In Vivo Deal-Making by Informa Pharma Intelligence

In Vivo vol. 35 ❚ no. 08

invivo.pharmamedtechbi.com SEPTEMBER 2017

pharma intelligence ❚ informa

DEAL-MAKING

Dissecting the deals that drive the life sciences

Q&A With ImmunoGen’s Mark Enyedy

Philips’ Bolt-On Deals

Amazon Vs. Biotech: The IPO Class Of 1997

❚ DEAL-MAKING: Q&A

ImmunoGen’s Mark Enyedy On Striking Deals – And Curing Cancer Veteran biopharma deal-maker Mark Enyedy has a new role as CEO of ImmunoGen, currently an investor favorite – company shares are up nearly 200% this year. In this interview he discusses restructuring, the evolving role of business development and making new scientific inroads against hardto-treat cancers.

MARK ENYEDY BY WILLIAM LOONEY Enyedy, who as head of Shire’s partnering team helped transform the company from an also-ran to a leader in rare disease therapies, discusses the impact of new technologies on the cancer product portfolio as well as other disruptions that will require a far more discriminating approach to obtaining innovations from the outside.

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As a freshly minted CEO, Enyedy also reviews how he handled the challenges of realigning the ImmunoGen business to lead with its own marketed products and looks ahead to tag the most promising newcomers in the cancer pharmacopeia over the next five years. So what? Still a deal-maker, Enyedy underscores one simple fact in separating the good acquisition prospect from the bad: forget the financial penny-pinching. Therapeutic complementarity trumps all. 2 | In Vivo | September 2017

n taking the top job at the Massachusetts-based cancer specialty biotech ImmunoGen Inc., Mark Enyedy supplements his reputation as a top industry deal-maker with a new assignment: turnaround artist. Since joining ImmunoGen in May 2016, the 53-year-old Harvard Law graduate and veteran of Shire PLC and Genzyme Corp. has pursued a course designed to protect the company’s essential raw material – a sound base in cutting-edge science – while shifting the business model decisively toward a future characterized by a tight focus on next-gen antibody drug conjugate (ADC) platforms that ImmunoGen intends to commercialize on its own. In the following Q&A, Enyedy reflects on his experience as a big ticket deal spinner – supervising Shire’s purchase and integration of two multibillion-dollar companies, Baxalta Inc. and NPS Pharmaceuticals Inc. – and looks forward to the next phase of his transformation plan for ImmunoGen, including the specific CEO leadership strategies required to make it happen. In Vivo: You left a prominent role in business development at Shire to take the post of CEO for ImmunoGen, a leading – but much smaller – biotech with a promising but still nascent oncology pipeline. How do you assess the transition to date, especially regarding the strategic review of the business launched after your arrival in May 2016? Mark Enyedy: The move to ImmunoGen gives me the opportunity to transform a highly productive research enterprise into a company able to commercialize its own novel, clinically differentiated products in the cancer space. I was hired by the ImmunoGen board of directors with a specific mandate to execute this transformation. invivo.pharmamedtechbi.com

ImmunoGen drew me in because it is far more than a start-up: it’s a 35-yearold business with a record of leadership in the hotly contested field of antibody drug conjugates. ImmunoGen’s DM1 cytotoxic payload was combined with the Roche drug Herceptin [trastuzumab] and in 2013 was introduced by Roche as Kadcyla. Since then, Kadcyla has established a strong clinical profile as an anti-tumor ADC well tolerated by breast cancer patients, earning Roche more than $800 million in annual sales last year. The out-licensing arrangement for our DM1 payload with this global leader in innovative cancer therapy has bolstered ImmunoGen’s finances and reputation as a positive play for investors. Now is the time to take the next step – to build a stronger business able to position innovations from our own labs for commercial success in the oncology marketplace. What we have done through the strategic review, completed in September 2016, is to create a vision and strategy to move ImmunoGen from a narrow, platform-based collaborative enterprise to a fully integrated commercial innovator in biotech. Simply put, the mission going forward is to put our own products on the market. It follows that ImmunoGen’s number

one priority is to complete development of our lead program, mirvetuximab soravtansine, which is currently in a Phase III trial for platinum-resistant ovarian cancer. It is the first ADC to enter registration testing for ovarian cancer, where at present there are few options for patients. We began the FORWARD I study on mirvetuximab in January; more than 100 trial sites will be activated by the end of this year. It’s the first pivotal trial for the company in more than a decade. Progression-free survival is the primary endpoint and we expect to read out the results in the first half of 2019. Our plan is to secure FDA approval in 2020, with a commercial launch date soon after that. [Editor’s note: Informa Pharma Intelligence’s Biomedtracker gives mirvetuximab soravtansine a 39% likelihood of approval, 4% above average for ovarian cancer treatments.] In June, we shared some data on mirvetuximab at the ASCO [American Society for Clinical Oncology] annual meeting in Chicago. The data, from a previous Phase I trial on mirvetuxumab, found an overall response rate of 47% and a progression-free survival of 6.7 months in patients who would have been eligible for FORWARD I, which compares favorably

with chemotherapy, at 3.5 months in this setting. This gives us a strong sense of confidence that FORWARD I will confirm mirvetuxumab as a breakthrough product for ImmunoGen. Our estimates indicate mirvetuximab has the potential to surpass the $1 billion mark in sales. Our second objective in the review was to inventory additional assets in ImmunoGen’s portfolio and set priorities in line with our commitment to organic growth. In the lead is an entirely new ADC, IMGN779, developed by our R&D team that targets acute myeloid leukemia (AML). It is the first outgrowth of work we commenced a few years ago on a more potent DNA-alkylating payload, the indolino-benzodiazepines (IGNs), which show promise against a range of hematological malignancies. We think IMGN779 is successful in binding and destroying AML cells while being well-tolerated by patients, characteristics we hope will be confirmed by the results of an ongoing Phase I trial. Over the next few years, the plan is to accelerate trial work on a few other ADCs, based on the IGN platform. Another outcome from the review is to evolve our collaborative research model toward a partnering strategy geared to activities around business development

Exhibit 1

ImmunoGen’s Pipeline Program

Indication

Preclinical

Ovarian – monotherapy

Ovarian - monotherapy

Phase I

Phase II

Phase III

FORWARD I

Ovarian – w/Avastin Mirvetuximab soravtansine

Ovarian – w/Keytruda

FORWARD II

Ovarian – w/carboplatin Ovarian – w/Doxil IMGN779

AML

IMGN632

AML malignancies Hematologic

Coltuximab ravtansine

Maytansinoid platform IGN platform

DLBCL

September 2017 | In Vivo | 3

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DEAL-MAKING: Q&A ❚

❚ DEAL-MAKING: Q&A and commercialization, which we think will generate more long-term value for ImmunoGen and its shareholders. (See Exhibit 1.) A good example is our three-year collaboration with Californiabased CytomX [Cytomx Therapeutics Inc.],where we are currently progressing our first joint ADC candidate into preclinical testing. Such partnerships are another way to increase our innovation bandwidth. Our recently announced collaboration with Jazz [Jazz Pharmaceuticals PLC] is another example where, for the first time, we will participate with a partner in the late-stage development and commercialization for products from our platform. Overall, the strategic review is explicit about staying closely engaged in the ADC class. ImmunoGen is already established as a leader in ADCs, with the most comprehensive and sophisticated tool box in the industry, covering antibodies, linkers and payloads. Our intent is to extend that leadership record through additional investments in innovative, in-house research. That’s central to our mission.

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There are more than 90 clinical programs underway in the ADC field to supplement the few such therapies already on the market. How do you differentiate the ImmunoGen ADC pipeline from others in this hotly contested group? Our unique identifier is the ability to optimize the pharmacokinetic and pharmacodynamic properties of the ADC in the context of a particular tumor type. These properties take into consideration the profile of the antigen, its density, the binding kinetics of the ADC, how it delivers its payload once it enters the tumor cell and, finally, its ability to generate that so-called bystander effect. In other words, the therapeutic differentiator lies in our multidisciplinary approach in optimizing the ADC against a specific tumor target. ImmunoGen’s IGN platform is an entirely new class of payload focused on using DNA as an agent in destroying malignant tumor cells. Other companies are exploring this approach with “crosslinking” agents that bind to both strands of the DNA, which creates a highly potent anti-tumor activity but also can damage 4 | In Vivo | September 2017

normal cells. ( Also see “Cancer’s NextGen Smart Bomb: Who Will Be First To Weaponize?” - In Vivo, May 2017.) What our researchers have done is design an antibody molecule that binds to just one strand of the tumor DNA, with equivalent anti-tumor potency while allowing normal cells to repair more quickly. This new class we call indolino-benzodiazepene – a DNA alkylating agent that binds to a single strand of DNA. We’ve demonstrated through preclinical and early-phase clinical work a very broad therapeutic window for this payload platform. In fact, at the American Society of Hematology (ASH) annual conference last year, we were able to show in a preclinical study a 150-fold differential between the potency required to kill the tumor cell compared to the payloads’ more salutary effect on normal cells. Our candidate ADC, IMGN779, is now in its ninth dosing cohort in our Phase I trial. To date, we are seeing no doselimiting toxicity and have been able to demonstrate this through repeat dosing on the patient study group – one of our patients has received over 20 doses at this point, with encouraging signs of vigorous anti-leukemic activity with tolerable impact on normal cell activity. Our work stands in contrast to Seattle Genetic’s [Seattle Genetics Inc.] trial with a similar cross-linking DNA agent, which had to be suspended due to toxicity issues between the control arm and the new therapy cohort. (Also see “A CASCADE Of Trouble For Seattle Genetics’ AML Drug SGN-CD33A” - Scrip, June 19, 2017.) This suggests our therapy delivers a far more effective anti-tumor payload, at minimal harm to healthy tissue. That’s a real differentiator in the cancer space. As a new CEO, can you point to any surprises or challenges in working through the strategic business review? It was completed in near record time, at least in comparison to the decisionmaking pace at larger life sciences companies. I realized early that its critical to persuade the organization to align around a vision. In our industry, the proposition is relatively simple: business success means having a positive impact on the patient. Our work opens a window on

survival for cancer victims who otherwise have few other options. That’s a compelling – even easy – way to frame that vision. Genzyme, where I gained my early exposure to this business, was a patient-centric organization. Everyone came to work with the same question: what are we going to do today to improve outcomes for patients? The second is the importance of being explicit about priorities to execute the strategy. Everywhere I have worked I see that when colleagues understand the choices the company is making, they feel empowered to do – and do more. This is followed up by effective delegation, pairing autonomy with the accountability that often leads to unexpected, innovative levels of performance, especially in teams. One challenge was to translate the alignment I established among my senior direct reports to the broader ImmunoGen workforce. I did this by investing significant time in hosting large group meetings to create conversations and receive feedback. When I arrived at ImmunoGen, we had about 385 employees. Restructuring linked to our strategic business review has reduced this to 300, which was actually ideal in terms of being able to convene everyone in a single space and conduct this conversation in an open, accessible manner. Of course, it was difficult that ImmunoGen’s new strategy required a reduction in head count. We addressed that in two ways. First, the separated staff was extensively briefed on the rationale for the decision. The objective was to ensure that everyone who left departed with a sense they had been treated fairly. I think we accomplished that. Second, for those colleagues who remained, we worked hard to maintain morale and to recertify our bona fides as a compassionate employer with an ongoing commitment to equitable treatment, regardless of what level and stage our colleagues happen to be in their career at ImmunoGen. Specifically, what part of the strategic review entailed a pullback in ImmunoGen business activities? There were four restructuring aspects we had to address. One was the effort to lower our general and administrative expenses, which were a little high invivo.pharmamedtechbi.com

compared to our competitive peer set. Another was in manufacturing, where we were overweight due to the complexity of the ADC process. Next, we needed to make changes in clinical operations in order to conduct the trials that regulators expect from us. I add as well the decommissioning of two portfolio ADC programs centered on B-cell lymphomas, one of which we successfully out-licensed in May in a $55 million deal with Debiopharma [Debiopharm Group]. The result is we are spending less, as evidenced by our latest second-quarter earnings report. And we are focusing that spending on higher value projects, such as the prospective launch of mirvetuximab. One program that is generating interest is the clinical study we are sponsoring on mirvetuximab in combination with four different agents: Amgen’s [Amgen Inc.] Avastin [bevacizumab], and, with Merck [Merck & Co. Inc.], their checkpoint inhibitor Keytruda [pembrolizumab]. On Keytruda, the plan is to report efficacy data from that arm of the study by the middle of 2018. Efficacy data on the Avastin arm already shows that while progression-free survival for Avastin in combination with chemotherapy was 6.7 months, with mirvetuximab it proved out at 9.6 months. That’s a big difference for the patient. How are you approaching the new role as a CEO? Being CEO is a different job than my earlier experience at Shire and Genzyme. I like the communication aspect of being a leader, articulating a vision and persuading people to rally around it. I have also been surprised by the resilience of this organization in handling the transition from a research-driven operation to a commercial enterprise. That’s a big cultural shift but as a group we made it happen. Perhaps the most interesting aspect of my new job is the engagement with investors. As CEO I am now the focal point for that relationship, whereas at Shire I worked with investors in a more supportive role behind Flemming Ornskov. There is a high degree of accountability in working with investors. It requires being judicious about what you convey to them. I am learning how important managing

their expectations can be. Stretch goals are great to create a sense of momentum in the business, but as CEO you must deliver to maintain credibility with this key stakeholder. Never overpromise. Looking ahead to the next decade, can you define what success will look like for ImmunoGen? How do you propose to be measured in terms of company performance? The first performance objective is having our first in-house drug on the market, abetted by a strong commercial launch. Our goal is to launch mirvetuximab in the US by no later than the end of this decade. It’s also very important for me to be able to say we are a business that can reach and serve patients around the globe. We intend to market mirvetuximab not just here in the US but in multiple international markets too. That means in turn we have a high performing, experienced workforce with the ability to create market access for all our products. The next performance marker for me is that we show progress in advancing our earlier-stage portfolio. We’d like to place our second ADC drug on the market before the end of 2022, and then continue to innovate in the oncology space with better pharmacology, well-differentiated targets and innovative ADC payloads. Finally, my goal is to establish a culture at ImmunoGen that fosters innovation. I like coming to work here every day and I wish to make sure my colleagues continue to feel the same way. I want to instill a sense that people here are valued and there is ample opportunity for each colleague to develop professionally, to have some fun, and improve outcomes for the patient. That’s the ultimate measure of what success means to me. In addition to your current position as a CEO, you have an extensive background in business development and partnering. How is this critical outward-facing function changing and what do CEOs now expect from their BD colleagues? I always start a discussion on dealmaking by analyzing the numbers. Large deal activity has tailed off a bit in the first half of this year. M&A activity north of $5 billion accounts for less than 10%

❚ IMMUNOGEN’S FOUR-STEP RESTRUCTURE

1. Lower general and administrative expenses 2. Streamline manufacturing 3. Enhance clinical operations 4. Out-license B-cell lymphoma ADCs

of the total number of transactions, but well over half of the value. The big spike in M&A activity in 2014 and 2015 did not persist and over the last two years we have seen a return to the normal range. Two factors explain this: one is acquirer concerns about valuation and the other is broader macroeconomic and policy trends. Combined, they raise the level of risk in evaluating an M&A transaction. In the cancer space, we are seeing some very lofty valuations – candidates in the hotly contested PARP class are a good example. It’s hard for me to reconcile their share prices with the underlying market trend for agents in the PARP class. The science is still new and the competition for firstin-class status is intense. Such valuations are making acquirers hesitant, which is reflected in a slow decline in the premium paid to get access to these assets. You can see the premium in some of the larger deals falling from the mid-fifties percent range in 2015 to the lower thirties so far this year. As I noted, look at the numbers. It will tell you the issue of the moment is setting value – appropriately. With reference to the second factor, September 2017 | In Vivo | 5

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DEAL-MAKING: Q&A ❚

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❚ DEAL-MAKING: Q&A macroeconomic trends, it has become a damper on prospects for larger transactions. These include political issues like the state of health care reform, pushbacks on drug pricing, tax reform and profit repatriation prospects. All the big players have to calculate the merits of moving forward on major deals when the conditions that drive government regulation are so uncertain. However, if you look at smaller transactions, the situation is different. The number of deals in the first half of this year is still lower than in 2016, but their value is roughly equivalent. Taking this into account, I think we will continue to see strength in the M&A environment overall – though not at the peak levels of 2014 and 2015. The basic element is supply and demand, reinforced by the incentive to achieve maximum efficiency in the use of scarce capital. For smaller companies, the key strategic question is: should a development-stage company pursue full commercialization? Or is it more efficient to sell the business at a financial premium and place those assets within an existing, ready-made infrastructure? The response to this question is dependent on the same demand fundamentals that have endured in this industry for decades. Size and scale are critical in taming intensive market competition, expressed in the need to strengthen drug pipelines, supplement existing revenue streams, address the patent cliff, and enhance the efficiency of research and the supply chain. Consider the top 20 companies: anywhere from 40% to 90% of their discovery and development programs originate from external sources. I don’t see this changing very much in the future. This pressing need for innovation will ensure M&A action overall remains fairly robust over the next few years. What is different is we will see fewer spontaneous, unsolicited “bear hugs” in favor of more structured deals geared to mitigating those valuation risks. Another trend is the proliferation of pharma-to-pharma collaborations, good examples of which include Eli Lilly [Eli Lilly & Co.] and Merck, Pfizer [Pfizer Inc.] and EMD Serono [EMD Serono Inc.], and Amgen and Novartis [Novartis AG]. These are now common but little more 6 | In Vivo | September 2017

than five years ago the reluctance to collaborate within the peer group was still entrenched. And there is the growth of pre-commercial consortia involving big pharma companies and academia to pursue performance and efficiency improvements in drug discovery, trial management, safety reporting and patient registry data. It’s a financial imperative for all drugmakers, regardless of size, to expedite the time from discovery to commercial launch. Working with outside stakeholders at the pre-commercial stage is a good way to benchmark against future class competition. Do you anticipate the same trends to dominate the licensing space? Licensing has been less volatile relative to M&A for both volume and value. What’s important is the increasing reliance on licensing as a deal-making tool. Compared with the period 2006 to 2010, the last five years have seen licensing activity taking an increased share of total deal value. One explanation for this is interest in novel collaborative deal structures that supplement the traditional straight licensing arrangement. The focus of this interest is on assets in the earlier stage of clinical development, which reflects the increasing competition for late-stage assets that tend to be heavily picked over. Looking to the back of the pipeline allows the investor more options to participate when decisions really count. Making the right choices early on is likely to generate higher long-term value for the business. How are these developments shaping the current mandate of the BD function in biopharma? All this makes the role of BD in biopharma more important today. At Shire, I sat on the Executive Committee, where I was responsible not only for strategy but for negotiating and executing deals as well. In fact, we regarded BD as a critical component of strategy. My position effectively meant that strategy and deals were managed as one function. Given the operational challenge to build the pipeline and increase R&D productivity, it’s hard to see how strategy and BD can be separated. BD is also required to demonstrate a

❚ IMMUNOGEN’S RECENT PARTNERSHIPS

Aug. 2017: ImmunoGen and Jazz enter blood cancer ADC option agreement. May 2017: Amending earlier deals, Sanofi pays $30m up front for exclusive rights to 4 named, 1 unnamed pipeline compounds, in an amendment of earlier arrangements. May 2017: Debiopharm gets ImmunoGen’s ADC candidate IMGN529 for B-cell malignancies. Feb. 2016: ImmunoGen adds Merck’s Keytruda to its ovarian cancer trials. Mar. 2015: ImmunoGen sells Kadcyla royalty rights to Immunity Royalty/TPG for $194m. Mar. 2015: Takeda Oncology licenses exclusive rights to ImmunoGen’s ADC technology. Oct. 2014: Ventana helps ImmunoGen develop a companion diagnostic for IMGN853. Jan. 2014: ImmunoGen, CytomX swap licenses to develop anticancer probody-drug conjugates.

much higher degree of sophistication on financial issues. When your board of directors considers paying a premium 50% or more above the current trading value of a public company stock, you had better demonstrate that the deal will add value beyond what either company can achieve on its own. This means in turn that BD is responsible for creating the metrics to achieve cost savings and operational synergies from a transaction. Where are the G&A reductions, staffing cuts and tax savings? But that’s just the beginning. The real savings come from establishing how the therapeutic profiles of each party complements the other. Merging two commercial infrastructures into invivo.pharmamedtechbi.com

one holds the most promise in driving revenue synergies. Internally, BD needs to create and sell the rationale and then help execute a plan to make it happen. An example is a deal we did at Shire in 2013, when we acquired a company called ViroPharma [ViroPharma Inc.], which had a leadership position in a treatment for hereditary angioedema (HAE). Its drug, Cinryze [C1 esterase inhibitor], was marketed to manage chronic HAE symptoms, while we had a product, Fiyazyr [icatibant injection], indicated for acute attack episodes of HAE. The acquisition of ViroPharma gave us a fuller therapeutic profile with additional revenue synergies as well as lower overhead costs from combining the separate commercial infrastructures. An emerging component of the BD function is mastery of key technologies like digital. Because digital communication is changing traditional interactions among biopharma companies, physicians and patients, the ability to understand how digital relates strategically to the product portfolio must be a priority for any BD team. Long term, there are many additional functional capabilities that BD will need to master as the complexity of the biopharma business continues apace. Finally, BD is compelled to embrace new operational models to monitor outside developments and speed decisionmaking. Some companies continue to segment their BD teams into scouts, transaction specialists and integration managers. Others are combining all three elements in one team. My preference is to rely on “endurance athletes” able to go the distance, from sourcing new product opportunities, negotiate and seal the deal, and explain to the top brass how the program can be worked seamlessly into the existing portfolio. This skill set calls for a seasoned generalist, one who is not just a scout but can articulate a vision to the potential partner that is compelling in how two companies will be better off when they join as one. People with this brand of articulate leadership are a great asset. They build momentum, ensure the parties stay engaged, and keep a deal on track. All of this is a time saver – and in this industry, time is money.

How do these trends in BD relate to the larger health care environment, with particular emphasis on your core competence at ImmunoGen – the fight to defeat cancer. Demographics indicate that the oncology drug market will continue to grow through the next decade. Cancer is a disease associated with aging; as the population over 65 expands, the larger this market will become. The other factor is the proliferation of new therapies driven by an unprecedented wave of innovation. A clear majority of all drugs currently in development are focused on treating cancer. Many of these are combination products, which create challenges on everything from safety to diagnostics to pricing. In the latter case, society is insisting on a debate over market access and affordability. This means in turn drugmakers are going to face significant, irreversible pressures to demonstrate evidence of value every time they go to market with a new cancer medicine. I am an optimist. I believe the industry is equal to this task. The evidence shows it. Oncology drugs approved during the past decade share a common characteristic in increasing the patient response rate to therapy. Duration of response has lengthened and overall survival for many cancers have risen too. But it’s clear we have to up our game in proving that patients will improve on our medicines enough to satisfy payer needs to keep their overall costs within budget. This industry also must pay closer attention to the preventive aspects of care. In the past decade, cancer deaths in the US have declined by about 20%. Improved drug therapy is part of it, but the leading factor here is screening for early detection of malignancies. Looking ahead, more effective use of data and analytics are likely to contribute to lower mortality as well. Nevertheless, it must be said that the outlook for many cancer patients remains poor. Patients with platinum-resistant ovarian cancer live only 12 months, on average, while those with relapsed refractory AML or late-stage colon cancer have a six-month survival rate. For many cancer victims it’s still a pretty challenging landscape, post diagnosis. We need to do better.

What’s next in the treatment paradigm for cancer? How well is ImmunoGen positioned to keep pace? Just a few weeks ago, I presented our five-year plan to the board of directors, looking out to 2022. What we see is that surgery and adjuvant drug therapy will continue as the mainstays in treating cancers. The real progress is going to come from the evidence researchers are compiling on the molecular origins of individual cancers. Understanding the specific molecular attributes of a tumor will drive a set of tailor-made therapeutic choices for each patient. A precedent was set just a few months ago with the immunotherapy Keytruda, which was evaluated and approved by the FDA for use based on the molecular composition of a tumor, rather than its location in the organ where it is expressed. An analogous trend is therapy guided by the assessment of profile mutations, resistance levels and immune phenotype. The “carpet bombing” approach is fading as awareness grows that there is no single magic bullet in defeating cancer. The medical case for combination therapies is destined to grow, with more industry R&D funds being allotted to this space. It also suggests a major role for the next-generation of ADCs, carrying payloads that can hit malignancies hard, in the right place, without destroying healthy cells. ImmunoGen is well positioned with the right products to fill cancer’s emerging pharmacopeia. We combine the best elements of a targeted antibody with potent apoptotic toxins, with a delivery effect that is selective enough to ensure maximum cytoreduction. This gives our drugs a better therapeutic index in clinical use. In addition, we think our candidates will work well in combination, as they have a low toxicity/high tolerability ratio that supplies potency without inducing the additional symptom side-effects often found in combination drugs. The mood here at ImmunoGen is good. But our core disease is cancer. There are no easy victories because every cancer cell is a learning organism. IV005178 Comments: Email the author: William.Looney@Informa.com

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DEAL-MAKING: Q&A ❚

❚ DEAL-MAKING: Medtech M&A

Philips, a giant of the medical systems and software industry, maintains its strategic direction with organic and external growth. That was illustrated in one recent four-month period in which the group made seven acquisitions, adding to its non-invasive diagnostics portfolio with Electrical Geodesics and bolstering its steps in therapeutic medical devices with the acquisition of Spectranetics. But whatever the target, the same ground rules apply.

BY ASHLEY YEO Philips has frequently made industry commentators sit up and take note of its M&A ambitions and ability to net welltargeted acquisitions. Mid-2017 was its most recent period of prolific dealmaking, resulting in several companies coming into the group, including imageguided therapy specialist Spectranetics.

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These deals must fulfill precise criteria, and the €1.9 billion enterprise-value Spectranetics purchase, along with that of Volcano Therapeutics two years ago, have given Philips a leadership position in image-guided therapy devices. So what? Investing in consumer health and patient treatment is Philips’ stated business, and to achieve growth, that means moving into technology sectors that are adjacent to current areas of expertise.

8 | In Vivo | September 2017

etter than many perhaps, Royal Philips Electronics NV knows how to develop to meet demand for health care as it evolves and shifts from costly secondary care to a balance of in- and outpatient, community and home care. Recent years have also illustrated its ability to respect past group achievements while moving on when necessary and setting new goals that maximize core competencies and innovation potential, in a bid to meet the expectations of all its stakeholders. The origins of the current Philips Healthcare business strategy go back to April 2011, when Frans van Houten was appointed CEO of the Royal Philips group. Van Houten had been with Philips in various senior roles for 25 almost unbroken years (in 2006 he left to lead the spun-off semiconductor unit, and subsequently formed his own consultancy but returned in 2010). From that vantage point, he had seen the development of both the group and the market with a unique insider’s and outsider’s view. Once in the role of group CEO (he also holds roles as chairman of the board of management and the executive committee), he identified the businesses that had strong fundamentals for future growth. But he also wanted the company to stay relevant in the market place – something that now requires much more adaptability and flexibility than when he started out on his Philips career path. So van Houten and his team had a look at what would be needed, and in 2011 launched Accelerate!, a global program to adapt the portfolio and drive innovation to improve customer focus. The former involved several structural elements and also included finding a new home for the television business (2012) and divesting the audio and video businesses (2014). Philips carved out its €7 billion ($8.4 billion) (2016 sales) lighting business into Philips Lighting, which went public on the Amsterdam Euronext exchange in May 2016. invivo.pharmamedtechbi.com

Shutterstock: Olivier Le Moal

Philips Targets Bolt-On Deals That Meet Demand At The Point Of Care

Exhibit 1

Philips Addressable HealthTech Markets – Three Segments In Growth (€bn)

SEGMENT

2015

2019

Diagnosis and treatment

60–61

Connected care and health informatics

70–72

Personal health and consumer care

55–57

Total

145

185–190

SOURCE: Philips Healthcare

It consolidated its remaining operations into the HealthTech group, which is active in diagnosis and treatment, connected care and informatics, and personal health and consumer care. It now plays in an addressable health technology market of €145 billion ($170 billion) in 2015, rising to €185 billion to €190 billion by 2019, according to Philips estimates. (See Exhibit 1.) In 2016, the Philips HealthTech portfolio made sales of €17.4 billion ($20.9 billion), a 4% reported rise and a 5% increase on a comparable basis.That is expected to increase to €20 billion by 2019, with a CAGR of 4% to 6% per year. The recurring theme running through Philips’ strategic decision-making has been the trend toward more and more health care being delivered outside the hospital. In view of this, the group took the conscious decision to bring its consumer health business (sleep apnea, tooth brushes, etc.) within its HealthTech portfolio, and thus merge it with the professional use scanners and patient monitoring business. “We had looked at the infrastructure and adapted our business models in the health services and software businesses and moved more towards informatics for modern-day needs,” Philips group communications director Steve Klink explains.

M&A Deals – Big Or Small – Are “Bolt-ons” The strategic platform is based very much on organic growth – Philips’ R&D in 2016 was almost 10% of sales, at €1.7 billion. Its stated policy is to complement that organic growth with “bolt-ons” – defined by Klink as acquisitions that strengthen the existing business – not transformative M&A that will change the business or push

Philips into completely new markets. Philips has a notable track record in M&A, and this year’s deal activity reached an interim peak in June and July. Within a four-month spring-summer period, it made seven acquisitions, all of them meeting strict criteria. (See Exhibit 2.) The standout deal has been the €1.9 billion offer (enterprise value, inclusive of cash and debt) for Spectranetics Corp., which makes image-guided therapy (IGT) devices for heart disease. This was swiftly followed by the smaller – and related – purchase of CardioProlific Inc. To see the rationale for the Spectranetics deal we can go back two years to Philips’ €1 billion purchase of Volcano Corp., the developer of catheters for minimally invasive treatments. (Also see “Philips Eyes M&A, Touts Informatics To Support HealthTech Ambition” - Medtech Insight, September 17, 2015.) Philips already had the cath labs and had been looking at building up this activity from the capital equipment point of view. Spectranetics brings further single-use consumables into Philips, and a business model that includes offering customers recurring sales in a competitive package. “It made business model sense. Now we have the devices and the cath labs, whereas some of our competitors such as Boston [Boston Scientific Corp.] or Siemens [Siemens AG], would have either one or the other,” says Klink. He adds, “The combination is unique. And where Volcano’s catheters are for diagnosis, Spectranetics specializes in therapy catheters, so we move into an adjacent territory – drug-coated balloons.” Volcano and Spectranetics are Philips’ biggest acquisitions since the $4.9 billion

acquisition of Respironics in 2007, but they are still classified as “bolt-ons.” The other, smaller purchases are intended to strengthen and expand the business generally or even just within a single market – but they all have one thing in common: they are complementary: “We will not start something from scratch,” says Klink. The impact from Volcano was two-fold: it was previously incurring losses on static sales of $400 million, but under Philips’ wing, it has become profitable on accelerated growth and productivity gains after just one year. This has been able to happen fast, as Philips identified channel synergies and has been able to use customer bases for cross-selling. The offer for Spectranetics ran for 20 days from July 20, required regulatory clearance in the US, Germany and Austria, and was completed on August 9. It consolidates Philips’ strength and leadership position in image-guided therapy, with overall sales of some €1.9 billion in an addressable market of over €6 billion. “In interventional cardiology, one in every two cath labs in the world are ours,” Klink observes. (For more on the augmentation of Philips’ IGT strengths with the Spectranetics buy, see sidebar, “Spectranetics Gives Philips Adjacent Territory On The Map Of Image-Guided Therapy.”) While cardio/cardiovascular are the big IGT focuses of both Volcano and Spectranetics, Philips is also pushing hard in interventional neurology and oncology R&D, which are smaller, but fast-growing parts of the market. With origins in cardiovascular going back over 60 years, Philips had one of the first X-ray-guided therapies, but it has diversified into interventional oncology software with navigational software and set up a collaboration in transarterial chemoembolization with UK company BTG PLC, for which Philips has devised an imaging protocol that visualizes BTG’s beads. Philips also has R&D programs in minimally invasive spine surgery. (Also see “BTG Deals Its Way Into Interventional Medicine” - In Vivo, September 2016.)

More M&A Ahead For Philips In IGT The immediate priorities in IGT now are to integrate Spectranetics and focus on maturing the technology acquired with the CardioProlific purchase. Although September 2017 | In Vivo | 9

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DEAL-MAKING: Medtech M&A ❚

❚ DEAL-MAKING: Medtech M&A Exhibit 2

Philips’ Selective M&A Focus In 2017 COMPANY

DATE

CONSIDERATION

RATIONALE

COMMENTS Expands the home sleep testing activity through the pharmacy channel in Australia

Australia Pharmacy Sleep Services (Australia)

March 27

Undisclosed

Patient monitoring – pharmacy sleep testing services

RespirTech (US)

May 22

Undisclosed

Respiratory care

Airway clearance therapy vests for chronic patients

Electrical Geodesics (US)

June 22

$36.7m

EEG-based neurodiagnostics and therapy tools

Non-invasive monitoring and interpreting of brain activity

Spectranetics (US)

June 28

Roughly €1.9bn Represents Philips’ entry (inclusive of cash and Catheters for PAD and CAD into disposable devices debt) on a $38.50 per treatment and ICD lead removal with drug-coated balloon share offer

CardioProlific (US)

June 30

Undisclosed

PAD catheter-based thrombectomy devices

Complementary to Philips’ and Spectranetics’ imageguided therapy devices Will become part of Philips’ uGrow (medical device) digital parenting platform Aimed at clinical applications in cardiology, radiology and OB/GYN

Health & Parenting (UK)

July 4

Undisclosed

Mobile tool for expectant and new parents

TomTec Imaging Systems (Germany)

July 18

Undisclosed

Image analysis software for diagnostic ultrasound

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Through July 18, 2017 SOURCE: Philips Healthcare

Philips is first and foremost an organic growth company, “we don’t exclude future acquisitions,” says Klink. But they need to make sense, and the group won’t acquire programs in which it already has R&D pipelines. All the recent acquisitions have been based on in-depth scouting and analysis that has taken place over the past two years. Uniquely, everything came together in a very short time frame, Klink observes. The deal for the EEG specialist Electrical Geodesics Inc. was being finalized as its COO and co-founder Ann Bunnenberg, PhD, addressed a global compliance meeting in May. (See online sidebar, “Philips Puts Its Money on Electrical Geodesics – The Universal Brain Flashlight.”)

Deals To Exploit Local Market Opportunities Philips’ first deal this year was for a small Australian company, Australia 10 | In Vivo | September 2017

Pharmacy Sleep Services (APSS), that provides services to enable sleep apnea to be diagnosed at the pharmacy. It is a fairly under-diagnosed condition, the symptoms of which are not very well recognized. The acquired company offers both diagnostic services and training, and does follow-ups with patients. This deal is strictly targeted at strengthening the business in Australia and made sense for Philips because of the local reimbursement policy. Usually, Philips takes the bigger picture view in strategic M&A, but with APSS, it was more flexible. According to Klink, “This is a relatively new trend, as M&A is usually done with a truly global perspective. But more and more we are seeing a focus on individual, local markets. It may be a Philips thing, but it’s a trend that we’ve observed.” Philips’ deal strategy follow-through involves the retention and use of local

talent and leveraging local management expertise. This is another element of the van Houten legacy. Since 2011, the CEO and his team have enhanced the seniority of local teams and increased the volume of locally focused projects. “We need local eyes and ears and expertise on the ground, so we started to strengthen local leadership teams,” says Klink.

Software And Services … But Mainly Hardware Philips is increasingly perceived as a software and service-based company, and it acknowledges that it has altered the way it views its overall business. “But we are not moving away from hardware, which is a very important element,” says Klink. “Where we differentiate ourselves from other companies that come from, say, the IT world, is that we combine hardware systems and devices, and strive to improve our software devices and services. Philips invivo.pharmamedtechbi.com

❚ TRACKING THE TRENDS TO STAY COMPETITIVE

Over the years, Philips has been tracking the shift in the market and the spend away from inpatient and toward community/primary care. Although certain procedures will always need to be carried out in the hospital setting, the group sees more of a balance going forward, and this is the rationale for the overarching Hospital to Home concept. This focuses around efficient hospital discharge, treating chronic disease at home and doing secondary prevention to avoid worsening of the condition. is a traditional hardware and services health care company that has stepped up its IT capability, but not at the expense of systems capability.” Of Philips’ R&D personnel, 60% are involved in software, including those working in the embedded software that is used in MRI machines.

Compared with the Googles and IBMs, Philips also provides the medical tools that are used on patients. “At the end of the day, to do population health management and manage the health of an entire population, you need to be able touch the individual patient – and that is where our strength is,” says Klink. But Philips also adds analytics to devices like its Philips Lifeline pendant that assesses the average movements of patients. Its cloud-based CareSage data analytics engine, enabled by Philips’ open HealthSuite Digital Platform, goes a step further in monitoring elderly patients. Providing analysis of real-time and historical data from health care providers and Philips Lifeline, it uses wearable technology to identify patients most likely to have health issues, allowing clinicians to intervene early and reduce hospitalizations.

Azurion Launch And Braun Deal Among all the M&A activity, two other noteworthy events this year have been the launch of the next-generation imageguided therapy Azurion – one of Philips’

largest global product launches in recent years – and its multi-year strategic alliance with regional anesthesia and pain management company B. Braun Melsungen AG. Azurion is a next-generation IGT platform that offers integrated solutions comprising interventional imaging technologies and planning and navigation software combined with interventional devices – including catheters for diagnosis and therapy – and a broad range of services. The partnership with B. Braun has led to the development of the Xperius ultrasound-guided regional anesthesia, comprising decision support software, echogenic needles and a suite of services. More innovations are planned from that partnership, says Philips, which, having transformed into a health technology group, has made innovation the driver of its deals strategy. And in IGT in particular, Philips’ deals have given it significant tailwind as it penetrates the markets globally. IV005171 Comments: Email the author: Ashley.Yeo@Informa.com

❚ SPECTRANETICS GIVES PHILIPS ADJACENT TERRITORY IN IMAGE-GUIDED THERAPY Frans van Houten was taking a peek into the future two and a half years ago when Philips Healthcare brought Volcano Corp. into the fold. “An important milestone in our strategy to become the leading systems integrator in the fast-growing image-guided minimally invasive surgery market,” is how the group CEO described the deal that was completed in February 2015. In June 2017, he took another step toward that aim in agreeing to buy US vascular interventions and cardiac solutions company Spectranetics Corp. (Colorado Springs, CO) for €1.9 billion (inclusive of cash and debt). After Respironics in late 2007, this is Philips’ second-biggest ever health care deal. Financial services group ING thought initially the purchase price to be on the high side – at $38.50 per share it was a 27% premium on the pre-closing day price. But van Houten called it “exciting,” pointing to expectations of double-digit sales growth (to €300 million) from Spectranetics in 2017 (2016, €240 million) and that it would be contributing to profits in 2018. As if that wasn’t enough to digest, barely two days later, Philips paid an undisclosed amount to buy the smaller US

blood clot catheter manufacturer CardioProlific Inc., which is developing catheter-based thrombectomy approaches for the treatment of peripheral artery/vascular disease. Its technologies complement Philips’ and Spectranetics’ portfolios of image-guided therapy devices. Remaining hyperactive in M&A, two more companies came under Philips’ wing before July was out, including TomTec Imaging Systems Inc., a provider of intelligent image analysis software, especially for diagnostic ultrasound. And in August, Philips struck a commercial and development deal with HeartFlow Inc., with the goal of improving access to diagnostic and planning tools for interventional cardiologists doing coronary artery disease (CAD) treatment. RATIONALE FOR SECOND MAJOR IGT TRANSACTION Pricey or not, the rationale for buying Spectranetics was clear, according to senior vice president and general manager of image-guided therapy (IGT) Bert van Meurs. Philips has an underlying aim of improving the delivery of care across the health care continuum – from diagnosis,

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DEAL-MAKING: Medtech M&A ❚

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❚ DEAL-MAKING: Medtech M&A

to therapy to quicker-to-home for patients. As an enabling tool, IGT is a central element in the execution of that aim: van Meurs describes it as “delivering more efficient diagnosis and more effective treatment, using minimally invasive therapy.” This means less trauma and better outcomes. As many of the new procedures obviate the need for high-impact surgery, more patients can be handled almost on a day-case basis, and at lower cost to the system. With IGT, Philips chose to look at its overall strategy. The company is already very strong in imaging, and in angiosystems especially, given the recent launch of the Azurion, an X-ray-based system, but also in other imaging modalities too, from ultrasound to preoperative CT. The next stages, van Meurs tells In Vivo, are to look at how to do procedures more effectively and how to give customers better treatment. “That is the overall strategy at Philips: to look at the whole procedure, not just limit it to X-ray,” he says. That means adding smart devices to the portfolio. “We wanted to be more involved in the treatment itself, which called for a move into therapeutic devices,” according to van Meurs. This is a place where Philips was not present before. “And that is where Spectranetics fits in.” Its portfolio of scoring balloons, drug-coated balloons and laser atherectomy devices means that it provides Philips with a market territory that neighbors that of Volcano. Van Meurs explains, “It gives us a more integrated solution, and in an area where we already know the customer. It’s an adjacent position that makes our offering more complete. Before, we would have done only half of that overall procedure.” The group has a very strong focus on X-ray technologies, and a leadership position with cath labs, but it notes that addressing the problems of the customer is another business in itself. Its customers want to treat their patients better, and perhaps in the future, that means treatments with fewer X-rays, van Meurs speculates. “We don’t want to make ourselves obsolete, which is why we are always looking at what customers need.” The new priority at Philips, then, is not to focus on one single technology. Today, the gold standard is X-ray with lower doses of ionizing radiation. But as noted, the aim is to deliver better therapy with smarter devices and avoid additional imaging. “Although we will still be using X-rays for many years, maybe over time we could completely eliminate them,” van Meurs continues. “Our business is not our current products per se, but about investing in how to treat the patient better.” That’s why we moved for Spectranetics, with its ‘fantastic’ Stellarex drug-coated balloon specifically for peripheral vascular treatment, which is a significant disease,” he adds.

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Philips homed in on Spectranetics as it was the closest adjacency specifically to PAD, where Philips already has a strong position in interventional radiology and cardiology. “We know this growing area very well and were looking for devices such as the drug-coated balloon, also the thrombectomy technology that came with CardioProlific. The way we did it was to determine the position we wanted to achieve, and only then look at the top players in this space,” says van Meurs. He continues, “That’s our filter, and there are not too many companies that can play in there.” Spectranetics, owning the former Covidien Ltd. product Stellarex, was a dedicated specialty player. “It introduced us to drug-coated technology in a big way.” Interventionists are preferring balloons over stents more and more – stents have been a PAD gold standard – but they leave metal behind. “We want to be part of this developing area.” Spectranetics’ portfolio also includes the AngioSculptX drug-coated PTCA scoring balloon catheter, which is a first-of-its-kind device that combines the AngioSculpt PTCA scoring balloon catheter with a drug coating. It is indicated for the treatment of hemodynamically significant coronary artery stenosis, including in-stent restenosis. Where Volcano gave Philips a smart device that does sensing, Spectranetics brought with it a therapeutic device in specific areas, allowing it to offer a differentiated solution, rather than offering a very large portfolio of standard devices. Philips had expected the deal to close in the third quarter, and right on cue that happened on August 9. Van Meurs is sure that Philips will learn a lot from Spectranetics. Three years ago, the group was not in interventional devices at all. But the IGT general manager believes that the group has the in-house technology that can help make these devices even smarter, and can integrate them more into its imaging systems. TARGETING LEADING SYSTEMS INTEGRATOR STATUS The drive to be a leader in integrated solutions, a target set by CEO van Houten, first calls for the integration of all the information that’s available to do such procedures. More patient information facilitates better treatment decisions, and there is a wealth of information from preoperative imaging in the cath lab that may come from non-Philips systems too. Philips sees a big and growing role for itself in providing managed solutions and work flows and services. For instance, US Integrated Delivery Networks (IDNs) are starting to ask the group to organize and optimize entire cardiology departments to improve productivity. Arching over the entire portfolio is the Philips HealthSuite digital platform, which is set up to deliver more cloud-based data analytics. Machine learning and AI are

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also able to support decision-making in diagnoses, which Philips already does across the whole health continuum in oncology, for instance. Philips estimates that its addressable market in imageguided therapy amounts to over €6 billion, including intravascular ultrasound (IVUS) imaging, fractional flow reserve (FFR) technologies and the newly added drug-coated balloons. Its image-guided therapy business group (BG) recorded sales in 2016 of €1.9 billion (about 20% of which was attributable to device sales). For this BG as a whole, Philips targets high single-digit comparable sales growth in 2017. Within the BG, the Spectranetics business ($240 million sales in 2016) is expected to make around €300 million in sales in 2017, including strong double-digit growth from the drug-coated balloon. In total, the combination of

“ Our business is not our current products per se, but about investing in how to treat the patient better.” – Bert van Meurs Spectranetics and Philips Volcano is expected to grow to around €1 billion by 2020. As Philips is the only group to combine imaging and devices in IGT, it is difficult to identify direct competitors. They are either in one or the other camp – Siemens AG, Toshiba Corp. and GE Healthcare in imaging, and Boston Scientific Corp., Medtronic PLC and Abbott Laboratories Inc. in devices, for instance. “We are unique in IGT, and in IVUS there are few direct competitors,” van Meurs states. There is competition in the drug-coated balloon market from the likes of Medtronic and CR Bard Inc. Spectranetics has just received FDA approval for Stellarex, which was launched in the US in July. Van Meurs acknowledges that, “The landscape is changing, but we’ve chosen to focus on our highly differentiated, specialized proposition, target-specific disease states and pursue the niche approach.” The integration of Volcano “went really well,” and has yielded a stronger business, says van Meurs. “Now to integrate Spectranetics and CardioProlific into this new device business, and merge the strengths of the larger elements of the portfolio into Philips’ IGT business to create an entity that combines devices and systems.” The deal with HeartFlow adds yet more strings to Philips’

IGT bow. (Also see “Philips, HeartFlow Cut FFR R&D, Commercial Deal” - Medtech Insight, August 30, 2017.) After use of CT, HeartFlow’s software technology can determine blood flow in the coronary arteries using fluid dynamics. It’s a non-invasive way of monitoring for a blockage, and an example of where Philips did not have its own in-house technology. Use of these twin technologies can assist surgeons in decisions over whether to use pressure wires to do a procedure locally. Alongside this commercial collaboration, Philips has also entered an exclusive development program in interventional X-ray imaging with HeartFlow. Van Meurs says Philips will continue on the strategic journey that it started out on many years ago when it began to look at adjacencies to PAD. He notes a strong integration on the coronary and electrophysiology sides at Spectranetics. In addition, there are a number of areas where Philips wants to strengthen. “We will continue to look at how we can grow the IGT space, both organically and inorganically,” says van Meurs, pointing to the new Azurion platform. “We are very busy with the Spectranetics integration, but over time we will look at other adjacencies to further strengthen the activity.” DISTRIBUTION OF GROUP SALES UNCHANGED Spectranetics is overwhelmingly US-focused, making more than 80% of its sales there, where it sells direct, as it does in major European markets, the UK, the Netherlands, Germany, France and Switzerland. Philips’ IGT business has direct sales in many international markets, such as Japan, where large, strong sales teams will expand Spectranetics’ business. The policy will be to maximize the capabilities of the Spectranetics’ commercial channels, and use Philips’ distribution channels where Spectranetics is absent or underpowered. The Spectranetics business will be integrated into a group with sales spread fairly evenly around the globe – its €17.4 billion sales in 2016 were split broadly in thirds, among North America (36%), Western Europe (22%), and the Growth Geographies (32%) and Other Mature Geographies (10%) – including Japan and Australasia. The balance of Philips’ group sales will be changed little by the integration of its largest buy in 2017. Securing a fairly even spread of sales is a conscious policy to ensure that slowand fast-moving geographic zones balance each other out. Van Meurs is struck by the business model similarities between Philips and Spectranetics. “It very much resembles how we’ve organized ourselves at Philips, with a specific focus on PAD and coronary artery disease.” The group has a team looking at these and is developing a focus on EP. “We will merge the structures and ensure we get the best of both worlds,” says van Meurs, adding another important success factor: “And we will learn.” IV005172

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DEAL-MAKING: Medtech M&A ❚

❚ DEAL-MAKING: Biopharma M&A

Bristol’s $2.4 billion buyout of Medarex in 2009 yielded value equivalent or greater to that realized in larger M&A transactions signed that year, such as Pfizer/Wyeth, Merck/ Schering-Plough and Roche/ Genentech. The deal made BMS a leader in immuno-oncology and by most accounts is the highlight of the pharma’s “string of pearls” strategy.

BY JOSEPH HAAS Bristol-Myers Squibb’s 19-year relationship with Medarex epitomizes the pharma’s deal-making strategy of using alliances and acquisitions to access new technologies in core therapeutic areas.

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Through the deal, which brought Opdivo and Yervoy in-house, BMS became an early leader in immuno-oncology. So what? This collaboration-turnedacquisition shows the importance of taking the time to nurture long-term business relationships. The value of the deal was not only in the assets, but what the partners, working together, made of them.

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rom an early-stage platform technology collaboration to a multi-year co-development pact in cancer to an outright acquisition of the smaller company by the larger, Bristol-Myers Squibb Co.’s nearly two-decade relationship with Medarex Inc. has proven one of the most fruitful big pharma/biotech deals – and the key to that success may be in the slow, gradual buildup of familiarity and shared priorities. Now, 19 years after Bristol first partnered with the California biotech and eight years after purchasing its cancer R&D partner for about $2.4 billion, it’s fair to ask whether the Medarex buyout ended up delivering the most value among the big pharma mergers signed in the hyperactive deal-making year of 2009. “What Bristol paid for Medarex, versus what they got out of it, is pretty remarkable,” Sanford C. Bernstein analyst Tim Anderson tells In Vivo. Making bigger headlines that year – not to mention generating larger fees for investment banks – also were Pfizer Inc.’s acquisition of Wyeth Pharmaceuticals (price tag $66.7 billion), Merck & Co. Inc.’s purchase of Schering-Plough Corp.(price tag $42.1 billion) and Roche, like Bristol, acquiring a longtime biotech R&D partner, Genentech Inc. (Roche acquired the roughly 44.1% of Genentech it didn’t already own for $43.7 billion in February 2009.) “It’s hard to say for sure, but I can pretty confidently say the percent return on that Medarex acquisition is probably much higher than those very large acquisitions,” says Damien Conover, Morningstar’s director of health care equity research. Further linking those transactions is the coincidence that three of them played direct roles in establishing the early leaders in the booming field of immuno-oncology. From Medarex, Bristol obtained, developed and launched the anti-CTLA-4 drug invivo.pharmamedtechbi.com

Shutterstock: Panacea Doll

Bristol/Medarex: A Transformational Acquisition Rooted In Collaboration

enhance immune response in cancer.” Lonberg, who is now SVP of Biologics Discovery and head of Oncology Discovery at Bristol, thinks Medarex ultimately brought forth significant innovation in what would come to be known as immuno-oncology by not being afraid to fail. “Part of [our] success was to go from one failure to another with no loss of enthusiasm,” he says. “At Medarex, we certainly failed a lot but we did not lose enthusiasm.”

Yervoy (ipilimumab) and the anti-PD-1 therapy Opdivo (nivolumab). Likewise, Merck got and eventually launched its anti-PD-1 product Keytruda (pembrolizumab) via its merger with ScheringPlough, while the genesis of Roche’s immuno-oncology success stemmed from early research at Genentech that ultimately yielded anti-PD-L1 drug Tecentriq (atezolizumab) as well as the cancer immunotherapy Gazyva (obinutuzumab), a CD20 antibody. (Also see “Keytruda And The Surprising Fruits Of M&A” - Scrip, September 18, 2015.)

Firms Created Value Opportunity In Partnership Beyond evaluating the “bang for the buck” Bristol derived from acquiring Medarex, with many M&A transactions at that time being driven partially or even largely by a desire for cost synergies, it be might worth asking if Bristol got such value from Medarex precisely because of the way the relationship between the two companies developed gradually over more than a decade. (While the buyout was much pricier, it is undeniable that Roche obtained significant value from its even-longer relationship with Genentech, in which the Swiss pharma became majority shareholder in 1990.) “Bristol and Medarex’s relationship, and then later Bristol’s acquisition of Medarex, has been arguably one of the smartest biotech collaborations to date (alongside Gilead’s acquisition of Pharmasset [Gilead Sciences Inc. and Pharmasset Inc.],” Datamonitor Healthcare senior analyst Amanda Micklus says. “From this relationship, Bristol has built the most commercially successful franchise in immuno-oncology, and I think Bristol really was a forward thinker in this area, getting involved in immunooncology so early on when big pharma wasn’t yet paying attention.” The Bristol/Medarex pairing got its start in June 1998, when the New York pharma licensed rights to Medarex’s HuMab technology platform – a transgenic mouse developed by Nils Lonberg, PhD, at Medarex predecessor Genpharm Inc. that offered the ability to create fully human, high-affinity antibodies in a few months – to develop antibody therapy candidates for cancer. Bristol also got a

“ It really wasn’t a challenging exercise to explain the science to Bristol. All the scientists at Bristol were steeped in this field.” –Nils Lonberg, PhD

commercialization option on any products resulting from the collaboration, with the potential for $20 million in licensing fees, milestones and royalties to Medarex. In an interview, Lonberg tells In Vivo that it was clear the two companies’ interests were aligned from early on in the partnership. “We were looking for a partnership with a drug company where we would make them a drug and then we were looking for milestones and royalties associated with that,” he says. “In 1998, couple of months after we started that effort, we formed a partnership with Bristol. The drug that we made for Bristol targeted a molecule called CD-137, and the idea was to actually

Early Prostate Cancer Data Led To Ipilimumab Partnership Medarex first presented ipilimumab to Bristol in 2001, overviewing early data in prostate cancer, and by 2003 the biotech had determined it wanted to find a partner to help develop the antibody. At the American Society of Clinical Oncology meeting that year, Medarex presented data from a trial of ipilimumab in melanoma conducted by the National Cancer Institute that showed durable complete response. The logical partner to take ipilimumab further was Bristol, and in November 2004, the companies signed a co-development deal for the asset, then known as MDX-010. Medarex got $50 million up front in that agreement – but a key characteristic of the deal was that $25 million was cash, whereas the other half was an equity investment by Bristol. The pharma got 2.9 million shares in Medarex at an 11.3% premium and committed to pay up to $205 million in milestones, pledged to cover 65% of US and European development costs, and gave Medarex an option to co-promote ipilimumab in the US. By early 2009, Bristol owned 2.4% of Medarex, an investment of roughly $16 million. Then an R&D executive at the pharma, but now its business development chief, Paul Biondi recalls that around 2006, CEO James Cornelius placed Bristol on a transformational path toward becoming a “next-generation biopharma.” Out of this goal arose Bristol’s “string of pearls” business development strategy – an effort to do targeted deal-making around licensing, partnerships and small-scale acquisitions, as opposed to the megamergers being pursued by some of its industry peers. “There was a discussion September 2017 | In Vivo | 15

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DEAL-MAKING: Biopharma M&A ❚

❚ DEAL-MAKING: Biopharma M&A

❚ BMS-MEDAREX TIME LINE 1998: BMS licenses Medarex’s HuMab technology platform to develop antibody therapy candidates for cancer. 2001: Medarex first presented ipilimumab (now Yervoy) to Bristol, overviewing early data in prostate cancer. 2003: Medarex decides to seek a partner to help develop the antibody. 2004: BMS and Medarex sign a co-development deal to develop ipilmumab as well as nivolumab (Opdivo). 2009: BMS buys Medarex before iplimumab data are released. 2011: Yervoy receives first FDA approval.

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2014: Opdivo receives first FDA approval. Fast forward to 2017: Opdivo yielded sales of $2.3 billion over the first six months of 2017, up 50% from one year earlier, while Yervoy brought in $652 million for the half-year.

16 | In Vivo | September 2017

at the time principally around the importance of biologics and, obviously, Nils and his team had a preeminent platform there,” he tells In Vivo. “The other piece was obviously there was an interest in expanding our capabilities within oncology and recognizing that there was a strong immunology bent to the company as well.” Bristol’s interest in ipilimumab specifically stemmed from the company already possessing deep familiarity with CTLA-4 – it was developing autoimmune drugs intended to down-regulate the pathway, resulting in the rheumatoid arthritis drug Orencia (abatacept) and the kidney transplant drug Nulojix (belatacept). Medarex’s work intrigued Bristol with the cancer-fighting potential of stimulating this immune response, Biondi explains. This overlapping interest deepened the partnership between Bristol and Medarex, leading to the 2004 collaboration around ipilimumab, which also included rights to MDX-1379, a Phase III peptide vaccine for melanoma, and an antibodydrug conjugate program Medarex had initiated. “It really wasn’t a challenging exercise to explain the science to Bristol,” Lonberg notes. “All the scientists at Bristol were steeped in this field.” As often is the case with multi-asset or multi-target collaborations, not everything included in the 2004 deal came to fruition. MDX-1379 was never really intended to become a drug, but was licensed from NCI to serve as a placebo in clinical studies of ipilimumab, Lonberg explains, while the ADC program was explored further and then shelved. The latter decision largely reflects a strategy to focus on the opportunity in immunooncology instead, he says.

Bristol Leaped Before Seeing Phase III Data By 2009, Phase III data for ipilimumab in metastatic melanoma were expected in about a year. Bristol decided to roll the dice and buy out its partner, paying a 92% premium of $16 per share in Medarex, before seeing the pivotal data. (Also see “Bristol-Myers Squibb Buys Medarex: Adds Eighth ‘Pearl’ To String” - Pink Sheet, July 27, 2009.) Of course, as co-development partner, the pharma probably had a pretty good idea of how the trial was progressing.

“Initially, we had a collaboration around an early target, and we got to know Nils and his team and build up a lot of rapport scientifically and then partner on the asset,” Biondi explains. “I think due to the familiarity at the time, the thinking was that we had a lot of comfort with both the benefit and the risk, but if we went in before and were willing to take the risk recognizing that we had some confidence in how this would play out we would realize the most value to the company, because if we had waited until post-data, obviously the [Medarex] management at that time would have had a very different view of the acquisition value.” From its $2.4 billion investment, Bristol obtained two of its three top-growing sales products today (along with anticoagulant Eliquis). On July 27, during its second-quarter earnings presentation, the pharma reported that Opdivo yielded sales of $2.3 billion over the first six months of 2017, up 50% from one year earlier, while Yervoy brought in $652 million for the half-year, up 29% from 2016. (Also see “Post-MYSTIC, Bristol Renews CTLA-4 Vows, But Is “Not Wedded” In Lung Cancer” - Scrip, July 27, 2017.) Morningstar analyst Conover says the Medarex acquisition has proven to be both transformative for Bristol and the highlight of the string of pearls. “When we think about that string of pearls strategy that Bristol had at that time, they were doing a lot of important deals, but out of the deals that they did then, this one stands out as probably being the most transformative for the company,” he notes. The transaction succeeded for two reasons, he adds – it gave Bristol multiple chances for success and it stemmed from an already fruitful partnership of some duration. (Also see “With The Launch Of Yervoy, Early Signs Of R&D Success For Bristol” - In Vivo, May 2011.) “When a company does these sort of bolt-on acquisitions – whether it’s an outright acquisition or a staged approach – it’s important to think about multiple shots on goal and diversifying the portfolio of acquisition targets,” Conover points out. “By doing that, you’ll likely get hits but you occasionally might get a home run. Obviously, you’re going to strike out as well, but by having that series of invivo.pharmamedtechbi.com

opportunities, that can line you up well.” As far as the staging and the strategy, I do think that is a successful way to start a relationship – to get closer and closer to the technology and understand it well, and then you ultimately make the acquisition,” he continues. “I think that is probably one of the more successful ways that an acquisition can happen, in the sense that you de-risk it to some extent by starting with a lower investment and then increasing the investment as you learn more about the technology.” Seeing the full extent of Medarex’s science encouraged Bristol to want to buy the biotech, Biondi says. “This played into our thoughts around acquisition, which was if we could be successful in this space, the depth and breadth of what Nils and his team had provided in terms of all the various targets they had been looking at in this space would allow for the ability to move forward if Yervoy was successful,” he says. “Obviously, nobody could have predicted what has happened since but that kind of optionality, the possibility that that could [occur] was part of the thought process at the time.” The Medarex technology continues to deliver for Bristol, as well. Currently, in its clinical pipeline are Medarexderived candidates BMS-986016, an antilymphocyte activation gene 3 (LAG-3) candidate being studied in tandem with Opdivo in advanced melanoma patients who are refractory to or relapsed following anti-PD-1/PD-L1 therapy, and a pair of Phase I candidates – anti-CXCR-4 ulocuplumab and an anti-fucosylated anti-CTLA-4 candidate. In addition, Bristol is working with CytomX Therapeutics Inc.on a Probody next-generation anti-CTLA-4 drug that it thinks could offer enhanced tumor targeting and less binding to healthy tissue than earlier CTLA-4 antibodies. Currently preclinical, that program may move into Phase I later this year or early in 2018, a Bristol spokesperson says. Meanwhile, despite some recent clinical trial disappointments, Bristol thinks it has only begun to scratch the surface of Opdivo and Yervoy’s potential, as solo agents, in combination with each other and in combination with other companies’ drugs or drug candidates. Bristol has more than 300 ongoing trials

“ The series of transactions that we did with Medarex provide a really good example of the strategy that we try to employ to this day.” –Paul Biondi

involving one or both of those drugs in more than 50 types of cancer, including more than 120 combination therapy trials. Opdivo alone has yielded roughly 250 approvals worldwide to date, according to the company.

Bristol’s Ongoing Deal-Making Strategy Impacted Biondi says its success with Medarex has continued to inform Bristol’s deal-making strategy, calling it “the kind of deal we like to do.” R&D has been and remains a “major driver” of Bristol’s deal-making approach, he adds. (Also see “Bristol Looking For Deals, Immuno-Oncology And Otherwise” - Pink Sheet, July 24, 2014.)

“If you look at most of the deals that we do, whether licensings or acquisitions, they tend to be at an earlier stage in time, because we do this type of process where we like to partner and get some comfort on both sides, but also in the belief that collaboration and working together is where we can create the most value,” Biondi says. “Not to say we wouldn’t do different arrangements – we have done deals for later-stage assets and we might in the future – but that is why the relationship and the series of transactions that we did with Medarex provide a really good example of the strategy that we try to employ to this day.” Both executives say a factor in the ongoing success of the acquisition was the decision to fully integrate Medarex into Bristol, a process Lonberg says he and his colleagues embraced. Through its three R&D sites in California, Medarex has grown from about 40 people at the time of the sale to a headcount of roughly 300 today. It is Bristol’s largest oncology discovery arm. “What was important to us was not trying to keep Medarex separate, not trying to establish sort of a team B that would not be able to become part of Bristol, but in fact to fully integrate,” Lonberg notes. “So we came up with an identity which was biologics discovery California, which we really tried to completely integrate within Bristol. We tried to use all of the resources that were available already at Bristol in our drug discovery efforts. I think it worked a lot better than an attempt to maintain a separate identity that would never be fully embraced by the acquirer.” Today, that process has resulted in a “lack of walls,” the exec says, which benefits discovery and R&D productivity. “We don’t have walls between the immunology therapeutic areas where the main focus is on inflammatory diseases and the oncology therapeutic area, where there is discovery,” Lonberg says. “So the teams are integrated in a number of ways, not just intellectually but also operationally in how we do drug discovery. And that I think has given us a real head start in a lot of important mechanisms in immunotherapy.” IV005175 Comments: Email the author: Joseph.Haas@Informa.com September 2017 | In Vivo | 17

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DEAL-MAKING: Biopharma M&A ❚

❚ DEAL-MAKING: Financing

Amazon Versus Biotech: How The IPO Class Of ’97 Worked Out

Shutterstock: HstrongART

Life sciences investors pumped around $15 billion into 175 biotech, medtech and diagnostics firms that went public during the 2014–16 IPO window. To understand what may be in store for those firms and their backers, In Vivo reexamines the fate of a previous generation of companies, the IPO Class of 1997.

BY JOHN HODGSON Amazon.com was a small, online bookseller when it debuted on the public markets in 1997. It has since done astoundingly better than the 49 biopharmas that floated the same year; the 14 biopharma companies still in business have a combined market cap just one one-hundredth of Amazon’s.

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While the business plan specifics may have changed, the patterns of successes, failures or mere persistence shown by the IPO Class of 1997 may throw light on the expectations for companies that went public during the big 2014–16 IPO window. So what? Perhaps the first lesson for biopharma managers, employees and investors is that the IPO is only another step toward value creation: it is neither an end in itself nor an approach that secures any certainty about the future of a company. 18 | In Vivo | September 2017

ompleting an initial public offering ought to be a big step in company development. It is a departure from a cosseted, insulated environment of unique technical approaches and regulatory progress and an entrance into the glare of quarterly scrutiny and comparative financial performance. To pump $15 billion into life sciences in the 2014–16 window, investors presumably convinced themselves they could pick winners. Two decades of hindsight say otherwise. Indeed, two decades of hindsight from the biotech Class of ’97 indicate that: • The IPO is insignificant as a funding mechanism; it can be a door to follow-on finance but only if a company can last until a subsequent financing window; • Companies often fail to achieve IPO goals having failed to anticipate technology commoditization, left-field competition or the cost of commercial development; • Immediate post-IPO equity valuations are often wishful; IPO investors’ best chance of profit is through early acquisition before IPO hopefulness evaporates; • If the past is any guide, around 20% of the 2014–16 crop will fail to create any value at all, 50% will be acquired (20% within five years of IPO) and 30% will survive (in some form) for a decade or more. Hindsight has obvious benefits but why go back 20 years? Trivially, it is a round number of years. Perhaps more pertinently, it is longer than the more pessimistic estimates of the drug development cycle: in other words, companies that were going invivo.pharmamedtechbi.com

to develop drug treatments ought to have had time to do so. And thirdly, Amazon. com Inc., now the fourth largest corporation in the world by market capitalization, went public 20 years ago. That gives us a benchmark that has nothing to do with biotech, reinforcing the notion that investors have a range of opportunities in which to choose to put their money. As a reminder, Amazon in 1997 was a small, 250-person, loss-making online retailer that needed cash to fuel ambitions to become “the worldwide authoritative source for books.” Twenty years later, it still sells books, but a good deal more besides. It also has 340,000 employees (one thousand times the number it had at IPO) and 2016 revenues ($136 billion) that exceed the collective drugs sales of the top 16 pharmaceutical companies. Its current market capitalization is a thousand times higher than in 1997. In two decades upstart Amazon has become the establishment, a target for middle-class literati who bemoan the loss of elitist, specialist bookshops and a force for social cohesion (as neighbors share in the convenience of next-day delivery). Its IPO peers from the life sciences have not quite matched Amazon’s impact on either public consciousness, investor prosperity or employment. Of the 54 biotech, pharma and medtech companies that tried to float stock on Nasdaq or the New York Stock Exchange in 1997, 14 are still in business in 2017 as independent entities even though many of those survive only at the margins. (See Exhibit 1.) Investors put $48 million into Amazon.com at IPO and the company is now worth around $475 billion (September 12, 2017); in contrast, the 14 surviving life sciences companies taken together raised $336 million and now have a combined market capitalization of just $4.4 billion.

Do The Financing Windows Compare? The funding environment 20 years ago was not as generous as the recent IPO window. In 1997, some 43 different life sciences companies got their offers away raising $1.17 billion between them, an average of just over $27 million each. Allowing for inflation, the total is quite similar to the $1.5 billion raised in US

Exhibit 1

Fate Of The Class Of ’97 FATE

# COMPANIES VALUE ($M)*

IPO TOTAL ($M) IN 1997

Offers withdrawn

269

Out of business

Acquired

16,742

737

Continues in business (September 12, 2017)

4,395

336

Total

21,228

1,436

Total (IPOs completed)

22,420

1,166

475,000

Amazon

*Value = deal cost (for acquired companies) or market capitalization (continuing companies). SOURCE: Strategic Transactions | Pharma Intelligence, 2017

Exhibit 2

Class Of ’97 Fundraising (1997 to August 2017) EVENT

$BN

IPO

1.166

Secondary public offering

3.478

Private institutional placements

3.347

Total

7.991

SOURCE: Strategic Transactions | Pharma Intelligence, 2017

IPOs in 2016, although in 2016 the money went to around half as many companies (30) and the average raised was commensurately higher ($53 million). The totals and averages raised at the peak of the more recent window were much higher: $4.5 billion in total raised in 2015 at an average of $77 million for 61 companies, and $5.6 billion at $67 million each for 83 companies in 2014.

IPOs Are Windows To More Finance Perhaps the first lesson for managers, employees and investors in the biopharmaceutical community is that the IPO is only another step toward value creation: it is neither an end in itself nor an approach that secures any certainty about the future of a company. Completing an initial public offering undoubtedly seems like a big step for any company: in the life sciences, it not only provides a cash

bolus (and the promise of more) but also gets a company out from under the feet of venture capital investors. Despite the administrative strictures that characterize publicly quoted companies, newly public companies attain a greater level of autonomy on IPO. Part of that autonomy is improved access to cheaper finance. Venture capital is an exotic and seductive form of finance, thriftily distributing money culled from the pecuniary risk-taking fringes to lure wild businesses inside the perimeter of credibility. Public finance markets can be more generous: the average $27 million from a 1997 IPO might have been a big step up for some companies from trickling venture capital. However, the real prize – at least for some of them – was the $6.8 billion that came through followon offerings, PIPEs and other financial mechanisms. (See Exhibit 2.) September 2017 | In Vivo | 19

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DEAL-MAKING: Financing ❚

❚ DEAL-MAKING: Financing Exhibit 3

IPOs Are Not Runes; Follow-On Finance May Be ■ Acquired

■ Continues

■ Out of business

The level of IPO is not a predictor of ability to raise money subsequently

Money raised post-IPO may be a predictor of end value 8K

1400 7K 1200 Value $m (cap or deal)

Money Raised $m

6K 1000 800 600 400

5K 4K 3K 2K

200

0K 0

60 IPO $m

100

120

200

400

600 800 1000 Money Raised $m

1200

1400

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IPO value does not predict what money a company can raise afterwards (left); however, money raised later correlates weakly with enterprise end value or market cap (right). SOURCE: Strategic Transactions | Pharma Intelligence, 2017

An IPO exposes a company to significantly more public scrutiny and judgment. In a rational world – where the evaluations of multiple knowledgeable stock market investors are expressed in aggregate as a valuation of a particular company – the level of finance raised at IPO might be expected to be a predictor of subsequent performance: companies with better prospects (as judged by the market) should be able to raise more money at IPO. However, as the left side of Exhibit 3 shows, there is no discernable correlation between the level of money raised in an IPO and the subsequent amounts of money that a company can raise. There is, though, a weak correlation between the money that a company raises after its IPO and the value it creates (Exhibit 3, right side). The magnitude of an IPO reflects many aspects of a company’s organization and behavior beyond the event itself, notably 20 | In Vivo | September 2017

the assessment at the IPO of the “opportunity” that subsequent commercialization represents. In addition, a firm’s initial valuation on the public market is likely to be inflated by the mere fact that it is made at a time when investor enthusiasm is high.

Acquisitions The autonomy that arises on IPO doesn’t necessarily last all that long. Of the 43 companies in the Class of ’97 that completed an IPO, 22 have since been acquired – the most common outcome from this set. Around 40% of the acquisitions (9/22) were made within five years of IPO. Roughly half of those early acquisitions were valued below the amount that the company raised at IPO. Transcend Therapeutics Inc., for instance, had already reduced its public offering when it raised $18 million in June 1997 to fund development of treatments for oxidative stress. But it ceased activities two years

later and was bought by ophthalmic specialist KeraVision Inc. for $9.5 million in stock, the lure for Keravision being $8.4 million in cash Transcend still had. At least two of the early acquisitions were, however, highly lucrative for the IPO investors. LeukoSite Inc.’s 1997 IPO had raised just $15 million but a subsequent secondary offering of $12 million in 1998 during the genomics bubble allowed it to make two acquisitions, $2.3 million for tiny Progenics Pharmaceuticals Inc. in June 1999 and $19 million (in stock) for CytoMed Inc.in January 1999. Leukosite itself was then acquired by Millennium Pharmaceuticals Ltd. for $585 million in genomics-bubble-inflated stock at the end of 1999. Many of the companies that withdrew their 1997 IPOs were also acquired shortly afterwards: Virologix Inc.in 1999 by Access Pharmaceuticals, Apollo BioPharmaceutics Inc. by MitoKor for stock in 2001, Apollon Inc. by Wyeth Pharmaceuticals invivo.pharmamedtechbi.com

in 1998 and Jenner Biotherapies Inc.’s cancer vaccines were bought up by Immuno-Designed Molecules Inc.in 2003 after Jenner was dissolved. (See sidebar, “Unsuccessful IPOs.”)

The Survivors Given the risky nature of product development in the life sciences sector, it is not a surprise that only 14 of the original 1997 IPO cohort continue independently in business. Indeed, the number of survivors that could claim to be in robust health is even lower than that. Four of the apparent survivors – Ore Pharmaceuticals Inc., Echo Therapeutics Inc., Guided Therapeutics Inc. and Proteonomix Inc. – have market capitalizations of below $1 million. The paths to these minuscule valuations are a warning, partly, of the unpredictability of trying to convert technical operations into commercial ventures, as the example of Ore Pharmaceuticals illustrates. Ore started off as Gene Logic, a company founded in 1994 amid the excitement of the gene-on-a-chip drug discovery movement. It offered a suite of wet and in silico genomics drug discovery and drug repurposing deployed both in house and as an external service. The $24 million it raised at IPO in November 1997 (at $8 per share) was 30% shy of the anticipated $33 million, but in January 2000 it raised what was then a record follow-on public offering of $247.9 million as its stock shot up to $144. Then the genomics bubble burst and Gene Logic floundered. By the end of 2000, its stock was back down to single figures; in 2006 it sold its preclinical division to Bridge Pharmaceuticals Inc. for $15 million and a year later sold its genomics assets to Ocimum for $10 million in cash to launch a service business in drug repositioning under the name Ore Pharmaceuticals (mining pharma’s prospectrich strata). But by the end of 2008, the stock was in a death spiral: a one-for-five reverse stock split that year was followed by a one-for-ten-thousand reverse split in 2011. The company died operationally at that point, becoming an investing shell, Ore Holdings, with just one company in its portfolio, the e-cigarette supplier Ballantyne Brands. Its market capitalization

❚ UNSUCCESSFUL IPOS Not all initial public offerings are taken up, even in the best of funding years. Of the 54 life sciences IPOs registered in 1997, 11 (20%) were withdrawn because of pricing issues or lack of interest. Apollon Inc., for example, was a naked DNA vaccines company spun off by Centocor Research & Development Inc. in 1992 (well before Centocor itself was acquired by Johnson & Johnson). A $100 million deal in 1995 for vaccine development with Wyeth-Lederle Vaccines had “validated” the company’s approach. But when the company withdrew its IPO, Apollon only had $2 million in cash. Unsurprisingly, it was Wyeth that acquired the cash-strapped Apollon. After Cell Pathways Inc. withdrew its IPO offer (filed in October 1997, withdrawn in April 1998), it raised $23 million in a private placement and then acquired for shares a cash-rich former graphics design firm, Tseng Labs, garnering a further $20 million. Cell Pathways raised another $50 million in four private placements before being swallowed by OSI Pharmaceuticals LLC in 2003 for a mere $33 million in stock. Centocor was still in the business of spinning off its non-core-biological assets in 1997. It tried to float its immunoassay-based diagnostics division in October in a $50 million IPO but withdrew a month later. The company management appeared to have overplayed its hand: a year after the abortive IPO, Fujirebio Inc. made Centocor Diagnostics the core of its diagnostics business, paying just $37.5 million, which was then equivalent to just one year of sales. Scriptgen Pharmaceuticals Inc. also withdrew its 1997 IPO. Roughly one-third of the company transformed itself into Anadys Pharmaceuticals Inc. in July 2000 with a cash injection from incoming CEO Kleanthis Xanthopoulos; it then floated on Nasdaq in 2004 and subsequently was acquired by Roche in 2011 for the hepatitis C RNA polymerase inhibitor setrobuvir, a compound that Roche canned in 2015 after Gilead Sciences Inc. took the bottom out of the hepatitis C market. Withdrawing an IPO doesn’t have to mean the end of the road for a company. After its own IPO failed to take off, respiratory-focused Discovery Laboratories Inc. merged later in 1997 with ailing cancer discovery firm Ansan Pharmaceuticals. Discovery shareholders owned 90% of that business and, over the next two decades, the company raised at least $430 million in private placements, follow-on public offering, loans and payments under collaborative deals. The company is still in business – as Windtree Therapeutics Inc. – but now, after two “reverse splits” of its stock, has a market capitalization of just over $2 million, less than the value of the cash it has in the bank. Like a bad actor, Windtree is dramatically hamming up its death throes.

is now under half a million dollars. A similar fate befell another survivor, ARCA biopharma Inc., back in 1997 a pioneer of sequencing by hybridization called Hyseq Pharmaceuticals Inc. In 2003, Hyseq merged with Variagenics to become part of Nuvelo Inc.,which

attained a market valuation of over $1 billion as its thrombolytic candidate alfimeprase entered late-stage development. Nuvelo raised around $277 million in four follow-on offerings between 2003 and 2006 as well as extracting a $50 million up-front collaboration fee September 2017 | In Vivo | 21

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DEAL-MAKING: Financing ❚

❚ DEAL-MAKING: Financing Exhibit 4

1400

7000

1200

6000

1000

5000

800

4000

600

3000

400

2000

200

1000

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

2017

IPO total

Follow-on Finance Raised by Class of '97

Followers Of Finance Fashion

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Further finance for the Class of ’97 was closely tied to open finance windows. SOURCE: Strategic Transactions | Pharma Intelligence, 2017

from Bayer AG. But the Phase III trial of alfimeprase did not reach its primary endpoint and Nuvelo became a wellfinanced shell lacking significant clinical assets. Up-and-coming venture-backed cardiovascular play ARCA biopharma took advantage, with a reverse merger into Nuvelo in September 2008 while the company still had around $50 million in liquid assets. Having received $369 million in public financing all told as Hyseq and Nuvelo, ARCA is currently valued at around $18 million. Reinventing a company and changing its name doesn’t necessarily propel it toward commercial oblivion. Sarepta Therapeutics Inc. has undergone two name changes but is still worth $2.4 billion, the only surviving member of the Class of ’97 to have a market cap in excess of a billion dollars. In June 1997, Sarepta, then known as Antivirals, completed an oversubscribed IPO for $19 million. Its near-term prospects were in developing drug delivery systems for cyclosporin and paclitaxel, the patents for which were about to expire. By the end of that year, it had acquired cancer vaccine outfit ImmunoTherapy for $24 million in 22 | In Vivo | September 2017

stock and changed its name to AVI BioPharma. Under the AVI name, between 1999 and 2011, the company accumulated $230 million in 11 follow-on public offerings and stock placements. But then the markets lost confidence in AVI and its stock price fell below $1, even though the seeds of the company’s efforts of exon-skipping RNA-based drugs had already been planted several years before. It was time for a one-for-six reverse stock split – to get the stock price up again – and another change of name to emphasize Sarepta’s newest direction as a developer of RNA drugs for rare diseases. As if by magic, the markets responded, throwing another $770 million in followons and placements at the freshly reminted company as its lead compound – etiplersen – wavered and teetered on the brink of FDA approval. That finally came in September 2016. The compound is currently awaiting approval in Europe.

Lessons For Now There is not much left to say about the fate of the IPO Class of ’97. A sixth of the companies (7) simply went out of business, creating virtually no terminal value: interestingly, two of those seven compa-

nies lasted until the start of 2017, nearly two decades of decline and another four firms (at least) are heading that way. Roughly half of the Class of ’97 (22) were acquired and 40% of those were acquired soon after their IPOs. That leaves a third (14) continuing independently in some form or other. Circumstances in biotechnology and in the financial markets are clearly different in 2017 than they were in 1997. However, we can be confident that some of the lessons of the past still apply. Investors might like to think that they can already distinguish which of the 175 companies that jumped through the 2014–16 IPO window will make it and which will not. But the evidence from the Class of ’97 is that they cannot. Even when markets back the hottest technology prospects or pump money into public companies through secondary financings, enterprises still fail. Imposing some of those numbers crudely on the 175 companies that completed an IPO in 2014–16, it seems perfectly plausible to predict that around 80 to 90 of them will have been acquired by 2035, that 30 to 40 of them will go out of business without having created invivo.pharmamedtechbi.com

any value and that another 30 to 40 will persist in one form or another as independent businesses. Probably half of those will remodel their businesses at least once and change their names. It is also possible to make some predictions about the future financing patterns for companies that remain extant. Collectively, the members of the Class of 1997 that completed an IPO raised around $1.17 billion in their first sorties onto the public markets. Subsequently, two-thirds of them returned to extract another $6.8 billion from the public capital markets – a multiple of roughly six times. Extrapolating that would mean the Class of ’14 –16 might hope to raise an additional $90 billion over the next two decades. Now, although that might seem like a reassuringly large amount of money, the precedent from 1997 suggests that the cash will not be evenly spread. Under onethird (13/43) of the Class of ’97 companies conjured up more than $100 million in additional finance and only eight firms managed to persuade investors to part with over $250 million. Those eight – CTI BioPharma Corp., Synageva BioPharma Corp., Sarepta Therapeutics, Depomed Inc., Progenics Pharmaceuticals Inc., Corixa Corp., Aastrom Biosciences (now Vericel Corp.) and Ore Pharmaceuticals – account for over 83% of all the post-IPO finance raised by the Class of ’97. Furthermore, the opportunity to raise addition finance is not in the gift of company management, any more than was the timing of the original IPO. To a very large extent, companies can only raise secondary finance when the public markets are open. (See Exhibit 4.) It’s not the finance window that a firm scrambles though that counts, but mak-

What’s New Online?

Investors might like to think that they can already distinguish which of the 175 companies that jumped through the 2014–16 IPO window will make it and which will not. But the evidence from the Class of ’97 is that they cannot. Even when markets back the hottest technology prospects or pump money into public companies through secondary financings, enterprises still fail.

ing it through to the next one. So it seems reasonable to expect that the bulk of follow-on finance for the 2014–16 IPO cohort would be concentrated on just 20% of the firms, 30 to 35 companies. It seems less reasonable, however, to expect that the public markets would provide an additional $90 billion worth of post-IPO money, the equivalent of the mark-up that the select few in the Class of ’97 accumulated. The period of 2014–16 was one of exceptionally generous financing and it would require several more like it to satisfy the capital hunger of the bioscience companies that the IPO window generated.

Amazon Coda Taken together, the life sciences cohort that floated in 1997 does not compare well with the dominant Internet retail and distribution giant. But perhaps comparisons with Amazon.com are unfair. Choosing the single most spectacular stock market story since Apple Inc. in 1980 as the benchmark will make the performance of any other company or sector appear shoddy. Many, if not most of the 700 companies that listed in 1997 haven’t survived. Garden cookery suppliers Barbecues Galore folded in 2005 while flip-flop retailer Shoe Pavillion went into Chapter 7 liquidation in 2008. The quality smoke trader General Cigar Holdings was acquired – most appropriately – by Swedish Match in 2005. Thankfully, outdoor grilling products, watershoes and the finest Havanas can be ordered through Amazon.com and delivered to your door. IV005140 Comments: Email the author: John.Hodgson@Informa.com

Authority. Precision. Forward Focus.

Strategic Insights for Life Sciences Decision-Makers

In Vivo

Pharma intelligence |

September 2017 | In Vivo | 23

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DEAL-MAKING: Financing ❚