDA Delays, Yen Appreciation and Acquisition Drags in 2008" - Scrip, 6 Nov, 2008.)).

Vertex/Undisclosed Investors: Vertex's June 2008 sale of the royalty stream on its HIV protease inhibitors, Agenerase and Lexiva , for $160 million to a group of undisclosed investors represents a phenomenon that surely will gather steam in 2009 as biotech firms search for non-dilutive sources of capital (³¹ (Also see "Vertex Sells Lexiva, Agenerase Royalties For $160M" - Pink Sheet, 3 Jun, 2008.)).

Vertex's deal was part of its plan to dispose of non-core assets and shore up its balance sheet in order to invest in its hepatitis C franchise. "Our belief is that we should get that money on the balance sheet now, and invest it in R&D," Vertex CFO Ian Smith said at the time of the deal's signing.

Royalties on Agenerase (amprenavir) and Lexiva (fosamprenavir), both marketed by GlaxoSmithKline, totaled $34 million on sales of $242 million in 2007. But the market wasn't attaching significant value to that royalty stream.

Other biotechs are recognizing similar unappreciated, or underappreciated, royalty streams and looking to sweep up some cash while they can (³² (Also see "With Royalty Stream Purchase, Cowen Is Bullish On Cetrotide In Fertility Market" - Pink Sheet, 17 Nov, 2008.)). CV Therapeutics sold half of the royalty stream on its A2A adenosine receptor agonist Lexiscan (regadenoson), the injectable stress agent, for $185 million to TPG-Axon in April.

And there's no shortage of buyers. Beyond the specialists like Paul Capital Healthcare and Cowen Royalty Partners, hedge funds are getting into the game as well. Expect to hear much more about this brand of alternative financing in the upcoming year.

- M. Nielsen Hobbs, Roger Longman, Michael McCaughan, Chris Morrison, Melanie Senior and Ellen Foster Licking ([email protected])