Too Big to Flail

In the biotech world, the acquisition of a company by another is an occasional but newsworthy event since it typically means that the acquired company has succeeded in creating sufficient value that an acquirer is willing to pony up significant cash (and/or stock) to buy out the acquired company’s founders and investors (e.g., Takeda’s recent purchase of Intellikine for $300 million plus, Fierce Biotech article).  And since the IPO market is pretty well closed to biotechs, acquisition is the primary way the investors can get their money out of one company and into others, thereby recycling capital in the entrepreneurial ecosystem.  But what does it mean when one granted-funded, global health product-oriented organization acquires (absorbs?) another?  An alert colleague brought to my attention the recent announcement that OneWorld Health (OWH), which calls itself the “first nonprofit pharmaceutical company in the U.S.” (OWH History), was becoming an “affiliate” of PATH, the Gates Foundation’s favorite conduit for global health technology development (PATH press release), or according to one source was being acquired by PATH (Humanosphere blog).

The PATH press release provided no clarity on what had happened and why, although it is clear OWH’s CEO, Richard Chin, is out.  But what will OWH do as an affiliate of PATH, who directs the programs and funds, does the hiring, calls the  shots?  Is the move driven by synergy?  Lethargy?  The PR language is opaque:  “By becoming a PATH affiliate, OneWorld Health will be able to scale and accelerate its successful drug development efforts,” which sounds to me like the plan will be to get rid of unproductive people and programs, which is often part of a for-profit acquisition.  OWH has always been a puzzlement to me since it called itself a pharma company but has never acted like a business, with a plan and accountability to its investors.  I reckon it is a global health product development program (so-called PDP), a grant-funded, primarily research-oriented, and academically-advised organization with a mission to develop new diagnostics or treatments for neglected diseases- a welcome addition in global health but not a company (for more on PDPs, see the DFID 2020 PDP report).

In one of my 2010 posts (“The Emperor’s New Clothes,” 6/17/10), I noted, while the OWH has been successful in garnering grants since its 2000 founding, more than $150 million primarily from the Gates Foundation and the UK’s Department for International Development, the organization had not developed and commercialized any drug (not-withstanding statement in the PATH press release, “OneWorld Health has a successful track record in developing and delivering effective, affordable drugs,”).  OWH’s lead product, an injected version of paromomycin, an off-patent aminoglycoside antibiotic, for treating visceral leishmaniasis (VL), a protozoan parasitic disease, had been approved in 2006 but its sale has been on hold pending completion of a “Phase IV demonstration program” to determine if the drug can be delivered and be effective in rural conditions.  I also noted according to the only financial data then available, a Form 990 which the IRS requires all 503(c) non-profits to file, OWH spent about $30 million in 2008:  $7 million on salaries, $3.7 million to its law firm, $1.3 million on travel, $7.6 million in contract labor and services (which, I am guessing, is for R and D), paid a “professional fee” of $2.7 million, and gave $5 million in grants yielding an uninspiring overhead rate of 50%.  In my post, I also noted that OWH had won a lot of awards and was offering two product tie-ins, a video camera and a charm bracelet charm.

I revisited the OWH website to see what has changed over the past year and half that may explain the PATH take-over.  The website is re-designed (as of June), the product tie-ins are gone, and apparently the lead drug is still in testing.  A November press release announced that OWH will be part of a new consortium with the aim of “establishing and implementing new treatment modalities as successful tools to support the elimination of VL in South Asia’s most endemic regions.” Then, “Upon completing the study, a feasibility report will be published, which will include recommendations for the private sector engagement using new treatment modalities,” more paperwork and no delivery (OWH press release).  As for financial accountability, OWH is still not doing annual reports, relying instead on the Form 990s to provide a snapshot of its finances.  The most recent (OWH 2010 Form 990) shows no financial problem:  expenses did not exceeded grant “revenue” ($27 million in and $19 million out for salaries, operations, and grants) and there is $26 million in assets “in the bank.”  And its large executive team was well-paid.  OWH also reported that CEO Chin got $400K in compensation and the top 10 salaried employees earned about $200K each.  I can’t help but note that, since the cost of treating one person with VL with the OWH drug is $20 (another OWH press release), for the cost of one its top-ten compensated employees, OWH could treat about 10,000 cases of VL, which is about 2% of the 500,000 new cases each year, possibly averting about 20% of the annual 50-60,000 deaths.

So what’s up with the acquisition?  Maybe someone in the Gates Foundation (like Trevor Mundel, the new head of global health, see my post, “Free Advice, Trevor,” 10/6/11) realized that OWH had not much to show for the $150 million it had received, that Dr. Chin was not a good choice for a CEO, or that OWH’s administrative expenses could be cut, fewer studies done, and more could be done to get a treatment to the people with VL.  As an indirect investor in both organizations (through the tax code and government grants), I’d like to know the rationale for and the expectations of the new OWH-PATH affiliation, but, unlike the acquisitions among for-profits, they are not obvious.


Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s