Deals Of The Week: Merck/Chimerix, Merck/Yamasa, CoDa/Rusnano/Domain

AstraZeneca has done a good job of preparing investors for revenue declines due to its patent cliff, but Wall Street thinks the pharma will need to undertake significant M&A activity to remain viable.

[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.]

Every player in big pharma is facing a patent cliff to some extent, but while some are dealing with their losses through diversification or a targeted approach to deal-making activity, it is unclear what direction AstraZeneca PLC, the pure-play pharma among the giants, will take now that Seroquel IR (quetiapine) is off-patent, to be followed soon enough by Crestor (rosuvastatin).

A good portion of this uncertainty stems from the vacancy in the chief executive’s office. CFO Simon Lowth has been serving as acting CEO since predecessor David Brennan stepped down June 1 under a plan announced during the Anglo/Swedish pharma’s first quarter earnings call in April (Also see "Brennan’s Abrupt Departure Has Some Viewing AstraZeneca As A Buyout Target" - Pink Sheet, 26 Apr, 2012.). The second quarter review occurred July 26, but while the impacts of patent expiries to top-selling AstraZeneca products are becoming clear, with a new permanent CEO not selected yet, the company’s strategy going forward remains a source of much speculation (Also see "Seroquel Patent Expiration Leads To Sharp 2Q Revenue Decline For AstraZeneca" - Pink Sheet, 26 Jul, 2012.).

AstraZeneca focused largely on recent launches and late-stage pipeline prospects during the call, while Brennan’s successor was not discussed and current executives didn’t offer much new in the way of corporate strategy for the near term. In talking up its pipeline, AstraZeneca said it has 90 candidates in clinical development, although it counts seven drugs in the approval and launch stage among that number – an instance of trying to have its cake and eat it too?

Still, an 83-candidate pipeline is nothing to sneeze at, although Wall Street generally does not enthuse about AstraZeneca’s internal R&D. Instead, citing Leerink Swann & Co. analyst Seamus Fernandez as an example, the call is for significant M&A to yield a new future for AstraZeneca. In his July 26 note reiterating a “market perform” rating for AstraZeneca’s shares despite an 18% year-over-year decline in revenues, Fernandez re-issued an earlier call for “aggressive” M&A activity.

“We continue to believe the most realistic path forward for AstraZeneca is a more aggressive M&A strategy … but if current trends continue, additional and likely substantial restructuring may be necessary to sustain profitability necessary to deliver on the company’s “balanced” capital allocation strategy,” he wrote.

On May 31, on the cusp of Brennan’s departure, Fernandez opined that an “increased reliance on international sales growth from Japan and the emerging markets” would not be sufficient to overcome a precipitous revenue decline in the U.S. Indeed, AstraZeneca reported emerging markets revenue growth of just 1% during the second quarter, the same growth as during the first quarter, but attributed the lackluster pace to supply-chain issues stemming from new IT snags at a manufacturing site in Sweden. But for those weak links, the chain would have produced 8% growth in emerging market sales during the quarter, AstraZeneca execs claimed.

Still, there has been a clamor for growth-by-acquisition. And in a year that has seen plenty of biopharma M&A already, AstraZeneca has contributed its share of deals.

It teamed up with Bristol-Myers Squibb Co. earlier this month to buy Amylin Pharmaceuticals Inc. for a whopping $7 billion (Also see "AstraZeneca, BMY To Target Disease Management And Primary Care Synergies With Amylin Acquisition" - Pink Sheet, 2 Jul, 2012.). While Bristol is the actual buyer, AstraZeneca will send Bristol $3.4 billion after the deal goes through, almost half the purchase price, and then the two pharmas will use Amylin’s Byetta (exenatide) and Bydureon (exenatide extended-release) to bolster their combined diabetes portfolio (Also see "In A Changing Diabetes Drug Market, Who Will Come Out On Top?" - Pink Sheet, 16 Jul, 2012.).

In fact, it seems only accurate to describe AstraZeneca’s business development approach as aggressive already, even if it let Bristol take the lead in the Amylin buyout. Just since April, AstraZeneca has participated in eight deals, highlighted by a $1.27 billion purchase of Ardea Biosciences Inc. centered on gout candidate lesinurad [See Deal]. During that period, the pharma also has signed partnerships and licensing agreements with Cellworks Group Inc., Link Medicine Corp., Axerion Therapeutics Inc., Amgen Inc. and The Medicines Co.

During the July 26 call, Lowth and President, R&D, Martin Mackay indicated that those deals should be seen as part of an ongoing business development strategy thar AstraZeneca will continue to pursue. While Mackay focused on open innovation and numerous R&D tie-ups with partners of all sizes, Lowth said the company is pleased with the three significant deals it has completed (Ardea, Amgen, Amylin) this year, adding “there’s a whole host of business developments and collaborations going on across research and development.”

Whether a new, permanent CEO – whether that’s Lowth, Mackay or someone from outside the organization – will bring a new direction is unknown, but it is fair to say the AstraZeneca already is pursuing an active and hectic business development course.

Now, here is our weekly look at other developments in the world of biopharma deal-making …

Merck/Chimerix and Merck/Yamasa

The marketer of billion-dollar HIV drug Isentress (raltegravir), Merck & Co. Inc., struck two July 24 deals to bolster its pipeline of compounds that fight the same virus. Merck paid $17.5 million upfront to privately held Chimerix Inc. for worldwide rights to the Phase I drug CMX157, a lipid-antiviral conjugate designed to deliver the antiviral compound tenofovir to cells in high concentrations with reduced systemic effects (Also see "Chimerix Chooses Merck As HIV Partner, Keeps Broad-Spectrum Antiviral" - Pink Sheet, 24 Jul, 2012.). Milestones could add $151 million to the deal’s value, and Merck would pay Chimerix royalties if the drug is approved.

CMX157 also is thought to hold promise in treating hepatitis B virus. Research Triangle Park, N.C.-based Chimerix, which has raised $101 million from venture investors, expects to put the funds toward trials on CMX101, a broad-spectrum antiviral soon to enter a Phase III study for cytomegalovirus.

Separately, Merck partnered with Japan’s Yamasa Corp. in a deal of undisclosed size that gives it global rights to EFdA (4-ethynyl-2-fluoro-2-deoxyadenosine), a nucleoside reverse transcriptase inhibitor that has shown efficacy against highly resistant strains of HIV. Merck also said it would begin a Phase IIb trial on one of its own HIV pipeline drugs, MK-1439.

CoDa Therapeutics/Rusnano/Domain Associates

San Diego wound-healing firm CoDa Therapeutics Inc. is the first to benefit from venture firm Domain Associates’ new strategic alliance with the Russian sovereign fund Rusnano. On July 24, Domain said CoDa has completed a $40 million Series B financing, with contributions split equally between Rusnano and a Domain-led syndicate of CoDa’s current investors (Also see "CoDa Therapeutics Closes B Round with $40 Million from Rusnano/ Domain-Led Syndicate" - Pink Sheet, 24 Jul, 2012.). These include the Australian VC firm GBS Ventures and the New Zealand firm BioPacific Ventures.

In March, Domain and Rusnano said each was committing up to $330 million over the next three to five years to fund Domain portfolio companies (Also see "Rusnano Teams With Domain Associates To Co-Fund Life Sciences Companies And Establish Pharma JV In Russia" - Scrip, 7 Mar, 2012.). CoDa came first because it needed financing, according to Domain partner Brian Dovey. It is in Phase IIb trials for a wound-healing compound aimed at venous leg ulcers and in Phase II trials for the same compound for treatment of diabetic foot ulcers.

Domain companies that receive Rusnano funds are obligated to license exclusive rights to sell their products in Russia and the CIS regions to NovaMedica LLC, a new Russian company that Rusnano and Domain are spending up to $190 million to create. The partners claim it will be Russia’s first fully integrated, innovative, domestic drug firm, and will be structured as a joint venture between Rusnano and Domain.

As a condition of its Series B financing, CoDa has licensed exclusive rights to its lead product and related technologies in Russia and the CIS to the new company, in exchange for undisclosed royalties on sales. Domain is one of several U.S. life sciences venture capital firms that are working with Rusnano, a five-year-old $10 billion sovereign fund charged with helping Russia jump start domestic high-tech industries, which has been aggressively making investments in Western biotech, both directly and through other funds such as Domain and Burrill & Co. (Also see "Rusnano’s Grand Ambitions In Biotech" - Scrip, 27 Feb, 2012.).

Boehringer Ingelheim/Funxional

Boehringer Ingelheim GMBH is expanding its respiratory drug pipeline with the acquisition of a novel oral small molecule anti-inflammatory drug developed by Funxional Therapeutics Ltd. The companies announced a deal July 23 in which BI will acquire Funxional’s lead candidate, FX125L, a potential first-in-class somatotaxin and back up compounds for an undisclosed amount (Also see "Building On Spiriva, BI Buys Funxional’s Oral Respiratory Drug" - Pink Sheet, 23 Jul, 2012.).

Respiratory disease is one of BI’s core therapeutic areas; the company markets the inhaled blockbuster Spiriva (tiotropium bromide) for chronic obstructive pulmonary disease and has several respiratory drugs in late-stage development, including tiotropium for asthma and nintedanib for idiopathic pulmonary fibrosis. The addition of FX125L will give BI a first-in-class asset in a novel pathway that acts through the type-2 somatotaxin receptor (sstr2). As an oral drug, the market opportunity for FX125L could be significant given that inhaled drugs dominate the respiratory landscape. But few details are known about the drug’s clinical safety and efficacy so far.

Funxional’s CEO Geoff Race said that in addition to offering the best terms, BI also had the pedigree and track record in respiratory disease that Funxional’s investors were looking for. “It is not just the initial payment that is important. It is the probability of getting the product to market that is also important,” he said. “We were pleased to have a partner like BI who we felt had the financial resources as well as the technical resources to take this product to the market.”

Since its somatotaxin portfolio was essentially Funxional’s only program, the deal provides an exit for the biotech’s backers Index Ventures, Novo AS and Ventech. But Funxional may not vanish; it’s already evaluating its other earlier-stage technologies. “We are thinking about which one goes into the pipe,” Race said.” “We will take a little bit of time to think about that and start research programs later in the year.”

Roche/AREVA

Roche and AREVA Med, a French biopharma specializing in the development of radioactive isotopes for therapeutic use, announced on July 27 that they will collaborate on a novel alpha radio-immunotherapeutic platform to focus on high-unmet-need cancers. No terms were disclosed.

Together, they will assess the efficacy of combining Roche’s engineered antibodies with AREVA Med’s radionuclide, Lead-212, a compound that shows promise in treating some types of cancer. Alpha radiation consists of fast-moving, high-energy helium atoms which, because of their large size, are easily stopped by a light, relatively insubstantial barrier such as a few inches of air or a piece of paper. Therefore, alpha radiation travels only short distances in human tissue. This means that its energy is absorbed in a smaller area for improved cell death with little damage to healthy tissue. By targeting cancer cells with highly specific antibodies combined with Lead-212, there is an opportunity to more precisely irradiate and kill cancerous cells.

In 2011, AREVA Med acquired Macrocyclics, a leader in metal chelators, which also will participate in the collaboration with Roche. AREVA Med is associated with the National Cancer Institute (NCI), the University of Alabama at Birmingham (UAB) and the French National Institute of Health and Medical Research (Inserm).