Deals Of The Week: GE Healthcare/Janssen, Axcan/Eurand, GSK/Theravance

Each week, “The Pink Sheet” presents commentary on some of the week’s most interesting business deals, contributed by the editors of the IN VIVO blog. Visit the blog at http://invivoblog.blogspot.com.

To quote William Shakespeare: "What freezings have I felt, what dark days seen. What old December's bareness everywhere."

In biopharma land, many are channeling Richard III. It's hardly surprising. Words describing the IPO probably shouldn't be printed here (this is a family publication, after all), and restructurings continue apace as firms accept it may be better to do less with less. The latest high-flier to reach this conclusion: Exelixis, which used its annual R&D day to announce a massive restructuring and a doubling-down on its small molecule cancer med XL-184.

If any company is eager to see the end of 2010, it's got to be Exelixis. There's no denying it's been a turbulent year for the biotech, which saw the abrupt departure of long-time CEO George Scangos and the end to a key development agreement with long-time partner Bristol-Myers Squibb for XL-184.

The good news: XL-184, in Phase III trials after having reported "unprecedented results" at a recent cancer meeting, is now wholly owned by Exelixis. The bad news, of course, is that the drug is wholly owned by Exelixis, meaning the company is picking up full development costs for the program.

Given the need to shoulder those expenses – especially in competitive settings like prostate cancer – Exelixis' decision to downsize and halt internal development of all non-partnered programs is eminently sensible. But that's likely cold comfort for the 40% of staff being laid off starting this month. Indeed, come some time in 2011, headcount at the firm will fall to around 240 from 670 the year before – and future cuts could trim employee numbers even further to just 140.

It's a reminder that as much as we like to talk about broad portfolios and multiple shots on goal, many biotechs – even very well capitalized ones like Exelixis (or Biogen Idec for that matter) – ultimately are forced to double-down on their best shot at commercial success.

GE Healthcare/Janssen

GE and specialist drug developer Janssen are joining forces to develop a biomarker signature for detecting Alzheimer’s disease prior to the onset of clinical symptoms. The research collaboration will draw upon the resources of GE’s Medical Diagnostics division, which has an amyloid PET imaging agent, flutemetamol, in Phase III, and Janssen’s neurology-related clinical, biomarker and informatics expertise.

At first blush, the arrangement may not seem remarkable for Deals of the Week, but it is indicative of GE’s gravitation towards IVD businesses. (Remember, in early 2007, GE bid for Abbott’s immunoassay, clinical chemistry, hematology and point-of-care businesses, but the deal fell apart.) For the most part, both before and after the Abbott near-miss, GE has focused on the development of new imaging agents, owing to its acquisition of Amersham – and that firm's contrast agent and medical isotopes business – in late 2003. While this isn't a division that historically has made acquisitions, recent signs suggest change could be afoot. In October, GE paid just over a half-billion dollars for molecular oncology testing services provider Clarient, its first major external investment for molecular diagnostic content.

“We are clearly seeing personalized medicine gaining in importance, and GE Healthcare is in a great position, with the diagnostics solutions we have in vivo,” says current President and CEO of Medical Diagnostics, Pascale Witz. Clarient “can be an engine to develop new tests that could come from a different horizon, from GE Healthcare, or other research institutions or companies,” she adds. The arrangement with Janssen aligns with that goal.

Axcan/Eurand

The board of Belgium-based specialty pharma company Eurand and its majority shareholder have approved the sale of the company to Axcan Holdings for $583 million in cash, the companies announced on Dec. 1. At $12 a share, the offer is a 9% premium to Eurand's closing share price as of Nov. 30 and gives Eurand a market cap of roughly $574 million. That figure seems low compared to analysts' estimates of Eurand's value, but the deal appears likely to succeed since key shareholders Warburg Pincus (which owns roughly 55% of the company's equity) and Eurand Chairman and CEO Gearoid Faherty (who owns another 3.7%) already have agreed to the terms.

Eurand belongs to a cadre of small- to mid-cap European specialty pharma companies that have struggled to transform their business models in the face of increased competition for assets and a difficult pricing environment. Eurand has adapted better than some of its peers, capitalizing on the success of its lead product, Zenpep (delayed-release pancrelipase), an improved form of an enzyme replacement therapy for treatment of exocrine pancreatic insufficiency.

Axcan, a Canadian firm taken private by TPG Capital in 2007, competes in this so-called PEP market, but has been stymied by new regulatory requirements and two “complete response” letters for its version, called Ultrase (also known as Viokase). That's important because Axcan has become increasingly dependent on Ultrase/Viokase sales, with the drugs contributing 19% of Axcan's total revenues for the fiscal year ending September 2009.

GlaxoSmithKline/Theravance

GlaxoSmithKline hitched its wagon even tighter to long-time partner Theravance Nov. 29, increasing its stake in the company to 19% via a $129.4 million investment. The move isn't terribly surprising, coming after the companies announced positive Phase II data on their partnered asset Relovair in September. The once-daily, long-acting beta-2 agonist/corticosteroid combination is in Phase III development to replace GSK's blockbuster Advair and the increased investment suggests GSK is confident in the companies' respiratory collaboration.

GSK and Theravance have been allies in the respiratory space since 2002 thanks to an early-stage LABA deal. In 2004, that arrangement morphed into a broader strategic alliance in which GSK paid $129 million upfront and increased its stake in Theravance from 6% to 19% in exchange for an exclusive option to license new medicines from all of the company's development programs through 2007. Theravance took advantage of the IPO window that same year and over time, through public offerings, GSK's stake was reduced to around 12.8% of Theravance's capital stock. With the latest private placement, GSK will purchase 5.75 million shares of Theravance common stock at $22.50 per share.

For Theravance, the deal extends the biopharma's cash runway and could see the company beyond the Phase III Relovair data release, expected in mid- to late-2011. CEO Rick Winningham told "The Pink Sheet" DAILY the investment should give Theravance enough cash to run the company out two years beyond the Phase III data release.

Merck/Smart Cells

In the wake of Phenomix's flame-out, venture capitalists are understandably gun shy about investing in diabetes players. And yet, this is clearly an area of interest to big pharma acquirers, who see the explosion in obesity and Type 2 diabetes as one way to fatten the bottom line. The latest proof that big pharma is on the prowl for diabetes assets? Merck's take-out Dec. 2 of privately-held Smart Cells for an undisclosed upfront plus development and regulatory milestones that could drive the deal price to $500 million. The acquisition gives Merck access to a preclinical insulin technology called SmartInsulin, a once-daily insulin injection for the treatment of type 1 and type 2 diabetes that is meant to automatically adjust to fluctuating levels of blood glucose. In doing so, the medicine presumably overcomes some of the stigmas associated with insulin therapy – the potential risks of either hyperglycemia or hypoglycemia and the frequent daily monitoring required to maintain appropriate blood glucose levels.

In its seven-year lifespan, Smart Cells has raised less than $20 million, relying heavily on grants from the Juvenile Diabetes Research Association, National Institutes of Health and angels. (Hint: without traditional VCs in the picture, the company's founders seem likely to make a pretty penny even if the upfront is in the tens of millions.)

The acquisition moves Merck into a new area of research since it doesn't offer insulin therapy currently. While some have speculated Merck is interested in building smart insulin for the type 1 market, Merck's interest is likely in solidifying its stance in the all important (and much bigger) type 2 population. This is an arena where Merck already has significant market share thanks to its juggernaut DPP-IV inhibitor Januvia, and Smart Cells' insulin seems uniquely positioned to take on long-acting insulins like Sanofi-Aventis’ Lantus or Novo Nordisk’s late-stage Degludec.

By Ellen Foster Licking, Mark Ratner, Wendy Diller, Jessica Merrill