BioWorld Today Columnist

If you stick around this industry long enough, it's hard to avoid forming some pretty firm opinions about how things work. Of course, it never pays to get too blinkered in one's thinking, but sometimes . . . well, we just can't help it. So in the spirit of humility and change, I've highlighted a few events from the past month that caused me to question some preconceived notions. Maybe you'll find some surprises, too.

1. Merger Spelled Backwards Is (Almost) Regret

It's been my firm belief that companies should make a loud beeping noise when reverse merging into a shell or zombie firm, so as to warn investors to stay clear. Nevertheless, reverse mergers have been gaining in popularity and legitimacy over the past several years, particularly since making a bona fide IPO has become next to impossible (at least until the last month or so). The recent acquisition of Cougar Biotechnology by Johnson & Johnson for nearly $1 billion is a remarkable validation of the fact that there's more than one way to get a public listing.

Not that it's time to throw all caveats out the window. Cougar became an over-the-counter stock in 2006 by merging into a shell with the catchy name of SRKP 4 Inc. SRKP 4 was created solely for the purpose of being a vehicle for a reverse merger, and creating and maintaining these shells has long been something of a cottage industry for some enterprising souls. This was made more legitimate back in 2000, when the SEC changed rules about reporting, requiring over-the-counter companies to make the same kinds of public filings as their counterparts on the NYSE and Nasdaq. (But note that those rules don't extend to the Pink Sheets, which is still a mine field of junk.)

Failed biotech companies actually have proven to be popular shells, because they often have debt-free balance sheets and huge operating losses that can be carried forward against future taxes. That's how erstwhile transgenics company Nexia Biotechnologies became Enseco Energy Services. Other biotechs have come public via the shells of unrelated, essentially defunct biotechs - examples include Infinity Pharmaceuticals (through Discovery Partners International), Micromet (through CancerVax), Cyclacel (through Xcyte Therapeutics), Solexa (through Lynx Therapeutics), IDM Pharma (through Epimmune), Epicept (through Maxim Pharmaceuticals), and Anesiva (through AlgoRx). With the exception of Solexa, which was acquired by Illumina in 2006 for $600 million, these companies thus far haven't exactly been a bonanza for investors. Indeed, many of those deals, and others that relied on true shells, went hand-in-hand with a private financing, and it's questionable how much of a focus management ever had on long-term value creation vs. securing a financing by offering an easy exit to investors.

But the batting average just got a lot better. Cougar, as far as I can tell, is the new record holder for reverse merger value creation.

2. A Rematch with Vanda!

Considering the abuse I've given to in-licensing companies (or no-research, development-only companies, accelerated commercialization companies, or whatever else you want to call them), it's only fair that I note the amazing turnaround success of Vanda Pharmaceuticals. The epic struggle to bring iloperidone (now trade-named Fanapt) to market didn't begin with Vanda. This atypical antipsychotic was discovered at Hoechst Marion Roussel (now Sanofi-Aventis), then licensed to Titan Pharmaceuticals in 1996, then sublicensed to Novartis in 1997, and finally to Vanda in 2004. Vanda still has obligations to Novartis, which still has obligations to Titan. (And if you think the 625 percent gain Vanda stock posted the day Fanapt was approved is impressive, look at the 15,000 percent gain Titan has made off its 52-week low of one penny!)

Usually compounds that have participated in that kind of game of hot potato haven't fared terribly well. And I'll still assert that Vanda's surprise success - approval just nine months after a "not approvable" letter - is more the exception than the rule. Some in-licensing companies have met with great success, but I still don't believe this is the "de-risked" path to success it was once put forward as. There are more in-licensing failures than successes, and even some companies that succeeded in the short-term - getting acquired for instance - have nonetheless met with long-term disappointment. Just consider Pfizer's $1.9 billion acquisition of Vicuron in 2005. It got the antifungal Eraxis (anidulafungin) and the antibiotic dalbavancin. The latter still hasn't been approved, and while Pfizer doesn't break out its sales of the former, that's probably an indication that sales have been paltry.

Nevertheless, it's interesting to note that Clovis Oncology just raised $145 million in start-up financing to pursue . . . you guessed it! . . . a no-research, in-licensing model. Vanda's ability to snatch victory from the jaws of defeat probably has little to do with that deal - more likely, it's the involvement of Patrick Mahaffey and other execs from Pharmion, who have a track record with this strategy that's pretty hard to gainsay.

I'm going to go ahead and keep gainsaying the strategy anyway. Deal-making is an art, and talented execs like Mahaffey may be able to keep beating the odds. But it's not where I'd place my chips.

3. Majority Rules?

I believe in democracy, the wisdom of crowds, apple pie, and all that . . . but lately I've begun to wonder a bit. When Carl Icahn lost his proxy battle with Biogen Idec shareholders last year, it was clear that he hadn't been persuasive that his slate of directors would push the company in a direction (i.e., a sale to a large pharma company) that maximized long-term shareholder value. Although the stock had run to an all-time high of more than $80 per share on speculation about an acquisition, by the time Icahn's directors came up for a vote, the prospects of a buyout had dimmed and the stock had come back down to earth. It actually rallied back north of $70 a share in the wake of his defeat and dropped again only after new cases of PML infection associated with Tysabri were reported. Investors spoke pretty clearly then that they didn't need Icahn's involvement.

But could democracy have failed Biogen shareholders? On May 11, Icahn and other investors distributed a presentation to stockholders (filed as a Schedule 14A on May 12) that makes some pretty convincing points about the shortcomings of Biogen under current management - particularly as regards the company's lack of productivity in R&D and pipeline advancement. To be fair, Biogen came back in a subsequent filing with some strong counterarguments, and it has solid revenue performance in 2008 to point to. But unfortunately, that doesn't translate to much of a performance for the stock.

The true test comes when shareholders vote again on directors supporting Icahn's latest proposal, which is to split the company. Icahn was resoundingly defeated last year, but he's gained at least one more important ally this time around: RiskMetrics, a firm that advises institutional investors and wields a lot of influence . . . and that was on the side of Biogen management last year.

Although I doubt Icahn will succeed in gaining control of the board, more investors may be second guessing their votes from a year ago.

Meanwhile, maybe I'll be second-guessing some of my other deeply held beliefs.

[Editor's note: Biogen Idec reported preliminary results of the stockholder vote Thursday. Two members were re-elected, while one of Icahn's nominees gained a seat on the board. Biogen said the vote on the fourth seat was too close to call.]

Karl Thiel, an analyst for the Motley Fool, can be reached kthiel@qwest.net. His opinions do not necessarily reflect those of BioWorld Today.