The biotech industry is facing the likelihood of a long IPO dry spell, which could extend beyond what is being forecasted in other industries, according to a report by Reuters.

According to Reuters, the last biotech IPO was in November 2007 with Nanosphere, Inc., which develops diagnostic tests, and in the last few weeks, over half of the biotech companies in the IPO pipeline have dropped out, including drug delivery company CyDex Pharmaceuticals Inc., Xanodyne Pharmaceuticals, which focuses pain management, and Phenomix Corp, which specializes in diabetes treatments. Reuters reports that only  five companies remain in the IPO pipeline.

Instead of IPOs, Reuters reports that biotech companies are continuing to turn to mergers; however, pharmaceutical companies are only interested in biotech companies that have products ready for sale, which means that they need to be past Stage 1 and Stage 2.  Pharmaceutical companies are not interested in investing another five years in research and development right now.  Rather, they are looking for products that can quickly replenish their pipelines.

When the IPO market returns, Reuters reports that biotech companies with marketable therapies for hepatitis C, cancer and Alzheimer’s therapies will be the best prospects for an IPO.

Having said this, Reuters reports that what may delay the return of the biotech IPO is the poor price of biotech stocks, and the fact that the biotech companies who have gone public have not increased their stock prices since their IPO.  Reuters reports:  "Only seven of the 61 biotech companies to have gone public since 2000 are currently trading above their IPO prices."

Thus, it appears that biotech is headed for a long IPO dry spell that is not likely to change course, until after the economy picks back up and the industry can show that IPOs make financial sense.   In the meantime, biotech companies will have to continue to rely on alternative exit strategies.

The recent plunge in the stock market is not just affecting the investments of the average investor–it is apparently also affecting the investment portfolios of some biotech and pharmaceutical companies such as Genentech, reported the San Francisco Business Times.

According to the San Francisco Business Times, Genentech held preferred stock in Fannie Mae, Freddie Mac, and Lehman Brothers Holdings, and had to take a $67 million third quarter charge for these investments. Genentech’s investment income for the year will reportedly be 50% of what it was in 2007, which was $197 million.

The San Francisco Business Times reports that other biotech and pharmaceutical companies which have been affected by investment losses include Biogen Idec. Inc. and Lexicon Pharmaceuticals, Inc.

While most in the industry would expect that biotech stock prices would be affected by a plunging stock market, it may very well come as a surprise to many to discover that any of these biotech and pharmaceutical companies are so heavily invested in the market themselves.  The San Francisco Business Times article explains that cash-rich companies like Genentech are invested largely in short-term investments due to the high cost of drug development and the need to manage all the cash that is required for the drug development effort.

Upon reading this article, the question comes to mind: how, if at all, will the drop in Genentech’s investment portfolio affect Roche’s acquisition talks with Genentech?  Could a drop in cash on hand could make a new acquisition offer more attractive to Genentech?

In my opinion, the industry expectation is that there will at some point be a Roche acquisition of Genentech, so perhaps this market downturn will not have much of an impact on any deal.  At the same time, it seems likely that Genentech’s investment losses will have some impact on how the talks progress, as a 50% portfolio loss is certainly not inconsequential to any investor–even Genentech.

The IRS has launched an effort to review universities’ tech transfer office activities, reported Biotech Transfer Week.

The IRS began mailing out compliance questionnaires last week to four hundred (400) colleges and universities.  According to the IRS website, these compliance questionnaires will explore the following:

• report revenues and expenses from taxable trade or business activities on Form 990-T, Exempt Organization Business Income Tax Return;
• classify activities as exempt or taxable activities;
• calculate and report income on losses on Form 990-T;
• allocate revenues and expenses between exempt and taxable activities;
• invest and use endowment funds; and
• determine types and amounts of executive compensation.

Biotech Transfer Week reported on the IRS review as follows:

It seems apparent that the IRS believes that it is currently losing taxable revenue from technology transfer activities that is going unreported by universities around the country, and that perhaps all universities with a technology transfer office–whether they received a questionnaire or not– would be wise to conduct their own review in parallel to the IRS review, in order to determine what, if any, mistakes in reporting are currently being made by their institutions.

Of course, given the fact universities are typically nonprofit organizations, you might wonder what kind of taxable income exactly could arise at a university.  The IRS website explains this dichotomy as follows:

Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more or gross income from an unrelated business must file Form 990-T. Form 990-T. . . .

The IRS defines “unrelated business income” as follows:

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

• It is a trade or business,
• It is regularly carried on, and
• it is not substantially related to furthering the exempt purpose of the organization.

IRS Publication 598 explains the issue of tax on the unrelated business income of tax exempt institutions.

It will be interesting to watch how the IRS review of technology transfer offices pans out.  As we have previously reported on the California Biotech Law Blog, technology transfer offices often generate tremendous revenue for universities.  Apparently the IRS has been watching the growth of technology transfer offices around the country and wants a larger piece of the action.

The California Biotech Law Blog  will be following this issue as it develops and will keep our blog readers posted on those developments.

Both Roche and Genentech are continuing to remain silent on the status of the Roche-Genentech acquisition talks.  For now, employees and investors are left hanging as Genentech’s future continues to be uncertain.

Analysts apparently had hoped to get an update this week during Genentech’s earnings call about the status of the acquisition,  but they were unsuccessful, according to Seeking Alpha’s Mike Huckman.

Huckman wrote regarding the earnings call as follows:

[Roche officials would] only say they remain “totally committed” to the Genentech offer and wouldn’t make any comments or answer any questions about a “negotiated agreement” or its ability to finance the deal. . . .

So many analysts, investors and reporters dialed into the Roche call yesterday morning after it had started that one company official later repeated for the benefit of the latecomers that it wasn’t going to show its hand. Some analysts and investors were banking on a new treatment to force Roche to come back with a much higher offer, but it didn’t pan out Sunday night when Genentech announced the test of Avastin as an add-on drug for colon cancer will continue through the end.

Analysts were similarly unsuccessful in the case of the Genentech earnings call earlier this month, although the subject of the acquisition was at least raised there.  Following the Genentech call, at least one analyst, Eric Schmidt of Cowen and Co., still decided to upgrade Genentech shares from an equivalent of “Buy” to a “Hold.” Schmidt stated in the Genentech call as follows:

While management refused to discuss the Roche situation, we believe a deal is inevitable, and that an agreement would be facilitated by a recovery in the credit markets. We believe large-cap investors seeking economically resilient growth at a reasonable valuation will find Genentech shares attractive.

So, the question remains: will they or won’t they do the deal?

I personally agree with Schmidt that the deal is going to eventually happen–that Roche will come up with a share price that will make it worth Genentech’s while to sell.  It is not so much a question of if but when. . . .

The California Biotech Law Blog will continue to keep you posted as any new developments regarding the deal emerge.

The status of SBIR reauthorization is unclear, according to an update by Rick Shindell of the SBIR Insider..

In his October 3rd newsletter, Rick Shindell had pronounced SBIR reauthorization dead.  Shindell wrote in his email update the following:

Over the last month and through today, October 3, 2008, there has been a flurry of intense efforts in the Senate to get an SBIR Reauthorization bill passed. . . .  Unfortunately the valiant efforts on SBIR reauthorization by the leaders and staff of the Senate Committee on Small Business and Entrepreneurship (SBE), John Kerry (D-MA) chair and Olympia Snowe (R-ME), were rebuffed by a few and ultimately could not be brought to the full Senate for a vote, in spite of the fact that the original bill S.3362 was passed unanimously 19-0 in the SBE committee back in July. . . .

In today’s update, however, Shindell appears to have changed his opinion somewhat, stating:

In our October 3rd issue we announced that SBIR reauthorization was dead in the 110th Congress. Although this scenario is still likely, the events of the last few weeks heighten the chances for more action in a “lame-duck” Congress which “may” present an opportunity for additional SBIR reauthorization activity.

So, the question is this: will the current economic climate push the Senate to move forward on this reauthorization effort?

In all honesty, I doubt it.  I have a bit of a bias when it comes to the subject of the SBA, since I started my law firm in a down economy following the sudden closing of my large law firm, and I found it disappointingly difficult to obtain funding through the SBA.  At one bank, I asked about SBA funding, and to my surprise, I was asked what my spouse’s salary was.  When I replied in some shock that I was single, I was told the bank could not assist me.  At another bank, I received the run-around on SBA funding on the basis that law was a “highly risky profession” and I wouldn’t be able to do anything other than practice law if my business failed.   Of all the businesses I could have started, I honestly would never have thought that a law practice would have been placed in a high risk category–particularly when I had already practiced law for a number of years.   Wnile I did eventually obtain a small SBA loan, I never obtained the loan I really needed to build my business. I must admit I became somewhat disenchanted with the whole concept of the SBA.  In my opinion, the whole program would benefit from an overhaul.

So, having disclosed my personal bias on the SBA program, I would argue that the SBA program is exactly where Congress should be focusing its attention in a down economy.

Why do I say this?

Well, in a down economy, there are generally a number of layoffs, and a number of laid off employees will not be able to find the right job.   Rather than sitting home, collecting unemployment, and potentially losing their home to foreclosure, many of the unemployed will contemplate starting a small business.  As anyone who has ever started a small business can tell you, securing adequate financing is often critical to the success of a small business.  So, in my opinion, it makes perfect sense for Congress to focus its efforts on improving the SBA program in a down economy, if it is serious about taking steps to invigorate the economy.

So, how does this relate to SBIR reauthorization?  Well, I would argue that Congress should ensure that the SBIR gets reauthorized for the very same reason–to promote small business and invigorate the economy.

Unfortunately, however, to date I have heard absolutely nothing of any plans by Congress to focus on the SBA as part of its economic relief efforts.  Instead, Congress and the administration are busy taking all kinds of economic steps that have little or nothing to do with small business.  For this reason, I doubt that SBIR reauthorization is going to get much attention by the Senate before the end of the year either.

The California Biotech Law Blog will continue to keep you posted as any new SBIR reauthorization developments occur.

Forbes published an interesting article last week which named the universities in this country with the most successful tech transfer programs in terms of rate of return (“ROI”), according to a 2006 survey.

At the top of the list was New York University.  Forbes reported as follows:

[New York University] generates $157 million in research-related income on $210 million in research and development (R&D) expenditures–tops the list with a 75% yield. . . . While Remicade has generated the bulk of NYU’s licensing income in the last decade, some 20 other biomedical technologies kick off royalties as well–and 15 more are in clinical trials. . . . Other hot areas include computer science, agriculture and nanotechnology. NYU also takes stakes in start-ups, including Perceptive Pixel, developer of the touch-screen map that CNN uses in its election coverage.

Next on the list was Wake Forest University, which had a 41% ROI.  According to Forbes, Wake Forest’s success was due in part to several patents, which generated more than $1 million in licensing revenue and the development of several key technologies, including the V.A.C. System, a mechanical vacuum technology that promotes wound-healing, which was licensed to San Antonio-based Kinetic Technologies, and a virtual endoscopy machine, which was licensed to GE Medical, a unit of General Electric.

Other successful programs included the Stevens Institute of Technology, Ohio University, Brigham Young University, and University of Rochester.

Interestingly enough, the University of California System (which includes all of its various institutions and campuses around the state) only came in fourteenth on the list, even though it reportedly generates more in total revenue from research than all other U.S. universities.  According to Forbes, out of the University of California System’s $48 million licensing program, about $24 million was incurred from royalties paid on a mere five patents.

The full Forbes‘ list of the top 15 most successful tech transfer programs in 2006 is as follows:

1. New York University, $210 million in research expenditures, $157 million in research related income, 75% yield

2. Wake Forest University, $146.3 million in research expenditures, $60.5 million in research related income, 41% yield

3. Stevens Institute of Technology, $28 million in research expenditures, $4.56 million in research related income, 16% yield

4. Ohio University, $24 million in research expenditures, $3.26 million in research related income, 13% yield

5. Brigham Young University, $26 million in research expenditures, $3.07 million in research related income, 11.7% yield

6.  University of Rochester, $355 million in research expenditures, $38 million in research related income, 11% yield

7.  University of Minnesota, $596 million in research expenditures, $56 million in research related income, 9.4% yield

8. University of Florida, $459 million in research expenditures, $42.9 million in research related income, 9.3% yield

9. Stanford University, $699 million in research expenditures, $61.3 million in research related income, 8.7% yield

10. Northwest University, $348 million in research expenditures, $29.9 million in research related income, 8.6%

11. Mount Sinai School of Medicine, $269 million in research expenditures, $20.1 million resarch related income, 7.5%

12. University of Massachusetts, $409.9 million in research expenditures, $27.2 million in research related income, 6.7% yield

13.  University of Utah, $246.5 million in research expenditures, $16.3 million in research related income, 6.6% yield

14.  University of California System, $3.04 billion in research expenditures, $193.4 billion in research related income, 6.4 % yield

15.  University of South Alabama, $20.6 million in research expenditures, $1.2 million in research releated income, 5.9% yield

Forbes published an interesting article last week which named the universities in this country with the most successful tech transfer programs in terms of rate of return ("ROI"), according to a 2006 survey.

At the top of the list was New York University.  Forbes reported as follows:

[New York University] generates $157 million in research-related income on $210 million in research and development (R&D) expenditures–tops the list with a 75% yield. . . . While Remicade has generated the bulk of NYU’s licensing income in the last decade, some 20 other biomedical technologies kick off royalties as well–and 15 more are in clinical trials. . . . Other hot areas include computer science, agriculture and nanotechnology. NYU also takes stakes in start-ups, including Perceptive Pixel, developer of the touch-screen map that CNN uses in its election coverage.

Next on the list was Wake Forest University, which had a 41% ROI.  According to Forbes, Wake Forest’s success was due in part to several patents, which generated more than $1 million in licensing revenue and the development of several key technologies, including the V.A.C. System, a mechanical vacuum technology that promotes wound-healing, which was licensed to San Antonio-based Kinetic Technologies, and a virtual endoscopy machine, which was licensed to GE Medical, a unit of General Electric.

Other successful programs included the Stevens Institute of Technology, Ohio University, Brigham Young University, and University of Rochester.

Interestingly enough, the University of California System (which includes all of its various institutions and campuses around the state) only came in fourteenth on the list, even though it reportedly generates more in total revenue from research than all other U.S. universities.  According to Forbes, out of the University of California System’s $48 million licensing program, about $24 million was incurred from royalties paid on a mere five patents. 

The full Forbes‘ list of the top 15 most successful tech transfer programs in 2006 is as follows:

1. New York University, $210 million in research expenditures, $157 million in research related income, 75% yield

2. Wake Forest University, $146.3 million in research expenditures, $60.5 million in research related income, 41% yield

3. Stevens Institute of Technology, $28 million in research expenditures, $4.56 million in research related income, 16% yield

4. Ohio University, $24 million in research expenditures, $3.26 million in research related income, 13% yield

5. Brigham Young University, $26 million in research expenditures, $3.07 million in research related income, 11.7% yield

6.  University of Rochester, $355 million in research expenditures, $38 million in research related income, 11% yield

7.  University of Minnesota, $596 million in research expenditures, $56 million in research related income, 9.4% yield

8. University of Florida, $459 million in research expenditures, $42.9 million in research related income, 9.3% yield

9. Stanford University, $699 million in research expenditures, $61.3 million in research related income, 8.7% yield

10. Northwest University, $348 million in research expenditures, $29.9 million in research related income, 8.6%

11. Mount Sinai School of Medicine, $269 million in research expenditures, $20.1 million resarch related income, 7.5%

12. University of Massachusetts, $409.9 million in research expenditures, $27.2 million in research related income, 6.7% yield

13.  University of Utah, $246.5 million in research expenditures, $16.3 million in research related income, 6.6% yield

14.  University of California System, $3.04 billion in research expenditures, $193.4 billion in research related income, 6.4 % yield

15.  University of South Alabama, $20.6 million in research expenditures, $1.2 million in research releated income, 5.9% yield        

South San Francisco-based Novacea announced its merger this week with Transcept Pharmaceuticals. 

The San Francisco Business Times reported on the terms of the deal as follows:

Under terms of the all-stock deal, Novacea . . . . will issue new shares of its common stock to Transcept stockholders, with Transcept stockholders owning 60 percent of the combined company. The newly issued shares will be based on an exchange ratio that will be determined before the transaction closes by early next year. . . . The name of the merged company, which will have cash of $88 million to $92 million, will be changed to Transcept Pharmaceuticals.

What prompted this deal?  According to the In Vivo Blog, it was the failure of Novacea’s new anti-cancer drug Asentar in trials, which left Novacea with a significant amount of cash on hand and no product.  In Vivo Blog reported:

Since November of 2007, when it stopped its pivotal trial of its anti-cancer drug Asentar because more people were dying on the drug than in the control arm, the writing was on the wall for the company. With something like $90 million in cash and marketable securities as of its last 10Q, Novacea was more valuable as a bank and a listing than as a company.

Will the deal prove to be a win-win for both Transcept and Novacea shareholders?

Well, that’s not entirely clear at the moment. 

According to the San Francisco Business Times, the deal is mutually beneficial to both sides, as it gives Novacea shareholders a "life raft" and provides Transcept a manner by which to go public and fund the final stages of its sleeping drug Intermezzo.  In contrast, the In Vivo Blog expresses some doubts on the outcome of the merger, stating as follows: 

 Whether that’s the right thing for investors is another question: analysis from our colleague Chris Morrison shows that the average share price decline for reverse-merged companies was about 40%, worse even than the declines from IPOs or the biotech index in general. . . .

Thus, while the deal may benefit Novacea shareholders in some ways, it may also have some negative consequences for shareholders on both sides of the transaction.  Only time will tell as to whether or not this deal proves to be a good one for both parties.

Medical identity theft is on the rise, according to a report by the Chicago Tribune.

What exactly is medical identity theft?  Well, it is when someone steals your identity in order to either submit fraudulent claims or to obtain otherwise unaffordable medical care. 

The Chicago Tribune reported on this issue as follows:

In many cases the crimes are not discovered until a collection agency begins calling. Often, the thief will arrange to have the insurers’ billing documents sent to a false address. . .It’s common for thieves to create fraudulent driver’s licenses and insurance cards, which are all most medical centers ask for before they provide care. . . .

Even if the victim does not end up paying the bill, he will have to deal with false information in his medical and health insurance records.

Having someone else’s information mixed in your medical record could compromise your own care. What if the test results or physical findings are those of someone else, but doctors use them when you have a medical emergency?

So, given the increasing prevalence of identity theft in the medical area, what can Americans do to protect their information?  Well, the most obvious ways to protect ourselves would be to take better care of our insurance cards and destroy all medical data before disposing of health-related records.  And, of course, we can check our credit reports frequently to ensure that no collections activity has been taken against us by medical clinics, etc.   Beyond these obvious courses of action, however, it is a bit unclear what can be done to stop medical identity theft, since most of us are not even privy to our health records, which are often scattered all over a number of healthcare facilities.  Given the fact that many of these records are not even stored in a centralized database to date, it seems highly unlikely that we are going to be able to start monitoring our health records in the near future in the same way that we currently monitor our FICO scores. 

All in all, the issue definitely raises cause for concern.   In my opinion, privacy experts need to start grappling with these issues now before they can become a more significant problem down the road..

Genentech has launched an employee retention program aimed at retaining employees following the recent bid by Roche to acquire Genentech.

The Mercury News reported that Genentech’s plan is to spend $371 million in cash on retaining its personnel, which the company had planned to spend instead on its employees in a previously established stock option program.  The prevailing wisdom is that spending the money now on cash will be much more attractive than spending the money on stock options to be cashed out in the future.

Will this program help to discourage the departures of personnel who would otherwise choose to leave the company, in light of the uncertainty now about its future?

In all likelihood, the answer to this question is “no.”  Given the current state of the economy and the collapse of the housing market, the average Genentech employee will probably be concerned enough about his or her future to start looking for a new salaried position.  Also, many of Genentech’s employees are already well enough off as a result of the company’s successes over the years to not be swayed by a retention package.  Moreover, the conventional wisdom is that Roche will ultimately be successful in its bid to acquire Genentech, which means that many employee jobs may prove to be on the cutting block wiithin the very near future.

Still, you have to admire Genentech’s attempts to slow down the flow of departing employees out the  company doors.  I feel confident that most observers would agree that spending $371 million on retaining employees in the face of a likely acquisition is an impressive effort to ensure that the company can continue to operate, regardless of what happens with the acquisition effort.  And, of course, such an effort may have the other important effect of maintaining the company’s value as the acquisition talks move forward.  The California Biotech Blog will continue to watch this issue as it unfolds and will report on whether or not these efforts by Genentech prove to be successful.