When I identified and assembled the latest CAR-T partnerships and agreements in a previous post, I noticed the following:
• There were only 3 big pharma participants - Novartis AG (NVS), Pfizer (PFE) and Merck KGaA.
• Two were foreign companies in partnership with American companies and organizations, i.e., Novartis, a large Swiss pharmaceutical company, with American partner University of Pennsylvania; and Merck KGaA, a large German company, with American partners Intrexon, ZioPharm and the University of Texas M.D. Anderson Cancer Center.
• The only American pharma company, Pfizer, one of the world’s largest, had foreign French partners, Cellectis S.A. and Le Laboratories Servier SAS.
I knew that Pfizer was sitting on a gigantic $193 billion stockpile of offshore profits, second to Apple’s $200.1 billion and thought that the high U.S. corporate tax rate 35% perhaps deterred Pfizer partnering with and investing in American companies. Other American pharmaceutical and biotech companies sitting on huge offshore stockpiles include Merck & Co. $59.2 billion, Amgen $32.6 billion, Gilead Sciences $28.5 billion, Eli Lilly $26.5 billion, Bistol-Myers Squibb $25 billion, Abbott Laboratories $22.4 billion and Celgene $9.6 billion; none of these American companies have jumped on the CAR-T train. Surely, Pfizer was fully aware of the perils, risks and extremely low success rate taking on biotech ventures. So I started to dig further.
Pfizer’s entry into the CAR T-cell sector
On June 18, 2014, Pfizer Inc. (PFE) and Cellectis (Paris:ALCLS) announced that they had entered into a global strategic collaboration to develop Chimeric Antigen Receptor T-cell (CAR-T) immunotherapies in the field of oncology directed at select targets.
Cellectis was taking an approach significantly different to those taken by its competitors. Cellectis’ CAR-T platform technology provided a proprietary, allogeneic approach which utilized engineered T-cells from a single donor for use in multiple patients to developing CAR-T therapies, which was different and distinct from other autologous approaches that engineered a patient’s own T-cells to target tumor cells.
Under the terms of the agreement, Pfizer gained exclusive rights to pursue development and commercialization of CAR-T therapies, in the field of oncology, directed at a total of fifteen targets selected by Pfizer. Both companies would work together on preclinical research and Pfizer would be responsible for the development and potential commercialization of any CAR-T therapies for the Pfizer-selected targets. In addition, the agreement provided for a total of twelve targets selected by Cellectis. Both companies would work together on preclinical research on four Cellectis-selected targets and Cellectis would work independently on eight additional targets. Cellectis would be responsible for clinical development and commercialization of CAR-T therapeutics for the Cellectis-selected targets. Pfizer had right of first refusal to the four Cellectis-selected targets.
Cellectis would receive an upfront payment of $80 million, as well as funding for research and development costs associated with Pfizer-selected targets and the four Cellectis-selected targets within the collaboration. Cellectis would be eligible to receive development, regulatory and commercial milestone payments of up to $185 million per Pfizer product. Cellectis was also eligible to receive tiered royalties on net sales of any products that are commercialized by Pfizer. Cellectis expected to open a site in the United States to work more closely with scientists at Pfizer.
Subsequently, on 3/25/2015, Cellectis (CLLS) raised more than $228 million in its IPO debut.
Why did Pfizer jump in the CAR-T sector?
After a lot of searching, I found a must read revealing interview with Pfizer Chairman and CEO Ian Read at the Biotechnology Industry Organization CEO & Investor Conference held on 2/10/2015.
Here are key excerpts with my notes in brackets and my emphasis in bold:
Value Creation and Capital Allocation:
Stephen Sands - Lazard - Vice Chairman Investment Banking and Global Co-Head Healthcare Group:
So what does it mean for the Innovative business? Because I know there’s been some statements that were made about creating near-term shareholder value and not just really focusing on the long-term development type assets. How does that sort of (inaudible)?
Ian Read - Pfizer Inc. - Chairman and CEO:
Well, I think about P/E as I said. When I took over our P/E was 8. So it’s difficult to get value when you’ve got a P/E of 8 when you add earnings.
And you had a P/E of 15 going on to hopefully higher than that, and every earnings you add gives you a lot more bang for the buck, right? So now I think we’re in a stage where we have got a mid-term, long-term pipeline that looks very strong.
So to the extent that we can add assets that add earnings growth and are better than the stock buybacks then it seems a good way of using our capital allocation for either business.
I think investor friendly means that your whole management team is focused on increasing shareholder value and being willing to contemplate any steps that you thought will create both short and long term. And the only issue becomes between the activists and if it’s short-term value or is it long-term value?
And I think that’s where this sort of crunch comes with sometimes with activists who will come in looking for a short-term pop. And they’re not worried about the long-term value. And you’ve got to balance that.
But that’s why we looked at our research engine. We sized it to how we thought we’d create value. We have a disciplined approach on how much we’re willing to spend in research. And we believe that if we want to do different projects and research they have to be better than what we’re doing already, and they have to replace what we’re doing already because we are reasonably firm on how much of our capital we want to allocate to research.
Pfizer’s Overseas Stockpile and U.S. 35% Corporate Tax Rate:
A lot of capital though is trapped overseas. And last year, there was lots written about you going after Astra-Zeneca and looking to move the domicile overseas and invert. Does it concern you that a lot of your competitors actually have overseas tax statuses and domiciles? And how does that affect you from an M&A and from a development perspective?
I think it puts all American companies at a huge disadvantage. The tax code in the United States right now stimulates foreign investment, and stimulates American companies investing abroad. So to put it simply, if we make $1 in the United Kingdom and we bring it back to the United States to invest in the United States we only have $0.65 to invest.
If a foreign company makes, especially a Swiss or one of these low-tax countries. They have a small domestic economy so they don’t have a high tax rate. If they make money in the U.K., they take it into the U.S. and they have $0.80.
So there’s a huge competitive advantage when they want to buy companies. Foreign companies have a huge competitive advantage because they’re taking U.S. earnings and they’re taking it out of the U.S. tax system at 35% and putting it into the tax system.
So it’s something that needs to be fixed. I don’t have a – there are various ways of fixing it. Congress is looking at it. But it is a huge incentive to remove businesses from the United States.
And the United States is a great place to invest. It’s got great scientists. It’s got rule of law. It’s got IP, but it has that for foreign companies as well as domestic companies. So the issue really is what is the competitive advantage? What’s the relative advantage? And for a foreign company the relative advantages are huge compared to domestic companies.
[My note: this explains why foreign companies - Novartis and Merck KGaA - have partnered with and invested in American businesses and why an American company Pfizer partners with foreign companies.]
Preference for Alliances Instead of M&A (mergers and acquisitions):
Where you used to be, a very active acquirer of biotech companies seven, eight, ten years ago to sort of maybe a more discerning consumer. What stops Pfizer from being more aggressive in acquisitions of biotech companies? Is it valuations? Is it the state of science?
Yes, I mean I don’t know if we’ve done – I mean we did the deal with Merck. I know it’s not a biotech company but it was a big investment. And we’ve done a deal with Spark. We’ve done small deal with a small molecule for (inaudible).
More alliances than acquisitions.
I think the problem has been that when we look at opportunities our companies are willing to pay more either because of their tax situation or because they feel they need to fill in their pipeline in a different way. I mean we have a very active internal research organization.
We compare the opportunities with our internal programs. And you’ve obviously got to be very careful it’s not invented here bias when your scientists are looking at it. But it really comes down to value. How do we add value? We didn’t get involved in one acquisition. We looked at it in the diabetes sector. We didn’t pay. The two companies that did buy it, wrote half of it off two years later. So we sort of felt vindicated by saying that we were very value focused.
[My note: Here, Ian Read refers to another deal with a foreign company, Merck KGaA, that I’ll comment on later in this post.]
Pfizer’s Oncology Business:
Well, your oncology business is really developing and congratulations on the Ibrance approval. And that was unexpected by the marketplace. I think everybody was surprised. You got that in phase 2 data. I mean how do you think about your Oncology business? I mean again it’s sort of separate from your Innovative business. It is a very contained franchise. I mean how do you think about that sort of growing out?
Well, it’s contained. I would say it’s not separate in a sense that the science is still under the chief scientific officer, but it is a separate business unit.
And it’s our largest segment we invest in of all of the segments we invest in.
We think we have world-class scientists and a great pipeline. And have our sights built on building a top Oncology business. And we think we have the substrate. (inaudible)–
Do you think the marketplace understands that business? Do you think the marketplace understands your business?
No, I don’t think they do. This is why they don’t really see – I mean I’ve had a lot of people saying, “Well the immuno-oncology was asset was an expensive asset with MERCK.” The market doesn’t see that the value isn’t in the first wave. The value is in the combination products that are going to follow.
And there’s a lot of now sub-segments of the PD-L1 marketplace where PD-L1 isn’t expressed enough and you have other agents that can turn it on. I think the huge value comes in second and third generation. And so we feel that having a dedicated team of top-notch scientists and commercial people dedicated to Oncology will enable us to become a first echelon company in Oncology while still being part of Pfizer.
Lessons from Celgene and Gilead and Risks Recognition:
It’s interesting, when you look at people like Celgene and Gilead which largely compete in one area, right? One therapeutic area. Is there lessons that you try to draw into Pfizer as you look at your business units and try to learn from them?
Business units in a certain way try and mimic the agility and the speed of a Celgene. But for every Celgene there’s a hundred that didn’t make it.
And it only took 20 years for Celgene too, right?
I mean it’s a great company, a great company, great leadership, but it’s a high-risk business. And so it’s easy to point to the two or three that really break through and make it, and make some bets that work out. And no one talks about the other 99 companies that didn’t succeed, right?
Yes, and do you think they’re sustainable business models when they only have a narrow, therapeutic focus? I mean do you think that’s a challenge?
I think it’s higher risk, but as long as they innovate and they have depth of science and continue to innovate in their area I think they can be successful. But how long can you continue to get improvements in one particular area?
Although I’m trying hard to stay focused on CAR-T, the aforementioned Pfizer-Merck KGaA deal in the Ian Read interview warrants a diversion. An American collaboration of Merck & Co. and Bristol-Myers Squibb Co. had launched another impressive group of cancer drugs called checkpoint inhibitors, which took the brakes off the immune system rather than genetically tweaking immune system cells to spot and destroy cancer cells. For those interested, here are websites on what is a checkpoint inhibitor.
In spite of starting behind the front runners, Pfizer Inc. announced on 11/17/2014 that it had entered into an agreement with Merck KGaA, Darmstadt, Germany, to jointly develop and commercialize MSB0010718C, an investigational anti-PD-L1 antibody that was at that time in development by Merck KGaA as a potential treatment for multiple types of cancer. Pfizer and Merck KGaA would explore the therapeutic potential of this novel anti-PD-L1 antibody as a single agent as well as in various combinations with Pfizer’s and Merck KGaA’s broad portfolio of approved and investigational oncology therapies.
Under the terms of the agreement, Merck KGaA received an upfront payment of $850 million [back then the largest ever by Pfizer] and was eligible to receive regulatory and commercial milestone payments up to approximately $2 billion. Both companies would jointly fund all development and commercialization costs and all revenues obtained from selling any anti-PD-L1 or anti-PD-1 products generated from this collaboration will be shared equally.
After a 3-1/2 year effort, on 3/23/21017, the Pfizer-Merck KGaA collaboration received its first FDA approval of their checkpoint inhibitor avelumab, the fourth drug in this category to make it to the marketplace. The FDA approval was achieved under an accelerated approval process, and the therapy, which will be sold as Bavencio, was given breakthrough drug status. Checkpoint inhibition is a big field, and the Pfizer/Merck KGaA team plan to make their mark as the pioneers divvy up leadership roles in a wide array of cancers. This is also tremendous reassuring news for the Merck KGaA/Intrexon/ZioPharm CAR-T partnership because it marks a major win for Merck KGaA, which came away with a package of regulatory and commercial milestones on avelumab worth up to $2 billion when it partnered with Pfizer in 2014. Merck KGaA also demonstrated that it could execute swiftly a development program from start to first approval. Also, I brought up this example to debunk any notions that it’s too late to jump in to the CAR-T fray as some pundits assert that the Pfizer/Cellectis partnership is lagging far behind the others, i.e., KITE and JUNO. The CAR-T field is wide open.
After a research team under the leadership of Dr. Carl June at the University of Pennsylvania released its 2011 publication of breakthrough results in several chronic lymphocytic leukemia patients treated with a CAR T-cell personalized immunotherapy technique, Novartis was the first big pharma to jump aboard the CAR-T train. In August 2011, in an alliance aimed at bringing a new, personalized immunotherapy approach to patients with a wide variety of cancers, the University of Pennsylvania and Novartis announced an exclusive global research and licensing agreement to further study and commercialize novel cellular immunotherapies using chimeric antigen receptor (CAR) technologies. The agreement paved the way for pivotal studies that would have the potential to expand the use of CAR therapies for additional cancers. Both Penn and Novartis agreed to build a first-of-its-kind Center for Advanced Cellular Therapies (CACT) on the Penn campus in Philadelphia that would be devoted to the discovery, development and manufacturing of adoptive T cell immunotherapies through a joint research and development program led by scientists and clinicians from Penn, Novartis, and the Novartis Institutes for Biomedical Research. Under the terms of the agreement, Penn granted Novartis an exclusive worldwide license to the technologies used in an ongoing trial of patients with chronic lymphocytic leukemia (CLL) as well as future CAR-based therapies developed through the collaboration. Novartis would invest in the establishment of the CACT and future research of the technology. Additional milestone and royalty payments to Penn were also part of the agreement.
Novartis delivered big time, investing $20 million in the total $27 million construction cost for the Novartis-Penn Center for Advanced Cellular Therapeutics (CACT), which opened on 2/16/2015 and became the epicenter on the Penn Medicine’s campus for research and early development of personalized cellular therapies for cancer. The CACT facility, staffed by 100 highly specialized cell therapy professionals, includes 23,610 square feet of laboratory and cell therapy manufacturing space and 6,300 square feet of “clean room” space for cell engineering with the capacity to manufacture cellular therapies for up to 400 patients per year.
CORPORATE FINANCIALS OF PFIZER & NOVARTIS AG
While both Pfizer and Novartis are not high growth stocks preferred at Saul’s board, I just want to point out that these two companies are very powerful partners in their CAR-T alliances with huge financial resources, large R&D budgets, top notch in-house research staffs and invaluable know-how and experience running through the FDA approval process, among other strengths.
PFIZER NOVARTIS (PFE) (NVS) Market Cap $ 202.06 B $ 174.23 B Employees 96,500 118,393 Revenue FY16 $ 52.824 B $ 49.436 B R & D $ 7.872 B $ 8.400 B Total Cash $ 17.880 B $ 7.550 B FCF FY16 $ 13.902 B $ 8.596 B Total debt/equity 70.58% 31.78% DIVIDEND 1.28 2.75 Yield, Fwd Annual 3.75% 3.73% EV/EBITDA (mrq) 11.46 13.23 P/E (ttm) 28.93 26.41 Fwd P/E 12.21 14.28 P/B (mrq) 3.46 2.35 P/S (ttm) 3.83 3.53 52-wk high 37.39 83.58 4/11/17 Price 33.93 73.96 52-wk low 29.83 66.93
With a new administration in Washington, D.C. determined to “level the playing field” by reducing the high 35% corporate tax rate to between 15% and 20%, it will interesting to see what impact it will have on the previously identified American pharma, biopharma and biotech companies sitting on huge offshore profits. If and when this happens, I can see, for example, the Fortress Biotech/Mustang Bio/City of Hope alliance seeking a partnership with one of these companies, or vice versa.
Hope my posts continue to help your understanding and assessment of this sector. I’m still in macro view mode in my due diligence and next will take a closer look at the Juno Therapeutics/Memorial Sloan Kettering/Fred Hutchinson Cancer Research Center alliance. As always, conduct your own due diligence and decision-making.