Deals of the Week: With Option Deal, Forest Keeps An Eye On The Prize-Winner

It’s an optimistic time for pharma dealmakers, with the Dow and the Nasdaq Biotechnology Index climbing, buyers sitting on big piles of cash, and the IPO window as wide-open as it’s been in years. But for smaller companies that have long lamented that pharmas hold all the cards in licensing and M&A deals, it can still be tough to wring the best value out of a deal. When even a Nobel Prize-winning technology leads to a wait-and-see option deal – as we’ll explain shortly -- structured dealmaking is clearly here to stay.

Pharmas seeking to defray or share risk as they license clinical-stage compounds have come to favor option deals over the past few years. Once a relative rarity, options came into vogue around 2007, according to statistics presented April 30 at Deloitte Recap’s Allicense conference in San Francisco. Senior biotech analyst Chris Dokomajilar reported that a few dozen option deals, including both licensing and buyout arrangements, have occurred annually since 2007. That figure has ballooned from fewer than 10 during each of the previous few years.

Typically, an option-to-license arrangement gives the buyer a close, exclusive look at an asset’s development path – most often through mid-stage trials – before it jumps in with both feet and licenses the drug completely. The asset’s original owner generally gets an option fee, which features non-dilutive funding, often more than it takes to develop the drug, up until the option period ends. Dokomajilar said that among 73 licensing deals with options since 2007, buyers paid an average up-front of $24 million for pre-clinical or Phase I assets, with an opportunity to license them at the end of Phase II.

But the choice to take an option rather than license right away is often telling. Dokomajilar said that 62% of buyout and licensing options are never exercised, and 90% of option deals are renegotiated in one way or another, based on a survey of 581 deals. (UCB Group’s recently adjusted arrangement with Biotie Therapies Corp. concerning Parkinson’s treatment tozadenant is an example.) Moreover, he noted, options “leave licensors with industry-perceived ‘damaged goods,’” making future deals less likely. (There are exceptions, of course; Singapore’s SBIO Pte. Ltd. licensed its JAK2 inhibitor pacritinib to Cell Therapeutics Inc. last year after Onyx Pharmaceuticals Inc. declined its option.)

Over the past year or two, when private companies in need of cash are involved, option arrangements have spilled over into venture fundraising deals. Thus far, most of those alliances include options to acquire start-ups, establishing a path to exit for founding investors. Some have been struck as early as a company’s Series A round: Sanofi, for example, took an option to acquire Warp Drive Bio as the company closed its initial round of funding in early 2012.

The latest twist arrived this week, when Forest Laboratories Inc. forged a deal with five-year-old Trevena Inc., a Duke University spin-out. Trevena co-founder Robert Lefkowitz earned a share of the 2012 Nobel Prize in Chemistry for his work studying G protein-coupled receptors. In the new deal, Forest took an option to license the start-up’s lead program, the Phase II compound TRV027 for acute heart failure. Rather than make an up-front payment, however, Forest invested $30 million as part of King of Prussia, Pa.-based Trevena’s new $60 million Series C round. Milestone payments could add $430 million to the deal’s value, which also includes eventual royalties if the drug is approved and marketed.

TRV027 would augment Forest’s cardiovascular program, if it licenses the drug. It will have the chance once results come back from a Phase IIb trial slated to begin later this year. But the companies may eventually share closer ties in the central nervous system space: Most of Trevena’s remaining pipeline programs address pain, and Forest will eventually have to replace revenues lost when top seller Namenda (memantine) loses patent protection in 2015.

Trevena CEO Maxine Gowen, a GlaxoSmithKline PLC veteran who worked on both its external drug discovery projects and its corporate venture team at SR One, said the deal structure was unique as far as she knew. Forest strategy chief David Solomon declined to comment on how closely the companies considered an outright buyout, saying only that both sides were comfortable with the type of transaction they worked out. - Paul Bonanos

More big companies opted for option deals of different stripes in recent days. Find out who as we pick and choose our way through...

Celgene/Concert: Some companies arrange option deals around platform technologies. Lexington, Mass-based Concert Pharmaceuticals Inc. has nailed down its fourth partnership for its deuterium chemical entity platform. On May 6, it announced a tie-up with Celgene Corp. in a deal that will use the platform to develop and commercialize drugs for cancer and inflammatory conditions. Celgene paid an undisclosed amount upfront and is on hook for $300 million in development, regulatory, and commercialization milestones on each compound, should it opt into the program. The companies would not reveal how many compounds on which they intend to collaborate, or what targets they willpursue. Work has already begun on the project. If it chooses to opt in, Celgene will take over the compounds at an unspecified point in development. Concert’s technology platform replaces a hydrogen atom with deuterium, also known as heavy hydrogen, at a specific point on a drug molecule, forming a more stable bond, but keeping the compound’s biochemical selectivity. The deuterium-conjugated drugs tend to have a better safety profile and a longer half-life, allowing for better dosing. Concert is using the funds it gains through its platform partnerships to bring its lead compound forward, CTP-499, an analog of HDX, which is an active metabolite of pentoxifylline (Sanofi’s Trental). The drug may offer favorable biologic activity as an anti-inflammatory, anti-oxidant and anti-fibrotic agent in chronic kidney disease. Concert also has deals with Jazz Pharmaceuticals PLC, Avanir Pharmaceuticals Inc. and GlaxoSmithKline. - Lisa LaMotta

Astellas/Drais: On May 7, Astellas Pharma Inc. and Drais Pharmaceuticals Inc. announced a development partnership in which Drais, through a special-purpose, virtual vehicle it created called Tacurion Pharma Inc. will take ASP7035, a Phase IIa-ready, vasopressin V2 receptor agonist for nocturia, to proof of concept. (Nocturia is characterized by the need to get up at night to urinate.) Per the May 7 deal announcement, Drais will pay Astellas an undisclosed milestone and royalties on potential sales of the drug. Astellas also retains a one-time option to acquire Tacurion on success of a proof-of-concept study planned to begin in the third quarter of 2013. As in two prior development deals with Drais, Astellas Venture Management – the venture arm of Astellas Pharma – joined as a minority investor along with Sutter Hill Ventures and InterWest Partners in a $15 million Series A round to fund Tacurion. Sutter Hill and InterWest also seeded Drais, and have seats on its board. According to Drais founder and CEO Donna Tempel, this deal differs slightly from the two predecessor deals with respect to the option. In those earlier deals Astellas’ option carried various territorial rights including the right of first refusal for the Japanese market and the right of first exclusive negotiation for any future partnering for the compound. In the deal for ASP7035, Astellas has an option to acquire Tacurion for a specified price. Tempel and co-founder Robert Desjardins, former R&D executives at Yamanouchi, helped found AkaRx in 2005 as a spin out of the merger of Yamanouchi and Fujisawa to form Astellas. Both Sutter Hill and InterWest seed funded AkaRx, along with Astellas Venture Management. Eisai bought it for $300 million in 2009. -- Michael Goodman

Shire/Nimbus: Seventeen months after Shire PLC said it would work with Atlas Venture to incubate and finance new start-ups that address rare diseases, the collaboration has resulted in its first deal. But rather than create a new company, Shire has inked a partnership with an existing one. Atlas portfolio company Nimbus Discovery LLC, a computational chemistry specialist will team up with Shire to discover and develop new therapies for lysosomal storage disorders, according to a May 8 announcement. The two companies have already chosen their first target, though it remains undisclosed; the companies will aim to develop an oral therapy that reaches previously inaccessible tissues. Financial terms weren’t released, but Shire has an option to acquire the program after Nimbus identifies a suitable candidate in the late preclinical stage; Nimbus will receive milestone payments of undisclosed size if and when the program advances through the clinic. Nimbus’s backers also include Bill Gates (investing his own money), Lilly Ventures and SR One. The start-up raised $24 million in Series A funding during the summer of 2011. Shire and Atlas announced their alliance in December of the same year. - P.B.

Takeda/Inviragen: Aiming to deliver on its promise to establish a world-class vaccines business, Takeda Pharmaceutical Co. Ltd. announced plans to buy privately-held Inviragen Inc. May 9. It’s the second acquisition for Takeda in vaccines in just over six months, following its takeout of LigoCyte Pharmaceuticals Inc. for $60 million upfront in October. In the latest deal, Takeda paid $35 million upfront and agreed to $215 million in development and commercial milestones. In exchange, Takeda gains DENVax, a vaccine in mid-stage development for the prevention of dengue infection. The vaccine is believed to be active against four strains of the virus, with a two-dose administration schedule currently being evaluated in Phase II clinical trials. LigoCyte and now Inviragen will form the basis of Takeda’s burgeoning vaccines portfolio. The company announced plans to create a vaccines business division in January 2012 and hired the former director of vaccine delivery in the Global Health Program at the Bill & Melinda Gates Foundation Rajeev Venkayya, to head it. The initiative is aimed at building a portfolio that rivals established leaders such as GlaxoSmithKline PLC, Sanofi and Merck & Co. Inc. - Jessica Merrill

Alexza/Teva: Alexza Pharmaceuticals Inc. put another piece of the puzzle in place for the launch of the inhalable antipsychotic Adasuve (loxapine) with an announcement May 8 that it has partnered with Teva Pharmaceutical Industries Ltd.’s U.S. affiliate to market the drug domestically. Teva will pay $40 million upfront and up to $195 million in post-approval and sales milestones under a deal that brings it rights to develop the product in other indications. Alexza also can earn tiered royalties based on Teva’s net commercial sales of Adasuve. In addition, the Israeli pharma is lending Alexza $25 million in the form of a five-year convertible note. Alexza can pay back up to 50% of the principal at any time prior to maturity, while Teva will have the option of converting at maturity all or part of any outstanding balance into equity in Alexza. This mirrors a facet of Alexza’s ex-U.S. partnership for Adasuve with Grupo Ferrer Internacional SA, which initially paid $10 million upfront along with potential regulatory milestones, including $3 million for EU approval of Adasuve. In March 2012, Alexza cashed out that milestone, with Grupo Ferrer buying 2.42 million shares in its partner at a 120% premium price. Alexza can convert other potential milestones under that deal to equity arrangements worth up to $8 million. Teva is stepping in where Biovail Pharmaceuticals Inc. exited in 2011, after being acquired by Valeant Pharmaceuticals. Alexza agreed with Grupo Ferrer in 2011 to market the product in Europe, Latin America, Russia and the Commonwealth of Independent States. Slated for launch in both the U.S. and Europe during the third quarter, Adasuve is an inhalable formulation of Watson Laboratories Inc.’s Loxitane, administered via Alexza’s proprietary Staccato inhaler technology. It is approved by FDA and the European Medicines Agency to treat episodes of agitation in adult patients with schizophrenia or bipolar disorder. - Joseph Haas

Amgen/Beta Pharma: Amgen Inc. and Chinese oncology specialist Beta Pharma Inc. have created a joint venture to commercialize colorectal cancer drug Vectibix (panitumumab) in China. Financial terms weren’t disclosed, but Beta will own 51% of the JV, to be named Amgen-Beta Pharmaceuticals Co. Ltd., while Amgen will hold the balance. The endeavor appears to be the first of its kind, mating Amgen’s expertise in developing large-molecule drugs with Beta’s local oncology development and marketing expertise in China. With Beta taking the majority stake, the JV could benefit Vectibix due to regulatory incentives in place for local firms, including an accelerated approval pathway. Vectibix is already approved in the West. Incidence of colorectal cancer in China is on the rise, with more than 250,000 new patients diagnosed in 2008, according to China Cancer Registration Center. Other oncology drugs such as Eli Lilly & Co. and Merck KGAA’s Erbitux (cetuximab) and Roche’s Avastin (bevacizumab) have already received approval in China. - P.B.

Thanks to Flickr user Mediocre2010 for a better-than-average photo of a better-than-average award, reproduced under Creative Commons license.