Maybe They Should Be Called SCRAPs

It was at least worth the attempt.

Dynogen’s VCs didn’t want to put up enough money; new VCs would invest only on punishing terms; public investors wouldn’t support an IPO; no good reverse-merger opportunities presented themselves; and it didn’t have enough clinical data to excite the interest of Big Pharma.

So it tried to SPAC (see our original analysis in START-UP here) – reverse merge into a shell called Apex Bioventures Acquisition, which had IPO’d back in June 2007 with the mandate to go and find its shareholders a business. Dynogen’s goal: reach an alternative class of IPO buyers, retail investors who might be willing to take venture-equivalent risk at a time the traditional biotech funds (e.g., Deerfield, T. Rowe Price, Brookside, MPM) won’t.

It didn’t work – the second biotech SPAC failure in as many months (see our coverage of Precision Therapeutics’ SPAC attempt here and here ). And while we don’t have the inside details of the Dynogen deal, the obvious point is that the spread of biotech aversion has reached virtually plague proportions.

Dynogen and Apex gave themselves every advantage a development-stage biotech could to succeed in SPAC-ing. First, they got themselves a top-tier bank, Lazard, to help them with the deal – SPACs have somewhat shady reputations and getting Lazard to sign on represented something of a coup.

Second, Apex and Dynogen did what they could to avoid hedge funds – a problem class of investors for a SPAC. Since a SPAC acquisition won’t go through unless it gets approval from a large majority of investors, the SPAC’s investors can basically blackmail the SPAC managers and the target’s VCs to buy them out at a profit. The first biotech SPAC, PharmAthene, for example, needed 80% of its SPAC’s shareholders to go along with the deal, but PharmAthene’s managers, VCs and the SPAC’s chairman ended up having to buy out perhaps $10 million or more worth of shares. So Apex had created a largely retail ownership base (retail investors are less likely to play financial games) and the deal could go through with the approval of just 70% of investors (not 80%).

Not good enough. According to news reports, Dynogen and Apex couldn’t even convince the 70% of Apex investors that they needed.

Dynogen is far from the riskiest of clinical-stage companies. But approvals for its drugs are by no means a slam dunk. It’s developing drugs for a condition – irritable bowel syndrome -- that interests Big Pharma (treatments are few; pipelines sparse), but also makes them quite nervous since virtually the only drugs for the condition -- GlaxoSmithKline’s Lotronex and Novartis’s Zelnorm -- ran into trouble for different adverse events.

And though Dynogen’s two most advanced IBS compounds are theoretically less likely to run into similar problems (none of these side effects showed up in previous human testing by originator Mitsubishi Tanabe), proving efficacy in IBS is tricky. You test whether patients feel better which means that getting a truly credible efficacy signal requires much larger trials than Dynogen’s positive Phase IIa tests. In short, Apex’s shareholders weren’t investing in a company with real efficacy proof-of-concept.

In terms of the life sciences world, SPACs are better suited to medical device companies and, in particular, companies with sales – like the temperature-management business Alsius (see the coverage here). But problem there is that – unlike biotech – most credible device companies can find private investors willing to put in money at relatively generous valuations. And Alsius itself is hardly an advertisement for device SPACs – the stock is down 72% since it began trading.

Apex, on its extremely brief conference call to announce the Dynogen deal’s demise, was upbeat about its chances to find another health-care company to buy. But the 14 months it’s got to find, negotiate and get approval for another transaction (average health-care SPAC seems to take about eight months from announcement to close) looks like a pretty short runway.

Meanwhile, for biotechs, and the VCs marooned in them, one other route to the public markets looks like it’s shut tight.

On the other hand, it also looks like the only way for biofinancing to go is up.

"On the grounds of Grant's Tomb, a heart, reconstructed," by Flikr user CarbonNYC used under a creative commons license

Breaking Up is REALLY Hard to Do

The seemingly ideal marriage of convenience and opportunity between Oracle Healthcare Acquisition Corp., a special purpose acquisition company, and diagnostics company Precision Therapeutics was called off just before ceremony.

And it's going to cost both parties a lot more than a deposit for the function hall.

Oracle announced this morning that the planned merger between the SPAC and the diagnostics company is over “due to currently prevailing market conditions.”

Seems to us SPACS were built to weather such market conditions. In fact, they’re supposed to thrive on it as they give private companies another alternative to get to the public market.

However, they’re not immune to the markets. A majority of the investors who buy into the SPAC through an initial public offering must approve of the merger. In deciding how to vote, investors must weigh whether or not they’d be better off cashing out now rather than letting their bets ride on a company like Precision Therapeutics.

In fact, according to Oracle’s annual filing, any shareholder that voted against the merger stood to receive roughly $8 for each of their shares if they were outvoted and the deal went through. To us, the question would appear to be simple. Were investors better off taking the $8 for their share or rolling the dice with shares in the new Precision Therapeutics shares?

Given the recent performance of IPOs, IN VIVO Blog is guessing the $8 was looking pretty good to Oracle investors.

The first sign of trouble came a few weeks ago when the two parties lowered the price of the deal. It appears that wasn’t enough to convince Oracle shareholders to approve the deal.

This is a fatal blow for Oracle. As we noted back in December,

Oracle Healthcare raised its capital through an IPO of its own on March 8, 2006. As per the structure of most SPACs, Oracle management had 18 months to find a company to acquire or else return the capital back to its investors.

On Sept. 8--the final day of the deadline--Oracle signed a letter of intent to acquire another company, according to Oracle's most recently quarterly filing. The signing of the letter gave Oracle management a six-month extension.

However, the filing goes on to state that the letter of intent regarding that purchase was terminated on Oct. 17, freeing up Oracle to find another deal before the pending March 8, 2008 deadline.

For those without calendars, March 8 is Saturday. The company’s officers must convene a meeting of shareholders to begin the process of dissolving the partnership and returning most of the $113 million raised in the IPO. According to SEC document it appears as if the figure might be closer to $100 million, minus the cost of expenses and other liabilities incurred over the past two years.

What's next for Precision? Hard to say. As pointed out by VentureBeat (where we first read of the news), the company had only $15 million on hand in September. According to the same S-1 filed in November, the company lost close to $10 million over the first nine months of the year. Precision pulled it IPO to pursue the Oracle merger, and now that avenue is closed as well. Its options are limited.

Deals of the Week: Winter of Our Discontent

Seems like many folks in pharma land are channeling Richard the Third this week. (Alas, there is no son of York to make winter's discontent glorious summer.)

Certainly staffers at both AstraZeneca and Sanofi-Aventis are less than happy: both companies announced more job cuts this week. (AZ will lay-off some 300 R&D employees from its Alderly Park site while Sanofi plans to reduce its German sales staff by 380.) And, pity the poor VCs. The Star Ledger is reporting that VCs are accepting smaller returns on smaller deals and waiting longer to cash-out as a result of the global credit crunch and the flagging IPO market.

Finally, remember Trimeris? Back in December that company put its R&D activities on hold to review its strategic options. But management isn't moving fast enough for the company's largest shareholder, HealthCor. On Feb. 1, HealthCor officials wrote a letter to Trimeris executives asking for two board seats, stating: "We are not in favor of strategic transactions other than those involving a sale of the business." (Hmm. Maybe the HealthCor folks are actually channeling Carl Icahn...)

If you, too, are suffering the winter blues, fear not. The IN VIVO Blog has a cure. (WARNING: Side-effects may include motivational deficiency disorder, sudden on-set of snarkiness syndrome (SOSS), maniacal laughter, and IN VIVO Blog addiction. Hey, there are worse things...) You guessed it. It's that time again.

• Dynogen/Apex Bioventures Acquisition Corp.: On Wednesday, Dynogen and Apex Bioventures announced they have signed a definitive agreement that will allow Dynogen to become public through a merger with one of Apex Bioventure's subsidiaries. (In case you don't know, Apex Bioventures is a special purpose acquisition company--or SPAC--that raises money for the sole purpose of buying another entity. The key thing is the SPAC can't say whom its acquiring--or even considering acquiring--before it raises the money. SPACs have enjoyed a resurgence in popularity in the life sciences in recent years as an alternative to the IPO market or a reverse merger.) The move gives Dynogen plenty of cash--the press release says the company should have up to $65 million at the deal's closing. Dynogen will certainly need it. It's currently developing two Phase II-stage drugs for gastrointestinal disorders, including irritable bowel syndrome. And given pharma's own R&D heartburn in the space, Dynogen may need the additional data before a partner with deep-pockets will assume some of the development risk. In the past, SPACs have favored companies with a shorter runway to commercialization like Alsius and Precision Therapeutics so this combination will be interesting to watch.
  
• Amgen/Takeda: Hit by declining sales of its EPO franchise and growing competition, Amgen announced a monster two-part deal with Takeda this week. In Part I, Takeda gets Japanese rights to 12 of Amgen's pipeline assets in exchange for $200 million up-front, up to $340 million in development costs, and potentially $363 million in sales-linked milestones and royalties. The Japanese firm will also buy Amgen’s Japanese subsidiary for an undisclosed sum. In Part II, Takeda takes on worldwide rights to Phase III motesanib, a small molecule angiogenesis inhibitor for cancer, for another $100 million up-front and $175 million in additional success-based milestones. The deal embodies two major trends we’ve talked about: the need to cut unnecessary infrastructure and the importance of risk-sharing in the vein of Bristol-Myers Squibb's deals with AstraZeneca and Pfizer. (For a more in-depth look at the deal, see here and here.)
  
• GE Healthcare/ Whatman: On Monday, GE Healthcare announced it was buying Whatman, a global supplier of filtration products and technologies for approximately $713 million. That's a lot of money for a research tools business, even if Whatman posted 2007 revenues of more than $225 million. Still it's a far cry from the $8 billion GE planned to plunk down for Abbott's point-of-care and diagnostics businesses, a deal that was eventually scuppered. It's likely GE has realized it must resort to a serial acquisition strategy if it's to challenge Siemens for the title of global leader in IVD. And Whatman's filtration and sample prep technologies could play a key role in building better protein and DNA-based tests, an area in which GE is interested in bulking up. Meanwhile, we continue to ponder the fundamental connections between tool and test companies, something we wrote about here.
  
• GlaxoSmithKline/ Amira: Also on Monday, GSK and Amira teamed up to develop Amira's 5-lipoxygenase activating protein (FLAP) inhibitors in a deal that could be worth up to $425 million for the biotech. (But only if it meets all potential development and regulatory milestones. Makes you wonder what the up-front payment was, doesn't it?) Most of the flap...sorry, we couldn't resist...is about Amira's lead product, AM103, a once-daily, non-steroidal asthma treatment that just completed Phase I trials in November. This isn't the first monster deal Amira has inked. Back in 2006 it signed a deal with Roche worth up to $287 million to develop three anti-inflammatory candidates.

"West," by Flickr user Dreamer7112, used under a creative commons license.

A Precision Move

We couldn't help but find a few interesting tidbits regarding the announcement that diagnostics maker Precision Therapeutics Inc. would merge with Oracle Healthcare Acquisition Corp.

First off, this is the first deal struck in the life sciences industry involving a special purpose acquisition company that we've seen in some time, not since Ithaka Acquisition Corp. acquired cooling company Alsius Corp.

Second, we'd just finished writing an article showing how well public investors have embraced diagnostics and imaging companies like Genoptix Inc. and Virtual Radiologic Inc. much to the benefit of the VCs in those companies. (Check out the upcoming START-UP for the full analysis.)

So here we have a diagnostics company that opted to pass on an IPO and embrace a SPAC-buyout. Why? Well, if the deal is consummated it'll likely turn out to be a good move for Precision.

Despite the rational exuberance for diagnostics, IPO buyers weren't likely to give as warm an embrace of Precision as they've given Genoptix simply because the financials aren't there yet. Nanosphere Inc., for example, is doing well but not nearly as well as Genoptix, possibly because its business isn't as developed.

With its cancer diagnostic product on the market (go here for details) Precision brought in $1.7 million in revenue over the first nine months of this year while reporting a loss of $13.5 million. Genoptix is pulling in far more revenue and now is actually making millions. Obviously, public investors prefer companies that actually report income rather than losses or they'll suspend that rule for biotechs and device companies with high upsides.

That certainly isn't to say Precision won't get there. It's just not there yet.

So Precision management probably is wise to put down the IPO dice and accept the merger with Oracle, which comes with a ticker symbol and, more importantly, $120 million in cash.

The company's board likely will have to share power and returns. But the capital and ticker give Precision's investors a surer route to an eventual exit.

With venture investors already committing $73 million to the company, finding attractive terms for more private capital likely would have been difficult if the IPO failed. According to Precision's S-1 filing, the company's largest shareholders include Adams Capital Management, Quaker BioVentures, TVM Life Science Ventures, Birchmere Ventures, Stephens & Co.

So what's in it for Oracle, which was started in 2005 by hedge fund manager Larry N. Feinberg, who founded of Oracle Partners,L.P., a healthcare-focused hedge fund in 1993. David Hamilton at VentureBeat asked that very question today.

We obviously can't say for sure other than to draw on Feinberg's standard comments about the company's strong management team and the fact that "the ChemoFx test has been validated in numerous clinical studies and has been reimbursed by both Medicare and commercial payors."

But one very real issue might have been that Oracle appears to be running out of time.

SPACs are not open-ended things. IPO investors acquire shares in a SPAC because they trust the management team will take that money and buy a company at an attractive price, thereby creating a strong business with valuable shares. But they'd like to get that money back at some point if such a deal can't be made. So all SPACs have an expiration date, so to speak, when investors are promised their money back--minus fees and other costs--if no company is acquired. Oracle shareholders must vote to approve any deal.

Oracle Healthcare raised its capital through an IPO of its own on March 8, 2006. As per the structure of most SPACs, Oracle management had 18 months to find a company to acquire or else return the capital back to its investors.

On Sept. 8--the final day of the deadline--Oracle signed a letter of intent to acquire another company, according to Oracle's most recently quarterly filing. The signing of the letter gave Oracle management a six-month extension.

However, the filing goes on to state that the letter of intent regarding that purchase was terminated on Oct. 17, freeing up Oracle to find another deal before the pending March 8, 2008 deadline.

Enter Precision.

We're not suggesting this is merely a marriage of convenience. Precision--with Oracle's support--could grow into a diagnostics powerhouse.

But given how long such a deal can take--ask Alsius and Ithaka management about the six months or so the SEC took to review their paperwork--this may be Oracle's last shot at completing a deal that could produce some real returns for its investors and managers, unless there is a provision for another extension that we can't unearth.

Seems like a potential win-win.

Good Things Come

Six months have passed since the deal was first announced, but shareholders of Ithaka Acquisiton Corp., the special purpose acquisition company, last week agreed to the merger with Alsius Corp., the temperature control device company.



The merger gives the new entity--called Alsius Corp.--roughly $45 million in cash and a ticker on Nasdaq. We'll have a lot more on this IPO alternative and Alsius' future plans in our upcoming START-UP.

We'd love to hear any thoughts on the whole SPAC model, which really doesn't appear to have taken off, at least not in the health care industry.