4 case study

MedImmune(

MedImmune, Incorporated, a biotechnology company with five products on the market and a series of products in the pipeline, has considered expanding its operations and market power through the purchase of a smaller biotech firm that would compliment their existing product base.

In their search for a suitable candidate, the management of MedImmune began to target Aviron, a biopharmaceutical company based in Mountain View, California. While the company’s lead product, FluMist, helped Aviron generate $11.7 million in revenue for the first nine months of 2001, it reported a net loss of $89.2 million for the same period. The company’s goal is to become a leader in the discovery, development, manufacture, and marketing of vaccines that are safe, effective, and can be marketed to a large population.

While the acquisition looked like a fairly good strategic fit for MedImmune, the financial condition of the new biotechnology firm made a decision on an offer difficult to calculate. If they were to proceed, they would need to come up with a reasonable offer sooner rather than later.

Drug Cycles

For pharmaceutical and biotechnology companies to remain competitive, a continuous flow of new and improved drugs must be developed. Many companies start with a series of early possible drugs that have merit, but as research and clinical trials progress, many hopeful therapies are deemed ineffective and are either discarded or part of the research is used in other areas for possible other drugs.

Drugs are considered to enter “phases” of development as they progress from hypothesis to manufacturing. At the earliest stage of testing, products are in Phase 1 and Phase 2 clinical trials. These clinical trials generally involve the administration of the drug to a small number of patients to examine the safety, dosage, and to a lesser extent, efficacy. Once the product has passed through Phase 1 and Phase 2 clinical trials, the drug enters Phase 3 where efficacy is tested. On average, it takes between ten to twelve years to bring a drug to market and the cost, depending on the products complexity, can reach as high as $500 million.

MedImmune Background

Headquartered in Gaithersburg, Maryland, MedImmune presently has five products on the market and a wide portfolio of potential products in the research phase of development. The company uses its strength in advanced immunology and other areas of biology to target unmet needs in infectious diseases and patients suffering from immune deficiencies. The company also focuses on cancer treatment through its wholly owned subsidiary, MedImmune Oncology, inc. This subsidiary, formerly under the name Bioscience, Inc., was acquired in November 1999.

Synagis

Approved by the Food and Drug Administration in 1998 for marketing, Synagis is prescribed for pediatric patients for the prevention of serious lower respiratory tract disease caused by respiratory syncytial virus. Administrated by an injection, the drug is given once per month during anticipated times of disease prevalence.

CytoGam

To prevent cytomegalovirus in kidney, lung, liver, pancreas, and heart transplants, the company developed the intravenous drug CytoGam. Cytomegalovirus is a species specific herpes virus and usually is harmless. For those with immune deficiency system however, it may cause a fatal pneumonia.

With approximately 20,000 transplants in the United States each year, CytoGam has been shown through clinical studies to reduce cytomegalovirus by 56% in liver and 50% in kidney transplant patients.

In 1993, the company began selling and marketing the drug through its hospital sales force. By 2000, sales of CytoGam reached $36.5 million in the United States. Sales of the drug may increase as the supply of organs increases.

RespiGam

Approved by the Food and Drug Administration in 1996, RespiGam is an intravenous drug used to treat respiratory syncytial virus for small children. The company believes that the drug is largely being replaced by Synagis.

Ethyol

To prevent renal toxicity associated with patients being repeatedly administrated with cisplatin for the treatment of ovarian cancer or non-small cell cancer, Ethyol acts as a cytoprotective agent. Ethyol was initially approved by the Food and Drug Administration in 1995 for the treatment of patients with ovarian cancer.

NeuTrexin

Approved in the United States and Canada in 1993, NeuTrexin is most commonly used as an anti-cancer agent as a treatment for Pneumocystis carinii pneumonia, a condition also experienced by patients that suffer from AIDS. However, due to the rapid improvement in the treatment of AIDS through new and improved drugs, the company has seen a slow decline in the use of NeuTrexin for AIDS patients.

In 1994, the European Union approved the use of NeuTrexin for patients suffering from Pneumocystis carinii pneumonia with compromised immune systems.

Products Under Development

The company has a long line of products under development. A list of these products is listed in Exhibit 1.

Manufacturing

MedImmune’s manufacturing facility is located in Frederick, Maryland and contains a large cell culture production area for the manufacture of products such as Synagis and MEDI-507, if it clears clinical trials and FDA approval. The company also maintains a small manufacturing facility in Nijmegan, the Netherlands.

Marketing

To market and sell the company’s line of products, MedImmune employs 240 people dedicated to the United States with approximately 50 representatives covering 500 hospitals specializing in transplantation, pediatric, or neonatal care. These sales reps concentrate on the promotion of CytoGam, RespiGam, and Synagis. About 90 sales and marketing representatives cover the top 10,000 hospitals in the United States promoting Synagis and RespiGam. Other representatives that specialize in oncology and immunology market products such as Ethyol to physicians practicing in cancer treatment centers, large hospitals, and private practices.

MedImmune also utilizes Abbott labs’ Ross Products division to co-promote its products in the United States. Ross Products employs roughly 500 sales representatives and promotes Synagis to 27,000 office-based pediatricians and 6,000 birth hospitals.

Sales made outside the United States are done through distributors. Abbot serves as the company’s exclusive distribution company for Synagis. For Europe, Scherico sells and markets Ethyol. Other products such as CytoGam, Hexalen, NeuTrexin, and RespitGam were marketed and sold by various smaller distribution companies.

Employee Base

At year-end 2000, the company maintained a good relationship with its 790 full time employees.

Government Regulation

The research, development, and marketing of pharmaceuticals are subject to regulations set forth by the United States and other countries. In the United States, all drugs must be approved by the Food and Drug Administration and fall under several statutes and regulations including the Food, Drug and Cosmetics Act and the Public Health Service Act. The Food and Drug Administration also has the right to revoke product licenses.

To encourage research into areas of rare disease, the United States government enacted the Orphan Drug Act. Because the financial costs are typically so high to develop new drugs, many of these companies were searching for cures to mass disease rather than disease populations with less than 200,000 persons. Under this act, any company that receives Food and Drug Administration approval can potentially provide the company with market exclusivity for seven years. In addition, the company will receive tax credits up to 50% for qualified clinical research in these areas and the opportunity for clinical research grants.

Aviron Background

Aviron is a biopharmaceutical company that concentrates its efforts on the prevention of disease through innovative and cutting edge vaccine technology. The company’s lead product for development and commercialization is FluMist, a live virus vaccine delivered to the patient as a nasal mist for the prevention of influenza. Research focuses on vaccine development programs that are based on producing weakened live vaccines and on its genetic engineering technologies. Weakened live virus vaccines have had a strong history in preventing disease such as smallpox, polio, measles, mumps, rubella, and chicken pox.

FluMist

FluMist, Aviron’s primary product, has undergone and continues to undergo clinical trials. Many of these trials are coordinated with the National Institute of Health investigators. FluMist has been tested in 24,000 healthy children and adults and has been generally shown to provide a protection against influenza. Typical side effects of the treatment were sore throat, nasal decongestion, and a slight fever.

The Biologics License Application, or BLA, for frozen FluMist was submitted to the United States Food and Drug Administration in October 2000. In September 2001, the FDA requested additional information regarding clinical and manufacturing data from the company.

PIV-3

PIV-3 is a common childhood respiratory virus that causes croup, cough, fever and pneumonia. For children in the United States, more than 60% are infected by the age of two and 80% of those who contract the disease do so by age four. Aviron is presently engaged in the research and development of a vaccine to treat this disease.

CMV

A member of the herpes virus family, CMV infections can result in mild symptoms such as a sore throat, headache, fatigue and swollen glands. In more drastic cases of infection, CMV can diminish the strength of the immune system and can often be found in patients with AIDS, cancer, and transplant patients.

Conclusion

The board of MedImmune believed that Aviron was a good strategic fit but didn’t know what to offer. While the company had some attractive features, it still lacked positive earnings and cash flow to generate a value. They didn’t want to insult the management of Aviron with a low offer, but also felt the pressure to offer an appropriate price. It had been their experience that a purchase like this one was better done as a friendly transaction.

Exhibit 1

MedImmune

Products Under Development

		Product	Indication
		Synais RSV Marketed	Prevention of RSV disease
		CytoGam Marketed	Prophylaxis of cytomegalovirus
		RespiGam Marketed	Prevention of serious RSV
		Ethyol Marketed	Reduction of cumulative renal toxicity
		Ethyol Marketed	Reduction of the incidence of severe xerostomia
		NeuTrexin Marketed	Alternative treatment of Pneumocystis carinii pneumonia
		Synagis RSV Phase 3	RSV disease in bone marrow transplant
		Synagis RSV Phase 4	Prevention of RSV children under 2 years
		Synagis RSV Phase 3	Children under 2 years with congenital heart disease
		Ethyol Phase 3	Treatment of NSCLC
		Ethyol Phase 2/3	Reduction in radiotherapy
		Neutrexin Phase 3	Treatment of colorectal cancer
		MEDI-507 Phase 1	Treatment of graft-versus-host disease
		MEDI-507 Phase 2	Treatment of psoriasis
		Ethyol Phase 2/3	Head and neck cancer
		MEDI-491 Phase 1	Prevention of B19 parvovirus infection
		UTI Vaccine Phase 2	Prevention of urinary tract
		HPV Cervical Cancer	Prevention of cervical cancer
		Vitaxin Anti Phase 1	Treatment of cancer
		Numax Preclinical	Prevention of RSV disease

Exhibit 2

MedImmune

Stock Performance

			2000		1999
			High	Low	High	Low
		First Quarter	76.25	43	22	14.33
		Second Quarter	80.69	42	24.67	15
		Third Quarter	86.13	57.75	40.21	22.96
		Fourth Quarter	72.63	44.63	58.6	29.67
		Year End Close	47.69		55.29

Exhibit 3

MedImmune

Product Sales

		Product Sales (In Million)	2000	1999
		Synagis	427	293
		CytoGam	36.5	34.7
		Ethyol	21.4	19.6
		Other Products	10.9	9.5
		Total	495.8	356.8

Exhibit 4

MedImmune

Total Assets

			31-Dec-00	31-Dec-99
			Assets
		Cash	84,974	36,570
		Marketable securities	406,455	214,750
		Trade receivable, net	115,635	86,894
		Inventory, net	46,633	31,777
		Deferred tax assets	22,319	23,132
		Other current assets	11,796	8,715
		Total Current Assets	687,812	401,838
		Property and equipment, net	86,383	87,452
		Deferred tax assets, net	194,761	128,990
		Marketable securities	34,825	19,074
		Other assets	2,794	11,070
		Total Assets	1,006,575	648,424

Exhibit 5

MedImmune

Liabilities

			Liabilities
		Accounts payable, trade	3,090	2,995
		Accrued expenses	72,159	65,300
		Product royalties payable	40,553	28,527
		Deferred revenue	33,966
		Other current liabilities	1,697	2,130
		Total Current Liabilities	151,465	98,952
		Long-term debt	9,595	10,366
		Other liabilities	1,933	2,027
		Total Liabilities	162,993	111,345

Exhibit 6

MedImmune

Statement of Operations

		Revenues
			2000	1999
		Product sales	495,803	356,815
		Other revenue	44,692	26,560
		Total revenues	540,495	383,375
		Costs and Expenses
		Cost of sales	127,320	90,193
		Research and development	66,296	59,565
		Selling, administrative and general	157,330	139,389
		Other operating expenses	9,231	17,409
		Total expenses	360,177	306,556
		Operating income (loss)	180,318	76,819

Exhibit 7

Aviron

Stock Performance

		Year Ended December 31, 1999
		First Quarter	26.75	17.50
		Second Quarter	28.75	17.13
		Third Quarter	34.06	21.00
		Fourth Quarter	28.75	14.81
		Year Ended December 31, 2000
		First Quarter	54.38	15.00
		Second Quarter	35.00	21.00
		Third Quarter	59.00	27.56
		Fourth Quarter	70.61	46.00

Exhibit 8

Aviron

Assets

			31-Dec
			1999	2000
		Current Assets:
		Cash and cash equivalents	28,081	64,662
		Short-term investments	24,235	67,651
		Accounts receivable	3,241	23,288
		Inventory	2,082	4,264
		Other current assets	1,009	2,691
		Total current assets	58,648	162,556
		Long-term investments		4,506
		Property and equipment, net	25,635	27,707
		Intangible assets, net		48,046
		Deposits and other assets	7,411	5,924
		Total Assets	91,694	248,739

Exhibit 9

Aviron

Liabilities

		Liabilities and stockholders' equity(deficit)
			1999	2000
		Current Liabilities:
		Accounts payable	3,038	5,106
		Accrued compensation	1,739	4,978
		Accrued clinical trial costs	846	1,974
		Accrued interest	1,438	695
		Accrued expenses and other liabilities	6,591	7,654
		Current portion of capital lease obligations	101	9
		Current portion of long term obligations	2,680	5,945
		Total current liabilities	16,433	26,361
		Deferred rent	2,214	2,095
		Deferred revenue		9,750
		Capital lease obligations, less current portion	9
		Long-term obligations, less current portion	112,657	89,947

Exhibit 10

Aviron

Stockholder Equity

			1999	2000
		Preferred stock
		Common stock	17	25
		Paid-in capital	143,822	394,012
		Notes receivable	-83	-50
		Deferred compensation	-96
		Accumulated deficit	-183279	-273401
		Total stockholders' equity(deficit)	-39619	120,586
		Total liabilities and stockholder's equity	91,694	248,739

Exhibit 11

Aviron

Statement of Operations

			Year Ended December 31
			1998	1999	2000
		Revenues:
		Contract revenue and grants	745	22,232	32,242
		Operating Expenses:
		Research and development	46,583	68,121	80,521
		Acquisition of in-process research and development		10,904
		General, administrative and marketing	10,085	13,159	13,849
		Total Operating Expenses	56,668	81,371	105,174
		Loss from Operations	-55,923	-59,139	-73,032
		Other Income(Expense)
		Interest income	6,003	3,633	6,541
		Interest expense	-4,882	-6,364	-11,020
		Total Other Income(expense), net	1,121	-2,731	-4,479
		Net Loss	-54,802	-61,870	-77,511

Exhibit 12

Aviron

Investments

		Cost	Gross Unrealized Gains	Gross Unrealized Loses	Market Value
	As of December 31, 1999
	Corporate commercial paper	4,386	25		4,411
	U.S. corporate notes	9,251		-139	9,112
	U.S. corporate bonds	9,385	3	-40	9,348
	U.S. government agency obligations	1,004		-13	991
	Municipal bonds	1,810		-9	1,801
		25,836	28	-201	25,663
	As of December 31, 2000
	Corporate commercial paper	72,894	26	-65	72,855
	U.S. corporate bonds	23,189	45	-52	23,182
	U.S. government agency obligations	2,000	12		2,012
		98,083	83	-117	98,049

Exhibit 13

Aviron

Property and Equipment

			1999	2000
		Property and Equipment
		Manufacturing equipment	5,978	6,551
		Laboratory equipment	5,992	7,780
		Computer equipment	3,113	4,219
		Office equipment	1,070	1,202
		Leasehold improvements	18,930	19,856
		Construction in progress	280	3,704
			35,363	43,312
		Less accumulated depreciation and amortization	-9,728	-15,605
		Net Property and Equipment	25,635	27,707

((copyright 2002 – John D. Sullivan

This case was written to stimulate class discussion and analysis and is not a critique of an effective or ineffective management situation.

� MedImmune, Inc. Securities and Exchange Form 10-K. December 30, 2000.

� MedImmune, Inc. Securities and Exchange Form 10-K. December 30, 2000.