Deals Of The Week Ponders Project Financing

GlaxoSmithKline has been out ahead of other big pharmas when it comes to investing in venture funds. Its deal with Avalon Ventures represents another flavor of the relationship – investing as a partner rather than as an LP and creating companies around a single drug. But in the rush to mint single-asset companies, are the stakeholders giving short shrift to innovation?

On April 22, GSK joined with Avalon Ventures to form up to 10 start-ups in one San Diego-area facility. Avalon will contribute up to $30 million from its Fund X, and GSK will provide up to $465 million in seed funding, based on development milestones, while retaining an option to swoop in and acquire a company if and when it produces a clinical candidate. Avalon will pick the early-stage prospects, and both companies jointly will approve the formation of new companies.

We’ve seen these deals before, motivated by the neediness of the two parties: big pharma needs low-risk access to external innovation as its own internal labs sputter; VCs need access to funding as their traditional sources dry up. GSK has been particularly active in teaming up with VCs, and seems to be trying out different flavors of collaboration. It invested last January in Sanderling Venture’s Fund VII; and in March 2012, it joined with Johnson & Johnson to invest in Index Ventures’ Index Life VI fund.

The Avalon deal is a new twist, however. GSK is not an LP in the venerable San Diego firm’s Fund X, which closed last year with $200 million in commitments. Rather, it is an investment partner, with the two sides forming syndicates of two for each company they create. They will not look to bring in more investors, officials from GSK and Avalon said this week.  And although GSK’s relationship to Index is as a limited partner, not a roll-up-the-sleeves, company-creation partner, it’s similar to the Avalon deal in one respect: the focus is on single-asset companies.

That’s also DOTW’s focus this week: project financing. Not from the perspective of the VCs who popularized the model and are investing in it like lemmings, but rather from the perspective of the scientists who do the daily work of inventing drugs. From the scientists’ point of view, the asset-centric model isn’t about lower risk and better returns. (After all, it’s an ongoing experiment whose benefits we won’t know for some time yet.) Scientists are asking a different question: is it the best route to innovation?

A single-asset company refers to a virtual start-up formed around a single drug. All staff, funding, planning and operations are geared to advancing that drug to an exit, whether it be the sale of the asset or the company that houses it. The leanness of the operation, and the need to outsource R&D, is thought to lead to capital efficiency. The exclusive focus on a single project is thought to offer operational efficiency and speed to proof-of-concept. The single-asset vehicle can make a clean, attractive package for a buyer, unencumbered with staff, infrastructure and overhead.

Here’s where the contrarian view comes in. Everything is outsourced these days, including synthesis and chemistry, in vitro and in vivo tox, ADME, pharmacokinetics, etc. But not so much target selection or lead optimization. Also, the outsourcing of R&D requires staff to oversee the tasks and manage the relationship – initiating the work, measuring performance and assuring quality, reviewing interpreted data, etc. Depending on the amount and complexity of the work, this can add bloat and cost.

Opinions about the capabilities and quality of CROs vary among scientists. Hermann Mucke PhD, founder of HM Pharma Consultancy, says he “would not trust a CRO's claims of its ability to identify any target, or optimize any lead structure.” He allows that a platform company with a sideline business could do specific target-related tasks quite well, likely better than most companies. But he adds that it’s sometimes difficult to achieve that narrow match. And it also requires more teamwork between internal staff and service provider than classical outsourcing.

Mucke’s last point about teamwork raises another potential problem with the virtual model. In his 1974 book “Lives of a Cell,” Lewis Thomas described the phenomenon of groups of ants, bees, fish, termites or people behaving like a thinking organism. It happens, like magic, when the group reaches critical mass. But does it happen in a virtual company with a handful of employees working from home, sometimes at a considerable remove from the operations? Thomas, who died in 1993, was the former Dean of Yale School of Medicine and New York University School of Medicine, and President of Memorial Sloan-Kettering Cancer Center. He knew something about scientists working in teams.

The short horizon to an exit  also could make it hard to attract top scientific talent. Scientists tend to like to dig deep into a project and are open to following leads thrown up by serendipity. Pfizer’s Xalkori (crizotinib) is a good example. The molecule was discovered at Sugen and came into Pfizer’s portfolio when it acquired Pharmacia, Sugen’s parent. Pfizer scientists at La Jolla, Calif., several of whom started at Sugen, spent seven years hitting crizotinib’s c-MET target before a chance publication in Nature magazine clued them into ALK and set them set them on the right path. Xalkori launched four years later.

Now, getting back to GSK – in siding with VCs, is the pharma seeking speed and cost-cutting advantages or is it hoping to get an innovative drug out of the investment? Are GSK’s interests aligned with its partners?

Beats us. We just thought the question needed to be aired. - Mike Goodman

We also think the following deals merit your patient attention:

Merck/Cerecor: In its second deal with Merck in the past month, on April 19 neuroscience specialist Cerecor acquired exclusive worldwide rights to develop and commercialize MK-0657, Merck’s NMDA (N-methyl-D-aspartate) receptor subunit 2B antagonist for all indications including depression.  The molecule was originally developed by Merck for Parkinson’s disease, but failed to show efficacy in an early study. However it did show a promising signal of antidepressant activity.  Dr. James Vornov, Cerecor’s SVP of clinical development, said his team was particularly interested in the oral drug’s “potential to rapidly reduce depressive symptoms, including suicidal ideation” in patients refractory to available therapies. Terms of the deal were not disclosed. Cerecor will immediately assume full development and commercialization responsibilities. The agreement includes milestone payments and royalties “consistent with clinical stage licenses in neuroscience.” Deals in the psychiatric space tend to feature low upfronts and moderate-large downstream payments, in keeping with the high-risk nature of neuropsychiatric drug development. In March, Cerecor received exclusive worldwide rights to develop and sell Merck’s catechol-O-methyltransferase (COMT) inhibitors, with potential applications in Parkinson’s disease, schizophrenia, and addictive behaviors. Financial terms were not disclosed. Founded in 2011, the start-up specializes in translating early stage neuroscience therapies into early human trials, and developing them for market. Merck’s mid and late-stage neuroscience pipeline shows no candidates for disorders of mood or behavior; but there are two for insomnia, two for neurodegenerative diseases, and one for neuromuscular blockade. - M.G.

AstraZeneca/Alchemia: In its ambition to transform the company through deal-making, AstraZeneca has signed yet another early-stage collaboration, this time a multi-target drug discovery deal with Australian oncology drug developer Alchemia. The agreement, announced April 23, gives AstraZeneca access to Alchemia’s Diversity Scanning Array (DSA) and associated Versatile Assembly on Stable Templates (VAST) chemistry platform to discover novel small-molecule drugs in a multitude of therapeutic areas, including oncology, respiratory and cardiovascular disease. Alchemia will receive an undisclosed upfront payment and is eligible for preclinical, clinical and commercial milestone payments of up to $240 million. The Alchemia’s DSA is a suite of 14,000 novel compounds that scan three dimensional molecular shapes and peptidomimetic functionality. It forms the basis of the VAST discovery platform which can identify the shape and binding elements required for target modulation. The deal is the fifth AstraZeneca has signed since unveiling its turnaround strategy to investors in March; the most recent was with Bind Therapeutics. - Jessica Merrill

Opko Health/Prolor Biotech: Opko Health announced April 24 that it will acquire Israel’s Prolor Biotech in an all-stock transaction valued at roughly $480 million. The stock-swap deal, expected to close during the second half of this year, is structured so that Prolor’s management and personnel will remain in place, serving as the biologics subsidiary of Opko, which already produces small-molecule drugs, vaccines and diagnostics. Prolor’s business focus is on developing longer-acting formulations of approved protein products, with a lead product for growth hormone deficiency, the Phase III human growth hormone hGH-CTP. Prolor intends to begin a Phase III trial in adults later this year, with a plan to position hGH-CTP as a weekly injectable more convenient for both adult and pediatric patients than the current daily-injection therapies. Opko Executive VP Steve Rubin said his firm placed a lot of value on acquiring the GHD product, which has orphan drug designation in both the U.S. and Europe in both adult and pediatric populations. The EU designation would protect the product, if approved, from direct competition for 10 years, he added. “This is the way we’re building Opko,” he said. “This gives us four products that will be in Phase III, which is very important to us. They’ll come on to the market at different times.” During an investor call, Prolor President Shai Novik spoke of how the deal structure – in which Prolor shareholders will receive 0.9951 shares of Opko stock for every full share in Prolor – will give his company’s investors the opportunity for lasting value by participating in Opko as long-term investors. The deal values shares in Opko at $7.03 a piece and Prolor shares at $7.00, a 20% premium over the Israeli firm’s closing price on April 23. - Joseph Haas

Bristol-Myers Squibb/Merck: Confident that its daclatasvir will prove the best-in-class NS5A replication complex inhibitor for hepatitis C, Bristol-Myers Squibb on April 22 signed its second non-exclusive partnership this month to test the compound in tandem with another company’s HCV candidate. The agreement to test Phase III daclatasvir in a Phase II combination trial with Merck’s MK-5172 follows on a similar arrangement signed with Vertex April 5 to test the NS5A inhibitor with nucleotide analog VX-135. The deal includes no financial considerations; Merck will fund the trial, with Bristol only contributing the volume of study drug needed, Doug Manion, Bristol’s senior VP of development, neuroscience, virology and Japan, said. The arrangement is open-ended, like other combo trial collaborations Bristol has entered – if the two companies want to move on to Phase III work with the combination being studied, they need to work out a new agreement. Manion said NS5A inhibition is a compelling pathway for treating HCV, in part because the exact function of the NS5A gene product in HCV is not fully understood. “It’s very complicated,” he said. “It does a large number of things and the virus can’t survive without it, we know that for sure. We were the first company to actually ‘crack the nut’ in terms of how to drug it.” Bristol plans to file the combination of daclatasvir and its proprietary Phase III protease inhibitor asunaprevir for Japanese approval later this year, specifically to treat genotype 1b of the virus, the version most prevalent in Japan. - J.A.H.

Achaogen/BARDA: The private anti-infectives company Achaogen secured $60 million from the Biomedical Advanced Research and Development Authority, a division of the U.S. Department of Health and Human Services, to advance its lead program. Disclosed on April 24, the funding is an extension of a 2010 contract with BARDA that brings the total to $103 million. The latest funding will go to conduct a global Phase III superiority study of plazomicin (ACHN-490) to treat patients with serious gram-negative bacterial infections due to carbapenem-resistant Enterobacteriaceae (CRE) infections. The trial is slated to start in the fourth quarter. Plazomicin is a next-generation aminoglycoside antibiotic; it’s also being developed against biothreat agents such as Yersinia pestis, which causes plague, and Francisella tularensis, which causes tularemia. Plazomicin is engineered to overcome known aminoglycoside resistance mechanisms. - Stacy Lawrence