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Biotech Roundup: Merck's Dumb Deal?, Political Hot Potato, AstraZeneca's Free Cash, Delays as Expected


Is that frenzy the same as the one where I eat too much candy?


Merck's dumb deal?

When Merck (MRK) bid over a billion dollars for Sirna Therapeutics (RNAI), you could just about hear the gasps in pharma and biopharma boardrooms across the country. CEOs at biopharma and pharma companies have to be concerned that this acquisition will set a benchmark price that will make filling the holes in their pipelines that much more expensive.

On the other hand, this could go down as the dumbest deal since Bristol-Myers (BMY) paid all that money to license ImClone's (IMCL) Erbitux. I mean c'mon. A billion dollars for a drug class nobody has even figured out how to deliver yet? And don't get me started on the complete tangle that is the intellectual property (patent) situation in this space.

Don't mistake my incredulity for disappointment. Far from it. This is exactly the kind of acquisition my firm has been expecting for so long. The deal flow over the last few weeks likely marks the beginning of the feeding frenzy. If the asking prices by other US biotechs are comparable to the billion Sirna got, we can understand why pharma and biopharma have been shopping in the private sector.

I've been hearing for a few months that the "good stuff" in the private space had already been bought. The remainder is either really asking the moon or is simply not attractive at its current stage. All the billions spent on private companies largely did not solve pharma's biggest problem, though – huge holes in their near-term pipelines.

Pharma still has to transition away from its addiction to mass-market blockbuster drugs. Not only are there looming patent expiration issues, the political climate clearly indicates that pricing power on these drugs may come to an end faster than many expected. Only biotech contains the huge pipeline of later-stage specialty drugs that can repair pharma's ills.

And as the Sirna deal shows, it's going to cost a pretty penny now that they've waited so long to start pulling the trigger. I guarantee no public biotech CEO is ignorant of the fact private company deal valuations were several times higher than comparable valuations in the public market.

My firm expects that gap to close over the next several months.

Political Hot Potato

Speaking of politics, we are likely to see the reset button hit on control in Congress. In my firm's monthly biotech recap, we handicapped the House and Senate contest and laid out how we think the political climate will shift in 2007.

My firm believes the Presidential election campaign will begin in January 2007. Normally, neither side is interested in passing legislation during a campaign, only proposing bills with catchy names (i.e. "The Chicken in Every Pot Act of 2007") that have no hope of passing just so they can bludgeon their opponents with it in the next election cycle. Such gridlock is actually good for stocks because it removes political uncertainty from the discounting equation.

Drug developers are in a unique situation, though. Congress has no choice but to act on the most important piece of legislation for the entire drug industry, the Prescription Drug User Fee Act, or PDUFA. In 1993, industry wanted faster and more predictable timing for the review of new drug applications. The FDA said they couldn't do it without more staff. Congress pled poverty. So industry stepped up and said they would pay user fees for each drug application if Congress would guarantee the fees would be dedicated to adding additional staff. The experiment was started with the law written so it expired after a certain time in case the FDA or Congress didn't follow through.

Since 1993, PDUFA legislation has been renewed three times. The third iteration expires on September 30, 2007. During this time, industry's financial support for the FDA has increased by 2500% while Congressional budget support for the FDA has only doubled. Industry's financial support was always supposed to be supplemental, but now it makes up over 50% of the FDA's budget. (The EMEA, the EU's version of the FDA, has 75% of its budget paid for by industry fees. The UK's drug approval apparatus is 100% supported by user fees.)

Into the political maelstrom that will be the 2007-2008 Presidential election free-for-all, the drug industry has to negotiate PDUFA-4. There are already multiple proposals on the books that will fundamentally change the way drugs are marketed. Depending on what ends up in the final iteration, it could be a big deal for pharma companies.

In my publication's last issue, we detail the major potential changes and make the point that most of the changes increase risk for investing in pharma and biopharma companies without adding significant risk to the development-stage biotech companies we focus on. This could be positive for biotech company valuations as the relative risk between the two very different asset classes narrows.

Frenzy: Part Two

AstraZeneca (AZN) has $4 bln in cash laying around and shareholders are not happy.

Usually when you read a sentence like that, you assume the next line will have something to do with increasing a dividend. Not this time. One more marker of the biotech feeding frenzy is that large shareholders of AZN are meeting with management to encourage them to put that $4 bln to work buying companies and products to supplement their pipeline.

Delays, As Expected

When Cell Genesys (CEGE) first announced the design of its VITAL-1 and VITAL-2 trials in prostate cancer, it suggested the trials would result in FDA applications in 2007 or 2008. My firm caught more than a little flak for saying we'd be surprised if the trials were enrolled by 2007 or 2008.

In yesterday's conference call, management guided enrollment completion for VITAL-1 for 2007. This is after the company started adding clinical trial sites in Eastern Europe in order to boost enrollment. Its PR spin was that this "broadening" of the trial to Europe was a good strategic move in terms of EU approval and finding a partner. I will give their CEO credit, though, as he readily admitted at an investment conference breakout session early this year that there was no way VITAL-1 would meet enrollment targets without adding those sites.

So what's the problem? Patient advocacy group surveys indicate nearly 60% of men won't take Taxotere for asymptomatic prostate cancer. Increasingly, good docs are reluctant to prescribe Taxotere while the patient is asymptomatic. Since the control arm in VITAL-1 is Taxotere, this is holding up enrollment. In VITAL-2, both arms include Taxotere but the patients in that trial are symptomatic.

I've always thought VITAL-2 would enroll earlier, but management has pulled resources off that trial in an effort to try and get VITAL-1 enrolled first. I'm a big fan of better treatments for men with prostate cancer, but wouldn't count on seeing GVAX in the indication any time soon. Even if it manages to make it through VITAL-1 with good data, which I doubt, it is not a particularly easy drug to deliver to patients (special handling, many injections) and will play second fiddle to any other approved active immunotherapy that is on the market.
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