Why the market does not like Flurizan

Guest content from Nicolaj H. Nielsen, managing director of Biostrat.

A case-study on the recent licensing-deal between Myriad and Lundbeck: Information asymmetry, calculated bets and royalties in the biotech industry.

The share-price of Lundbeck has fallen with approximately 10 %, since the Danish pharmaceutical company announced an inlicensing deal with the US biotech company Myriad for a new drug named Flurizan aimed against mild Alzheimer. Why do investors not like the deal, and could the deal be (yet another) good sign for biotech companies?

What we know…
Flurizan has completed phase II and the results from the two ongoing phase III studies will not be known until June 2008. Lundbeck will pay Myriad USD 100 million for the European commercialization rights + milestone payments + royalties in the range of 20-39 % of sales.

Lundbeck has clearly taken a calculated bet. Lundbeck believes so much in Flurizan that the company is willing to pay a large sum of money before the phase III data is known. The company is thereby trying to avoid a bidding-war against Big Pharma after positive phase III data, but is at the same time taking significant financial risk.

Why is the Market so skeptical?
Biotech is maybe the industry with the largest degree of information asymmetry. Biotech companies simply know much more about the strength and weaknesses of a potential product than outside investors/partners. This has been proven again and again by the lack of shareholder value creation in investment funds – even those that are managed by highly specialized investment companies.
The market believes that the information asymmetry is also in play in the Flurizan deal. If data from the ongoing phase III studies are so promising, why is Myriad outlicensing the product before the phase III data is available? Such a decision could of course be explained by a risk-minimizing strategy by Myriad – but again, if Myriad believes so much in the product, why not take the risk and wait 4 weeks for the data to be available?

The price…
The other thing that worries the market is the price of the drug. Taking the calculated bet could of course be defended if the acquisition price and royalties are very low. Many investors believe that not only have Lundbeck just spent USD 100 million on the roulette, but even if successful – the product will be very expensive for Lundbeck.
The parties have announced that Lundbeck will pay royalties in the range of 20-39 % of sales, which seems very high com compared to industry standards.

We don’t know the details of the agreement, and are therefore not in a position to judge whether the price is too high or not. We can just conclude that the market has voted with its feet, and the share-price has fallen with close to 10 % since the announcement. The market believes that Lundbeck’s bet is not generating shareholder-value.

Is the Myriad-deal good news for biotech companies in general?

We believe that the Myriad deal is yet another sign that the power between (inlicensing) Pharma companies and (outlicensing) biotech-companies are shifting to the favor of the latter.
In a time where many biotech companies, especially the companies with many early-stage projects, are struggling to get new funding, it is encouraging to see how good terms it is possible to negotiate only with phase II data. Most Pharma companies, like Lundbeck, is struggling to fill out their pipeline. The fight over good potential products is constantly getting tougher and tougher – for the benefit of biotech companies with the “right” products in their pipeline.

About the author:

This analysis was written by Nicolaj H. Nielsen, managing director of Biostrat, which provides management consulting services to the biotech industry.

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