Luke Timmerman 1/25/11
ZymoGenetics, if it had stayed an independent company in Seattle, would be worth tens of millions of dollars more today than what it was in September when it agreed to be acquired by Bristol-Myers Squibb (NYSE: BMY).
Bristol clearly scored a big break with its new ZymoGenetics assets on December 21, about two months after it closed the books on its $885 million acquisition of the venerable Seattle biotech.
If it had still been an independent biotech, the value of ZymoGenetics would have soared that day when Cambridge, MA-based Vertex Pharmaceuticals announced that, essentially, it had failed to make ZymoGenetics’ lead drug candidate obsolete. On that day, Vertex (NASDAQ: VRTX) said it was unable to eradicate one of backbone components of hepatitis C therapy in a high profile clinical trial.
Vertex is blazing a new trail in the field with a potent new oral pill that generates unprecedented cure rates when given in combination with two standard treatments—pegylated interferon alpha and ribavirin. Vertex was hoping to raise the bar even higher, to find out if its lead molecule, telaprevir, could be combined into a new cocktail regimen that Vertex hoped would kick old-school interferon into the dustbin of history. Doctors and patients have been yearning for a way to get rid of interferon, which causes nasty flu-like symptoms that make patients feel awful for months, which discourages most patients from seeking treatment today.
ZymoGenetics, knowing this well, had developed a genetically modified version of interferon, which it called pegylated interferon lambda. This new form of interferon was designed to kill the hepatitis C virus just like the older version of interferon, but without the flu-like side effects. Results from early clinical trials were so promising that ZymoGenetics was able to entice Bristol to sign a $1.1 billion partnership to co-develop the drug in January 2009.
But many on Wall Street weren’t impressed. They had fallen head over heels for Vertex’s new molecule, insisting that ZymoGenetics and Bristol were wasting their time with a new type of interferon. Vertex, they said, was coming along with a cocktail approach of new oral pills that would get rid of interferon, meaning any improvement on old-school interferon would soon be irrelevant. While many doctors, and companies like Vertex still hope it will be possible to do this, the latest clinical trial failure makes it clear that interferon will be part of the standard treatment regimen for years. That means the drug Bristol acquired from ZymoGenetics has a chance to integrate itself into a new standard of care, at a moment when awareness has never been higher among an estimated 6 million U.S. and European patients with this liver-damaging condition.
Former ZymoGenetics CEO Doug Williams, who recently took a new job as head of R&D at Weston, MA-based Biogen Idec, acknowledged in a recent interview that the failure of Vertex’s combination trial would have been a positive turn of events for ZymoGenetics and its pegylated interferon lambda program. He stopped short of saying that Wall Street would have perceived the development in a way that would have boosted ZymoGenetics’ stock price.
“Certainly some will people would have come off the fence and perhaps started to believe that interferons will be really hard to get rid of,” Williams says. “I’m certainly of the mind that it will be extremely difficult to get rid of interferon, and achieve [cure rates] currently seen.”
He added: “I gotta believe it would have been viewed as a net positive, but the degree to which it would have been reflected in the stock price, I don’t think anybody can say that.”
David Miller, the president of Biotech Stock Research in Seattle, who criticized ZymoGenetics for selling the company at a bargain price, said he believes investors would have given the company credit. An estimated 6 million patients in the U.S. and Europe have hepatitis C, and many of them are expected to start seeking treatment in 2011, now that a new wave of protease inhibitors like Vertex’s telaprevir and Merck’s boceprevir are being primed to hit the market later this year. The existing interferons from Roche and Merck made up a combined market worth more than $2 billion in 2009, even before the more-effective protease inhibitors came along to spur more interest in hepatitis C therapy.
ZymoGenetics could have seen its stock climb another $2 to $3 a share if it had still been an independent company when the Vertex news hit the wire on December 21, Miller says.
“Smart money was moving toward ZymoGenetics,” Miller says. The latest clinical trial failure of the no-interferon regimen, Miller says, “would have been huge for ZymoGenetics. People were starting to understand that interferons aren’t going anyway anytime soon. This press release (from Vertex) would have cemented that.”
Now that doctors are getting accustomed to seeing hepatitis C cure rates in the neighborhood of 70 to 75 percent of patients who take the combo regimen of the Vertex drug, plus interferon and ribavirin, it’s unlikely they will ever sacrifice even a few percentage points of effectiveness just to get rid of interferon’s side effects, Williams says. That means the bar is high for any oral pill cocktail regimen that aspires to get rid of interferon. It’s certainly possible that the combination of doses, and schedules, could coalesce to make that happen, but it will take years to figure out in clinical trials, Williams says.
Given that was what ZymoGenetics management was betting on with their new interferon, and that its thesis was essentially validated on December 21st, I had to ask Williams if he regrets selling the company for less than a billion dollars. He said no.
“I don’t look back on these sorts of decisions,” Williams says. “You make the decision you have to make at the time with the information you have available to you at the time. I feel we made the right decision at the right time.”