NextWave of Pharma Innovation?

Posted November 8th, 2012 in Exits IPOs M&As, Pharma industry

Medical innovation is the key to addressing the big unmet needs in neurodegeneration, metabolic and heart disease, cancer, among many other conditions.  Not only do new therapeutics and devices aimed at this diseases offer clinical promise, but they also can provide significant health economics benefits.

This combination – clinically meaningful advance coupled with sound economics – is what those of us in the life science R&D funding ecosystem focus on every day.  On the venture side, figuring out how to generate returns from medical advances requires us to innovate both with regards to products and business models.

Pfizer’s recent acquisition of NextWave Pharmaceuticals sparked my interest in exploring this topic of innovation.  As many of you probably saw in October, Pfizer announced it was purchasing NextWave for $255M upfront and up to $425M in earnouts if sales milestones are met.

Founded in 2004 by Mahendra Shah in concert with Vivo Ventures and Sofinnova Ventures, NextWave was initially focused on developing more than 25 products leveraging various liquid and combination delivery technologies.  They raised a $10M Series A in 2005, a $40M Series B in 2007 led by Aisling Capital and Fidelity (which we looked at), a bridge round in 2010, and a $45M Series C in early 2011 led by Panorama and Bay City along with Kearny Venture Partners.  This recent financing also focused the company onto just a pair of lead programs rather than a large basket.

Kudos to all of those involved.  After ~$105M was invested over the past 8 years, the venture investors will likely see a 2-3x return upfront and a path to significantly more over time.  If some of those milestones pay out, this is certainly a top quartile deal outcome.  Beyond the interesting financials, I see three other pieces of good news worth highlighting from this deal.

First, it represents the successful exercise of an option-to-buy deal structure.  Pfizer put in a $20M option earlier in 2012, and upon approval exercised their pre-negotiated right to purchase the company.  Always good to see those deals play through the way we hope.

Second, and a related point, during the option period Pfizer collaborated extensively with NextWave to ensure a good outcome (approval with the right label) and an appropriate manufacturing plan was in place.  Witnessing successful big-small company partnerships is also a good thing, especially given how challenging joint efforts can be.

And third, this deal was done by Pfizer’s Established Products business unit.  Unlike the Primary Care and Specialty business units at Pfizer, this business is supposed to be where old products go to die on the tail of their lifecycle.  Yet this group has been remarkably creative in how they structured the deal with NextWave and worked to a great outcome.  Unexpectedly innovative business units and their strategies should be celebrated and rewarded.

But let me now share my broader concern and where my enthusiasm for the deal dims: why is Pharma spending hundreds of millions for a reformulated 50-year old molecule, methyphenidate, in a world where healthcare costs are spiraling out of control?  At a time when Pfizer is cutting its internal R&D budget and missing out on innovative BD deals (i.e., they aren’t one of the top buyers of innovation these days, or known as a preferred strategic partner in the biotech world), why are they going to fork out up to $700M for a liquid version of Ritalin?

To counter the criticism that I might be shortchanging the story, lets look at the market and the product, Quillivant XR.  Methylphenidate (Ritalin) went generic ages ago and is widely used to treat Attention Deficit Hyperactivity Disorder or ADHD in children and adults.  ADHD is a serious medical condition and I’m all in favor of diagnosing and treating it to help those who suffer with it.  In the Ritalin-related armamentarium for ADHD, there are pill forms for once-daily and twice-daily use.  There are chewable tablet forms for those kids that can’t swallow pills.  There are even liquid forms for those kids who prefer drinking fluids, albeit prior to Nextwave these were only twice-daily versions as far as I’m aware.

This is where Quillivant XR comes to play.  It’s a once-daily liquid formulation, based on innovative liquid delivery technology from Nextwave’s partner Tris Pharma, NextWave.  Its interesting technology for sure – attractive extended release profile, stable across food effects, less nighttime disruption when given in the morning, etc – and offers parents with kids who don’t like pills a nice incrementally improved alternative.

The big question is what should we – and we all are paying for it in our insurance premiums – pay for this type of product advance?  Is it worth a significant price premium over all the generic alternatives?  For a parent with a child who doesn’t like pills and wants convenience with effectiveness, a once-daily liquid would be great – especially if health insurance pays for the bulk of it.  But should this narrowly differentiated improvement demand a big premium over other ADHD alternatives, especially generics?

Apparently Pfizer must think so.  To justify the price tag Pfizer paid, they must have a forecast above $500M at peak sales.  And to get to these forecast numbers amidst a sea of generics and competing ADHD franchises (like Adderall), the price has to be an order of magnitude, or more likely two orders, higher than generic or even branded generic versions.

That’s hard to stomach at a time when the fiscal cliff of healthcare costs looms large.  It’s obviously great for Pfizer to get an approved product with $500M+ in top line revenues that they can drop into their sales rep’s bags, and their option-to-buy structure derisked the bet enormously for them.  So for each individual Pharma company, acquiring this type of incremental, marginal product may make sense to their P&L in the near term.  Wall Street will likely reward them.  But for the healthcare ecosystem, is this really worth it?  I’m doubtful.

The question I keep coming back to: where’s the commitment to real biomedical innovation – focusing on high impact, clinically-meaningful advances with unquestionably positive health economics?

A second order consequence of deals like this is that, reflecting the herd mentality of many venture investors, these deals channel more risk capital towards these less innovative, more incremental medical advances.  I’ve already heard VCs talking about “NextWave 2.0”.  I wish them luck, and hope they make money off the deals.  Returns will help the asset class as a whole.  But I’ll remain on the sideline on this “2.0” thesis, and focus on real innovation solving big medical challenges.

The NextWave flavor of specialty pharma reformulation play was in vogue back in 2005-2007, where lots of similar reformulation plays were funded (e.g., Zogenix, Alexxa, Alimera, Cogentus, Horizon, etc).   Atlas did some as well unfortunately.  But given the challenging returns in that space, I had hoped the model had run its course.  The number of truly early stage deals (see blog here) suggests that the recent tide is moving towards more meaningful medical innovation.  And fortunately, funding the latter type of play still pays dividends when done well: great returns have been achieved in deals like Avila, Stromedix, Amira, Plexxikon, BioVex, Intellikine, and many others focused on cutting-edge innovation.

In the capital markets, where companies and their projects compete for funding, I’m hopeful the winners in the long run will stand on the side of real innovation.


This entry was posted in Exits IPOs M&As, Pharma industry. Bookmark the permalink.