Putting the M Back in M&A

Posted under Agency Insight, BIOCOM, Blog, Companies, Deals, Diagnostics, FDA, Funding, Joe Panetta, M&A, Medical Devices, Medical Supply, Pharmaceuticals, Startups, Universities, venture capital, Videos by Jennifer Ringler

Joe Panetta, president and CEO of BIOCOM, discusses an emerging model of M&As in which human and IP assets are valued and biotech brings expertise to Big Pharma as venture capitalist funding dwindles and patent cliffs loom large.

Pharm Exec: Can you tell me about how small biotech and specialty companies have started switching from relying on venture capitalist (VC) funds to M&As, and when that shift came about?

Joe Panetta: I wouldn’t say they’re switching from relying on VC. I think the fact is that VC investment has taken on a different approach than it had traditionally; so we’re seeing a different, let’s say more conservative, shorter-term VC investment model. That’s combined with the fact that we’ve seen for a couple of years now that VC firms have been much more engaged in investing in their current portfolio companies, and there’s been less of an appetite for investment in new companies than there was five years ago.

Part of that is the fact that we’ve got economic challenges; part of it is the fact that we have a tremendously challenging environment at FDA; and part of it is the fact that we have uncertainty from a political standpoint. So those kinds of things have created a much more conservative approach to VC investing than we’ve seen in the past, and that’s had an impact in terms of the ability of our companies to be able to raise the kind of funding that they still need to raise to move their products through the pipeline.

What that means is that companies need to turn toward alternative sources of funding beyond VC. VC is also taking a much shorter timeframe perspective in terms of the investments that they’re making now. But that leads us to the need that large pharma companies see for innovative technology to fill their pipelines; the ability of biotech companies to attract large biotech and large pharma partners much more successfully than they have in the past; and the dynamic that we’re beginning to see—biotech companies becoming much more focused on management of the products that they’re developing, and on partnering to gain the expertise that is needed to move through development and clinical testing and commercialization.

So that creates the opportunity for companies to focus on innovation and to team up and partner with the experts on product development, commercialization, and manufacturing. And that’s where pharma comes in and plays an enormous role. Obviously pharma’s pipelines have become more depleted in terms of new innovative products over time, so there’s a greater appetite from the pharma side to engage in real partnerships with biotech companies. It’s not outright acquisition; rather, what I’m hearing more and more from a number of different pharma companies, is that the partnering model is more attractive than the outright acquisition model. And if the outright acquisition takes place, then the ability to allow a biotech company to continue to function as a satellite entity is much more attractive than simply acquiring the assets and letting the people go.

PE: What has changed in the industry or the economy that has larger pharma realizing that partnerships where both organizations work together on a level playing field may be more valuable than the straight acquisition model?

JP: There isn’t so much of an appetite any more in biotech, from the investor side or even from the management side, for creating fully integrated future large biotech companies that look like pharmaceutical companies. That used to be much more the direction that the companies were headed in, and for the most part that model has gone by the wayside. Now there’s a more virtual model, a leaner model, and that makes it much more attractive for partnering. The larger partner doesn’t have to worry about what to do with an entity that is duplicating—or at least attempting to duplicate—what they already have the ability to do.

The other thing that’s changing is the fact that we’re seeing generics come on the scene. Now there’s a future road map for biosimilars that is being developed. We see that way forward, and larger companies are beginning to plan for the world of biosimilars. Also, Big Pharma is beginning to plan more for the world of generics and of patents expiring, and I think they’re beginning to realize that they need to go into fast forward to begin to fill the pipeline, and to develop more innovative products. That’s not coming out of the merger of pharmaceutical companies. Those mergers are actually resulting in the large pharma companies having to deal with duplicate organizations and integrating existing products together, so that isn’t providing for innovation.

PE: So the mergers with smaller or more specialized biotech companies are where you believe the more specialized knowledge can come from?

JP: Absolutely—the more specialized knowledge, and the ability to do early-stage research and development much more nimbly and more quickly, resulting in more candidate products that can be developed through partnerships.

PE: How is this working so far as an economic strategy? Is this helping to bridge the financial gap that’s left from VC funding?

JP: I think it’s more than bridging the gap. Last year we did our first pharma/biotech partnering conference here in San Diego, but the relationship between large pharma and biotech has been evolving slowly over time. There was a time when the attitude on the pharma side was, ‘don’t call us, we’ll call you.’ But what we saw at out partnering conference last year and we are continuing to see now is a real appetite for equal partnership on both sides.

Everything we hear and everything we see points to a greater desire for there to be a real partnership between the two. And I think that can sustain smaller biotech companies. Pharma needs biotech as a partner, and biotech needs pharma, but pharma especially needs to continue to appreciate the value of biotech as a partner in terms of the people assets, and not just the intellectual property assets.

PE: Can you tell me more about the dynamic? How is this model of partnering different in terms of what both sides might be gaining, compared to the traditional acquisition model?

JP: The major difference is that by utilizing the resources of smaller biotech companies and by creating partnerships with various smaller biotech companies, a larger pharma can take advantage of the diversity of technologies that these small biotech companies are working in; they can take advantage of the creative environments that exist within these companies; they can harness all of that energy. Just as the biotech model is evolving away from creating a fully integrated pharmaceutical company, the pharma model is evolving away from creating these enormous R&D organizations; if we look at the performance over the last few years for the investment that’s been made, it’s pretty clear that that model isn’t as successful as it was years ago.

PE: What are some factors that result in VCs not being as willing to invest as they were in the past?

JP: I think FDA is overwhelmingly the concern right now. I don’t think a day goes by where I don’t hear or read something about how the FDA is negatively impacting the ability of the industry to be competitive in terms of developing and introducing new drugs. The climate has changed. Because of the risk-averseness at FDA, the lack of ability to accept innovation at FDA, the investor community—particularly the VC community—has been encouraging its members to obtain their approvals outside of the US, in Europe in particular. And that’s because the review process at the European Medicines Agency (EMA) is much more predictable and much more innovation-focused than the FDA is here.

If we look at what has happened with a number of drugs that have been reviewed by the FDA in the last year or two, in the obesity arena in particular and in diabetes drugs, the FDA has shown a real reluctance to approve new products and new technologies. So why invest in a process that’s unpredictable and has demonstrated that the ability to get all the way through the process to commercialization is pretty slim? That wasn’t the case years ago with FDA, especially when the Prescription Drug User Fee Act (PDUFA) came into play 15 years ago. There was a real desire on the part of the FDA to move products through the pipeline more efficiently, to take advantage of the user fees and the deadlines that were agreed upon. But now we’ve got an FDA that’s just mired in bureaucracy and risk-averseness.

Part of that is fear of making a mistake. We’ve got examples like Vioxx where, post-approval, there have been issues that have come up, and FDA is taken to task by Congress for having made a mistake. There’s a lack of understanding of the fact that there are risks associated with all products that are approved; from a media standpoint, from the Congress standpoint, from the public’s standpoint. So that all makes for a very risk-averse climate and VCs won’t invest in a process that isn’t predictable. That’s why we’re seeing a lot of VC investment moving more towards early-stage product development with an investment period of maybe three years. This way, they can be more focused on the part of the process that doesn’t involve FDA review, and can let pharma or other partners deal with the later stages of review at FDA.

I think FDA is beginning to appreciate the fact that this is an issue, and is beginning to talk more about the need to focus more on innovation. But making good on that is a long-term process, and it’s going to take years for it to happen.

PE: How do you see all of this panning out in the next five to ten years? Will M&As continue to spread, and will VCs come around if they see certain changes occurring within industry?

JP: I think pharma will continue to need to engage in M&A over the next five years. I think biotech is becoming more sophisticated in terms of its ability to rely on outside expertise and predictive tools.

Two weeks ago I talked to a VC firm that actually has an FDA expert within the firm, who now goes in and looks at all of the relationships that the biotech company might have had with the FDA before making a decision on investing. I think that’s good; I think it helps to focus in on the companies that are doing it right, and it helps to drive other companies to understand that they need to bring in the expertise to help them to create greater predictability for the investors.

But I think in the next five years, if we see an FDA that truly responds to this call that’s coming from the industry and from Congress to focus more on innovation, and we begin to see some results, then I don’t think there’s any doubt that we will see the VC community engaging in later-stage investing. But I don’t think that changes anything in terms of the need for Big Pharma to create more partnerships across the board with biotech companies. And I think we’ll continue to see that happening as there’s a need to fill pipelines and as the patents expire on products, and as we move more towards the implementation of the biosimilars legislation. VC funding and healthy, dynamic M&A deals do not have to be mutually exclusive.

The HCR Taxman Cometh

Posted under Advertising, Agency Insight, Blog, Companies, compliance, Corporate Responsibility, Diagnostics, Funding, Medical Devices, Medical Supply, Pharmaceuticals, Startups, Strategy, Universities, Videos by Guest Blogger

By Tom Norton

As the country struggles with the current economic malaise, and the pharmaceutical industry enters into yet another difficult quarter of “trying to make the numbers,” one matter that I doubt many Rx execs are thinking about today is the HCR Taxman.  That’s too bad.  They probably should.  That’s because he’s coming for the entire industry on September 30^th.

Now that I have your attention, what in the world am I talking about?  It’s a long story, but let’s just say that the HCR chit that the industry signed in Washington, D.C. during the summer of 2009 has come due, and it’s time to begin paying up.  If your company does more than $5 million a year in sales to various federal government entities, you should read on.

On August 22^nd, the IRS issued temporary rules on the matter that direct the following:

“Drug manufacturers that sell $5 million or more annually through the federal government’s Medicare Parts B and D, Medicaid, Veterans Affairs, the Department of Defense and TriCare programs, are required to make combined total fee payments of $2.5 billion by Sept. 30, 2011.”

The Obama Administration, in the push for HCR in 2008, understood that it needed to bring the Rx industry “into the fold.” The subsequent deal – $80 billion over 10 years – struck between the Administration and PhRMA required the Rx industry to “fill the donut hole in Part D,” offer up other payments to ameliorate the costs of Medicare Part B, and to “contribute” to various military health services. In exchange, the Administration would back off demands for additional HCR taxes on the Rx industry, going forward.  Clearly, the industry’s theory was that the Rx volume to be generated by 35 million newly covered HCR patients would more than offset the costs of the deal. But now, two years later, PhRMA is back in protective mode, as the same fee proposals have begun to resurface. So much for the Administration’s 2009 deal with industry.

Back to the impending September tax obligation. According to the preliminary rules the IRS released on August 22^nd, the aggregate fee amount due from the Rx industry for each year of the HCR funding is:

• $2.5 billion for fee year 2011;
• $2.8 billion for fee years 2012 and 2013;
• $3 billion for fee years 2014 through 2016;
• $4 billion for fee year 2017;
• $4.1 billion  for fee year 2018;
• $2.8 billion for fee year 2019 and thereafter.

The fees for each year will be allocated:

• Using a specified formula, among covered entities (i.e., manufacturers & importers) with aggregate branded prescription drug sales of over $5 million to specified government programs (Medicare Part B program, the Medicare Part D program, the Medicaid program, any program under which branded prescription drugs are procured by the Department of Veterans Affairs, any program under which branded prescription drugs are procured by the Department of Defense, and the TRICARE retail pharmacy program).

Provides that the annual fee for each covered entity is calculated by determining the ratio of:

• The covered entity’s branded prescription drug sales taken into account during the preceding calendar year to…
• The aggregate branded prescription drug sales taken into account for all covered entities during the same year, and applying this ratio to the applicable amount.

So what is the Rx industry’s tax liability?  Here’s a 2010 estimated look at how this lays out, courtesy of Foley-Hoag, LLC:

The table that follows illustrates the graduated structure of the fee for a (hypothetical) covered entity, “ Q Pharmaceuticals,” with $1 billion in total branded prescription branded drug sales in 2010 (under specified programs):

Statutory Scale: Total Branded Prescription Drug Sales	Applicable Sales	Percentage of Sales Taken into Account	Covered Entity’s Sales Taken into Account
Up to $5m	$5m	0%	$0
More than $5m up to $125 m	$120m	10%	$12m
More than $125m up to $225m	$100m	40%	$40m
More than $225m up to $400m	$175m	75%	$131m
More than $400m	$600m	100%	$600m
Total Sales Taken into Account			$783m

To calculate a covered entity’s share of the statutorily determined aggregate fee, the IRS would multiply the fee by the ratio of the covered entity’s total sales taken into account to the aggregate of all covered entities branded drug sales taken into account.

Determined Fee x	Q Pharmaceuticals Sales Taken into Account
	Aggregate Industry Sales Taken into Account

Under the above scenario, where Q Pharmaceuticals total sales taken into account is $783 million in 2010, and where the aggregate sales taken into account for all covered entities is $10 billion, Q Pharmaceuticals fee would be:

$2.5 billion x	$783 million	= $195.75 million
	$10 billion

If you’re an Rx firm doing an aggregate one billion dollars of business with the federal entities listed above, you’re on the hook for nearly $200 million by September 30, according to the IRS and the 2010 Foley-Hoag formula. This is a hypothetical, but the above formula is pretty straightforward.  You should be able to load in your federal sales numbers, as appropriate, and figure out where you will actually stand on September 30th.  It could be a very interesting number.

For brand managers who are sweating out sales every quarter, trying to make quota, the idea that the profitability of their product may be adversely impacted by this new HCR “fee” is no small matter. Will these fees have an impact on 2011 bottom line, year-end bonuses, for example? As HCR continues to roll out, keep an eye on the activities happening beneath the surface of the law. Rx industry CFOs and industry tax departments are well aware of this development, but I’m guessing that the September 30^th tax obligation might come as a surprise to many in the C-suite. I would be interested in your thoughts on this latest development in HCR.

Biosimilars Spend to Reach $2.5 Bln by 2015: IMS

Posted under Agency Insight, biosimilars, Blog, Companies, Diagnostics, Emerging Markets, Europe, forecast, Funding, IMS Health, Medical Devices, Medical Supply, Pharmaceuticals, Startups, Strategy, Universities, Videos by Ben Comer

Global spending on biosimilars is expected to reach between $2 and $2.5 billion by 2015, up from $311 million in 2010, according to an IMS forecast. Total spend on biologics is expected to climb as high as $200 billion.

On a call with reporters yesterday, Murray Aitken, executive director of the IMS Institute for Healthcare Informatics, said adoption rates for biosimilars are challenged by manufacturing complexity, patent exclusivity periods and an untested regulatory pathway in the U.S., plus a reticence “of providers and patients to accept biosimilars in place of original brands.” Current U.S. law allows for 12 years of patent exclusivity for new biologic drugs, although the Obama Administration’s proposed budget for 2012 would shorten that period to seven years, and prohibit the practice of “evergreening,” or making minor changes to a drug in order to extend patent exclusivity.

“We’re not expecting the U.S. regulatory pathway to be cleared, such that biosimilars can enter the U.S. market until 2014,” said Aitken. “We’ve been watching this in the European market, and we’ve seen a pattern where for the first two or three years, the penetration was relatively low, but it’s begun to take off, especially in Germany,” although not all European markets have been keen to adopt biosimilars. “I think it’s fair to say that we expect in the 2015 to 2020 period, biosimilars will see a high rate of growth and share of the market,” said Aitken on the call.

Total spending, globally, on all medicines is expected to cross the trillion dollar threshold by 2015. That figure represents a slowdown, from 6.2% growth over the last five years, to between 3%-6% estimated growth between 2010 and 2015, according to the forecast. By 2015, emerging markets will represent 28% of worldwide spending, up from 18% in 2010. IMS’s designated emerging markets include China, Brazil, India, Russia, Mexico, Turkey, Poland,Venezuela, Argentina, Indonesia, South Africa, Thailand, Romania, Egypt, Ukraine, Pakistan and Vietnam. Spending rates in China are expected to grow by 19-22%, more than any other country. Spending in China increased by 23.9%, to $41.1 billion, between 2005 and 2010.

The top three therapeutic classes in 2015, according to the forecast, are likely to be oncology ($75-80 billion), antidiabetics ($43-48 billion) and respiratory products ($41-46 billion).

Aitken noted on the call that off-invoice drug discounts,increasingly offered to payers in the U.S., France and Germany, were not reflected in IMS’ forecast. The estimated amount of such discounts in 2010 is $60-65 billion, he said.

The full report is available as a free download here.