The share price of Clal Biotechnology Industries Ltd. (TASE: CBI) lost 40% of its value this morning, shedding NIS 400 million in market cap within a few hours. The reason for this dramatic plunge was the announcement published yesterday by US company Hyperion Therapeutics that it was halting development of the drug for treating Type 1 diabetes developed by Israeli company Andromeda, a subsidiary of Clal Biotech. Hyperion acquired Andromeda from Clal Biotech in June, and is now asserting that it is canceling the acquisition agreement, after detecting serious fraud by Andromeda employees.
The announcement shocked the market, and struck Clal Biotech without warning. Hyperion did not even contact the company before issuing its announcement to the press, and castigated the Andromeda team in a conference call. In its most recent financial statements, Clal Biotech recognized a NIS 482 million profit on the sale of Andromeda. If Hyperion's announcement completely eliminates the value of the deal and Andromeda, as now appears to be the case, it will cost Clal Biotech far more than today's drop in its share price.
Andromeda developed a drug for delaying the development of juvenile diabetes, which was previously called "a vaccine against juvenile diabetes," until it was decided to market the drug with a slightly less bombastic claim.
The product is in a multi-center effectiveness trial, the second of two large-scale multi-center trials that the European Medicines Agency (EMA) asked the company to carry out. The trial was scheduled to be completed in the first quarter of 2015, followed, in the event of success in the trial, by approval for marketing the drug in Europe. Since the trial was the second of two identical trials, and good results were obtained in the first trial, the company was very optimistic about obtaining approval for the product and bringing it to market.
Hyperion acquired complete ownership of Andromeda from Clal Biotech for $20 million - $12.5 million in cash and the rest in Hyperion shares. Had the trial been successful and the drug been successfully marketed, Clal Biotech stood to gain over $500 million in milestone payments and royalties. Hyperion announced yesterday that when the acquisition deal was completed, it had received complete information about the first Phase III trial, and a check it conducted had revealed several suspicious findings. According to Hyperion, it contacted Andromeda to get answers, and had encountered increasing reluctance to transfer information. Hyperion began a more thorough investigation, and said that it had discovered clear evidence of fraud.
Hyperion CEO Donald Santel spoke extremely caustically. “Well, it would be impossible to say this hasn't shaken our faith in people. On the other hand, I have to look at the long calculus of my career and our collective careers and we have never seen anything like this in our life. And obviously the deceit, when it gets extended to filings with regulatory bodies, both here in United States and elsewhere, that is obviously a deception that is extraordinarily serious. So I certainly don't think this industry is populated with similar people,” he said.
At the same time, this should be qualified by saying that there is still no decisive proof of fraud by Andromeda and its employees. It is possible that Hyperion believes that the product will not succeed, and therefore wishes to get out of the deal. If it cancels the agreement on the basis of information it had when the acquisition agreement was signed, however, it will be exposed to lawsuits from investors. If it proves that the information was completely distorted by Andromeda, however, the blame will lie with Andromeda, the acquired company, not Hyperion.
Hyperion is a relatively small pharmaceutical firm, with one drug approved for marketing and a market cap of $533 million, following a 6% drop on its announcement. For Hyperion, the way the market perceives its action - as either an injury suffered or a lack of professionalism on its part - is likely to prove critical.
Clal Biotech said it had no particulars about the event reported by Hyperion, and that it was assessing the action and its consequences. No response from Andromeda CEO Shlomo Dagan was available.
How high up did the failure go?
Hyperion accused certain employees at Andromeda, and it is not clear whether Dagan, who refused to respond today, was among them. Hyperion has so far made no reference to Clal Biotech, nor given any hint of any involvement by it. Nevertheless, the company's full data should have been as clear to Clal Biotech as they were to Hyperion, and it is possible that in retrospect, Hyperion may claim that it would have expected Clal Biotech to have made the same analysis, and to have asked the same questions.
Criticism of Andromeda and the way it presented its trial results has been heard before. As the main endpoint of its trial, the company chose a variable recognized for approval purposes by the EMA, but not by the US Food and Drug Administration (FDA). The company asserted that it could probably persuade the FDA to recognize the endpoint it had achieved for approval of the drug, but Israeli market sources alleged that it was liable to encounter difficulties in marketing the product to doctors with such results.
It could be understood from Hyperion's conference call yesterday that, according to its findings, both the main endpoint of the trial and the trial protocol, which was revised during approval by the European regulator, had been adjusted in order to manipulate the trial results.
Several medical sources around the world previously contended that the results of the trial on the Israeli patients with which they were familiar were not the same as those reported by the company - something that could have been coincidental, but which could also have aroused doubts.
In addition, Clal Biotech's choice of a small, unknown US company for an acquisition deal with little cash, and which left Clal Biotech with no rights whatsoever, was also criticized. Sources inform "Globes" that several other companies that examined the produced decided to wait for the full results, rather than go ahead with a deal on the basis of the existing data. The market found the decision to hurriedly sell the company before the results were obtained astonishing.
Hyperion could also have asked all these questions, but was apparently dazzled by the opportunity available to it. Market sources told "Globes" today that it was rare for a large company to acquire a product without asking for the complete raw data.
What will happen to the drug?
Hyperion now fully owns Andromeda's drug, DiaPep277, and has unequivocally announced that it will not continue its development. Hyperion says it will pay to see the trial through to completion for the T1D community, in the event it provides important insights into the natural history of T1D, and that it will provide the dataset from the ongoing trial to the community.
Even if Clal Biotech or Andromeda believes that Hyperion is mistaken, they will be unable to regain possession of the drug. Weizmann Institute Prof. Yaron Cohen, who developed the drug, still holds the rights to develop similar products for other inflammatory diseases. Andromeda (and now Hyperion), however, holds a patent for the drug's composition, so that if it is developed into other areas, the patent owner's consent will be required. The discovery that the trial results would have been poor, had they been properly processed, does not necessarily mean that the product cannot be successfully developed in other directions.
What will happen to Clal Biotech?
Clal Biotech, managed by CEO Ruben Krupik, is being hit hard, and not just by the loss of potential profit from Andromeda, but also by damage to its reputation. If it is found that Hyperion's accusations are correct, Clal Biotech will probably have to refund the $20 million to Hyperion in shares and cash, leaving it with NIS 84 million, some of which will be earmarked for the legal procedure that will undoubtedly ensue, and for compensating Hyperion, should it prove that Clal Biotech was negligent, or worse, in giving Hyperion information about the deal.
Clal Biotech has almost no products considered close to marketing left in its pipeline. In the past, its shiny image was due mostly to the large number of products it had in the advanced stages. Clal Biotech also previously cooperated closely with Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), an arrangement which faded during Jeremy Levin's term as Teva CEO.
Clal Biotech currently owns 46% of MediWound Ltd. (Nasdaq:MDWD), which is developing a drug for treatment of burns, and has a $143 million market cap. Mediwound did not post any significant sales of its product in the first two quarters of 2014, and its future is still uncertain.
The other advanced company held by Clal Biotech is CureTech (48%), which is developing a cancer drug, and which is in commercializing negotiations with large companies. Gamida Cell, in which Clal Biotech has a 22% stake, recently announced it had obtained a $35 million investment from Novartis at a $230 company value, after money, with an option to acquire the company later for a sum likely to reach $495 million. Clal Biotech's other holdings are in young or less significant companies.
As of now, it appears that CureTech is the only venture with the potential for a significant change in Clal Biotech's future, unless Mediwound achieves an unexpected spurt in sales. This possibility is probably already partially reflected in the share price, even after its decline.
For the past year, it seemed that Clal Biotech was recovering from its separation from Teva, an event that could have completely crushed other companies of this type, and was managing to sign commercialization agreements with large companies. In recent months, however, some of these agreements have proved disappointing. The agreement with Hyperion, which initially appeared aimed at a small market, compared with the company's potential, has now been canceled. A previous agreement to sell Gamida Cell to Novartis has shrunk into an investment agreement at a lower price, and the negotiations over CureTech reported by the company for several quarters are not leading to an agreement. Although Clal Biotech still has several interesting assets, the accumulation of these events is liable to put the company in a less comfortable position with the investors than in the past.
Teva is not missing out on a good thing
The only one to come well out of the affair is Teva, which previously acquired Andromeda, but did not invest much in developing the product. Two years ago, Teva canceled almost all its deals for developing products of Israeli startups, but continued holding the particularly advanced and ostensibly promising Andromeda, although it did not invest in promoting its product. Clal Biotech finally took action on its own to regain ownership of the product at a cost of $73 million in the event of success. When the agreement with Hyperion was signed shortly afterwards, it appeared that Teva had let the product slip away. Things now look very different.
Published by Globes [online], Israel business news - www.globes-online.com - on September 9, 2014
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