Friday, June 26, 2009

DotW: Dollars To Donuts

It was a busy week but not necessarily in terms of deal-making activity. Instead, all eyes were on Washington DC, where the discussion on healthcare reform continued to dominate--from the spacious halls of Congress to the tight confines of taxi cabs. As you muse over how many dollars it will take to close the donut hole (are these the Dunkin' variety or Krispy Kremes?) and ponder emerging news about the exclusivity period for biologics, we bring you...

GlaxoSmithKline/Chroma: We confess we've had entirely too much fun writing about this deal this week. We could use this post to delve into the industry's mysterious desire to inflate a deal's price by including stratospheric but highly improbable bio-bucks figures. But where is the fun in that? So let's focus on the actual deal. Here's what we know: GSK and Chroma teamed up June 23 in an option-based drug discovery and development deal. In conjunction with the deal, Chroma announced its $24.5 million Series D financing, which GSK also took part in, although it hasn't become a major shareholder overall. According to Chroma's CEO Ian Nicholson, GSK's stake is "well below 10 percent." Further terms weren't disclosed beyond the $1 billion 'biodollars' figure Chroma cited in a press release, but the helpful folks at EP Vantage provided some additional color on the tie-up: "we found out that GSK paid £5m upfront and contributed £5m of the £15m Series D, giving GSK a 5% equity stake in Chroma. So a total upfront consideration of £10m," EPV commented on our earlier post.

Every little bit counts, as they say. In exchange for the cash and equity, Chroma will use its macrophage-targeting technology to identify four small molecules, mainly for inflammatory and auto-immune disease indications, although the deal covers other indications as well, according to Nicholson. The biotech will take these compounds through proof of concept, at which point Glaxo can exercise its option to take an exclusive worldwide license. As an option-based deal, the tie-up illustrates yet again that this kind of risk-sharing approach to partnerships is GSK's modus operandi. (When it comes to actually exercising the option--well, that's another story.) Earlier this month the Big Pharma signed a similar deal with Concert Pharmaceuticals around three preclinical candidates in which it paid $18.3 million up front in cash and took a $16.7 million equity stake.

From Chroma's standpoint the equity stake was likely just as important as the option portion of the deal. At a time when every small company is a seller, and Big Pharma is barraged with pitches screaming "Buy me!" (or at least "Buy a piece of me!"), engaging the larger company is the real sticking point for smaller biotechs. With skin in the game, GSK is far likelier to pay closer attention to the ongoing work at Chroma, which likely stands to benefit the company as its programs move through development. Indeed, the need to engage Big Pharma is one reason traditional VCs are going out of their way to include corporate venture investors in their syndicates (the fact that CVCs still have money to commit is just a minor detail).

Biovail/Cambridge: Okay, we admit it: we’re obsessed with Xenazine, a drug for Hungington’s chorea that was approved by FDA last year. But we have our reasons. We see Xenazine as exactly the type of narrow-market product that the new regulatory and reimbursement climate favors. And, as the flurry of deal-making triggered by its approval indicates, it demonstrates that these types of products can be very lucrative, albeit not at the level of the primary care blockbusters Big Pharma is built on. (You can read much more “The Billion Dollar REMS,” from The RPM Report.)

Biovail certainly agrees with us: the company paid $200 million to buy-out Xenazine developer Prestwick Pharmaceuticals. That deal was complex, since Ovation (now Lundbeck Inc.) simultaneously acquired US marketing rights for the drug for $50 million, so Biovail really acquired Canadian marketing rights and a US royalty stream. Now Biovail is upping its piece of the Xenazine pie by acquiring global commercial rights from Cambridge Labs. Biovail paid $200 million when the deal closed June 22—an indication of the value the company sees in the product. The company will pay an additional $30 million over the next two years.

In one sense, Biovail is simply buying out a large royalty obligation: Cambridge collected 50% of US revenues. With almost 2,000 patients already on therapy at an average annual cost of $30,000 to $50,000 each, that is already a significant amount. Biovail won't save all that money; the company will continue to pay a royalty to an undisclosed third-party who manufacturers the product for global markets.

Still, Biovail says the transaction will be immediately accretive to revenues and margins, and will add $23 million to $26 million to Biovail’s cash flow in 2010. (Those figures include the contribution from international sales from European marketers of the drug as well as the impact from canceling out the royalty obligation.) It is also a pipeline play, giving Biovail full rights to a controlled-release formulation of the drug and a single isomer version of the active ingredient. Those line extensions may be key to expanding the market beyond Huntington’s; the extended release form is in development for Tourette Syndrome.

But the deal has one more wrinkle, in keeping with the unique profile of Xenazine: It takes out a layer between Biovail and international marketers of the drug, and this is a case where cutting out a middleman can pay off for reasons that aren't strictly economic. Xenazine is basically a generic drug around the world, raising a high potential for diversion into the US to capitalize on the premium price. Biovail told its investors during its second quarter call in May that Cambridge was keeping appropriate track of the supply in Europe, and the company says preventing diversion is not a factor in this deal. But we’re still betting that this transaction buys Biovail some peace of mind.—Michael McCaughan

MediciNova/Avigen: It ain't over till it's over, but for Avigen--and major shareholder Biotechnology Value Fund--the future grows clearer every day. Late on Thursday came news that MediciNova and Avigen had reached an "understanding of certain key terms", paving the way for MediciNova's acquisition of the troubled biotech. Should it come to fruition, the deal would combine the two companies' development programs based on the novel glial activation inhibitor ibudlast. (Avigen's AV-411 is stalled in Phase I studies for neuropathic pain; while MediciNova's MN-166 has advanced to Phase II for multiple sclerosis.) Interestingly, the buy-out by MediciNova recalls the plan Biotechnology Value Fund proposed several months ago.

Avigen has been reeling ever since last fall when its multiple sclerosis spasticity drug, AV-650, failed to meet its primary endpoint in a Phase IIb study. Shortly afterwards, Avigen reduced headcount and suspended its other clinical programs but BVF, loudly and publicly, called upon the biotech to suspend operations and return its remaining cash to its shareholders. Meanwhile, BVF offered to buy the company's outstanding shares with a tender offer of $1.20 per share, with the intention of merging Avigen with MediciNova. But to effect this latter proposal, BVF needed to win control of the board, a change that could only happen with the support of two-thirds of Avigen's shareholders. In late March, BVF came close--its proposal swayed 58% of Avigen's investors--but that wasn't good enough. At the time Avigen's acting CEO, Andrew Sauter, promised the biotech would sell off the remaining assets and roll-up the company. In an interview with "The Pink Sheet" DAILY, Sauter made it clear that Avigen would consider a bid by MediciNova as long as it offered fair return to Avigen shareholders.

And it looks like both sides have come to an agreement on the definition of "fair". Under the terms of the merger, Avigen shareholders will receive a consideration approximating Avigen's net cash liquidation value plus $3 million. Avigen shareholders would be able to elect to receive this consideration in cash or as MediciNova stock. At the end of 18 months, any unexercised convertible securities would be paid out at their cash value. "We believe that the proposed merger presents clear advantages for the shareholders of both companies," said Yuichi Iwaki, MediciNova's President and Chief Executive Officer, in a press release.

Astellas/NeurogesX: This week's deal with Astellas to market and distribute the neuropathic pain patch Qutenza in Europe bolsters NeurogesX’s cash position, giving the company some breathing room to prepare for regulatory approval and a 2010 launch in the U.S. market. Qutenza was approved for neuropathic pain in non-diabetic patients by the European Medicines Agency in May and it is pending review at the FDA, with an Aug. 16 user fee date. A European launch is expected by the first half of 2010. NeurogesX is set to get €30 million ($42 million) upfront for Qutenza commercialization rights from Astellas' European subsidiary. In addition to 27 countries in the European Union, the deal covers Iceland, Switzerland, and some countries in the Middle East and Africa. This isn't exactly the deal Astellas watchers have been expecting ever since it tried--and failed--to bring CV Therapeutics in-house. But in a small way, rights to Qutenza help the Japanese pharma achieve another ambition: bolstering its European presence with an additional product it can market alongside its specialist-focused medicines in dermatology, urology, transplantation, and infectious disease. The dermal patch Qutenza packs a high concentration form of synthetic capsaicin (also called trans-capsaicin) that stimulates transient vanilloid 1 receptors in the skin to subdue overactive pain receptors. As part of this week's agreement, Astellas will also pay €5 million upfront ($7 million) for a co-development and commercialization option on NGX-1998, a Phase I liquid formulation of the NeurogesX product.

The deal is definitely a balm to NeurogesX's uncertain cash position: the company had about $19 million in cash and marketable securities at the close of the first quarter, enough to carry it through 2009, but insufficient to give the company much comfort in making plans for breaking into the U.S. market. During a June 22 investors’ call, Chief Financial Officer Stephen Giglieri declined to provide runway guidance, but added: “Obviously, putting $49 million into the bank is going to extend our runway fairly significantly.” (It's all about the runway, people.) NeurogesX is also eligible for roughly $100 million in sales-based milestone payments and additional option payments for the liquid formulation. (Not billion dollar bio-bucks territory, but nothing to sneeze at either.)--Emily Hayes

LabCorp/Monogram Biosciences: Molecular diagnostics specialist Monogram Biosciences will become part of LabCorp under a tender offer announced this week. The deal, for $4.55 per share of Monogram’s stock is worth $155 million including the net indebtedness LabCorp picks up. (According to the press release announcing the news that gives Monogram an implied equity value of $106.7 million.) For the cash, LabCorp gets two of the more innovative marketed commercial tests in the molecular diagnostics space: Trofile, developed in collaboration with Pfizer, identifies patients who are eligible for the CCR5 class of HIV drugs and is a companion diagnostic for Pfizer’s first-in-class drug Selzentry; HERmark, the first commercially available functional Her2 assay, is one of a new wave of Her2 tests for breast cancer patients. Monogram is also applying the technology that led to HERmark, called VeraTag, to other cancer markers in the EGFR pathway. But it’s been struggling to come up with the resources to do that--or, as we wrote earlier this year in our coverage of the new generation of Her2 tests--to validate its Her2 assay in a prospective trial. Moreover, Monogram has been building disease management capabilities in two distinct therapy areas – HIV and oncology – also a difficult challenge for a small company with limited capital. The cash reserves at LabCorp, which has been eying the esoteric testing market for some time, should solve those problems.--Mark Ratner

(image by flickr user Pink Sherbet Photography used with permission via a creative commons license.)<

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