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Biotech Roundup: Dangers of Convertible Debt, Doc Talk Policy


Keep calm, says ASCO to docs...


Dangers of Convertible Debt

In a Buzz earlier in the week, I noted GlaxoSmithKline (GSK) is taking an unusual step of launching a clinical trial that pits its cervical cancer vaccine Cervarix head-to-head against Merck's (MRK) already approved Gardasil. Glaxo must really think its vaccine will turn out to be superior or they wouldn't take the risk.

Vaccines typically have two components: (1) An inactivated piece of whatever critter you are trying to vaccinate against; and (2) an "adjuvant" to attract immune system cells to the critter. Between the two, the immune system is trained to recognize and attack the real critter if it happens to show up.

Better adjuvants make better vaccines. Vaccines are big business and are getting bigger as healthcare slowly shifts from being treatment-centric to prevention-centric. Those companies who create powerful adjuvants, therefore, can often write their own tickets when it comes to partnerships with other companies.

How well that works out for shareholders is a function, as it so often is, about how careful management is with their capital structure. For example, the adjuvant technology Glaxo is betting so heavily on for Cervarix was developed by Corixa. Corixa's management team buried their company under convertible debt. When Corixa couldn't make a go of it with its cancer drug Bexxar, it could have rebooted the company based upon its excellent adjuvant technology.

That would have taken 3-4 years, however. The company's considerable convertible debt would have come due before it would have been able to demonstrate significant progress to Wall Street. So, that avenue towards building shareholder value was not open to the company. Instead, it had to sell the company at a fraction of its potential worth had the company the time to develop more and better adjuvants.

When a development-stage biotech company that my firm covers sells convertible debt, we most often simply drop coverage. That may seem a little severe, but any dev-stage management team that does convertible debt reveals an essential ignorance about corporate operations. I know from experience operational ignorance is not confined to one area. It spreads like a cancer, affecting things like manufacturing and proper design of clinical trials.

At the least, the company ends up underweighted in my firm's models compared to its peers and where it would be without the convertible debt.

ASCO Issues Doc Talk Policy

In August 2005, the Seattle Times published an award-winning investigative piece on how doctors were selling secrets from unreported clinical trials to Wall Street firms. The article raised quite the hubbub, including calls for SEC investigations and Congressional hearings, but nothing happened.

Nearly 18 months later, the American Society of Clinical Oncology (ASCO) finally came out with a policy requiring doctors to disclose these relationships. Any doctor who has taken consulting funds will now have to list who paid them when they publish their journal articles, present at conferences, or have abstracts listed in abstract books.

For the record, I have no problem with doctors talking to investors. What I want is disclosure of paid relationships and a better understanding in the medical community that docs shouldn't talk in anything other than generalities about trials not yet completed and reported. Yes, I'm aware this is a fine line, but docs make fine distinctions all the time. Besides, most of it is common sense:

  • It's OK to talk about the enrollment criteria for a trial, but not OK to tell someone how many patients you've enrolled.

  • It's OK to talk about how you think an "average" patient will perform, but not OK to talk about how your patients are actually performing on the trial.

  • It's OK to talk about all aspects of the trial once it is concluded and reported, but it's not OK to give people advance peeks at your presentation posters or slides.

One danger of ASCO's policy is docs will clam up. This would be a disservice to the medical community and patients. Let's face it, most drugs wouldn't exist without Wall Street's considerable financial support. Contrary to the conventional wisdom, the single biggest source of drug development dollars is not the government. It is Wall Street and VCs via funding of public and private companies.

If we can't get the information necessary to have some confidence a particular drug will succeed and reach FDA approval, then those billions and billions in investment capital will dry up. And since we're all healthcare consumers, nobody wants that.

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