Wednesday, December 16, 2009

2009 Exits/Financings DOTY Nominee: Cephalon/Ception

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

With all due respect to my colleagues, I insist that if you vote for one option-based deal, it must be the Cephalon/Ception transaction. As we've told you, option-based deals are in vogue and likely to remain so--unless something dramatic happens to the IPO market. And I completely agree that option-to-license deals are flexible, low-cost, risk-mitigating, pay-for-performance-oriented and, indeed clever. But they're also not really all that new. If you want novelty, it's the option-to-acquire, which despite all the hype (or handwringing from VCs) remains a relative rarity.

According to Elsevier's Strategic Transactions (a better source than the magic eight ball), there have been just six option-to-acquire deals in the past two years, including five in 2009 alone. Among them: Alcon/Potentia; Novartis/Proteon; Novartis/Elixir; and Cephalon/BioAssets. But the one that got the '09 party started, so to speak, was Cephalon's option to buy Ception for $100 million upfront and another $250 million in milestones, with the purchase tied to the clinical performance of the start-up's Phase IIb/Phase III anti-interleukin-5 antibody, reslizumab.

As we wrote at the time the deal was announced, the option-to-buy strategy is a clever way for Cephalon to acquire a potentially valuable large molecule platform while simultaneously capping the expenses it might owe down the road as it tries to build a pipeline of novel drugs to treat inflammatory diseases. It's fair to say the deal hasn't worked out exactly as planned: Cephalon and Ception renegotiated the option-to-buy in November after a trial of reslizumab in patients with eosinophilic esophagitis, a rare autoinflammatory disease, yielded disappointing results. Now the two companies will focus on results in another indication, eosinophilic asthma, with data expected sometime in the first quarter of 2010.

But the companies are still tightly linked--$100 million dollars has a way of doing that--despite the ups and downs of reslizumab's clinical development. Indeed, Cephalon appears even more enamored of the molecule than it did back in January, spending quite a bit of its recent R&D day highlighting the drug's potential.

And that level of engagement is critical in today's climate, where exits are still primarily via acquisition. Pharma is barraged by would be sellers--especially privately-held venture backed biotechs ala Ception. Contrary to popular opinion, the economic doldrums haven't sparked a rash of dealmaking just because assets are suddenly cheap (or cheaper), leaving VCs even hungrier for exits.

The question becomes how best to get a potential acquirer's attention? One answer: make sure the drug maker has some skin in the game. Give the company a financial reason to think seriously about wanting to own all of a particular start-up--even as the two parties get to know each other better as they work on furthering a common goal such as the development of a drug. In other words, the option-to-acquire.

We know--and recognize--that the option-to-acquire model necessitates trade-offs. Buyers are taking on some risk by ponying up money for an asset or platform that may require additional tweaking. Meantime, sellers must let go of the dream that a future deal will yield outsized returns, trading a highly theoretical fortune for the greater certainty of a profitable--albeit capped--exit. But as the Cephalon/Ception deal shows, there's increasing value to this kind of certainty, both for biotech execs and their VCs.

Don't you know a bird in the hand is worth two in the bush--or at least $100 million.

(Image by flickrer toyfoto used with permission through a creative commons license.)

1 comment:

Melanie Senior said...

And just which colleagues might you be paying due respect to?!