Did the Clinical Data to Forest Labs deal hurt biotech?

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By M.E.Garza   
Wednesday, 23 February 2011 12:41
The news that Clinical Data (Nasdaq:CLDA) sold to Forest Laboratories (NYSE: FRX ) for only $30 a share plus incentives sent some minor shockwaves through the biotech community.
It wasn’t that the news wasn’t highly anticipated, in fact, going as far back as 2007, the man who engineered the biotech sale was already polishing CLDA for deals.

The thing that left investors scratching their heads was the unexpected $1.2 billion buyout price- $30 a share in cash plus $6 per share more if sales milestones are met- a discount of nearly 12 percent from Friday's closing price of the stock.

Randal J. Kirk, is the man behind the scenes at CLDA that everyone has been second-guessing  for weeks leading up to today’s deal is the same billionaire who structured a $2.4 billion sale of biotech company Scios Inc. to Johnson & Johnson (NYSE: JNJ) in 2003 and a $2.6 billion sale of New River Pharmaceuticals to Shire (Nasdaq:SHPGY) four years later- both while pocketing a huge chunk of the proceeds along the way. Yes, Kirk has been positioning himself for the windfall from today’s Clinical Data deal for years and  just as it did back then, the media attention will now turn to the next company that Kirk has been molding into a more valuable asset- his new synthetic biology company Intrexon.  Forbes and others are already calling the venture far bigger than anything Kirk has done before. Kirk predicts the new company will someday be “the Google of the life sciences.”

Nobody can fault Kirk, or his method for means and prosperity, but some are left wondering whether the CLDA/FRX deal is good for the rest of the biotech sector given the broad-reaching sentiment that he should have held out for something sweeter. Yes, CLDA was a $14 stock just a few weeks ago, but speculators had hoped for a buy-out somewhere north of $40. In fact, one analyst had even set a price target of $46 per share of Clinical Data stock.

After all, the Massachusetts-based biotech had just gotten FDA approval for the antidepressant Vilazodone (marketed as Viibryd), which Kirk himself calls “the first genuinely new antidepressant in 14 or 15 years.”  The market felt Viibryd offered Big Pharma a very special proposition: The drug does not have the negative impact on sexual associated with most of the current therapies available to those suffering from depression. Those rooting for the stock argue that the market potential could be tremendous given that as many as 40% of patients currently taking some of the best-selling depression treatments report sexual side effects, which often leads to discontinuation of therapy. In fact, clinicians observed a slight improvement in sexual function for patients treated with Viibryd, although those improvements did not reach statistical significance. Even Kirk said, “I haven’t spoken to anyone who doesn’t appreciate the differentiation this has.”

Theoretically, a big drug company desperate for new products would have offered a better deal. Sources told BioMedReports that some at the company were hoping for a deal with Eli Lilly (NYSE: LLY)- who markets Cymbalta- late in the game.  Even now, some feel that there is still a window for another firm to come in and top the priced deal, but given his track record and the fact that Kirk is sitting on a 52% stake worth over $600 million (common stock, convertible notes and warrants), it looks to most of us like the dealin’ is done and that Kirk is ready to move on.

The entire drama has prompted an investigation by the usual suspects- law firms acting “on behalf of investors”- questioning the potential unfairness of the takeover and possible breaches of fiduciary duties by certain Clinical Data officers and directors. According to various press releases issued by those firms, some of those investigations are focused on whether the Clinical Data Board of Directors undertook an adequate and fair sales process to obtain fair and maximized consideration for all shareholders before entering into the Forest transaction. Some are also concerned with whether Forest Laboratories is underpaying for CLDA shares. Several potential class action lawsuits would seek to maximize the amount of money and information shareholders would receive in the buyout.

There is, of course, the other side of the coin. Forest shares have dropped after investors in that stock feel that the buy-out will impact profits for at least the next two years. In addition, some psychiatrists have revealed skepticism about Viibryd’s side effect profile.

Today’s biotech industry has grand plans. They are the companies working on the huge sellers of the future, but like anything else, the big pharmaceutical companies aren’t just going to lay down and give them whatever they want. Despite industry opinion to the contrary, we found it interesting that immediately following the CLDA news, Merck told the Wall Street Journal that it doesn't expect to make any big acquisitions this year. Instead, the pharmaceutical company could pursue alliances, license purchases or smaller takeovers. Earlier this month, Pfizer Inc. (NYSE:PFE) said that it expects to spend up to 23.5% less than previously projected on research and development in 2012.

Those types of statements add even more weight to our analysis of Rexahn Pharmaceuticals (AMEX:RNN). Like Clinical Data’s Viibryd, RNN’s anti-depressant candidate, Serdaxin has all the markings of a blockbuster. Serdaxin works on the pleasure center of the brain and helps raise both dopamine and serotonin levels. Scientists and clinicians believe the drug will continue to show excellent efficacy in on-going trials and that its safety profile is exceptional. The fact that it has shown the potential to treat multiple CNS illnesses including depression, anxiety, and other mood disorders has already made it attractive to Big Pharma. My report of an early partnership offer for Serdaxin worth an estimated $20 million upfront coupled with over $1 billion in milestone payments was actually corrected by someone familiar with the offer late last week. Apparently, the deal presented to RNN had only a half-billion milestone kicker attached to the $20 million upfront cash proposal.

In any case, the reality is that many of the big pharmaceutical players have been stashing billions away for spending on companies and drug candidates in the later stages of development who have a high probability of success in the Phase III trials.

As Richard Franco, the Chairman and Chief Executive Officer of DARA BioSciences (Nasdaq: DARA) told BioMedReports earlier this month, “What became clear to us, was that what was going to happen with this patent cliff- over the next several years- was going to really diminish revenue in the U.S. Pharma  business like no other time in history. We drilled down a little bit and we found that of the top ten drugs in the world, nine will lose their patent protection over the next several years and of the top twenty, eighteen will do the same. So, there is a great need to fill and replace this revenue; which totals about $92 billion. Almost a third of $300 billion which is generated in sales in the United States.”  Taking a note from Kirk, Franco and countless other biotech executives have set about saying, ‘What do we need to do to get a major position in here and have big pharma take interest in what we’re doing?’

Franco’s decades of experience working on the inside at big pharmaceutical companies like Glaxo Inc. [now GlaxoSmithKline (NYSE: GSK)] and Eli Lilly may help temper expectations. “You never know with big pharma," explains Franco. "I did business development with Glaxo for three years and I know how the vagaries go- like the president of Pfizer changes and everybody freezes in place. I’d hate to forecast that, but what I can tell you is that deal flow has increased dramatically."

Disclosure: Long RNN



BiomedReports is not paid or compensated to report news and developments about publicly traded companies. Full disclosure can be read in the About Us Section

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