Friday, April 18, 2008

Maybe They Should Be Called SCRAPs

It was at least worth the attempt.

Dynogen’s VCs didn’t want to put up enough money; new VCs would invest only on punishing terms; public investors wouldn’t support an IPO; no good reverse-merger opportunities presented themselves; and it didn’t have enough clinical data to excite the interest of Big Pharma.

So it tried to SPAC (see our original analysis in START-UP here) – reverse merge into a shell called Apex Bioventures Acquisition, which had IPO’d back in June 2007 with the mandate to go and find its shareholders a business. Dynogen’s goal: reach an alternative class of IPO buyers, retail investors who might be willing to take venture-equivalent risk at a time the traditional biotech funds (e.g., Deerfield, T. Rowe Price, Brookside, MPM) won’t.

It didn’t work – the second biotech SPAC failure in as many months (see our coverage of Precision Therapeutics’ SPAC attempt here and here ). And while we don’t have the inside details of the Dynogen deal, the obvious point is that the spread of biotech aversion has reached virtually plague proportions.

Dynogen and Apex gave themselves every advantage a development-stage biotech could to succeed in SPAC-ing. First, they got themselves a top-tier bank, Lazard, to help them with the deal – SPACs have somewhat shady reputations and getting Lazard to sign on represented something of a coup.

Second, Apex and Dynogen did what they could to avoid hedge funds – a problem class of investors for a SPAC. Since a SPAC acquisition won’t go through unless it gets approval from a large majority of investors, the SPAC’s investors can basically blackmail the SPAC managers and the target’s VCs to buy them out at a profit. The first biotech SPAC, PharmAthene, for example, needed 80% of its SPAC’s shareholders to go along with the deal, but PharmAthene’s managers, VCs and the SPAC’s chairman ended up having to buy out perhaps $10 million or more worth of shares. So Apex had created a largely retail ownership base (retail investors are less likely to play financial games) and the deal could go through with the approval of just 70% of investors (not 80%).

Not good enough. According to news reports, Dynogen and Apex couldn’t even convince the 70% of Apex investors that they needed.

Dynogen is far from the riskiest of clinical-stage companies. But approvals for its drugs are by no means a slam dunk. It’s developing drugs for a condition – irritable bowel syndrome -- that interests Big Pharma (treatments are few; pipelines sparse), but also makes them quite nervous since virtually the only drugs for the condition -- GlaxoSmithKline’s Lotronex and Novartis’s Zelnorm -- ran into trouble for different adverse events.

And though Dynogen’s two most advanced IBS compounds are theoretically less likely to run into similar problems (none of these side effects showed up in previous human testing by originator Mitsubishi Tanabe), proving efficacy in IBS is tricky. You test whether patients feel better which means that getting a truly credible efficacy signal requires much larger trials than Dynogen’s positive Phase IIa tests. In short, Apex’s shareholders weren’t investing in a company with real efficacy proof-of-concept.

In terms of the life sciences world, SPACs are better suited to medical device companies and, in particular, companies with sales – like the temperature-management business Alsius (see the coverage here). But problem there is that – unlike biotech – most credible device companies can find private investors willing to put in money at relatively generous valuations. And Alsius itself is hardly an advertisement for device SPACs – the stock is down 72% since it began trading.

Apex, on its extremely brief conference call to announce the Dynogen deal’s demise, was upbeat about its chances to find another health-care company to buy. But the 14 months it’s got to find, negotiate and get approval for another transaction (average health-care SPAC seems to take about eight months from announcement to close) looks like a pretty short runway.

Meanwhile, for biotechs, and the VCs marooned in them, one other route to the public markets looks like it’s shut tight.

On the other hand, it also looks like the only way for biofinancing to go is up.

"On the grounds of Grant's Tomb, a heart, reconstructed," by Flikr user CarbonNYC used under a creative commons license

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