Biotech in 2008
pharmafile | December 31, 2008 | Feature | Research and Development | Genentech, InClone, biotech, economy, investment
The credit crunch hits biotech
By October Europe's biotech sector was feeling severe effects from the credit crunch, with small and medium-sized companies being starved of funding from venture capitalists.
Neal Ransome, the European pharmaceutical sector leader at PwC, said: "The current climate for biotech to new raise funds is tough, and it means more companies are being forced to sell up.
"Biotech companies have always been attached to retaining their independence, but now they have to be more pragmatic."
Figures from analysts EPFR show that in 2007, nearly one billion euro in investor funding was provided to European biotech companies. But the first half of 2008 saw this supply dry up almost completely, reducing the sector's options for funding.
Another established route, the IPO or stock market flotation is also ruled out for biotechs given the tumult the international finance markets have experienced.
Such has been instability in the market that two biotech companies have gone to the wall this year, a phenomenon rarely seen in the sector until now.
Edinburgh-based biotech Ardana called in the administrators in June, while Kent-based Phoqus suffered the same fate the following month, both companies running out of money after failing to attract investment in their products.
The biotech sector has always been risky, but the credit crunch has meant there are fewer investors to put money in the sector. This only adds to an existing disenchantment in biotech among investors, who have been frustrated by slow returns and lack of strategic direction from the boards of some biotech companies.
But while biotech is starved of funds, big pharma is able to seize its opportunity. Reduced investor interest is driving more biotechs into the arms of pharma, which are now more likely to buy out companies than agree a more complex licensing deal.
One example was Jerini, the German company specialising in peptides which was set up in 1994. The company was preparing to launch and market its first product Firazyr without any assistance, and had already invested in its own sales and marketing team, but in July it decided to sell out to Shire.
Jerini was among the better-established European biotech companies, with revenue streams from providing specialist services to pharma, and listed on the stock market.
Its relatively low market value made it an attractive target for Shire, and a buy out represented a simpler option than a licensing agreement. Shire's chief executive Angus Russell has admitted that current turmoil had strengthened its hand in the deal.
Venture capitalists sit on the executive boards of many of Europe's biotech companies, and will back a sale to big pharma, as it is seen as the only feasible route in the current climate.
Martyn Postle, director of Cambridge Healthcare & Biotech, says: "Any venture capitalists left interested in biotech will ask themselves the question, Which pharma company is going to buy it?'"
He said VCs are now unwilling to invest in anything where there isn't a clear trade sale exit.
But he points out that the sector was already struggling, and that the economic turmoil has only made a bad situation worse.
"It was crisis time before the credit crunch. If a person is very ill and you kick them, they don't notice they're being kicked."
Reorganisation better than liquidation
But commentators say consolidation is not necessarily negative if the science is still developed somewhere.
Consolidation activity is at a high in the UK, as biotech BTG have recently agreed a merger with Protherics, the British critical care and cancer specialist. The companies say it will create a UK leader in biopharmaceuticals, which will have a valuable portfolio of pipeline and marketed products, sufficient cash resources and development expertise.
Analysts expect that such reorganisation will continue as the economic climate worsens, and the differences between what makes a biotech and a pharma companies may blur.
Good science will still get funding in the future, though this could be delivered direct from industry to academic research units, and may cut out any new start-up biotechs.
Playing hard to get
Genentech and ImClone show their independent nature by resisting unwelcome overtures
There were many takeover bids from major pharmaceutical companies for biotechs in 2008, but none quite as high profile as Roche's move for Genentech.
Roche has held a 55.9% share in Genentech since in 1990, but until this year it has allowed Genentech to remain autonomous, and this has been seen as key to their joint success.
But Roche moved to end its 'arm's length' arrangement with Genentech in August, offering to buy the remaining shares in the company for $43.7 billion – but the biotech's board has refused to go down without a fight.
The companies are still riding high from a series of breakthrough cancer products they co-developed, including Avastin, Herceptin and MabThera/Rituxan, which Genentech markets in the US, and Roche markets in the rest of the world.
The Swiss pharma company says the move to finally merge operations would allow it to develop its 'hub and spoke' model of research and development, and also produce cost savings for the companies.
But despite enjoying good relations until now, Genentech's board didn't welcome the offer with open arms. The Californian company set up a special committee to review the proposal and chairman Charles Sanders said the bid was "both unsolicited and unexpected."
Genentech's structure means that although its board can vote against accepting Roche's initial offer, it will eventually have to accept defeat. If there is not a majority vote in favour of the offer, two investment banks of Genentech's choice would then be asked to make valuations of the company, and an offer based on these would have to be accepted.
The bid was a very clear change in policy for Roche. In 2007 chairman Franz Humer had indicated that Genentech would remain an independent operator, crediting the arm's length agreement with encouraging "a greater diversity of ideas and approaches, increasing the chances of bringing new products to patients".
But Humer stood down as chief executive in April this year, and Severin Schwan, former head of the company's diagnostics division, took over the top job.
He now suggests that while he believes Genentech should maintain its autonomy, he also believes both companies could benefit from closer integration.
"We are looking forward to working more closely with our colleagues from Genentech," he said.
"We have great respect for their achievements and we will take the necessary steps to nurture Genentech's innovative and unique science-driven culture. The Genentech Founders Research Centre will operate as an independent unit within the Roche Group to safeguard a diversity of different approaches and to foster the long term flow of novel breakthrough medicines."
Schwan suggested that Genentech has grown in recent years, and now resembles a fully fledged pharma company – with this size bringing disadvantages as well as advantages.
He said eliminating duplication between the companies would 'unlock synergies' and improve operational efficiency.
ImClone spurns BMS
In October Lilly secured the purchase of ImClone for $6.5 billion after outbidding Bristol-Myers Squibb.
Lilly's victory was not just down to its superior bid to BMS, but also because of bad blood between ImClone's board and BMS.
After an initial 'friendly' bid by BMS in August ImClone's board accused its Erbitux marketing partner and major shareholder of acting on confidential information on ImClone's pipeline to time its bid.
ImClone's board, headed by chairman Carl Icahn had mooted plans to split the company in two, selling off the increasingly valuable Erbitux cancer treatment and selling the remaining pipeline as a separate entity. As BMS increased its bids over a number of weeks, Icahn rejected several offers from BMS as being insultingly low, and was meanwhile in secret talks with Lilly.
In October Lilly triumphed with its mega-bid and said the acquisition would make it one of the world's leaders in cancer treatment, an increasingly important field in the pharma industry.
The company outbid BMS with is $70 per share offer, trumping BMS's $62 per share bid.
Because BMS still holds 14.4 million shares of ImClone the deal, at $70 per share, saw BMS receive around $1 billion in cash.
The company tried to put a brave face on the embarrassing situation and said it was "pleased to have initiated a process that has resulted in the substantial increase of ImClone's value for all of its stockholders".
The move expands Lilly's biotechnology capabilities and also gives it access to ImClone blockbuster cancer treatment Erbitux (cetuximab).
Erbitux is indicated for a variety of colorectal and head and neck cancers. Worldwide sales grew 18% to $1.3 billion last year.
The drug is marketed by ImClone's two partners, Merck and BMS will continue to co co-promotes Erbitux in North America with ImClone/Lilly.
Lilly will take a one-off hit for the continuing research and development it acquires, but the company says it is too early to say how much that will be.
John Lechleiter, Lilly's president and chief executive, said: "By bringing together ImClone's and Lilly's marketed oncology products, pipelines, and biotech capabilities, we are taking a very important step forward in addressing the challenges of patent expirations we will face early in the next decade."
Bristol-Myers Squibb still holds long-term marketing rights to another ImClone compound, IMC-11F8, currently in phase II studies for metastatic colorectal cancer.
It targets the epidermal growth factor receptor (EGFR), the same receptor targeted by Erbitux.
Related Links:
2008: A year in the life of UK pharma
Patient power, pharma streamlining and the rest of the stories that shaped the industry over the last 12 months
NHS 2008: Rejuvenating the 60 year-old service
The year NHS-pharma collaborations came of age, but Practice-based Commissioning still fell short
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