5.2.16 | Forbes
By Steve Brozak
To read the entire article on Forbes, please click here.
The last week was a nonstop whirlwind for biotech, so I’ve decided to treat this entry a little differently by commenting on key events and sharing what I’ve been seeing.
It began last Monday in Washington, D.C., with the U.S. Food and Drug Administration’s (FDA) advisory panel convening for 12 hours to make recommendations on Sarepta Therapeutic, Inc.’s controversial drug for a rare form of muscular dystrophy that only strikes young boys, and continued on Wednesday afternoon with a riveting Senate hearing on drug pricing and Valeant Pharmaceuticals Then on Wednesday night we had two biotech deals hit the road publicly, with one led by JP Morgan. Thursday morning, as if deftly coordinated by the Fates to boost biotech, three M&A deals were announced, including a $9.2 billion hostile bid by Sanofi S.A. for oncology player Medivation, Inc., which was summarily rejected by the company on Friday. Finally on Thursday, Gilead dropped its earnings release, showing a slowdown in sales for its Hep-C cure amidst growing competition. That news bled through the markets on Friday.
Sarepta Advisory Panel Meeting
I attended the FDA advisory meeting for Sarepta Therapeutics, Inc. this past Monday in College Park, Maryland for a drug that may show some promise at slowing down Duchenne muscular dystrophy (DMD), a rare disease that afflicts less than 20,000 boys in the U.S. Sarepta’s drug has the potential to work on only 2,600 of these patients. At the meeting there were over 1,000 advocates and DMD experts. The meeting began with a preamble by an FDA official who said science, not emotion, would prevail. However, the FDA was surrounded by boys with DMD both in wheelchairs and still able to walk. Being at the meeting was certainly a different experience over watching it through a webcast. In person, members of the panel and FDA were visibly rattled. I met parents and experts from London to Louisiana, heard the testimony and limited debate, and saw how visibly impacted everyone was at the dais. The burden was palpable, something that could not have been captured and carried through the cameras of a webcast. At times rousing and by the end raucous, the outpouring fazed even the staunchest opponent to Sarepta’s case. Some panel members were unable to make eye contact with the audience and speakers.
In the end, the FDA’s decision may be less about both emotion and science, and more about how its top brass interprets the agency’s new mandate and power to approve what it deems important drugs that are safe and have met some endpoint. In this case, it could be whether or not the drug increases the amount of an essential protein lacking in patients, to which a majority of the panel agreed. With no options for patients and their families, a safe profile in thousands of infusions, and after witnessing the interaction between the FDA and its panel, it’ll be hard to see this not approved conditionally by the FDA, but we’ll have to wait and see.
Senate Hearing on Valeant and Drug Pricing
On Wednesday, April 27th, the drama continued when the Senate Committee on Aging held a public hearing on drug pricing and the affordability of older generic drugs for rare diseases. If you weren’t able to watch it, you really should. Unfortunately, the hearing was only available online, and not broadcast like other hearings in the past, but you can watch it here. Unlike previous congressional hearings on pharmaceutical drug pricing, Senators Susan Collins (R-Maine) and Claire McCaskill (D-Mo.) had a firm grasp of the problems that plague the healthcare system with respect to drug pricing and the free market system. They also made it a point to differentiate between good actors and bad actors in the industry, and acknowledged the importance of preserving the incentives for large pharma and biotech to take risks on developing new drugs. There was none of the senseless grandstanding seen at previous hearings conducted in February.
In recent years, the business model of a few pharmaceutical companies has been to acquire the rights to old drugs necessary for life-threatening illness. These drugs are usually made by a few manufacturers because their lack of profitability. Once a larger company acquires the drug, it increases the price exponentially. Drug pricing has been a major thorn in the side of pharma and biotech over the last 12 months, with the Senate investigation of Gilead and its high-priced cure for Hepatitis C, the investigation and implosion of Valeant, and the rise and fall of Martin Shkreli and his Turing Pharmaceuticals. It’s an issue that can’t go away soon enough for investors and industry during a political year. The rising cost of drugs needs to be addressed in a very meaningful way that alleviates some of the pressures on the system and disallows malefactors from taking advantage of a free market system. This has to be done without dismantling the incentives for pharma to invest in and bring new drugs to the market. Even institutional investors we work with have brought up the cost of medicine as they contemplate investments and have asked our views on how new therapies and procedures are going to be paid for. How the government responds to drug pricing is a major concern for patients and stakeholders in the healthcare market.
Two panels presented before the committee. Panel 1 was made up of two physicians and Ms. Berna Heyman, a patient who was unable to afford a drug Valeant acquired and raised the price of. According to the Financial Times in 2015 and her own testimony this week, Ms. Heyman’s drug cost for Wilson’s disease went from $510 a year in 2010 to $12,000 a year in 2014 after Valeant acquired the drug and raised the price by 2,250%. Ms. Heyman said the company did not respond to her request for drug assistance before the Financial Times article, but said Valeant tried to offer her the drug for free after the Financial Times wrote about her situation. She she rejected both the offer and flowers sent to her by the company. The two physicians on the panel spoke of their inability to treat patients for rare and fatal diseases because of the sudden unaffordability of old drugs. Panel 2 was made up Valeant’s outgoing CEO Michael Pearson, its former CFO Howard Schiller and investor and board member Bill Ackman. Probably a relief to industry, all three were contrite, but Mr. Pearson was exceptionally penitent and expressed remorse for the decisions he made as the company’s chief executive.
A few things were revealed by Valeant’s management, as it seemed Mr. Ackman was addressing the concerns of Congress and his investors. Important to investors, Mr. Ackman indicated the company was preparing to file its 10-K, or annual report, on Friday. Valeant is late in filing its 10-K and has held it up for months now as the company continues to work through accounting discrepancies related to Philidor, a mail-order specialty pharmaceutical company Valeant was revealed to have a material stake in late last year. Valeant’s 10-K is important because its filing will allow analysts and investors to make a final judgment on the company’s financial performance and prospects and, just as importantly, bring the company into compliance with its debt covenants which require it to file an annual report. Mr. Ackman also revealed that a new chief executive officer may be in place as soon as today. This is a positive sign for a lot of investors, including major hedge funds, who are looking for any light. The collapse of Valeant is causing a great deal of pain on Wall Street, and investors are looking to Mr. Ackman to do what he said he does best: turn around distressed companies.
Two weeks ago I wrote an article about how weak earnings at the big banks could affect an already weak biotech market. The basic thesis was that a malaise in banking tends to spread into other sectors, including biotech. As banks continue to see trading and banking fees plummet, bank leadership will take tried-and-true measures to stop the bleeding. I also wrote that there are two primary drivers to a biotech market: good clinical or regulatory results and merger activity. Both types of events remind investors why they’re in the sector in the first place, and hopefully one of them would send the sector in a reversal. It seems that M&A has certainly struck.
In a grab bag of M&A, three deals were announced last week. Abbott Laboratories announced it was acquiring medical device maker St. Jude Medical for $25 billion in a cash-and-stock deal. Abbott and St. Jude operate in complementary domains and, if approved by regulators, the combined companies will seek greater dominance in the cardiovascular space. AbbVie, Inc. (which coincidentally was spun out of Abbott Labs in 2013) also announced its $5.8 billion acquisition of private oncology company Stemcentrx. The deal also includes an additional $4 billion in contingency payments should Stemcentrx’s technology meet milestones. If it pays off, AbbVie’s acquisition of Stemcentrx reminds me of Bristol Myers Squibb’s 2009 acquisition of Medarex for $2.5 billion. That acquisition yielded BMS the blockbuster titans Yervoy and Opdivo, two cancer therapies with ever-expanding uses. As a result, BMS holds the position of market leader in immunotherapy with its Nimitz-class clinical, regulatory and commercial programs.
On Thursday Sanofi also announced its bid for Medivation for $9.2 billion, which the company rebuffed on Friday. Medivation is a commercial oncology company that markets Xtandi for the treatment of castration-resistant prostate cancer. Medivation’s commercial partner is Astellas Pharma, Inc. With Xtandi already on the market, Medivation is testing the drug in late-stage trials in multiple oncology indications and for nonalchoholic steatohepatitis (NASH), a deadly condition brought about by the accumulation of fat around the liver. The fight over Medivation may heat up as other big pharma enter the ring.
A few things to keep in mind with M&A is that deals take time to mature, but once they are announced, M&A begets more M&A. Executives pondering aggressive, potentially transformational acquisitions gain confidence as others open and step through the M&A gates. With falling asset prices and the capital markets closed to all but exceptionally well-backed companies, I expect more M&A in the biotech markets, which should in turn encourage the capital markets.