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August 21, 2012 8:38 pm

Pharma continues to explore novel diabetes investments, slimmer interest in obesity

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This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com

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The rapidly growing obesity rate and related surge in type 2 diabetes will continue to spur mergers, collaborations, and partnerships within the pharmaceuticals industry, five industry bankers told dealReporter. Bankers interviewed noted more of an interest from big pharma for anti-diabetics than anti-obesity therapies.

The squeeze obesity is putting on global healthcare costs has pushed it into the spotlight but pharmaceutical companies and regulators continue to have problems with treating obesity directly. Pharma continues to view obesity as a high-risk area, said Kevin Sheridan, managing director of Jefferies healthcare investment banking. The notorious health scare that Wyeth’s (now Pfizer’s [PFE US]) weight-loss pill Pondimin/Redux (known as fen/phen) caused, involving rare cardiac problems, has left a bad aftertaste for big pharma. Wyeth was left with a USD 21bn compensation bill.

Buyers have remained very cautious in the obesity space, after past recalls over safety concerns and ensuing civil litigation, said the two bankers. The first banker added that on top of this potential concern, patients who are obese typically have other undetected health problems, which could be worsened as a side effect of the weight-loss drug.

In June, the US Food and Drug Administration (FDA) approved Arena Pharmaceutical’s [ARNA US] Belviq, the first drug to be green-lighted in 13 years. Eisai [4523 TYO], current partner on Belviq, plans to launch the drug in early 2013.

The FDA then approved Vivus’ [VVUS US] Qsymia shortly afterwards, despite the drug’s propensity to cause potential birth defects. There is an impression the regulatory environment is improving in obesity, said Keith Gottesdiener, CEO of private obesity drug developer Rhythm Therapeutics.

While the tide may be shifting for weight-loss drugs, a revival in obesity M&A is not expected, as the risks are still considered too great, two bankers said.

Since reaching a peak of USD 13.5 per share, Arena’s stock has fallen to trade around USD 8 per share, as takeover hopes have waned. Vivus’ stock has also fallen from USD 31.2 after Qysmia’s approval, to trade around USD 20.8 per share.

Potential buyers of obesity-focused companies on sidelines

If big pharma was truly interested in Arena or Vivus, both would have been acquired by now, one banker said.

Although the newly marketed obesity drugs have large peak sales forecasts, Potential acquirers are waiting on the sidelines to see what the actual sales figures will look like, said one US-based fund manager. “It’s too much risk to make any buy before seeing sales for at least a couple of quarters.

The global obesity epidemic is just beginning to be recognized as a medical program that requires therapeutics, said Tom Hughes, CEO of Zafgen, a private US-based company developing the anti-obesity drug beloranib.

Most interested partners want to see how patients charge over a long-term period, Hughes said. Some potential partners want to see three-month data, and some have even requested six-month data, he added. The major deal risks for any interested parties include product liability due to increased potential for drug abuse, Sheridan and two other bankers said.

Obesity-related illness in the US alone costs USD 190bn a year – almost 21% of the country’s annual medical spending, according to a recent Bank of America Merrill Lynch report. Recent figures by the World Health Organisation predicted 50%-60% of the global population will be obese by 2030. Obesity is defined as a body-mass index of more than 30.

Greater interest in diabetes

Obesity is more difficult to treat and is considered more of a lifestyle or societal disease, limiting interest among pharma companies, Sheridan said. In contrast, type 2 diabetes can be diagnosed and monitored through blood markers and other clinical tests, making it more attractive. “A few companies will consider both – an area they refer to as ‘diabesity’ – but for the most part diabetes is the preferred focus,” he said.

Professor Hilary Thomas, healthcare advisory partner at KPMG, said “The pharma industry is becoming involved earlier in the treatment cycle and therefore we will see pharma companies moving increasingly into early detection and diagnosis of diabetes, the prevention of diabetes and obesity and taking a long-term view.”

Despite heavy FDA regulatory requirements for diabetes drugs – notably huge cardiovascular outcomes trials – these requirements are not seen as discouraging to further drug development, said Matt Foehr, chief operating officer of Ligand Pharmaceuticals [LGND US]. The company has a preclinical anti-diabetic. Diabetes is such a growing market that no matter what the hurdles are, it is still a desirable commercial space, he said.

In diabetes, SGLT-2 drugs were viewed as the most attractive class of drugs in development, but they’ve had setbacks in the clinic, the US fund manager noted.

AstraZeneca [AZN LN] and Bristol Myers-Squibb [BMS LN] fought off pharma peers by splitting the USD 7bn cost of acquiring Amylin to share its GLP-1 drug portfolio.

At the time of transaction, Lamberto Andreotti, BMS’ chief executive, pointed out that one in every 11 US adults has been diagnosed with diabetes. He noted that 95% of those patients are type 2 diabetics. Likewise, Simon Lowth, AstraZeneca’s interim CEO, has told analysts he wanted to transform the company into a diabetes powerhouse.

AstraZeneca’s former CEO David Brennan was ousted by investors in April after shareholders vented their fury about the group’s continued reliance on white pill drugs and failed clinical trials which have impacted the group’s pipeline.

BMS/AZN Amylin deal as “new normal”

Some eyebrows were raised about the potential of a merger between AstraZeneca and BMS after the two increased their partnership in diabetes through the Amylin deal. But BMS is seen as continuing with its “String of Pearls” strategy, which focuses on a biotech approach for bringing in new treatment options for diseases through typically smaller acquisitions and partnerships, said a second industry banker. Since 2007 BMS has completed 11 pearl deals while splashing out on significant acquisitions such as the joint Amylin deal, the USD 2.5bn takeover of HepC drug maker Inhibitex and its USD 2.3bn acquisition of Medarex in 2009 to boost its oncology pipeline.

While AstraZeneca could look more aggressively to larger buys in the future, the company is not anticipated to look at mergers of equals, added two other bankers.

Novo Nordisk [NVO US] would be a dream acquisition for many large-cap pharmas wanting to be at the forefront of the diabetes market, two bankers said. However a takeover is virtually impossible as the group’s foundation, which controls Novo Nordisk shares, is prevented from making any capital undertaking that would result in loss of control, the bankers said, also nothing that the Danish Ministry of Justice, which governs the foundation, would be very reluctant to see a major employer slip out of Danish hands.

While a complex three-way deal such as BMS, AZN, and Amylin could be interpreted as a courtship leading to marriage, it is far more typical of the novel ideas bankers and healthcare companies are executing to ensure adequate risk-sharing, four bankers said.

The deal highlights the extent of the industry’s struggles to make returns on R&D, so pharmaceutical players are looking to structure deals differently, said Chris Stirling, head of pharmaceuticals at KPMG. The third banker said if there is a diabetes asset BMS’ primary-care sales force can handle, the company will be able to go it alone.

The fourth banker said he believed AstraZeneca had only just finished “untangling” itself from its disastrous MedImmune acquisition. The deal decimated USD 8bn of AstraZeneca’s share price in half an hour, Stirling noted.

The appetite for big mergers has waned, as former blockbuster deals showed the difficulty of squeezing costs out of a business, and increased regulatory attention minimises the chances for directly overlapping businesses to merge, the fourth and fifth banker said. However, for large players, money is cheap to raise at the moment, the third banker said, pointing to increasingly large cash piles and shortening pipelines. To reinforce growth, money either needs to be plugged into lengthy and risky R&D or growth through acquisitions, the third banker said.

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