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Biotech Roundup: Tipping Point, Hostile Takeover


The only change in the air next week is likely to be Autumn's impending arrival...


Biotech Tipping Point or Sordid Vendetta?

On April 20, 2004, I wrote a piece warning how an upcoming FDA Advisory Panel meeting could provide a tipping point for the biotech sector. On April 27, 2004, the NASDAQ Biotech Index hit 851 intraday to post an after-bubble high. On May 3, the date of the panel, the decision went against biotech. Tipping point it was, with the NBI stripping off 200 points into last spring's lows. It took two years for the sector to get back to that level.

The company involved in the panel meeting was Genta (GNTA), attempting to get approval for Genasense for the treatment of melanoma. The application had warts – actually more warts than we were led to believe by the company – but the bottom line was that the data available were stronger than those for any other melanoma drug approved to date.

FDA division head Dr. Richard Pazdur jettisoned almost the entire sitting ODAC advisory panel and had a bunch of breast cancer docs adjudicating Genta's melanoma drug. The FDA statistician performed a statistical manipulation of the data whose only reference was in a message board post by a stats program coder. Not knowing any better, the panel bought the mostly specious arguments. It was a low point for panel conduct, probably not exceeded until the Plan B nonsense.

Anyway, Genta is back in front of ODAC on September 6. Genasense is again the subject, but this time in the blood cancer Chronic Lymphocytic Leukemia (CLL). The company is seeking accelerated approval. The data are not perfect, natch, so the panel will have some decisions to make. One primary issue is how to deal with the fact that Genta does not have a confirmatory study under way. Dr. Pazdur has ODAC convinced this is a requirement prior to granting accelerated approval, though it is not according to the rules the FDA is supposed to live by.

There is other drama here, though I'll spare you the sordid details. The question is whether this is a tipping point for biotech to the magnitude it was in 2004.

The answer is that if it is a tipping point, it is exclusively for the bears this time. In 2004, biotech bulls and bears were playing the Hatfields and McCoys across the Genta gulch. There was serious convinction on both sides. This time, only the bears have conviction. Over 10 mln shares short on Genta, nearly all under about $3-$3.50. About a third or more was shorted under $2.

I don't detect the kind of sentiment this time that would lead to people completely re-evaluating how they approach investing in biotech. The 2004 Genta debacle fundamentally changed the tactics of the sector. Some people might look back on next week's decision and see a positive outcome as an early sign that FDA Commisioner-elect Dr. Andrew von Eschenbach is truly the adult supervision the FDA has lacked – particularly the Oncology Division. I suspect such an analysis would be armchair quarterbacking.

That said, if the ODAC panel turns down Genta only because they do not have their confirmatory trial underway, I would see that as news. Few companies are foolish enough to make the mistake Genta is making by not having the confirmatory trial underway, so the overall impact across biotech would be minimal. There could be a perception issue, though.

Oncology and anti-infective drugs are increasingly popular with investors. The perception is that these classes are less likely to get the probing less critical drugs are receiving. I've written often about how lifestyle drugs and mass-market drugs are really under the microscope at an FDA rocked by Vioxx and other "drug safety" concerns. Perhaps a Genasense defeat might expand this into oncology, but I don't think so.

I suspect a failure in front of the committee will either be chalked up to the personal urination match between Genta's CEO Dr. Ray Warrell and the FDA's Dr. Pazdur, or simply another in a long series of mistakes by Genta.

Hostile Takeover

In something very rare for biotech, Genzyme (GENZ) has made a hostile bid for Canuck biotech AnorMed for $380 mln in cash, or about $8.55 a share. Such actions are rare in dev-stage biotech because 75% of a dev-stage biotech's worth is their people. People tend to walk after an acquisition anyway, something that is accelerated when the takeover is hostile.

I've read where some people believe this will be a trend. Hedge funds desperate to get something approaching rational fundamental valuations for their publicly-traded investments will agitate for Board seats and declare "strategic options season" to be open. Pharma and biopharma sees an opening to not have to pay the big prices the former Board might have been asking. The Board still refuses, but you get a hostile offer anyway because the hedge funds know offering something above the ask on an embattled company often gets people to bolt to greener pastures. That's the theory, anyway.

I'm not sure I buy this. True, one possible explanation for the lack of acquisitions in the public space is that public CEOs have a high opinion of their true worth. Such situations are ripe for hostile takeovers. True also that pharma and biopharma will be getting more desperate. But I don't think hostile takeovers are going to increase significantly. Perhaps at the end of the feeding frenzy, but that's probably 2008-09's business – if at all.
No positions in stocks mentioned.

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