Anatomy of a Pharma Exit

How does a bio pharma company with no sales, an FDA order to cease trials on its principal drug candidate, and a burn rate that has absorbed nine figures manage to nonetheless exit with a $3.85 billion dollar enterprise value?

The “how to” was explained at the ACG-Boston breakfast meeting, October 23rd, by Ron Renaud, former President and CEO of Idenix Pharmaceutical.

Idenix was doing research in the hot but highly competitive area of infectious diseases, including hepatitis and HIV, relying on small molecule research in an area described by Renaud as “nucleoside chemistry.” Notwithstanding initial backing from MPM Capital, Nomura and corporate partner Novartis (which also purchased 54% of the company in 2003, from then-shareholders, for $255,000,000), and with subsequent raises of an additional $200,000,000, by mid-2013 Idenix nonetheless found itself behind its competition (particularly Gilead, Vertex and Bristol Meyers). The company adopted a strategic plan to build a single pharmaceutical, administered by pill, which would address most forms of type C hepatitis without reliance on Interferon. In late 2013, the company began clinical trials in the face of a patent law suit by Gilead, with first results available about April, 2014.

Suddenly, without final data available but in the light of acquisitions by larger pharmaceutical companies at substantial multiples, in June, 2014 Merck offered a buyout of $24.50 per share in cash, a 239% premium above market; the deal closed on August 6, 2014, with Merck proudly announcing that it had purchased a company which had a portfolio of promising drugs including some major hepatitis C “candidates.”

Certainly timing had a lot to do with the enterprise value received from Merck, coupled with the worldwide incidence of hepatitis C (indicating a significant and continuing global market).

Renaud also particularly credited several specifics for his ability to guide his company to such a robust exit:

Continuous transparent communication with major shareholders, who were thus not spooked by day-to-day developments in the marketplace.

The raising of an additional $100,000,000 in capital from one of its existing major investors at the start of 2014, which allowed the company credibly to state that it intended to develop and market its own pharmaceuticals, and was not available at distress sale prices.

Renaud’s cynical take: nothing drives up the desire to do a deal, or the valuation of that deal, like telling a major pharma company that you are just not for sale.

Voter Access under Attack

As the elections approach, news reports have been full of legal battles surrounding efforts in various states to restrict access to the voting booth. These efforts may be traced back to the results of the 2008 election, which might otherwise be interpreted as reflecting an inter-racial detente in American society; however, it may not be working out that way.

Attorney Dale Ho, Director of the National Voting Rights Project of the American Civil Liberties Union, addressed a luncheon at the Boston offices of the Bingham McCutchen law firm on October 16th. He noted that before 2008, only two states had restrictions on voter registration which required the presentation of one of a small number of government-issued IDs bearing a photograph. By August, 2012, twelve states had such a provision. In 2013, after the United States Supreme Court struck down Section 5 of the Voting Rights Act of 1965, thirteen more states adopted new restrictive laws, many of similar import.

It seems statistically irrefutable that the effect of these various laws work against young people, and racial minorities, getting to the voting booth. These laws come in several flavors, and while many laws require photo IDs which may be difficult to obtain (elderly without drivers licenses in Texas may need to travel 250 miles to reach the Texas equivalent of the Department of Motor Vehicles in order to obtain a license), other provisions include: shrinking the period of time prior to an election that early voting can occur; preventing early voting on the day before election day (cutting into the practice of poorer churches that on Sunday they organize voters and on the following Monday, the day before election day, they drive them to the polls); requiring registration of individuals who assist people in obtaining voter status, and requiring their filing of monthly state reports (struck down by the courts); elimination of pre-registration qualification for younger teens; elimination of a civics course in high school.

Prior to 2008, most voter litigation involved improper districting (gerrymandering). Since 2008, almost all the litigation involves voter ID and related new state regulations. The Civil Liberties Union and other groups are sometimes, but not always, successful in barring the operation of these voter limitations either in Federal Court or in State Courts.

Finally, there was discussion of laws limiting rights of felons, once released from incarceration, to vote. Felony convictions fall disproportionally on minority groups. Four states permanently bar felons from voting, and other states have varying disqualification provisions. The United States has the highest incarceration rate of any Western democracy. If all the people presently in prison for felonies were to be organized into a state, that state would have six votes in our Electoral College.

Conclusion: There is going to be voter access litigation for a long time to come.

I’ve Been Thinking….

What about those radio ads for hospitals that say they focus on the human being and his comfort, that you were a human being before being a patient? Next they say the most important thing is to get the best possible medical care. A total logical disconnect, just words that sound good even if they are inconsistent.

When did they start putting advertising into cable TV movies? I will never forgive Volvo as a prime offender.

Why don’t our gubernatorial candidates tell us where they stand on the gambling referendum, or on passing a Massachusetts law banning noncompetition agreements like California? Why are they fighting over who loves children more?

When did television become standard in restaurants? Doesn’t the TV noise interfere with all the diners who are texting?

Why is it necessary in restaurants to purposely design the space to maximize noise, which is defined as energy and viewed as hip, young and modern? Where does an older American go these days for a peaceful meal? Maybe the idea is, “no problem, those guys can’t hear anything anyway.”

Now that the Turks are fighting the Kurds who are the only credible ground force opposing ISIL, and since our strategy is to drop bombs and leave the clearly required ground offensive to others, does this mean the President will have to commit US troops and, if so, will he do it before the election?

There are so many different factions fighting in the Mid-East that I have given up keeping track; my map of the area, in my den, has not been updated with small yellow stickies in weeks. Seems you need to know who is fighting whom on a tribe-by-tribe, or block-by-block basis. No wonder our government seems confused, we cannot even be saved by our Secretary of State’s sonorous voice.

Why do we have baseball playoffs, rewarding teams that get temporarily hot or have traded well on August 31, rather than having a single World Series between the two teams that put in the best hard work during the entire full six-month season?

Oh yeah; it’s the money….

Who else would like to seal our borders against Ebola, disbelieving this is not going to seriously mess with us? (No surprise: my test audience of two people who were exposed to this idea promised me that I was hopelessly naive to think this was possible.)  I can see a three part made-for-TV series: in episode one an outbreak in Africa spreads through the continent (sound familiar?); in episode two, the disease pops up in random places while governments, in an effort to maintain calm and in defiance of warnings from some, continue to reassure and counsel life as usual (sound familiar?); in episode three, the surviving 42 people in the world try to find each other to build a society (or at least mate and drink the remaining fine wine before it sours).

Did you ever notice in the apocalypse movies that the survivors represent a cross section of the world, different races, backgrounds, skill sets, age, degree of lawlessness? What if a genetic or random quirk defined the survivors and they all were of a single sort? All over 7 feet tall. All from Albania. Or all from Newark? Or all Kansas City Royals fans….

Trending M&A

What is happening in the M & A markets during 2014? The short answer is: so far, 2014 is the most active year for United States M & A since 2008 (we all know what happened after 2008).

The current and future state of the market was discussed at the Practicing Law Institute panel held in New York on October 2, 2014, led by senior investment bankers from Lazard and Goldman Sachs.

United States target M & A volume was up 79% from 2013, through mid-August, driven in part by increased frequency of “mega deals”. Nearly 30% of the announced M & A volume arose from transactions in excess of $10 Billion.

There also was a significant upswing in strategic purchases. Part of this trend was driven by private equity firms partially divesting to corporate buyers. Meanwhile, leveraged buyouts by management remained depressed.

Were buyers paying cash? Almost 40% of M & A involved payment in some stock, and 15% of acquisitions were all-stock deals. Of course, when you are talking mega-transactions, it is difficult to come up with all that cash and, hence, the resurgence of paper.

Possible drivers which helped increased M & A: growth in hostile takeover attempts; pressure by shareholder activists seeking, in many instances, to break up larger companies; low interest rates; lots of dry powder on corporate balance sheets; positive performance of the equity markets which made payment in stock more palatable than in the recent past.

Where will M & A trend for the balance of the year and into 2015? While the prognosis expressed was generally positive, with sustained M&A activity assisted by projected modest but continued increase in the S&P, several warnings were noted: the world has become a more dangerous place which, in turn, increases business risk; some current deals may prove over-leveraged, and their weaknesses may trickle back into the marketplace and depress valuations, discouraging sellers; conversely, continued increased price multiples perhaps will dampen the enthusiasm of private equity buyers.

Trends in Med Device Compensation


At the September 16th meeting at MassMEDIC (the association of medical device manufacturers), the folks from Radford, leading compensation consultants, made a comprehensive presentation of trends in med device compensation.

Radford reports that salary budgets have been almost flat for the last two years, but a greater uptick is expected in 2015. Most interesting is the difference in the ways in which public and private med device companies structure their compensation.

Generally, privately owned firms compare themselves to a peer group within their industry with similar levels of invested capital, revenue, development stage and employee count; base salaries, which for a while were low-balled, now are viewed as necessarily competitive, with annual bonuses becoming more prevalent. Most importantly, equity is aggressively distributed, typically in the form of stock options, with awards being measured against ownership percentage in the enterprise.

Public companies identify with a small peer group of public companies with particular reference to market cap, R&D spending and product stage. More of the cash goes into an annual bonus and not into base. Equity is more parsimoniously distributed, with a strong movement toward restricted stock units. Units are issued based on their value in absolute dollars in relationship to overall compensation. Additionally although not surprisingly, as companies grow from private to small public to large public, the bonus metric becomes much more focused on profits.

The most predictable aspect has to do with the progression of executive compensation through the company tiers. Each of base salary, total cash compensation (including bonuses) and long term incentives increases as the company moves from private to small public, and from small public to large public status. This is true not only at the CEO level but also at the CFO level.

Finally, what Radford characterized as a “hot IPO marketplace” has heightened the interest of all employees, in companies of all stages, in equity compensation. This is just a matter of common sense, reflecting the general recovery of the securities markets and the robust performance of life science equities in particular, and consequently the greater potential appreciation values hoped for from the equity portion of comp.

No doubt public device companies are informed, with respect to their information concerning their peer groups, by SEC disclosure of compensation, which has been heightened over the last several years. Since practices in private companies are materially disparate in numerous areas, reference to public company disclosure for this cohort is not going to prove fruitful. For this private cohort, experience in actual hiring will be informative to management, as people are marked to market in an increasingly competitive hiring environment.

Can med device employers hold on to their employees, in this more mobile environment, by vigorous use of noncomp agreements? See my post of September 17th for the answer to that question.

Finally, hats off to the folks at Radford, upon whom I have wholly relied for the data in this post (interpretive commentary should be attributed to and blamed upon me alone).

Boston Olympics? More than Meets the Eye

Suffolk Construction CEO John Fish leads the committee exploring bringing the 2024 Summer Olympic Games to Boston. His reasons, however, are likely not what you expected.

Delivering remarks at the National Association of Corporate Directors/New England September 18th breakfast meeting, Fish emphasized that attempting to attract the Olympics was not just about the Olympics. Although I am sure that he would consider Olympics Games in Greater Boston to be a lot of fun (he never actually said as much), his foci were directed elsewhere.

First, he noted that the development of a robust infrastructure to support the movement, housing, feeding and care of an expanding workforce, regardless of whether the Olympics come to Boston, was a necessary component of robust economic growth. The Olympics could feed into the build-out of that infrastructure, by creating sustainable space which could be utilized as part of that future infrastructure. He sees the Olympics as getting a head start on future development.

Second, in developing Boston’s Olympics proposal, the committee convened many experts in data analysis. What events would be held in which venues and at what time? Where should the housing and support functions be located? What will be the impact on participants and the general population in different locations for pedestrians, drivers, workers, people seeking food or other services? The committee has developed a computerized model to analyze data for all locations relevant to the Olympic Games, and to do so hour by hour. For example [which I am suggesting, this was not made express at the meeting], let us assume there is a hockey game at the Harvard Hockey Arena on a Thursday. Should that be held at 10:00 in the morning, 2:00 in the afternoon or 8:00 at night? What will be most crowded, least crowded, most supported, least intrusive on the different constituencies and how do you address those issues by planning?

Fish cannot say whether Boston will receive the United States recommendation, and thereafter the International Olympic Committee approval, but he hopes that the information-based tools they have developed can be utilized in the future for planning infrastructure build-out.

A week or two ago, the Globe printed a map of Greater Boston with an indication of how the Olympics might fit into existing facilities, and into newly built facilities which could be repurposed after the Games concluded. I recall, at the time, not understanding the logic of how locations were being assigned; having heard Fish speak with respect to the data-driven methodology behind the plan, the logic of the proposal now becomes clear.

Business in China: How to?

Economic growth in China may have slowed, but it has slowed to an annual rate which for the foreseeable future, claims GE Chairman Jeff Immelt, will be between 7% and 8%. I note that this is more robust than predicted growth in other developed economies. Consequently, China should be on one’s mind.

Immelt and the rest of his panel (Suffolk Construction CEO John Fish and Simmons Business School Dean Cathy Minehan) discussed China at the September 18th meeting of the National Association of Corporate Directors/New England, before approximately 200 corporate directors and business leaders. Herewith some of the major take-aways with respect to China:

The best people in China are in government, not industry. They are well-educated with world views. While certain reforms are necessary, there remain some impediments to those reforms. The central government has been centralizing power of late (not necessarily a favorable development), in light of corruption and suspicions with respect to party loyalty. One must be careful in doing business with China.

It is necessary to appreciate the vantage point of the Chinese government, according to Immelt. Their constant primary concern is: how do I house and feed 1.3 billion people? A business plan that is part of that solution will succeed.

So China will be a growth market but there will be risks. You can’t approach China just as a market; they want business to build things within China. This recognizes that one manufacturing job does not create just one manufacturing job; people working in the supply chain may bear an 8-to-1 ratio to the actual number of workers in a given factory.

GE does not “bet the ranch in China,” Immelt stated. He follows events in the country closely, and every single decision with respect to business in China, on the part of GE, is made by him personally.

A bit sobering, I think.

White Collar Labor: pass me the hammer…..

Future manufacturing and construction jobs in the United States should not be viewed as blue collar jobs but rather as white collar jobs.

The September 18th panel convened by the National Association of Corporate Directors/New England (consisting of GE Chairman Jeffrey Immelt, Suffolk Construction CEO John Fish and Simmons Business School Dean Cathy Minehan) spent a lot of time discussing the role of technology in the economy. Technology was seen as the key to economic expansion.

Fish noted that construction was now viewed by him as a “white collar” industry, in that his company was “doing more with fewer people,” and while we needed more seats in vocational schools and we needed companies to take a lead in worker training, the application of technology to construction was changing the nature of the workforce he required.

Immelt was even more emphatic. All industrial companies either are now or soon will be reliant on software and analytics. He used as an example the jet engines built by GE. By measuring robust real-time data concerning how a jet engine was running, its wear and tear, its use of oil and fuel, and its overall performance, and by injecting that broad data back into the manufacturing process, the manufacture of jet engines would improve, over time, establishing a competitive edge.

There was also discussion of the use of technology as solving growing problems; for example, worldwide pollution, something which will become a central planning issue for China (suffering from pollution which must be mitigated by the government). Technology is addressing global warming through new developments in solar and other alternate power, and electric vehicles. Additionally, technology is addressing the shortage of water, a major need for the growth of industry as 70% of the world’s land mass does not have an adequate supply (even before you get to the need for water in fracking).

The ages of the panel members might make you expect that they would not be particularly attuned to technology as a key element in business growth. Nothing could be further from the truth. Job growth and competitive advantage, and the re-establishment of the United States middle class through creation of well-paid technologically oriented jobs, were all related by the panel to further technological innovation.

Experts, including GE CEO Immelt, Analyze Economy

The near term prospect for United States business is on the uptick. Our recovery from the recession is steady, although it is subject to months where statistics appear counter-cyclical. The United States is faring better than most developed economies, and the time to start business initiatives is today. You shouldn’t wait around; the way things look today constitutes the “new normal.”

This is the view of the panel at the September 18th meeting of the National Association of Corporate Directors/New England.  Panel members were Jeffrey Immelt (CEO of General Electric), John Fish (CEO of Suffolk Construction and head of the committee to bring the 2024 Summer Olympics to Boston) and Cathy Minehan (Dean of the Simmons School of Management and former President of the Boston Federal Reserve Bank).

According to Immelt, there are still problems which the United States economy should overcome, particularly paucity of investment for small and mid-size businesses, which are the drivers of employment growth. We also need to work on training and education, protecting small businesses (we say we love them but “crush them”), infrastructure and regulatory reform.

The panel also cited the complex and over-reaching United States corporate tax system. This has led to “inversion” transactions, where American companies re-establish their home base outside of the United States to save on taxes (Immelt noted that “We’re not doing that.”). There was, however, a lack of confidence that the political deadlock would permit addressing the tax code any time soon.

One of the drivers of American manufacturing, which Immelt claims is in its best shape in thirty years, is inexpensive energy compared to our worldwide competitors.

Minehan noted that while the United States is indeed on an “upward trajectory,” one great help would be a “normalization of interest rates,” particularly in the short term; we should not be concerned with month-to-month volatility. She also noted that the United States was benefitted by our ability to attract, educate and retain young people from other countries (“thank God for immigration”), which makes the United States more resistant to an aging demographic than other developed economies. China was going to run into a problem of an aging workforce as a fallout of its “one child per family” policy.

The panel noted that we were not training people to do the jobs we need, and that we lack the technical schools to train an intelligent workforce. Education is too expensive, and there is unsustainable student debt. Industry must take a lead, also, perhaps in summer internship and apprenticeship programs.

Failure of the government to cooperate with industry to understand the growing needs for infrastructure, including roads and transportation, will stifle growth and already is causing gridlock in a variety of ways. For Massachusetts, attracting people from overseas and inducing them to work in Massachusetts outside Route 128, attracted by new infrastructure support in the rest of the State, would be a great way to build the economy and to provide affordable housing.

The panel agreed that under-employment was not just an American problem. Immelt noted that under-employment is the global issue, and that for example over 60% of Egyptian college graduates were unemployed.

In subsequent posts, I will address three additional areas discussed by the panel: the role of technology; doing business with China; and, the effort to attract the Olympics to Boston.

Sox it to me….

I don’t know about your email box, but I am flooded by emails from baseball fans near and far, driven by a press frenzy and (surprisingly) arriving from such baseball outposts as Chicago and Washington, relative to what the Red Sox ought to be doing when they rebuild.

For starters, the outfield seems over-staffed yet complicated. Jackie Bradley has been unable to hit the big league slider. He is a kid; he should be sent down to Triple A to see if he can work on his fundamentals.

This still leaves a plethora of outfielders: Cespedes who seems to be lionized even though he is hitting below .260, the newly signed Cuban Castillo (who never played a major league game until last night but landed a $72,500,000 long term contract), the allegedly much-feared Allen Craig (who is hitting around .200 and can’t seem to find his footing), last year’s star Shane Victorino (who I think has played fewer games than my grandmother this year by reason of injury, and appears to be continually fragile), and then Mookie Betts (a surprise 21 year old with attitude and skill).

Throw into the mix Daniel Nava who had a fabulous year in 2013 and this year is languishing (like many of the Sox) around the .260 mark with 4 home runs in over 300 at bats. And he can’t run. Where does he fit in?

Ellsbury is having a lousy year with the Yankees. Would he have done better here? One wonders. Then again, he is surely not worth the salary the Yankees are paying him, and he is still on the early side of his tenure with the Yankees. I love the guy, but perhaps it was a good move to let him go?

The Sox have weaknesses in pitching. Who will they have to trade to get pitching, if they don’t want to give away any of the “kids?” If you protect Betts, how much outfield playing time could you give Craig (who has no trade value)? You are not going to blow out Castillo, nor Cespedes. Betts likely has huge trade value, but for that reason do you let him go? If you let Betts go, aside from Cespedes your outfield looks like unproven Castillo, unperforming Craig and crippled Victorino, into which salad you would shake Bradley if he develops down in Pawtucket and then Nava.

Is common wisdom correct, that we need big-time starters? One of my correspondents claims that the Orioles, who have opened a huge lead in the American League race, and just clinched the Division, don’t have a “stud starter.” Could Buchholz and Kelly jointly fill a semi-stud top-of-rotation role?  (Last night’s shelling of Buchholz surely cannot be reassuring.)  Blend in some of the kids (Webster, Rubby, Wright)? Mujica and the rest of the committee as closers (Koji is likely toast). Is that enough? Given the price of seats, does management have the nerve to leave the pitching staff right where it is today, bearing in mind that the team is struggling to win 70 games? An interesting question.

So what is with the infield? Napoli has some power but not a lot of RBIs and has been spotty. (He has a high OBP and likely is misused hitting later in the line-up but he projects as a power hitter so he hits where the power guys hit.)  Middlebrooks, whom the Sox seem to love because of his alleged power, has been a total disaster for the entire year. How much playing time do you give him at third base? Everyone keeps talking about Holt as a backup but I see him as a third baseman. Bogaerts seems coming around as a shortstop and I don’t think anyone will move his position again, nor trade him. Do you give Craig a shot at first base? Platoon him with Napoli, and use either or both of them to spell Big Papi in the DH role?

This is not the first time Big Papi has had a weak year. A weak year punctuated by 32 home runs I might add; will he come back in terms of batting average? Is this the beginning of the end for Big Papi?

Another way to slice the pie is to say that Cespedes can become the next Big Papi. He has never hit for the average that Big Papi has achieved in many years; can he be trained to be sufficiently patient at the plate to do that? Does he care to do that in any event? He becomes a free agent at the end of 2015 I think. If he continues to play the way he is playing, and doesn’t conform to Red Sox needs, maybe he doesn’t care because he goes elsewhere as a position player, without changing his act, for the big bucks.

That brings us to our little second baseman, Dustin Pedroia. In each of the last several years he has had noticeable decline. He is at this moment being operated on for a hand injury and is gone for the rest of this year, but then there isn’t much of this year left. What will he be like on his return?  Sox management on today’s team web-page assures us that after surgery he and his power will return; sounds like the old joke (“Doctor doctor will I be able to play the piano after my surgery,” to which the doctor replies in the affirmative and the patient says “great, because I don’t know how to play now and I always wanted ….”).  It is premature to suggest that Pedroia, everyone’s darling and the player with the attitude you wish everyone had, former Rookie of the Year, former .300 hitter, might be fading to average-ness at this early age. But he is small, he plays all out, he punishes his body in every game and in every role. How long can he last? You know the book on small ballplayers, don’t you? They burn brightly and then all of a sudden, the flame goes out.

So maybe if the Sox are married to Middlebrooks he is at third, Bogaerts at short, Pedroia at second, Craig/Napoli at first, and Holt is the floater. (We will put aside the fact that Holt has a higher batting average than all the rest of these guys, and, in fact, just about a higher batting than a couple of them combined.)

Oh, one more thought; Mookie Betts was a second baseman in Pawtucket and the Sox are now trying him out at that position. Does that mean we are now short of proven outfielders and long on proven infielders?

Back to pitching one more time. Everyone keeps telling me that Jon Lester will come back. Is there anyone out there willing to bet on that? I have $10 that says that Lester will not be back in a Sox uniform next year. Anyone want the bet? Lester’s return has become something of urban legend. But the Sox don’t give long contracts to aging players, and Lester is going to bring down a long-term fortune next year given his studly performance so far at Oakland.

I see Lester next year in pinstripes. Eat your heart out.