FOOL ON THE HILL
Up-and-coming biotech Isis, the top dog in the business of antisense technology, scored a major patron in the maker of Prozac. The deal is what could be called a "company maker," which is a good signal to investors: The time to put high-risk capital into developing biotech drugmakers is when they have received the imprimatur of big pharma, not before.
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Big drug maker Eli Lilly (NYSE: LLY) and antisense biotechnology company Isis Pharmaceuticals (Nasdaq: ISIP) announced a major alliance last week. Shares of the latter vaulted over 60% in three days, from around $10 to over $16. The alliance promises Isis at least $200 million over the next four years, and gives Lilly some major drug pipeline fuel. For Isis, featured in the July issue of The Motley Fool Select, it's the kind of deal that can truly be called company-making. Isis has been toiling for 12 years to build a drug discovery platform technology and drug product pipeline around its antisense technology, but has produced only one product and negligible revenues. (We'll talk more about what "antisense" means further down.) The company took in $37 million in year 2000, burned through $25 million in cash, and had $127 million in cash and short-term investments -- hardly enough to fund years of very expensive drug development and testing -- when the year ended. Against those numbers, Lilly's injection is huge: Prozac's maker hands over $25 million in cash at closing and will purchase $75 million in Isis stock at $18 a share -- 79% over the shares' close for the day prior to the announcement -- giving it 9% ownership of the company. Lilly will loan Isis $100 million at no interest, which Isis is to repay in four years, either in cash or stock valued at $40 a share. Where do I get terms like that? There's more. For its $25 million, Lilly licenses Isis's non-small-cell lung cancer drug, ISIS 3521, now in Phase II and Phase III trials. Lilly commits to reimbursing Isis for the remaining Phase III development and registration costs, and the big pharma will pay $50 million plus royalties should ISIS 3521 meet certain milestones, such as Food & Drug Administration (FDA) approval and marketing success. Lilly will also make milestone and royalty payments for other indications (drugspeak for "other diseases or conditions") of the drug. The $100 million loan funds a four-year collaboration to discover antisense drugs for metabolic (diabetes, obesity) and inflammatory (rheumatoid arthritis, psoriasis) diseases. The partners will use Isis' GeneTrove antisense technology to explore the functions of 1000 genes and validate about 300 as potential targets for antisense drug discovery. If Lilly finds a target and chooses to develop a drug for it, Isis will earn milestone and royalty payments. For a company that had a market value of $400 million when the deal was announced, a $200-plus million deal is pretty heady stuff. Why antisense? This should help you understand another reason why antisense is special for drug discovery. As Isis and Lilly test 300 genes using antisense, they may find that this gene or that gene plays a role in disease. But here's the beauty of it: If by using antisense inhibitors to stop a protein from being created, they find that protein is implicated in a disease, they not only have a drug target (the protein), but also the potential drug (the antisense inhibitor) for that disease, without going through years more of looking for compounds. As our recent interview with biotech venture capital firm A.M. Pappas & Associates highlighted, genomics advances have led to a proliferation of drug targets, so that the drug discovery bottleneck has shifted from finding targets to finding small molecules that work on the targets. With antisense, once you have found your target, you have your potential drug. The potential cost savings are astounding. (You can learn more about drugmaking at our InDepth: Pharmaceuticals page.) Other companies have tried and are trying to work with antisense, but the Lilly deal, following Isis pacts with Elan Pharmaceuticals (NYSE: ELN), Celera Genomics (NYSE: CRA), and Merck (NYSE: MRK), shows a consensus building that Isis is not only the top dog and first-mover, but that its technology has come of age. For more about that technology, see Zeke Ashton's detailed analysis in The Motley Fool Select. For why the deal is a company-maker, read on. A longer lease on life You start with the venture capitalists, cruise to the IPO, and, if you're lucky with timing and a story that captures Wall Street's fascination, you may reap some cash from a secondary stock offering. All along you try to interest deep-pocketed partners -- Pfizer (NYSE: PFE), GlaxoSmithKline (NYSE: GSK), or Merck (NYSE: MRK), for example, the latter which Mike Trigg has been analyzing for our Rule Maker Portfolio -- who want to take advantage of drugs developed with new technologies and the platforms that discovered those drugs. They are also the companies with worldwide sales forces that can make a drug a hit. The alliance's personal significance There's another, insider perspective, too. Science is subjective and everchanging. Despite the data for ISIS-3521 that Lily undoubtedly went over atom by atom, no one can know for certain that a given project will work or that it won't be superceded by something else to be published in Science or Nature next week. Books like Barry Werth's The Billion-Dollar Molecule: One Company's Quest for the Perfect Drug about Vertex Pharmaceuticals (Nasdaq: VRTX), show that drug companies deal with these risks very much like others that make huge investments in research and development. At first they may screen people and deals based on publications and numbers, but in the end, the decisions have to be based on relationship characteristics, such as familiarity and trust. That's why my ears pricked up at one point long into the conference call announcing the Lilly-Isis deal. Lilly's Richard DiMarchi, vice president of research technologies and product development, mentioned casually that an Isis representative also participating, Chief Medical Officer Andy Dorr, was a former Lilly clinical oncologist, and that the "confidence [Lilly] placed in Andy helped" seal the deal. I don't doubt it. If you're going to take scarce resources outside your company and put them in a technology that is still very much developing -- even though it has produced one drug and another late-stage drug candidate -- at least you want to be in bed with someone you've known and trusted, someone who once played on your team. Someone you can deal with the many times that drugmaking presents forks in the road and you have to navigate among the subjective scientific assessments of your own employees and those at your partner company. I realize that sounds horribly "Old Boy," but as I get older I see it as "Old Everyone." It's plain human nature, and why DiMarchi's words about Dorr are far more important than a few words. Time to buy? Tom Jacobs (TMF Tom9) and his partner are a two-kayak family. Tom owns shares of Millennium Pharmaceuticals and Vertex Pharmaceuticals. To see his other stock holdings, view his profile, and check out The Motley Fool's disclosure policy.
Investors interested in new biotechnologies have known for years that Isis is the top dog and first-mover in antisense technology. Briefly, genes lead to the creation of proteins, which carry out all of the body's major functions. The gene's DNA is copied to messenger RNA (mRNA), so called because it delivers the code into the cell, where it is read and a protein is formed. Antisense technology aims to inhibit the creation of proteins implicated in disease by creating mirrors of the mRNA that will bind to it, preventing the mRNA from creating the offending protein. Antisense is elegant in theory, but has proven difficult in practice. To its proponents, the technology offers an unparalleled specificity and effectiveness, and they can point to Isis' marketed antisense drug, Vitravene, as proof that it works.
It's a constant battle for up-and-comers to find funding sources without giving away so many rights to future revenue streams that shareholders are stiffed. When you're Isis, a small company that will burn cash for years while it tests and refines new drug discovery and development technology, you need a continual diet of the green stuff.
Deals with deep-pocket drugmakers represent more than just cash lifelines and marketing muscle for future drugs. They are building blocks for more deals with more partners. Once Human Genome Sciences (Nasdaq: HGSI) secured a deal with a precursor of GlaxoSmithKline (NYSE: GSK), other deals flowed its way. After Bayer AG (OTC: BAYZF) paid $130 million for 14% of Millennium Pharmaceuticals (Nasdaq: MLNM) and committed $331 million for 225 drug targets, other companies lined up. Lilly's cash and vote give Isis a better future, and other partners know that the price of partnering with Isis has just gone up.
The symbolism for Isis is enormous too. People and projects in big pharmas, as in all large corporations, are constantly competing for R&D resources. The last thing they want is to give up potential resources to another company down the road. It implies that its own gazillion-dollar labs and big-shot scientists have somehow failed or that their projects shouldn't have priority. They don't just smile, link hands, sing "Kumbaya," and sign a check to Newbie Biotech. Everyone in the drug world understands this and why it's a coup for Isis.
The time to put high-risk capital into developing biotech drugmakers is when they have received the imprimatur of big pharma, not before. With Lilly's seal of approval, Isis is now one good place for risk-tolerant biotech investors to look.
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