The buzz in the biotech world this week has been squarely focused on Roche’s surprising move to launch a $43.7 billion bid to acquire Genentech.

Of course, Roche already owns fifty-six percent (56%) of Genentech, so the acquisition would actually result in Roche owning the remaining forty-four percent (44%) of the company.  The offer would pay Eighty-Nine Dollars ($89.00) per share.

Steve Johnson for the Mercury News reported on the Roche bid as follows:

Although Genentech’s operations would remain in South San Francisco under the deal, it would cease to be a separate company, according to a Roche statement. The proposal will be reviewed by three Genentech board members who aren’t Roche employees, and must be approved by Genentech’s non-Roche shareholders.

If approved, the transaction would create the seventh-biggest drug-making entity in the United States in terms of stock value, according to Roche executives, who noted that Genentech now accounts for about 22 percent of Roche’s revenue.

By eliminating duplication, the combined companies could save up to $850 million a year, Roche executives said. The transaction also could eliminate current trade-secret roadblocks that now hinder their ability to share research data, they said.

According to the Mercury News, the deal is unlikely to close for the current offering price, and Roche may have to offer as much as One Hundred Dollars ($100.00) per share to finalize the deal.

As a member of the Bay Area biotech community, it is hard to envision South San Francisco without Genentech at the helm.   Many of the most successful players in the biotech world got their start at Genentech, and the company has had a very historic role in the growth of the biotech industry, both in the Bay Area and around the world.   That historic role, however, may soon be relegated to a new role in the history books–and we all may have to get used to a world without Genentech as we know it.

What will the entity formerly known as Genentech look like if Roche is successful with the acquisition?

Well, according to The In Vivo Blog, the acquired Genentech is likely to lose its culture, although it may or may not lose the majority of its talent–this will likely depend on whether CEO Art Levinson stays or goes.  For its part, The In Vivo Blog is prediciting that Levinson will make his departure, particularly given the manner in which this bid attempt was handled.  Certainly, there was no effort by Roche to preserve the collaborative spirit that had previously existed between the two companies.

Given this huge loss, will the Genentech acquisition really prove to be a good move for Roche?

Well, perhaps the acquisition will save Roche money.  This seems to be the overriding justification.

The In Vivo Blog reported as follows:

It’s likely Roche took a look at the price of its current Genentech relationship–with its manufacturing transfer prices, up-front fees and royalties, and most importantly no ability to leverage its investment in the US marketplace where the economics of oncology marketing look more and more like primary care–and figured those costs outweighed the innovation it would lose if Genentech’s world class talented departed as a result of a takeover. Just as no primary-care force can afford to sell a single product, Roche can’t afford a US oncology operation selling only Xeloda.

Moreover, Roche is clearly not convinced that Genentech’s productivity would have continued at the rates it has in the last decade. And there are plenty of people who agree. “We all know that Amgen is now a Big Pharma. We talked about it eight years ago. But I think Genentech has now sneaked over that line too,” says the CEO of one of Genentech’s peer Big Biotechs.

The East Bay Business Times agreed with this assessment:

The Basel-based drug maker said it expects to increase research productivity and cut costs by combining operations . . . .

“The transaction will also unlock synergies by leveraging the scale of the combined operations in the U.S. and improving operational efficiency,” said Roche chief executive Severin Schwan.

In the end, however, it seems likely that Roche will end up losing much of what is special about Genentech over the course of the transaction.  However, apparently this is a gamble that Roche is willing to take.

The California Biotech Blog will continue to follow the developments regarding this deal as they come to light.

Bristol-Myers Squibb has agreed to acquire Hayward-based Kosan Biosciences for $190 million, reported the San Francisco Business Times.  Both boards of directors have approved the deal.

The deal will pay investors $5.50 per share, which amounts to a "huge premium" according to BioHealth Investor, which indicated that the stock was only at $1.65 on the day the deal was made, and that its 52-week trading range was $1.28 to $6.49.

BioHealth Investor reported on the acquisition as follows:

The acquisition of Kosan will enhance Bristol-Myers Squibb’s pipeline will get to enhance its pipeline with compounds in two important classes of anticancer agents, called novel Hsp90 (heat shock protein 90) inhibitors and epothilones.

The company believes this will result in new treatment options for patients as another important milestone in becoming a next-generation BioPharma leader.  Kosan evolved from a research platform to a development company and this should offer a timely opportunity to place its clinical programs in the hands of a much larger company to bring innovative cancer treatment options to patients.

According to the San Francisco Business Journal, a separate exclusive worldwide license agreement was signed simultaneously, which will remain in effect even if the acquisition does not go through.  The terms of that agreement are $25 million up front plus milestones for rights to Kosan’s epothilone compounds.

The In Vivo Blog reported on the Kosan deal that while some were underwhelmed by the price Bristol-Myers Squibb paid to acquire Kosan, "The market–and, probably Bristol as well–attached very little value to Kosan’s unpartnered projects beyond the epothilones."  In Vivo Blog further explained:

That the deal isn’t centered more around tanespimycin probably says more about the difficulties Kosan has faced with this particular molecule than it does about the value of Hsp 90 inhibitors generally. Remember Hsp90, as a target class, has been the driver of multiple buyouts and licensing deals in the past couple years. . . . Instead it probably has more to do with the fact that tanespimycin is one of several Hsp90 inhibitors in development that are derived from geldanamycin, a natural compound relatively high in molecular weight that might have trouble reaching an important hotbed of Hsp90 activity, the interior of the mitochondria. . . .

Meanwhile, Kosan’s epothilones are clearly commanding more interest. These molecules target a tumor cell’s skeletal infrastructure, much like taxanes, but via a different mechanism, and molecules like Ixempra have been specifically designed to overcome drug resistance. . . . Cornelius and co. are counting on Ixempra as a key part of its strategy to regain leadership in the cancer arena.

So, while this deal may not have resulted in a huge payoff for Kosan investors, there does seem to be a perception among at least some industry watchers that the deal–providing a 230% premium over the stock price–achieved a good result for both sides. 

Biotech companies are running into roadblocks when they enter into deals with the UC System, according to a report this week by the San Francisco Business Journal. 

According to the San Francisco Business Journal, the key problem is that it simply takes too long to get the deal done.  The San Francisco Business Journal reported:

"Most of us would prefer not to work with" the UC System, [Don] Francis [chairman and executive director of the South San Francisco nonprofit Global Solutions for Infectious Diseases and co-founder of Vaxgen, Inc. of South San Francisco] said at a recent UCSF forum on product development partnerships

Francis recalled VaxGen’s late-stage AIDS vaccine trials that included UC sites. Because UC lawyers pushed for intellectual property rights for the system — though VaxGen had done the research and was only conducting paid-for trials at UC — agreements took months rather than weeks to complete, Francis said. In fact, UC was the last series of clinical sites to sign on. 

It’s fixable. . . . but unless changes are made, he said, UC will drive away companies.

The other significant problem, according to the San Francisco Business Journal, is that the UC leadership is just too risk-adverse.  The San Francisco Business Journal reported:

Deals must pass "the Chronicle test," said Jack Newman, a UC Berkeley graduate and now senior vice president of research at Amyris Biotechnologies Inc. in Emeryville. In other words, UC system lawyers want to be sure no one — those pesky media types, in particular — can accuse them of giving away too much value.

As an IP attorney who regularly handles deals with universities and companies in the private sector, my personal experience has been that deals with universities in general do tend to take an excrutiatingly long time to get finalized and signed.  Typically, the time period far exceeds the normal negotiating period in the private sector. 

Why is this? 

Well, in all likelihood, it is because the universities operate on a different timeclock.  Businesses are often anxious to get deals signed, so that they can move on to a different set of problems and concerns.  However, universities frequently operate on a different schedule and set of priorities–there just is not the same level of pressure to get the deal closed in a specific period of time that you have in the private sector.  I suspect that if you took a survey of all of the tech transfer offices around the country, you would find that the UC System’s turnaround time is fairly representative of what you find at other university tech transfer offices.

I would be interested in hearing from others of you in the blogosphere who have experience with doing deals with universities: what has your experience been with the turnaround time?  Has your experience been similar to mine or have you found that any particular universities are operating at a much faster timetable?  I will, of course, share any feedback I receive on this topic. 

Takeda has agreed to acquire Cambridge, Massachusetts-based Millennium Pharmaceuticals for $8.8. billion dollars. 

The Wall Street Journal reported on the terms of the deal as follows:

Takeda, Japan’s biggest drug maker by revenue, will buy Millennium. . . . for $25 a share. The price represents a 53% premium to Wednesday’s $16.35 closing price for Millennium shares. The deal, the largest acquisition by Takeda, is structured as a tender offer and is conditional upon a majority of shareholders accepting the terms.

Obviously Millennium came out of this deal quite well: $8.8. billion is certainly not an insignificant amount of money.  In Vivo Blog certainly characterized this as an excellent deal from Millennium’s perspective, explaining as follows:

Millennium hit its billion dollar jack-pot a bit sooner than expected. . . . Not bad for a company with just one marketed product and less than a dozen promising, but still risky, clinical assets. . . .In addition to Velcade, Millennium has 10 drugs currently in clinical trials, primarily focused around oncology and inflammatory bowel disease. But the company’s next most advanced product, MLN-0002, an antibody against the gut-specific alpha-4 beta-7 integrin for ulcerative colitis and Crohn’s disease, has yet to enter Phase III clinical trials and isn’t likely to be approved before 2011 or 2012.

Thus, until the Takeda acquisition announcement, Millennium’s fate–barring some kind of external business transaction–was entirely dependent on expanding the use of its first-in-class proteasome inhibitor beyond its approved uses in relapsed multiple myeloma and mantle cell lymphoma. . . .

Simply put, Takeda’s rich was offer was too good to ignore. Yes, Velcade growth was strong and growing stronger. But unable to in-license or acquire a late stage product on favorable economic terms, the company was forced to rely heavily on the growth of this product to feed its clinical pipeline until MLN-0002 was ready for prime time. A risky situation and one that already seemed as if it were necessitating tough development choices.

So, why was this a good deal from Takeda’s perspective?  Well, as in the case of many pharmaceutical companies, it was all about rebuilding the pipeline.

The Wall Street Journal explained as follows:

By acquiring Millennium, Takeda will help address a revenue problem it will likely face soon. The patents on two of Takeda’s biggest-selling products — ulcer drug Prevacid and diabetes treatment Actos — expire in 2009 and 2011, respectively. Revenue from Millennium’s best-selling product, blood-cancer treatment Velcade, is growing quickly and is expected to reach as much as $345 million this year.

Sales of Velcade could get another big boost this summer when the U.S. Food and Drug Administration rules on an application from Millennium to sell the drug as a first-line treatment for multiple myeloma. Currently, the drug’s labeling indicates it should be used only with patients who have already tried another medicine first. A label allowing for broader usage of the drug would likely result in more patients using Velcade for longer periods of time.

Also, according to The Wall Street Journal, the acquisition is part of a larger strategy by Takeda to expand into overseas markets.  The Wall Street Journal reported as follows:

The acquisition. . . .is part of an aggressive campaign by Takeda President Yasuchika Hasegawa to spend a good chunk of the roughly $20 billion the company has in cash on acquisitions or licensing agreements.Last year, the company set aside $10 billion as part of a strategic fund to help it expand into overseas markets. In February, Takeda struck a deal to buy biotech giant Amgen Inc.’s Japan unit, as well as gain marketing rights to 13 Amgen drugs for Japan and elsewhere in Asia. Last month, it bought out partner Abbott Laboratories’ share of a U.S. joint venture. 

Thus, in the end, the deal was a win-win for both Takeda and Millenium.  

It seems likely that we will be seeing more such acquistions from Takeda in the near future.  Perhaps biotech companies should take note and put Takeda on their short list for potential strategic partners: Takeda may just be in the market for more such relationships. 

Palo Alto-based CV Therapeutics signed a lucrative deal earlier this week with New York-based TPG-Axon Capital in which TPG-Axon Capital, a New York hedge fund, agreed to pay up to $185 million in exchange for the payment of a royalty in the amount of fifty percent of its North American sales of Lexiscan, reported the San Jose Business Journal. 

According to the San Jose Business Journal, the U.S. Food and Drug Administration("FDA") recently approved CV Therapeutics’s Lexiscan injection, an A2A adenosine receptor agonist, for use as a pharmacologic stress agent for patients unable to undergo adequate exercise for stress tests.

The San Jose Business Journal reported on the terms of the deal as follows:

[T]he deal with. . . .TPG-Axon Capital includes $175 million on closing of the transaction and a potential future milestone payment of $10 million. . . .CV Therapeutics retains rights to the other 50 percent of royalty revenue from North American sales of the product [by its partner Astellas Pharma US, Inc., and also may receive a royalty on another Astellas product under the terms of the company’s collaboration agreement with Astellas Pharma US Inc.

The San Jose Mercury News further reported:

[I]nvestment bank Leerink Swann described the $175 million payment as "a surprisingly positive transaction," because other heart stressing agents already are on the market.

"The magnitude of this deal is much bigger than we would expect since physicians we have queried seem relatively uninterested in a novel cardiac stress agent," the report said.

It goes with out staying that a deal of this magnitude dramatically improves CV Therapeutics’ cash flow situation.  According the the San Jose Business Journal, CV Therapeutics plans to use the financing to meet a 2010 debt obligation and to also support its commercialization plans for Ranexa.

While investors may not aways support biotech alliances as discussed in our  March 27th blog posting, entering into an alliance with a pharmaceutical company can still make good business sense, as in the case of the $320 million Cell Genesys-Takeda deal that closed this week. 

The In Vivo Blog reported on the terms of the deal as follows:

Takeda agreed to fork over $50 million in up-front payments, plus additional regulatory and commercialization milestones worth up to $270 million for exclusive world-wide rights to the product. In addition, Takeda will pay Cell Genesys tiered, double-digit royalties based on net sales of the GVAX immunotherapy in the US; in all other regions, Cell Genesys will receive flat double-digit royalties. Not quite a profit split, but again, by no means stingy.

Just as important, going forward Takeda will pay for all external development costs associated with the the immunotherapy’s clinical development and will also pick up the tab for all additional development and commercialization costs. Cell Genesys even managed to wrangle a co-promote option–US only–out of the Japanse firm. Finally, the deal only includes the prostate cancer immunotherapy. Cell Genesys is free to develop its GVAX technology to treat other cancers.

Why did this deal make good business sense for Cell Genesys? 

According to the In Vivo Blog, one reason is that Cell Genesys obtained a deal which will pay the company a significant amount of money in an agreement for technology that remains unproven–Cell Genesys Phase III GVAX immunotherapy for prostate cancer.

Moreover, the partnership will provide the cash to cover the costs that Cell Genesys anticipates burning this year,  The In Vivo Blog explains as follows:

On its fourth quarter earnings call in late February, the company’s CFO, Sharon Tetlow, reported it had just $147 million in cash. Not bad for a biotech, but not good considering the $100 to $105 million burn the company forecasted for 2008, thanks largely to the significant costs associated with its prostate cancer immunotherapy trials, VITAL-1 and VITAL-2. With one partnership, the company has managed to off-load the lion’s share of these costs, giving it some much needed breathing room, while still enjoying upsides in terms of development and generous royalties. 

All in all, the In Vivo Blog concludes that "[t]here’s no doubt the deal makes financial sense for Cell Genesys.  However, did this deal really make sense for Takeda?

First of all, backing the GVAX Prostate is highly risky, according toThe Street.com’s Adam Fuerstein, who argues that the clinical data to date is unreliable. 

Second of all, the controversy surrounding cancer immunotherapies may have been a red flag to other companies, who In Vivo Blog suggests would have "steered clear of Cell Genesys’s GVAX Prostate."

On the other hand, the In Vivo Blog suggests that the deal furthered Takeda’s recent growth strategy:

[Takeda] is desperate to extend its reach beyond Japan given that country’s sluggish growth and harsh price cuts. And, like other pharmas, Takeda certainly faces its own patent cliff. But the Japanese pharma is taking bold steps to play in the large molecule arena; according to Windhover’s Strategic Transactions Database, Takeda has signed 9 large molecule alliances since 2006. While most of the deals have focused on antibody technology–a la the Amgen partnership–the company is no stranger to risky ventures. Last summer, Takeda became one of the first pharmas to collaborate with aptamer pioneer, Archemix. . . .

So, perhaps this deal will really be a win-win for both parties.  Feurstein expresses his doubts and even the In Vivo Blog is not so sure.

Regardless of how Takeda fares, it is clear that Cell Genesys will benefit from this alliance–thus demonstrating in a very clear way why entering into alliances can be a good business decision for biotech companies.

VaxGen announced the termination of its merger agreement with Raven in a press release issued last Friday.  As a result, liquidation may be in the company’s future, reported Steve Johnson for the San Jose Mercury News. 

According to Johnson, VaxGen had planned to have its shareholders vote on the merger Monday morning, but it became clear that the deal was not going to be approved by VaxGen’s investors.

Johnson reported on the "troubled" history of VaxGen as follows:

Founded in 1995, it labored for years to develop a vaccine for the AIDS virus, HIV, but was forced to give up that quest in 2003 after its vaccine proved ineffective. In subsequent years, the company disclosed that its financial records were in disorder, resulting in it being delisted from the Nasdaq Stock Market in 2004.

The government provided a brief salvation. Following the Sept. 11, 2001, terrorist attacks, federal officials in 2002 and 2003 gave VaxGen $101.2 million to begin developing a new anthrax vaccine. The government followed that up in 2004 with $877.5 million more to provide 75 million doses of the vaccine.  It was the biggest contract ever awarded under President Bush’s anti-terror program, Project BioShield, but it was short-lived. The government revoked the contract in December 2006 when the vaccine failed a key test. .  . .

In the interest of full disclosure, VaxGen was a client of my previous employer, Pennie & Edmonds, LLP and I did some work for the company during the term of my employment at the firm.  It has been sad to see the company fall on hard times, and I am sorry now to see this report of the company moving toward liquidation.  I remember a time when VaxGen’s future seemed very full of promise, and when the management team’s enthusiasm for its work was quite infectious (no pun intended).  While the nature of the biotech business model is inherently risky and some companies will inevitably fail while others will be wildly successful, it is still sad to see VaxGen come to the end of its road under these circumstances.   I had hoped that the company would enjoy a very different fate: that its AIDs vaccine would prove to be the answer to preventing AIDS that we hoped it to be.  Hopefully the work of VaxGen–despite all of its "troubles"–has nevertheless brought us one step closer to finding that answer. 

Gilead Sciences has now overtaken Amgen as the world’s second most highly valued biotech company after Genentech, according to Seeking Alpha.

Seeking Alpha reported:

Investors now think that a biotech company with less than one-third the revenue of Amgen (AMGN) is worth more than the former sector king. . . .

Genentech (DNA) is the commanding number one with a market cap of more than $83 billion. It’s a little nip and tuck between GILD and AMGN, but as I write this Amgen’s market cap stands at approximately $43.5 billion and Gilead’s at $45.5 billion. Amgen is still tops when it comes to revenue: $14.8 billion in 2007 versus Genentech’s $11.7 billion and Gilead’s $4.2 billion.

While Gilead Sciences’ ascension to the number two slot has little if any bearing on the biotech legal landscape, it undoubtedly will have some impact on the negotiating power of Gilead Sciences in future commercial negotiations. 

The In Vivo Blog ran an interesting posting today, which asserts that  investors dislike biotech alliances.

The In Vivo Blog explains this argument as follows:

Since November 2007, there have been nine deals by public biotech companies with upfront payments (equity and cash) of greater than $20 million – to us a reasonable proxy for a biggish deal. Among them: Isis Pharmaceuticals’ mipomersen deal with Genzyme ($325 million upfront); Merck’s with GTx on its Phase II SARM and two backups ($70 million upfront); and Sanofi Aventis’ multi-antibody arrangement with Regeneron ($85 million upfront).And yet, with all this mostly undilutive capital flowing in, the market’s reaction has been distinctly negative. The median share price among these nine biotechs is down 15% from the day the deal was signed. . . .

[Y]ou’d expect better from companies with pretty darned good news. Regeneron, for the third time non-exclusively monetizing its VelocImmune antibody production system and this time adding a rich co-development deal on a series of programs, with spectacular downstream economics, has nonetheless lost 16% of its value since it announced the deal.

What is the explanation for the investors’ behavior? The In VIVO Blog concedes that the "entire decline cannot be blamed on the deals" but gives three possible explanations for the dislike of biotech alliances:

At one time, a Big Pharma deal was the required validation for an IPO or additional public round. But now it’s clear that the market no longer gives a damn about such imprimaturs. Big Pharmas’ frequent missteps in development haven’t shined up their product-picking reputations. More importantly, biotech’s institutional investors now have the teams to do their own scientific and clinical homework.

Second, the M&A-based logic of the market leads investors to the conclusion that any product-based deal subtracts value. We’re not aware of any data that actually supports that conclusion (we’ll look into it, of course). But as long as acquirers are willing to pay a nearly 100% premium to what IPO investors are willing to pay, investors are hardly willing to jeopardize a potential merger windfall by selling off rights to a key product.

And finally, investors just don’t like some of the deals biotech is signing, despite the big dollars attached to them. One reason, noted Bill Slattery of Deerfield Partners at the opening BIO-Windhover panel in New York: deals often give Big Pharma development control.

The In Vivo Blog raises some interesting arguments.  As an IP transactions attorney myself, I cannot help but wonder if there is some truth in their arguments: is it possible that biotech companies are just making bad deals–perhaps due to inexperience or poor negotiating? or due to running low on cash?  Or is it the case that recent alliances just have not been as successful as anticipated on signing?  On the other hand, is something more going on, and alliances are just little by little becoming disfavored by the investing community?

I am interested in what California Biotech Law Blog readers have to say on this issue. What do you think: do investors dislike biotech alliances in 2008?  Why or why not?   We will let you know what  kind of feedback we get on the issue and share it with the readers, as I am confident many biotech companies would benefit from the insight, and those of us in the legal community advising such companies would likely benefit as well.

The Washington Post ran a column today by Jon Leibowitz of the Federal Trade Commission, which addresses a suit recently filed by the agency against Cephalon, Inc., which will test the legality of the practice of entering into “pay for delay” settlements.

Liebowitz describes the  “pay for delay” settlement controversy at the root of this case as follows:

When these troubling deals first came to light in the late 1990s, the FTC fought them — and stopped them cold. Between 2000 and 2004, no brand and generic companies entered pay-for-delay deals; in other words, companies resolved patent disputes without anticompetitive payoffs.

Unfortunately, that success is under siege. Two federal appeals courts — in rulings that conflict with the analysis of a third appellate court — have found that a brand-name drug company facing a patent challenge is free to pay any amount to keep a generic producer from entering the market until the patent expires. These rulings depart from the spirit of Hatch-Waxman and our nation’s antitrust laws, and they harm consumers by subverting the competition at the heart of our free-market system.

Courts that have sided with pharmaceutical companies believe, in essence, that even an infirm patent gives its owner the right to pay competitors not to compete. . . .Not surprisingly, after two courts blessed such payoffs, the frequency of these settlements has increased sharply. In fiscal 2006, fully half of all pharmaceutical patent settlements (14 of 28) contained such payments. Brand-name manufacturers, seeing the potential to continue reaping monopoly profits, have taken advantage of this apparent judicial leniency. . . .

This dispute clearly puts Hatch-Waxman to the test: should a patent owner have the right to pay to keep a competitor out of the market until the patent expires?

Clearly, insurers and the public would say yes.  According to Liebowitz, Cephalon made an additional $4 billion dollars as a direct result form entering into this “pay for delay” settlement–this is money that came directly out of the pockets of insurers and patients.  As a member of the public who lost my health insurance following the collapse of my former law firm just over four years ago, when my former employer terminated COBRA at the six month mark, leaving me in the position of having to pay full price for prescription medications, I know all too well how expensive it can get to pay for prescription medications, when no generic is available.   There is definitely an impact on the public at large, insurers, and individuals when they have to foot the bill for a more expensive medication.

On the other hand, as an IP lawyer, I can’t help but scratch my head a bit over this case: the FTC is effectively taking issue over a patent owner trying to protect its exclusivity until the patent expires.  Isn’t that the patent owner’s right?

Not according to the FTC.  The FTC’s position is that patent owners do not have the right to enter into these types of settlements–that such deals violate the spirit of Hatch-Waxman and antitrust law.

It makes perfect sense to me why certain courts have sided against the FTC on this particular issue, and also why the FTC anticipates this case going to the Supreme Court.   According to Liebowitz, however, a bill is also making its way through Congress that would prohibit such agreements.  The FTC, of course, supports this legislation.

The California Biotech Law Blog will keep you posted as this battle unfolds.