Friday, March 04, 2011

Financings of the Fortnight Is Innocent Until Proven Guilty

Welcome to the jury service edition. We were called in to do our civic duty this week, and we were stunned when we made it through the voir dire and found ourselves on our feet, raising our right hand and taking an oath to well and truly try the cause before us.

Now impaneled for the first time and deciding the fate of a fellow citizen, your columnist is struck by how difficult -- and important -- it is to remember that a person charged with a crime is innocent until proven guilty. Everyone likes to think of himself or herself as open minded, but the real challenge is to keep the mind open in the pressure cooker of a criminal trial: sealed into a room, artificially separated from the outside world, and bombarded with new jargon, complicated timelines, and tangled facts, or egregious lack thereof.

We're also finding the process fascinating in the age of social media. All of us are constantly encouraged to be insta-pundits. Indeed, 140-character snap judgments are not just encouraged, they're lionized, but a juror's job is the opposite: You must banish the snap judgments. No, better yet, be skeptical of them, then gather them, shape them, and rework them into a coherent latticework of reason.

It's a weird out-of-body experience. It's also a lot like journalism, though with very different rules. While I've been deliberating with eleven others, my colleagues committed a small act of heads-up journalism, digging up notice in a Cephalon regulatory filing that the firm is starting its own in-house venture group. In case you missed it, here's our report. Cephalon joins Merck-Serono, Boehringer-Ingelheim and Shire, all recent joiners of the corporate venture club.

Any holdouts? The biggest, or so we thought, is the American Merck. Consider this response from Merck's SVP of worldwide licensing David Nicholson at last year's Pharmaceutical Strategic Outlook conference, when he was asked if Merck would ever create a biotech venture fund:

Look, there are some really fantastic VC folks out there and that's their business. Our business is discovering and developing drugs. At least to date, have we contributed to VCs and to their firms? Yes, absolutely. All parts of the various legacy companies of Merck have done that. That's something that we remain interested in. Are there concrete plans to set up a VC fund at Merck today? No. Does that rule it out forever? Who knows?
"Who knows" has arrived. Without fanfare, the big pharma has launched what it calls the Global Health Innovation Fund, a $125 million vehicle with five staffers who report into Merck's executive committee and chief strategy officer. The group's mandate is to invest beyond drugs: diagnostics, devices, information and health management tools, site-of-care services. The fund is run by Bill Taranto, who came to Merck from Johnson & Johnson, where he was most recently in charge of health care strategy and alliances. Taranto's been out stumping for the fund at conferences like this.

We asked about the fund's investments so far, and we got a tight-lipped response: Nothing yet disclosed.

Another holdout that comes to mind is Celgene. Though it's done one-off investments like the one Cephalon made in Japanese firm SymBio Pharmaceutical, which we describe below, Celgene doesn't have a venture group. But as we report in the upcoming issue of IN VIVO, executives certainly have been thinking about it -- and larger questions of how to tap into outside innovation -- as the big biotech grows more attuned to its size ($3.6 billion in 2010 sales), its dependence on one product (Revlimid, $2.5 billion in 2010 sales), and the pitfalls of having investors who want some of that cash back, dammit, instead of seeing it plowed into R&D (28% of fourth-quarter revenues) or marquee deals.

We're often accused of bringing you, dear reader, tasty little tidbits from the financial front. You can call us innocent, you can call us guilty, but you can't deny that you're reading another edition of...

Acetylon Pharmaceuticals: A few weeks back, we’d heard that oncology startup Acetylon was looking to tap a broad network of angels for an upcoming round of funding well into the double-digit millions -- a lot more money than can fit on the head of a pin. Now Acetylon has taken the first step, revealing in an SEC filing that it’s raised the first $12.4 million of a planned $30 million Series B round. Although it hasn’t revealed details about its investor group, CEO Walter Ogier said in a recent START-UP feature that Acetylon wanted to avoid working with traditional VCs. Rather, it planned to seek capital from friends and colleagues of its existing angel network, which includes The Kraft Group, a family philanthropic organization and holding company tied to the owners of the New England Patriots. The strategy appears to be working: The filing says 23 investors are already involved with the new round, more than twice the number involved in its $7.2 million Series A during 2009. (A $2 million convertible note followed last year.) Founded to investigate new drugs in the class known as histone deacetylase (HDAC) inhibitors, Acetylon is aiming to move its first drug candidate, multiple myeloma treatment ACY-1215, into the clinic. The company published and presented encouraging preclinical data about the drug in December. In a new wave of HDAC inhibitors in recent years, only two have been approved: Celgene's Istodax (romidepsin), which it nabbed in its takeover of Gloucester Pharmaceuticals; and Merck & Co.'s Zolinza (vorinostat). Both were approved for cutaneous T-cell lymphoma. -- Paul Bonanos

Tengion: Raise or fold: Those were the two options in the cards for organ and tissue regeneration firm Tengion. On March 1, two months away from running dry, the firm raised $31.4 million in a PIPE by selling 11.1 million shares at $2.83, a 13% discount to the ten-day average. Tengion also issued five-year warrants for another 10.5 million shares at $2.88. Tengion announced last month it only had enough cash to last through April, which would mark the one-year anniversary of the firm's 2010 initial public offering. The company priced 6 million shares at $5, though it wanted a stock price twice as high with fewer shares sold. The stock has since traded between $3 to $5 except for two days in mid-February, when it got a boost supposedly from rumored discussions of a stock-for-stock merger between Tengion and an undisclosed publicly traded company. But the price spike caused the potential buyer to pull out of those negotiations, according to Tengion. Device giant Medtronic was the big name in this week's stock sale. It bought 2.5 million shares and received a right of first refusal that expires Oct. 31, 2013 to Tengion’s Neo-Kidney Augment, a preclinical cell augmentation candidate designed to prevent or delay dialysis or kidney replacement by regenerating kidney tissue. Upon first glance Medtronic’s investment seems out of the ordinary, but Medtronic has been trying to build a regenerative biologics business. This past August it paid $118 million for Osteotech, which produces demineralized bone matrices, bone grafts, and structural allografts. -- Amanda Micklus

Advanced BioHealing: ABH is looking for a smoother road than what Tengion has experienced in the public domain. The Connecticut firm, also working on regenerative medicine products, has filed for an IPO with a $200 million placeholder. Just a placeholder, mind you, but it's at least a rough gauge of what the company and its advisors think of its prospects. It sells a bioengineered skin substitute called Dermagraft used to treat diabetic foot ulcers, and it would like to expand the product to treat venous leg ulcers. It's also working on a skin treatment for severe burns. This year started with a flurry of IPOs that mainly followed last year's trend of discounted pricing and, post-IPO, lukewarm reception for shares. It's something ABH's shareholders must be keenly aware of. Canaan Partners owns 41%, Safeguard Delaware 28%, and Wheatley Partners 15%. -- A.L.

SymBio Pharmaceuticals
: Plenty of Western biopharmas have found interesting compounds sitting on Japanese drug makers' shelves. SymBio turns that formula on its head. The Tokyo-based specialty pharma in-licenses foreign products and brings them to the Japanese market. It just raised a ¥ 2 billion ($24 million) Series E round, which makes the company sound ancient. Not so; it was founded in 2005 by the former head of Amgen in Japan, and it shepherded the lymphoma treatment bendamustine to approval in Japan last October within four years of starting a Phase I study. The F round was led by Cephalon and JAFCO, with Cephalon boosting by an undisclosed amount its 17.5%, which it gained in its 2009 deal with SymBio to take over bendamustine rights in China and Hong Kong. Cephalon also has US rights to the drug through a deal cut by Salmedix, which Cephalon acquired in 2005. (Salmedix got the rights from Fujisawa Deutschland in 2003.) There's a lot of ink devoted to SymBio in our colleague Mel Senior's IN VIVO feature on Japanese specialty pharma here. The story is four years old -- note the reference to a "burgeoning private equity sector" -- but quotes like this one from SymBio CEO Fuminori Yoshida are timeless: "Many [non-Japanese] companies in niche areas, looking for partners in Japan, visit Japanese pharma firms, take their executives to a nice restaurant, and think they have a deal. Twelve months later, nothing happens." -- A.L.

Image courtesy of flickr user mira66 under a Creative Commons license.

1 comment:

Anonymous said...

Very insightful reporting, thanks. Cephalon is leading the charge in the new wave of "biological drugs" which are harder for competitors to reverse engineer and copy. PII results just published in Nature showed that Cephalon's "off-the-shelf" stem cell drug Revascor reduced MACE (Major Adverse Cardiac Events: chest pain, heart attack, death, etc) by an unprecedented 84%, virtually curing heart disease with a single injection. If you can afford it, the drug has been approved for treatment in Australia. Even though they just beat earnings, raised EPS targets, are net positive cash and have the highest FCF/share of any biotech, Cephalon is approaching a 52-week low and has the highest short interest of any stock in the S&P 500. Go figure.