Friday, July 23, 2010

Deals of the Week Watches Medigene Squeeze Out of a Jam of Its Own Making

On Tuesday, Medigene said it had landed €25 million from its Eligard partner Astellas as part of a renegotiation of the companies' distribution deal for the prostate cancer drug in Europe. In addition, Medigene will get about a 2% royalty from Astellas -- roughly a third of its current net margin on the drug now. We're not covering it below the DOTW banner because it's not a new deal, or a no-deal. It's not even a terribly unusual deal (agreements get renegotiated all the time, right?) -- but the circumstances around why Medigene needed this deal are very peculiar indeed.

Medigene secured European rights to Eligard (leuprolide), an LHRH agonist used to treat hormone-receptive prostate cancer, from Atrix Labs (now Tolmar) back in 2001. The tab, for a drug at NDA stage in the US, wasn't that huge: $6mm up front--$2mm in cash and $4mm in equity at a premium--plus clinical, regulatory, and sales milestones. In addition, the deal also included royalties, with Atrix manufacturing the products for MediGene.

Medigene got Eligard to the European market in 2004, and that same year signed up Yamanouchi (now Astellas) to sell the drug. It nearly made its money back doing so: the deal netted Medigene an up-front payment of €4mm, success milestones of up to €19.5mm, and royalties.

So: Medigene pays Tolmar royalties and cost-of-goods. Astellas pays Medigene royalties. And therein lies the squeeze, and the reason why Medigene has extricated itself from the middle of this deal-chain.

Rock, meet hard place.

"Medigene has been in the sandwiched position between our supplier Tolmar and our distribution partner Astellas," pointed out Medigene CEO Arnd Christ on a call to announce the new arrangement. This "led to a complex and in some respects unfavorable situation for us."

Howso? The cost of sales was high and a little unpredictable, and someone at Medigene perhaps forgot to account for the fact that Eligard sales may actually take off a little, meaning Medigene would owe Tolmar a bit more cash, relatively speaking. In 2009 Astellas racked up more than €100 million in Eligard sales.

As a result, "the structure of the two contracts led to a situation in which Medigene was not able to gain from further growth of Eligard due to a decrease in the net margin," said Christ.

Come again? "Once in-market sales reached a certain level we had to pay for the incremental amount more royalties to Tolmar than we received from Astellas. We have reached this level already in 2009."

At least Medigene wasn't taking excess risk on top of that? Well there was the risk that Tolmar would raise Medigene's cost-of-goods bill too. Surely not! "According to the previous agreements Tolmar was entitled to increase the prices for Eligard, whereas Medigene was not able to pass on such an increase to Astellas," said Christ.

Is that it? "Medigene was responsible for the supply chain, and was exposed to various regulatory risks, like risk and quality assurance, regulatory product liability and so on and so forth."

It's easy to see why--oh, there's more? "Last but not least, we've been exposed to foreign exchange risk, since the contract with Tolmar was based on US dollars whereas the royalty stream with Astellas was based on euro. A significant change of the euro-dollar exchange rate had a significant impact on our P&L," said Christ.

All in all the new arrangement with Astellas seems to get Medigene out of a bind, and shores up its balance sheet with non-dilutive funding. But it was the kind of self-inflicted bind we mostly see on sit-coms, Brad Lidge save attempts, or maybe an old episode of Scooby Doo, not so much in ...

Actelion/Trophos: This deal -- in which Trophos granted Actelion an option to buy based on the results of a pivotal study for its lead ALS project -- puts the number of options-to-buy so far this year at at least six, compared to 2009's five. Actelion paid €10 million up-front to the French biotech and will pay €125 million to complete the deal upon conclusion of a Phase III pivotal trial of Trophos' lead amyotrophic lateral sclerosis candidate, olesoxime. Enrollment in that 512-patient study is complete and results are expected by the end of 2011; thus, Actelion will need to make up its mind within a couple months of seeing the data or by the end of 2012, whichever comes first. Should Actelion exercise its option, Trophos' backers could see up to €70 million in further milestone payments based on the clinical progress of the company's pipeline and the regulatory success of olesoxime. Meanwhile, Actelion has gained access to Trophos' proprietary CNS assay technology and cholesterol-oxime chemistry compound library; Trophos will also test proprietary Actelion compounds with its technology. The research collaboration is early stage and specific terms have not been disclosed, but should Actelion not exercise its option to buy Trophos, the biotech has at least lined up a fully-funded partnership to complement its internal, rare-disease focused R&D.Our full write up is in "The Pink Sheet" DAILY.--CM

Merck/Hawaii Biotech: In something of a stealth transaction – neither company issued a press release – Merck has purchased bankrupt Hawaii Biotech’s dengue fever vaccine program for undisclosed terms. The deal was approved July 19 by a U.S. bankruptcy court. Hawaii Biotech filed for Chapter 11 bankruptcy protection last December and has been operating via a line of credit in the interim. Merck said the deal would enable it to expand on its vaccine development program for unmet medical needs, which already includes candidates for hepatitis A and B, measles, mumps, rubella, human Papillomavirus and flu. A tetravalent dengue fever vaccine is set to enter Phase I testing later this year, through a contract with the National Institute of Allergy and Infectious Diseases. Funded most recently by a 2006 $7.8 million Series C round led by chairman Nick Mitsakos, with participation from other private investors, Hawaii Biotech’s vaccine program stems from a 2006 joint venture with Avantogen.--Joseph Haas

Cypress/Ramius: Investors in specialty drug developer Cypress Bioscience had already expressed their displeasure with the company's latest licensing deal. But one shareholder is going one step farther: hedge fund operator Ramius, which already holds 9.9% of Cypress' shares, has made an unsolicited all-cash offer to acquire the biotech firm outright. At $4 per share, representing a 60% premium over Cypress' closing price of $2.50 on Friday, July 16, the deal would be worth $154 million. Cypress gets most of its revenue from the fibromyalgia drug Savella, but has turned around and spent money on M&A and in-licensing development candidates. It's latest deal, with BiolineRx for CYP-1020, a novel anti-schizophrenic, has not been well received by its investors. As part of its hostile bid, Ramius proposed that shareholders and management split CYP-1020 rights but with management funding future development on its own or with third-party help. Although details were left vague, the unusual proposal seems to give shareholders upside from CYP-1020 without taking on more development risk, while rewarding them with some immediate liquidity as well. Our write up -- with full coverage of Ramius' displeasure -- is (you guessed it) in the PSD. --Paul Bonanos

image from flickr user bernatcg used under a creative commons license

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