Well, I spent about an hour last night typing up a great response to this, but then my entire system froze when my damn ISP disconnected me (which happens entirely too much, and I lost it). In fact, I'm going to Word now to type this and will cut and paste it into SI, but I will never be able to reproduce the inspirations that drove me in the middle of last night.
This XOMA deal is great for INCY and XOMA. INCY takes 7 patents which are just collecting dust on the walls (nice plaques), and for which there is virtually no market for without probably some kind of conflict with XOMA and give it the potential for a return. For XOMA, it eliminates a big potential patent liablility and gives them clear sailing for BPI. The fact that XOMA has done this now is clearly a good move on their part. They do not want to wait until this is an approved product with a huge value, which would certainly give them a big stock runup only to have INCY pop a patent suit on them which would give them a big stock rundown. And, I'm certain INCY would have pursued them. INCY is an information company. Most of their assets are intellectual property. When IP is all you have, you defend it mercilessly as a matter of principle. Plus, INCY has about 30 people or so in a an inhouse patent group, with personnel strictly dedicated to pursuing patent prosecutions. But INCY also has the philosophy that they'd rather make a deal than enrich the courts and attorneys. Afterall, they are in the IP licensing business.
Now, if XOMA bombs and doesn't get BPI to market, then INCY is out nothing but the negotiating costs. If XOMA succeeds getting BPI to market, then INCY wins big on both the royalty stream and the appreciation in the XOMA stock price. Plus, putting the BPI patents to work has got to be something the INCY founders are thrilled to see, as they put a lot of work into BPI back in 91 and 92 when INCY was essentially a BPI development company.
I am also thrilled to see INCY taking equity for intellectual property. Even though it isn't for genomic services, it is a good start. I've suggested for years that INCY consider taking equity in smaller biotechs in return for their genomic services, but management has never been in favor of it. I'd love to see INCY hold a big portfolio of equity, warrants, or options in lots of other biotechs. In my mind it is a great way to diversify their financials and greatly expand the number of users of their services.
As far a pharma buying up INCY, I would see that as a nightmare. I don't think you will see the multiples out of a big pharma that absorbed INCY as you would out of a pure INCY play. Plus, a pharma owner would be a huge culture clash. The most important assets at INCY wear tennis shoes and go out the door every night. If a big pharma took over, I would fear that a lot of those shoes would go out the door and never return. For example, after Glaxo took over Affymax, lots of people jumped ship after their options vested. Another non-biotech example of culture clash was when IBM bought ROLM. Well, at ROLM, all the employees got stock options grants as part of their annual reviews. At IBM, about 1% got them. When ROLM got around to their annual reviews, IBM informed them that they could only give options to a couple of % of the employees and not everyone as had been the standard. Needless to say, the ROLM people were thrilled, and gave their all to increase their productivity (at finding other jobs) and enjoying life (by working less diligently). Well, the end result is that IBM lost a huge amount of money on this deal. ROLM was eventually sold to someone else and became hugely successful. The moral of this story, is that typical East Coast and European management philosophies just don't tend to do well in Silicon Valley.
Another issue I have with a pharma owning INCY is based on a customers point of view. If I was running a pharma, I would much rather do a deal with a service company that isn't one of my competitors, than with another pharma who is. One problem with a Pharma owner is that customers end up revealing to INCY what they are working on. This is not something you want to give to your competitor. Also, the suspicion that you are getting cherry-picked data would definitely be there. Of course there is a historical basis for this in the HGSI:SKB relationship. While they started on an exclusive basis originally, SKB soon realized that there was vastly more genomic data produced by HGSI than SKB could ever use. And, by that time, it was obvious that INCY had a superior business model for genomic services. Well, SKB started to try and compete with INCY by signing up other pharmas to access the HGSI data SKB had. Well, they did a couple of deals, but nothing of major substance. In INCY you are essentially being serviced by and industry consortium, but with SKB you are being serviced by one of your fierce competitors. Who would you trust to do business with, especially in the ultrasecretive, paranoid Pharma business? The answer is too obvious.
A third strike against this in my mind is that big Pharmas are primarily manufacturing companies, not industy service companies. I can imagine that the internal politics and turf battles between the manufacturing divisions and the service division could be huge. I can just see those tennis shoes going out the door and not coming back...
Now, if INCY were to be acquired by a large service agency that is not a competitor to Pharmas, that could have possibilities. But, why bother? I just don't see the advantages it brings. Myself, I see the opposite happening, INCY acquiring and starting companies that provide additional services to the industry.
If INCY were to sell a percent or two of equity to each of their pharma clients, now that would not seem to be so bad to me, but I doubt it ever happens.
Well, enough on this.
Rocketman out
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