Editor

When thinking about buyouts, most industry observers would hardly consider Genentech Inc. first.

The premier biotech firm is too big, too successful to be a likely target itself, and snatching up smaller firms has not been Genentech's business model. By sticking to its knitting, the company continues to thrive, creating blockbuster drugs such as Herceptin (trastuzumab). The drug, approved in 1998 for metastatic breast cancer, last week won the FDA's blessing for use in early stage disease, as part of a regimen containing doxorubicin, cyclophosphamide and paclitaxel.

Why acquire, when you've got so much strong science in house?

But news earlier in the month of Genentech's plan to grab Tanox Inc. for $20 per share, or $919 million - about $650 million net of cash - made a certain amount of sense, even if the price amounted to a 47 percent premium over the previous trading day's closing price for Tanox.

The deal, expected to close in the first quarter of next year, would do away with the royalties due Tanox on sales of the asthma drug Xolair (omalizumab), and line up Genentech to get a stream from Novartis AG, which has been paying Tanox as part of the companies' three-way deal. Genentech, which already markets Lucentis (ranibizumab) for the wet form of age-related macular degeneration, also gets in the Tanox takeover preclinical TNX-234 for the dry form of AMD.

Wet, or neovascular, AMD is characterized by new blood vessels forming behind the eye as the body attempts to get more blood to retinal tissue. When the blood vessels break, the tissue around them is progressively damaged.

Wet AMD, while making up 10 percent to 15 percent of cases, is responsible for most blindness caused by the condition, with vision loss typically starting at about age 55. The much more common, gradual, dry AMD, against which TNX-234 might work, involves drusen, or yellowish deposits, appearing in the retina to cause a loss of pigment.

Also in the Tanox pipeline is TNX-650, an interleukin-13 target for Hodgkin's lymphoma and asthma, at the Phase I stage for both indications. Furthest along, though, is TNX-355, an anti-CD4 antibody in development as a viral entry inhibitor against HIV/AIDS. TNX-355 is nearing Phase III trials, but possibly will get there without Genentech. Analysts expect the firm to try out-licensing the drug, since it fails to fit Genentech's areas of interest.

Licensors might not be easy to find. Terence Flynn, with Lazard Capital Markets in New York, wrote in a research report that the "high doses of TNX-355 necessary to generate viral reductions (three times that of an average antibody therapeutic) will adversely impact" the drug's chances, and could relegate the compound to the salvage-patient population, a market due to become increasingly competitive."

Flynn said Tanox wasted money by plowing Xolair royalties back into the nonviable HIV drug, which has run into problems. In early August, Tanox said an end-of-Phase II meeting with the FDA included the agency's request for another dose-ranging trial - though regulators said an appropriately designed trial could become part of the pivotal efforts.

Hal Barron, vice president of product development and chief medical officer for Genentech, was noncommittal about TNX-355 during a conference call.

"Our approach to this, as well as the entire pipeline, is to go through our usual processes of evaluating the science, the clinical data and determining our plans for next steps and to determine whether we would further develop the molecule internally or work with a collaborator who has a greater expertise in HIV therapies than we do," he said. "But at this early stage, we really can't say anything more than that."

Even setting TNX-355 aside, the premium paid by Genentech for Tanox gave pause to some observers, including Flynn. "It was definitely a surprise to me," he told BioWorld Financial Watch. Flynn had a "hold" rating on Tanox, and estimated revenue that the firm would get from all sources in the Xolair deal at $52 million this year, $66 million next year, $91 million in 2008 and $117 million in 2009.

Bidding by Novartis ahead of Genentech might have pushed the price higher, he acknowledged, since "Novartis represents the most logical suitor," given the Xolair connection. Others who might yet try to intervene include Bristol-Myers Squibb Co., Boehringer Ingelheim GmbH and Abbott Laboratories, but Flynn deemed remote the possibility that a scenario would arise like October's with AnorMED Inc., which agreed to a buyout by Genzyme Corp. after Millennium Pharmaceuticals Inc. refused to raise its bid. (See BioWorld Financial Watch, Oct. 23, 2006.)

AnorMED agreed to let Genzyme take over the firm for $13.50 per outstanding share, or about $580 million, shortly after Millennium refused to go higher than its $12-per-share offer. Genzyme earlier had offered $8.55. Ultimately, AnorMED and Genzyme entered an agreement regarding the acquisition at the higher price.

Analyst Christopher Raymond with Robert Baird & Co. said Millennium "dodged a bullet" - while collecting a $19.5 million breakup fee - since AnorMED's Phase III stem cell mobilizer Mozobil (also known as AMD3100) occupies an ever-narrowing niche market.

The Genentech/Tanox situation, though, is hardly comparable, thanks largely to Xolair, although "it depends on what you're assuming for patent expiry and the tiered royalty that Tanox receives on sales," Flynn said.

During Genentech's conference call, the future of Xolair became the subject of a question from Goldman Sachs analyst May-Kin Ho, who wanted to know why the drug has penetrated only 15 percent of the eligible patient population "after so many years." Xolair was approved in June 2003.

Bill Anderson, vice president of sales and marketing, pointed out that the FDA cleared the drug as the first in a new therapy class, "which involved some change right up front," and Xolair involves monthly or semi-monthly injections in the doctor's office.

"As patients and physicians are educated about the benefits of Xolair, there's an increased willingness to perform those injections, and we've seen continued strong growth year on year, and we believe we can continue to see that over a number of years to come," he said.

"It's partly a matter of time," Anderson said, but Genentech also is trying ways to enhance the drug's safety and efficacy. "We're looking at a number of special areas we wouldn't go into on this call."

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