Thursday, September 23, 2010

Notes From PSA: More on Lilly's Next Project Financing Project

If at first your project financing doesn't succeed, try try again. That was the message during a panel discussion at our (20th Anniversary) Pharmaceutical Strategic Alliances conference in NYC on Wednesday. The topic of conversation was deal structures for high-risk, high-reward projects, which screamed for analysis of the 2008 three-party deal to finance two of Eli Lilly's late-stage Alzheimer drugs.

Private equity firm TPG-Axon Capital and CRO Quintiles Transnational put up much of the cash, with Quintiles running the Phase III trials. The structure is still in place for one of the compounds, solanezumab, but the other, the gamma-secretase inhibitor semagacestat, is no longer in development.

We should amend our opening statement: The deal has succeeded for Lilly in the sense that someone else helped pay for development of a drug that failed (or, at least, is currently on the shelf). Lilly senior vice president Gino Santini and Quintiles senior vice president Tom Perkins, both on the panel, said everyone knew from the start that the risk-reward calculation for Alzheimer's was high on both counts. "We went in with our eyes wide open," said Perkins.

The deal turned out to be a true product of its time, announced just two months before Lehman Brothers imploded, and cheap, leverageable private equity suddenly became a distant dream. "I don't know that we could attract capital of that size for a project of that risk profile if we went out looking today," said Perkins.

Then again, the lure of reaching the brass ring in Alzheimer's has proved over and again to be awfully tempting. Just ask Lundbeck (Flurizan, ouch), Pfizer (Dimebon -- not a happy result), and J&J (bapineuzumab -- jury's still out).

Meanwhile, Lilly keeps plugging away at project finance models. Its latest, reported in part a couple weeks ago, centers around three venture funds that Lilly is backing, putting up just shy of 20% of each fund's capital, up to $50 million in each. Lilly will be the only biopharma LP in each fund.

One will be reportedly run by CMEA Ventures in San Francisco, which Lilly officials haven't disputed; one we hear by a well-established firm in Cambridge, Mass.; and the third remains a mystery. The final two funds haven't closed yet. Lilly is also offering a portfolio of its pipeline compounds to each fund manager. They can choose from Lilly's basket or from outside opportunities. Santini said today the mix of compounds in each fund should be 50/50. Lilly gets call options on all its own molecules and on one of five sourced externally. For the calls it exercises, Lilly must pay "fair market value," though it's unclear how independently that value will be determined. The funds can also use Lilly's Chorus development team -- or teams, as the company has two in Indianapolis, one in India and could add a fourth in Europe -- to run the development.

Santini said the one general partner up and running has already chosen one Lilly molecule and one third-party molecule.

Various attempts at project financing haven't turned out very well so far, but the promise of newly freed assets, released by Big Pharma mergers and downsizing, has kept the dream alive. And we emphasize dream -- the next wave of funds mostly remain behind the scenes, as their founders scramble to convince investors to join. (We examined the dream of asset financing, and the difficulties it faces, in this feature.)

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