Peter,
An article below, that you might find interesting. As usual, ImClone is mentioned.
It makes sense that large Pharmaceutical companies have to be more careful with who and how much they invest, but they also need to fill the pipeline with new cutting-edge technology products to fuel future earnings and that will involve taking risks with small biotech companies, IMHO. What is your opinion on this?
Regards,
Shawn
April 26, 2002
Biotech deal making more difficult these days
David Miller, President of NymbleInvestor Biotech Monthly, publisher of the monthly NIBM Newsletter on the biotech market sector, provides the following article. His web site address is biotechmonthly.com. He welcomes your comments and questions at ddmiller@BiotechMonthly.com
In a mid-February Reuters article about partnership negotiations in the biotechnology field, an Aventis spokeswoman declared the ImClone (IMCL) battle with Bristol Meyers (BMY) had no impact on negotiations with potential partner Genta (GNTA) over that company's antisense oncology platform.
If that is indeed the case, I'd see it as an exception rather than the rule. Conversations with industry executives over the past two weeks seem to indicate the problems between Bristol-Meyers and ImClone have had a serious impact on negotiations between large pharmaceutical companies and development stage biotechnology companies.
Given the charged atmosphere around Genta's partnership prospects, I should make it clear Genta management would only say partnership negotiations were "reasonably far along." They reiterated their negotiations do not depend on the timelines of the three current pivotal trials I wrote about two weeks ago in this space. They also said negotiations were not affected by confirmation of an August 2001 increase in the enrollment for one of those trials. As such, the themes in this article came from other executives in the business and not from Genta management.
"They are scared to death"
To return to the subject at hand, big pharma executives have been characterized by those recently across the table from them as "scared to death" of the implications of the Bristol Meyer/ImClone fiasco. This is fueled by investment bank analyst declarations the problems with Erbitux could spell the end of Bristol Meyers as an independent company. Sure, analysts were making that point largely to create a frenzy for the investment banking side of the business. Nevertheless, it scared big pharma executives.
"We had a deal nearly done with one big pharma company," said one biotech executive who asked to remain anonymous. "When the paperwork went to the top levels, they refused to close the deal because of their fear it would tar their company with the Erbitux fiasco brush."
Corixa (CRXA) and Glaxo's (GSK) problems with Bexxar haven't helped much, either. The FDA's decision to deny the application's Fast Track status because the submission did not prove an unmet need shocked big pharma executives. It seems not even Fast Track status is safe any longer from FDA stalling tactics.
The fallout from Enron, believe it or not, has also hurt the biotechnology industry. Enron's manipulation of shareholders via substantively illegal off-balance sheet subsidiaries tarnished the legitimate role of such entities in the biotech arena. Ireland's Elan Corporation (ELN) felt this backlash when non-biotech analysts "discovered" their penchant for creating partnerships based upon subsidiaries in which they owned 19.9% -- a tenth short of the 20% threshold required for balance sheet inclusion. This chilled these types of deals, especially after Elan partners like Targeted Genetics (TGEN) saw their stocks drop in sympathy.
Reminiscent of the ag-biotech patterns
I've written before how the current desperate search for pipeline products by big pharma closely resembles the late-90's buying spree in the agricultural biotechnology sector. Multinational agricultural chemical companies (MACCs) realized their industry's future was in bioengineered seeds and not chemicals. MACCs went on a buying spree, paying 5-7 times existing share prices for companies with proprietary technology. That boom busted in 1999 as resistance to bioengineered seeds and a dramatic downturn in the seed markets swept across the industry.
Given all this, it is easy to see why big pharma was scared enough to step back and re-examine potential deals. The FDA has been a constant source of setbacks for the biotech business -- especially where blockbuster drugs are concerned. Oncology products have had a particularly tough time of late. In addition, 2002 has seen far more instances of disappointing clinical news than positive late-stage data.
Who is most at risk?
According to the people we spoke with, companies looking to do the type of rolling application attempted by ImClone are most at risk. Companies with minimally sized Phase III pivotal trials or trial data with some ambiguity are also in trouble. Submissions relying on secondary endpoints for approval or asking for a narrower label than originally intended when the pivotal trial protocol was first initiated are in this camp as well.
Oddly, drugs with Fast Track status may also be viewed in a negative light because of the FDA's rejection of Bexxar's Fast Track status and suggestion that Corixa and Glaxo refile. We expect, however, this is less a Fast Track issue than an issue with the quality of pivotal trials. If a company has a robust data set from well-designed trials, we expect Fast Track status will not be a negative.
Big pharma wants to avoid egg on its face. Even deals whose dollar size represent rounding errors for some of the biggest companies are not being done because of a fear of backlash among shareholders and analysts.
Will it get better?
We believe the current dearth of blockbuster deals is temporary. As with most things on Wall Street, the fear will eventually pass or be replaced by a different set of fears. This is especially true in the executive offices of big pharma as fear of shrinking pipelines displaces fear of big deals. As I write, analysts are busily issuing pipeline evaluations so their reports may begin to provide a catalyst for change.
We also believe those companies with robust pivotal trial data and a clean pathway to approval may even be able to obtain premium valuations in a partnership deal. Those companies with less perceived "ImClone risk" will be more desirable.
On the other hand, we expect development stage biotech companies will have to give up more of the decision-making responsibilities for partnered products. Post-ImClone, we expect partnership agreements will be exponentially more complicated and be very focused on exclusively reserving regulatory and clinical trial decisions for the company footing the bills.
When will the deal flow begin again?
The completion of earnings season will be the first waypoint in a return to deal normalcy. Big pharma execs simply do not want to deal with the news flow surrounding a partnership announcement at the same time as the news flow surrounding earnings releases. The bigger the deal, the more likely this is the case.
We would expect the ASCO conference in mid-May to be a catalyst for oncology partnerships. As one of the two biggest oncology conferences of the year, a significant amount of clinical trial data will be readied for presentation. Partners will not make a move without seeing a preliminary form of that data and can use a positive ASCO presentation to provide PR support to their partnership announcement.
The annual BIO conference is developing a reputation for big deal announcements. This year's conference is in Toronto on June 9-12. We don't think the "foreign" locale will hurt deal announcements as most people we speak with in the industry are looking to attend.
Consequently, the May-June timeframe looks good to us for a restart of biotechnology deal flow. We think companies with near- perfect, late-stage products will actually benefit from the delay while those with sketchier approval prospects will find the deals smaller than their shareholders had hoped. Everyone will see partners retaining more control over clinical and regulatory decisions.
We pride ourselves on our share ownership disclosure policies. I've written in this space before about the need for disclosure from all analysts. Our company and its staff members are barred from receiving compensation from the publicly traded companies we mention in our newsletter or on our web site. One or more Biotech Monthly staff members owned shares in Genta at the time this was written. The shares were purchased in the open market with personal funds. For more information, visit the Disclosures portion of our web site at biotechmonthly.com.
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