Say What: Inception Inks Hearing-Loss Deal With Roche

Inception Sciences, the discovery-stage biotech firm-slash-incubator created from the ground up to spin out assets in a buyer-friendly manner, has its first pharma partner.

The San Diego firm has created a spin-off dubbed Inception 3 that will house a technology platform from Stanford University and develop drugs to treat permanent hearing loss. Roche is the partner, pledging R&D funds via undisclosed milestones in exchange for an option to acquire the company when Inception files its IND package for the first lead compound.

If you're wondering what happened to Inception 1 and 2, they were announced when Inception was unveiled in the summer of 2011 with general therapeutic areas of focus, one neurology, one oncology. But to date there's been no word of their products, programs, or outside partners.

Inception itself came from the aftermath of Bristol-Myers Squibb's acquisition of Amira Pharmaceuticals, a lucrative but complicated affair that saw BMS extract Amira's lead candidate for idiopathic pulmonary fibrosis, plus a preclinical program, for $325 million in upfront cash. BMS did not take hold of other Amira assets, however, and spinning them into separate entities was a headache. So Amira CEO Peppi Prasit and Versant partner Brad Bolzon formed Inception in anticipation of Prasit's team, once a drug-hunting unit at Merck, remaining similarly productive.

In addition to the little Inceptions potentially housing the fruits of labor from Inception's drug hunting team, the company has also created a "build to buy" strategy, according to chief business officer Clare Ozawa. The idea is to hitch a program early to a potential acquirer with prearranged options. Versant has already accomplished the trick outside of the Inception structure with Quanticel Pharmaceuticals, also a Stanford spinout (unrelated to the hearing-loss program). After a long incubation, Versant brought Quanticel out of stealth in 2011 with Celgene on board.

The Roche deal for Inception 3 was revealed Wednesday in unusual fashion, in an "advertorial" article penned by Roche touting its neurology partnering program in the October 10 issue of Nature. Ozawa confirmed the deal but declined to comment further. Our "Pink Sheet" colleagues will have more details later today, so stay tuned. -- Alex Lash

Deals of the Week Points to a Solution to Your Phase III Woes

Early this morning the US/German biotech Agennix announced a significant restructuring whereby it would attempt to spare capital by dismissing 55% of its workforce, or 37 people. The restructuring isn't a surprise; two weeks ago Agennix said its lead program in non-small cell lung cancer failed a Phase III trial in the third-line setting. The company's market value has deteriorated accordingly; it now trades at or below the Eur22.7 million in cash it had as of the end of June. It'll certainly need a financial infusion if it plans to continue any operations beyond the first quarter of 2013. What are the odds investors buck up?

Though clearly a disappointment for patients, Agennix management, and its unusually concentrated investor base (the company is publicly traded but controlled by shareholder Dietmar Hopp, whose funds hold about 65% of Agennix's stock), the biotech's plight provides a timely illustration of some fairly common biotech problems. And it allows us to point toward a theoretical solution.

Agennix, the product of a merger of two biotechs in 2009, is a somewhat diversified company, but investors obviously based its entire value on that Phase III program. Besides developing talactoferrin alfa -- the above-mentioned immunotherapy that failed in early August -- in two NSCLC settings, other cancer indications, severe sepsis, and (as a topical formula) in diabetic foot ulcers, Agennix also has rights to a handful of unrelated oncology programs (remember satraplatin?). The biotech is far from alone in this kind of pipeline-in-a-product diversification, even if it is unusually stretched -- from lung to foot -- to the physiological maximum. It's also about average when it comes to the way investors viewed its later-stage programs (as in, if it ain't first, it don't matter). In fact, more or less, this is the default biotech valuation model.

Check out the twin pie charts at the top of this post, created with data provided by TechAtlas. At least 48 different biopharmaceutical companies are pursuing clinical-stage treatments for Type II diabetes. In NSCLC, 41 different companies have drugs that are in Phase II or beyond. Only a handful of competitors – typically the largest companies – are pursuing multiple agents against the same disease. Most NSCLC developers are like Agennix -- small, diversified, and reliant upon a single asset because it's first in the firing line. It's the larger companies, those with multiple drug candidates in development for the same indication, that therefore are able not only to identify the best single agent of the group but also to experiment with combinations pre-commercialization.

But imagine a parallel universe version of a company like Agennix, one that was diversified around a single indication instead, say NSCLC, before it reached pivotal studies. A company that instead of chasing three or four disparate indications, was wholly focused on one well-defined problem. And instead of relying heavily on a single asset and a series of clinical trials that pits that asset against placebo or standard of care, it had a handful of candidates against that single indication in the same stage of development, and tested them against one another in a proof-of-concept trial.

Wouldn't investors have more faith that the winner of that trial not just in terms of its ability to succeed in Phase III, but the likelihood that it passes muster with regulators and payors as well? Wouldn't an ecosystem populated by these solution-focused companies reduce duplicative clinical infrastructure, find it easier to recruit patients to participate in clinical trials, and attract likeminded and driven backers?

Such are the arguments that RA Capital's Peter Kolchinsky puts forth in the September issue of IN VIVO (subscribers should check out the full feature here; we'll also be discussing this model on a panel at our upcoming Pharmaceutical Strategic Alliances meeting -- Sept 17-19 in NYC).

Pulling together the foundations of a so-called Solution Development company is a tall though by no means impossible order. Beyond the central arguments about how to build biotechs and design meaningful trials, Kolchinsky suggests a role for disease foundations in identifying promising assets and even incentivizing developers to pool their candidates, as well as the opportunity for large pharmaceutical players to strike pre-negotiated deals to license the winners of these contests.

For the whole feature, get over to IN VIVO. Meanwhile we've got the solution to your late-summer Friday blues, it's time for the latest installment of ...

Allergan/Molecular Partners: Allergan must like what it sees in Molecular Partners' obscurely named DARPins, returning Aug. 21 to license another potential therapy for wet age-related macular degeneration (AMD), MP0260, and entering into a discovery collaboration to find more DARPin compounds with activity against serious eye conditions. The U.S. ophthalmics-to-dermatology specialty company already has licensed the Swiss biotech's lead compound, MP0112 (AGN-150998), which is being compared with Genentech/Novartis' Lucentis (ranibizumab) in a Phase IIb clinical study. DARPins are based on repeated peptide sequences that mediate natural protein-protein interactions and have some interesting characteristics, including a possibly longer duration of action in the eye than current AMD therapies like Lucentis and Regeneron/Bayer's Eylea (aflibercept), and maybe improved efficacy. In return for access to the cutting-edge research, Allergan is making an upfront payment of $62.5 million for the two new agreements, which include licensing options on three compounds. In total, Molecular Partners could receive up to an eye-watering $1.4 billion in development and regulatory milestones and tiered royalties on future product sales. The company signed up Janssen Biotech in December 2011 to evaluate DARPins for immunological applications, and also is developing its own pipeline of proprietary products.—John Davis

Riemser Arzneimittel AG/AXA Private Equity: The Greifswald, Germany-based specialty pharmaceutical company Riemser Arzneimittel has been sold by the founding Braun family and various minority shareholders, including TVM Capital, to the European diversified private equity firm, AXA Private Equity, for an undisclosed amount, the companies announced Aug. 21. Over the past 30 years, Riemser has made a remarkable journey, from a veterinary vaccines company based in East Germany to an international marketer of niche pharmaceuticals in the oncology, anti-infectives and dermatological fields. This has been achieved by organic growth and by the acquisition of smaller German companies and portfolios of unwanted products from other companies, supported by investments from TVM Capital and GE Capital. Riemser divested its veterinary business in 2010. AXA Private Equity intends to use its global network to support Riemser's internationalization strategy and its continued focus on niche therapeutics. A new round of company consolidation also might be in the cards in this less-risky corner of the pharmaceutical industry.—J.D.

Silence Therapeutics/MiReven: Silence Therapeutics has been tapped again for its RNA-delivery techniques that allow RNA-based drugs to reach tissues deep within the body. Australian-based microRNA company MiReven has signed a deal with Silence to use its delivery system with its cancer drug miR-7. Silence will formulate a miR-7 mimetic molecule with its proprietary lipid-delivery systems in order to evaluate miR-7 in various cancer models. It will also undertake in vitro and in vivo studies of the formulated miR-7. Silence is being paid an undisclosed fee for the collaboration. In July, Silence raised $8.8 million from new and existing investors to help extend its cash runway to 2014. The company uses its revenue from delivery partnerships, as well as funds raised to forward its own internal pipeline, which includes RNA-interference compounds. Silence Chief Scientific Officer Klaus Giese noted that this is the company’s fourth microRNA delivery technology partnership. “Whilst we remain internally focused on the delivery of our siRNA therapies, we continue to broaden the potential value of our proprietary delivery systems by collaborating with partners,” he added.—Lisa LaMotta

Pfizer/Mylan: In one corner, Pfizer wanted to expand its Established Products footprint in Japan, the world’s second-largest pharma market but only the sixth-largest generics market with room to grow. In the other, Mylan has more than 380 products in its portfolio in Japan, but has been stalled in gaining significant market share due to lacking distribution and marketing capabilities. The two firms say it was a perfect fit for an “exclusive, long-term strategic collaboration” for generics in Japan. Pfizer will slap its label on Mylan’s existing portfolio and an additional 125 compounds in Mylan’s pipeline and handle the commercial side, while Mylan is tasked with development and manufacturing of compounds in the agreement. A key to success in gaining market share in Japan’s generic market is securing preference from nationwide wholesalers. Pfizer’s status as an innovative company likely will go a long way in bumping Mylan-sourced products near the top of wholesalers’ recommendation lists for hospital sales. The companies will split revenue, but otherwise the deal does not include any capital alliance. In terms of sales, Pfizer Established Products Business Unit President Albert Bourla said the firms have “very high ambitions” to be a market leader in terms of sales by 2015.—Daniel Poppy

Bristol-Myers Squibb/Synergy: Gastrointestinal disorder-focused Synergy Pharmaceuticals signed an asset purchase agreement Aug. 23 with Bristol-Myers Squibb to acquire all assets related to FV-100, an orally available nucleoside analogue in mid-stage testing for shingles. Financial terms were not disclosed. Bristol previously had completed a Phase IIa trial of the candidate in which it was found to be well tolerated dosed at 200 mg and 400 mg in 230 patients. The trial also demonstrated clinically meaningful reductions in time to resolution of clinically significant pain and in incidence of post-herpetic neuralgia, Synergy stated in a release. "We believe that with our expanding clinical experience in utilizing patient-reported outcome tools from our GI program, a feature that will be necessary for supporting pain-related indications for FV-100, we are in a unique position to further develop FV-100 for patients not adequately treated with present-day therapy,” said Synergy CEO Gary Jacob. In July, Synergy merged with cancer-focused Callisto Pharmaceuticals, its largest shareholder, in a tax-free stock swap.—Joseph Haas

2011 Exit/Financing of the Year Nominee: Ascletis

It's time for the IN VIVO Blog's Fourth Annual Deal of the Year! competition. This year we're once again presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (a half dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Emerging biotech Ascletis Inc. is embarked on a truly ambitious attempt to create a trans-global pharma company and, in doing so, has raised one of the largest Series A rounds ever in biopharma -- $50 million in the first tranche, with another $50 million guaranteed to follow when the company hits certain milestones. Based on those achievements alone, Ascletis surely qualifies as a top-gun deal-maker of 2011.

The money speaks for itself—only 10% of 2011’s year-to-date Series As raised more than $40 million—and of those, only one other, Hua Medicine, also a Chinese biopharma, raised $50 million.

Asceltis’ round was the largest by far but the company is distinct in other ways that enable it to creatively exploit a host of industry-wide trends. Its strategy is to search globally for appropriate clinical-stage in-licensing candidates, which it can develop and eventually commercialize in China. It also plans to discover new drugs internally and bring them through mid-stage trials before seeking global partners for large-stage development and commercialization.

The aim, it says, is creation of a true hybrid model, poised, on the one hand, to capitalize on the innovation and strategic expertise of Western trained executives and scientists and, on the other hand, China’s capital efficiencies and opportunities for accelerated research. To drive its point, Ascletis recently broke ground on a new China headquarters and R&D center in the Zhenjiang Province in China and is planning a U.S. headquarters in Research Triangle Park, NC.

With la creme de la creme Western-trained management talent moving to China, more opportunities for savvy in-licensing deals exist there. The therapeutic areas of interest are oncology and infectious diseases, reflecting the expertise of its co-founders and scientific advisors, Jinzi Wu, a former VP, global HIV drug discovery at GlaxoSmithKline, Xiao-fan Wang, a professor of cancer biology at Duke University Medical Center, and Allan Baxter, former global head of medicines development at GSK.

And the financial largesse stems from the generosity of one angel investor, real estate billionaire Jinxing Qi, with additional commitments from unnamed private investors in the U.S. and China and elsewhere. That in itself is a trend, as angel investors, stepping in seem likely to be playing increasing, albeit limited, roles in early-stage biotech financing. And, of course, China itself is a massive commercial opportunity for the right talent, with a CAGR of 17% estimated between 2011 and 2015, according to IMS Health, which predicts China will be the world's second largest pharma market by 2016, up from No. 3 in 2010.

Of course, finding solid development stage assets is a hurdle, even for large, deep-pocketed companies. And the hybrid U.S.-China combined development strategy didn’t pan out for some earlier companies. But Ascletis, by dint of its multi-faceted strategy, highly experienced, globally-oriented management team, and angel-backed financial cushion, is de-risked more than most, even as it positions itself to benefit from one of the industry’s biggest current opportunities. A deal-maker of this caliber surely deserves Deal Of The Year recognition.

DOTW: This Is Spinal Tap Edition

In the immortal words of one Bobbi Flekman, "money talks and bull**** walks."

And on 11.11.11, a day some are lauding corduroy and many are honoring our veterans and active service men and women, we look across the pond for the big money deal.

That's right. In a week when "most blokes, you know, will be playing at ten," Lundbeck and Otsuka took it to eleven with a multi-faceted alliance centered around two late-stage products from the Japanese pharma and up to three earlier stage programs from the Danes. (No word yet on whether Lundbeck's CEO Ulf Wiinberg or Otsuka's President Tatsuo Higuchi will play the role of Nigel Tufnel, alas.) The pipeline- and profit-sharing, co-development, co-commercialization deal requires Lundbeck to pay Otsuka 1.1 billion Danish Kroners, or 200 million George Washingtons, up front and potentially another $1.6 billion in development, regulatory, and sales milestones.

In spirit, Lundbeck/Otsuka recalls the major alliance Lilly and Boehringer Ingelheim struck in diabetes earlier this year --the consequences of that deal, as you will read about below, are still causing ripples. Interestingly today's eleven alliance sees two companies -- both heavily dependent for the bulk of their revenue on a single product that will soon go generic -- try to diversify not only their pipelines but also geographic reach. That Lundbeck is the one on the economic hook stems from the fact that its patent cliff is not only steeper but also arrives in a few months time.

The $200 million upfront Lundbeck is undoubtedly hefty, but analysts and investors in Denmark didn't smell anything rotten, sending the company's stock price, which trades on the Copenhagen exchange, up nearly 10% on the news. "We see this deal as clearly positive for Lundbeck and it bodes well for long-term revenue, top-line diversification and company perception" Nordea analysts wrote in a note to clients.

The reason for the optimism? Recall that Lundbeck is overly dependent on Cipralex (which is partnered with Forest in the US where it is sold as Lexapro) for sales revenue. In 2010, close to 40% of the company's DKK 14.8 billion in revenue came from the antidepressant, whose key patents begin to expire in 2012. And for this upfront payment, Lundbeck gets co-dev/co-commercialization rights in certain regions (North and Latin America, Europe, Australia, and "some other countries") to two late stage Otsuka products that can help smooth its revenue line starting in 2013.

The first is the Japan pharma's depot formulation of aripiprazole, which is the same active ingredient in Otsuka's anti-sychotic juggernaut, Abilify, a drug that is partnered with BMS and goes off patent in 2015. The second is OPC-37415, a partial D2 dopamine receptor agonist in Phase III trials for schizophrenia and major depressive disorder. According to the press release announcing the deal, Otsuka plans to submit an NDA for aripiprazole depot to US regulators "soon" -- and to EMA authorities in 2013.

Lundbeck has done other big deals in the past in a bid to deemphasize its reliance on Cipralex, including its 2009 acquisitions of Ovation and Life Health to gain access to the chorea treatment Xenazine. Those deals certainly helped bolster Lundbeck's US CNS presence (especially after the failed 2008 $100 million alliance with Myriad Genetics around Alzheimer's therapy Flurizan), but are nothing compared to the potential it might reap with this Otsuka alliance, should aripiprazole depot and '37415 both make it to market and enjoy strong payer traction.

And reimbursement remains an open and intriguing question, especially for aripiprazole depot. Note that $1.4 billion of the milestone payments are tied to development and regulatory advances not actual reimbursement, meaning Lundbeck is still on the hook, even if payers ding the next-generation anti-psychotic. And that could well happen. The anti-psychotic market is not only competitive, but ripe with cheaper alternatives, including since October 2011 a generic version of Lilly's Zyprexa. Over a year ago Medco and genetic test developer SureGene, meantime, launched a research project to validate biomarkers that could improve the cost effectiveness of atypical antipsychotic treatments.

For its part, Lundbeck and Otsuka seemed to play up in the press release the known safety and efficacy of the depot formulation, noting there may be an outcomes-based reason to prescribe the more patient-friendly version of Abilify. After all it has been designed to "reduce the chance of reoccurence of symptoms for the patients who sometimes forget to take their medication". Patient adherence to anti-psychotic regimens is admittedly a big problem; whether Otsuka has data convincing payers of this benefit is another question. It's also one that the Japanese pharma, and now Lundbeck, will need to answer effectively to make the economics of the new alliance work for both parties.

As David St. Hubbins would no doubt tell you it's such a fine line between stupid and clever. In the meantime, turn the amperage all the way to the right 'cuz you'll feel much worse if you aren't under such heavy sedation. With none more black than IVB, it's time for...


Merck Serono/Ablynx: In a move that might reduce the sting of last week’s announcement that Pfizer was handing back a pair of anti-TNF-alpha programs, Ablynx said this week that partner Merck-Serono would expand its alliance with the Nanobody specialist. The new deal will see the partners co-discovering and co-developing Ablynx’s brand of single-domain antibodies against two targets in osteoarthritis. Ablynx gets €20 million up-front (paid as two tranches over the next three months) and will conduct and fund all pre-clinical work on the programs. Merck-Serono can then opt in at IND stage at a price of €15 million per program, after which Ablynx gets the choice to move forward as a 50/50 partner or choose a more traditional milestone/royalty-based licensing structure. This is the two companies' third deal since 2008; they’re currently also working on programs in oncology, immunology and inflammation. The deal has done little to reverse the slide in Ablynx’s market value since the Pfizer news, however. That drop worsened this week when Ablynx said its lead proprietary asset, the IV-formulated anti-vWF ALX-0081, did not meet its primary endpoint in Phase II studies. – Chris Morrison

Salix/Oceana: Gastroenterology-focused Salix Pharmaceuticals will expand its product portfolio and increase its revenues almost immediately with the planned $300 million acquisition of privately held Oceana Therapeutics. Announced during Salix’s third-quarter earnings call Nov. 8, the acquisition brings the specialty pharma two marketed products – Solesta for fecal incontinence and Deflux for vesicoureteral reflux. The company’s optimism about Oceana seems largely based on the upside potential of Solesta, an injectable gel approved by FDA as a Class III medical device in June, to win a large share of the fecal incontinence market. Oceana launched Solesta in September at a price of $3,690 per treatment. It can be administered on an out-patient basis without anesthesia. By contrast, surgical methods for treating fecal incontinence are thought to cost about $30,000 per patient. Salix did not say how much Solesta has earned to date but CEO Carolyn Logan predicted the product could produce peak-year sales greater than $500 million. Also an injectable gel, Deflux was approved by FDA in 2001. It is indicated for children affected by Grade II to Grade IV vesicoureteral reflux, a bladder malformation that can result in severe kidney infections and irreversible renal damage. It also is approved and marketed in 40 countries outside the US and posted net sales of about $26 million through the first nine months of 2011. –Joseph Haas

Amylin/Lilly: Once a fruitful partnership, the nine-year tie-up between diabetes specialist Amylin Pharmaceuticals and Eli Lilly around the GLP-1 agonist exenatide is being unwound. Although the agreement produced an $800 million drug in Byetta, a twice-daily injectable compound that stimulates insulin production in the pancreas, and a potential blockbuster follow-on in the once-weekly Bydureon, the writing’s been on the wall for some time, as their relationship became frostier over time. Lilly co-developed a different drug, DPP-4 antagonist Tradjenta (linagliptin) alongside Boehringer-Ingelheim; that led to a lawsuit, as Amylin believed Lilly breached their confidentiality agreement by using a shared sales force for both Byetta and Tradjenta. To remedy the situation, Lilly will return worldwide exenatide rights to Amylin in exchange for $250 million up-front plus 15% of sales, the latter of which could be worth up to $1.2 billion. All related litigation will be dropped. The separation occurs as Amylin awaits approval of Bydureon in the US; the drug has a PDUFA date of January 28, 2012. In the meantime, as this "Pink Sheet" Daily story discusses, Amylin plans to build its domestic sales force while seeking an international partner to sell Bydureon, which is already approved in Europe. Some observers, however, think Amylin could be acquired by another pharma instead. – Paul Bonanos

Deals of the Week Ponders: Is IND the New Biotech Dealmaking Sweet Spot?

Today in the hot-off-the-presses October issue of IN VIVO we argue that early-stage biotechs ought to stop pushing their drug candidates through to clinical proof of concept.

Now before you start to laugh, hear us out. And take a look at the data.

Though clinical proof-of-concept has long been the goal for biotechs hoping to land a sweet licensing deal or acquisition, getting there takes plenty of cash -- cash that's increasingly scarce as venture funding dries up or moves on to later-stage, in-licensing based opportunities. What's more, it seems that neither the public markets nor licensing partners ascribe much value any more to early clinical success. Finally pharma companies seem eager to deal earlier on in the value-chain as pre-clinical stage deals are up in volume this year while the number of deals for assets in Phase I, II or III remains stagnant. They're also increasingly skeptical, executives and analysts note, of biotech's development work.

In short, for many biotechs in 2011, clinical development might not be worth the risk. Up-front deal values for pre-clinical stage assets have held steady over the past five years, while up-fronts for assets in Phase I, II and III have suffered. The chart below shows average data for about 300 deals since 2007 with disclosed up-front payments (from a larger set of 770 deals between biotechs and revenue-generating pharmaceutical marketing partners, Jan 2007 through 14 September 2011); we first presented this data at this year's Pharmaceutical Strategic Alliances meeting on September 22.

Sure biotech companies can expect lower up-fronts from preclinical deals, and still stronger up-fronts from Phase I or Phase II transactions. But is it worth the cost, and thus the risk, of getting there? We argue this month in IN VIVO that in fact for most discovery-based biotech companies it probably isn't. Better to land an early-stage deal that's structured to provide investors with at least some liquidity -- Forma's deal with Genentech is an interesting and perhaps imitable model -- than to curb discovery to allocate the lion's share of resources to a lead program.

In Vivo subscribers can check out the whole piece here. And meanwhile here's something that never loses value, it's time for the next edition of ...

Abbott/Costello (deemed so by IVB's reader poll) : In a move intended to unlock the value of its proprietary pharmaceuticals business, which may be undervalued due to investor concerns about the possibility of declining sales for multi-blockbuster Humira (adalimumab), Abbott announced a plan Oct. 19 to split into two companies over the next year. The pharma will consolidate four business segments – medical devices, diagnostics, nutritionals and brandedgeneric drugs – into a diversified medical products company that will retain the Abbott name and be led by current Chairman and CEO Miles White. Meanwhile, the company will spin out its portfolio of prescription pharmaceuticals, including Humira, which has garnered sales of $5.7 billion through the first nine months of 2011, along with its R&D pipeline into a still-unnamed research-based pharmaceutical company. The spinout will be led by Richard Gonzalez, currently executive VP, Global Pharmaceuticals, for Abbott and a decades-long veteran at the company. The diversified company brings in about $22 billion a year, execs said on an investor call, while the pharmaceuticals unit earns about $18 billion annually, with Humira’s share of that total growing. Investors are wary of Humira’s growth potential because of competition it may face from new drugs in development, like Pfizer’s tofacitinib, and biosimilars. Gonzalez said Humira can continue to grow, however, by increasing penetration in non-mature indications as well as through label-expansion plans. All in all the move (and investors' reaction) suggests confidence in pharmaceutical growth continues to ebb. —Joseph Haas

Servier/Miragen: In the largest deal yet for the fledgling microRNA sector, four-year-old startup Miragen Therapeutics agreed to license some geographic rights to three preclinical targets to Les Laboratoires Servier. The mid-sized French pharma will pay $45 million up-front, plus potential milestone and royalty payments worth $352 million as well as development and support payments, for rights to the three targets outside the U.S. and Japan. The deal covers Miragen’s two lead programs, miR-208 and miR-15/195, and a third target not yet identified by the companies; all are in the cardiovascular disease space. Although Servier will fund all clinical trials through Phase II, Miragen retains the right to co-sponsor the Phase III development and commercialization of any of the three, and will collaborate with Servier throughout the research and development phase. MicroRNA drugs are thought to overcome a difficult problem of delivery of RNAi drugs, allowing for traditional infusions and injections; Boulder, Colo.-based Miragen has named eight compounds in its pipeline. Although the fresh capital will keep it afloat far longer than its initial $18 million in private capital raised since 2007, Miragen CEO William Marshall says the company is still planning a large Series B round. – Wendy Diller & Paul Bonanos

Roche/Anadys: For several years as competition in the hepatitis C space intensified, some market analysts have expected a big pharma to buy out Anadys Pharmaceuticals and its portfolio of two HCV candidates. Roche did so Oct. 17, announcing a tender offer to acquire the biotech for $3.70 a share, a premium of 256% over the stock’s closing price on the last business day before the transaction. The purchase price willcome to about $230 million, which analysts and Anadys executives alike called solid value for current shareholders. Despite unveiling promising Phase IIb data for its lead program, non-nucleoside polymerase inhibitor setrobuvir (ANA598) on Oct. 13, the San Diego firm’s stock closed at just $1.04 on Oct. 14. Roche proposes a tender offer which Anadys officers and board members, collectively comprising about 7.9% of thebiotech’s outstanding shares, already have committed to accept. The Swiss pharma said it plans to complete the tender offer before the end of the year and two analysts we interviewed predicted Roche would face little difficulty in getting shareholders to accept its offer. While a 256% share price premium is an eye-catching number in the current biotech environment, a long-term review of Anadys’ history suggests the sale’s valuation may not make for a great success story for biotech investors. Overall, Roche is offering about the equivalent of the amount investors have put into the company since its relaunch in 2000.--JAH

Ipsen/Syntaxin: Ipsen and UK biotech Syntaxin on Oct. 20 announced a tie-up to discover new compounds in the field of botulinum toxins, an area where Syntaxin has considerable biology expertise, and where mid-sized Ipsen already sells Dysport for a variety of movement disorders. Ipsen will provide up to $9m in research milestones over the first three years, help fund FTEs and offers additional license fees and the usual slate of pre- and post-approval milestones and royalties. The tie-up doesn’t come out of the blue: Ipsen in November 2010 participated in an €18m Series C for Syntaxin, owns 8.9% of preferred shares on a fully-diluted basis, and, according to CBO Nigel Clark, concurrently signed a first research collaboration with the French group at the time of the investment – a deal that remained largely below-the-radar. Even without the history, Ipsen’s re-invigorated focus on its two key commercial assets, Dysport and acromegaly drug Somatuline, and its related move to restrict R&D efforts to the corresponding neurology and endocrinology franchises make Syntaxin an obvious partner, on paper: besides its knowledge of neurotoxins, its own lead program is an acromegaly candidate due to enter the clinic during the 2H of 2012. “We fall into a strategic focal point for Ipsen,” summarized Syntaxin CEO Melanie Lee. This latest deal does come with a few potential wrinkles, though. The biggest is that Syntaxin has, since several years before its 2005 spin out of the UK’s Health Protection Agency, been in bed with Allergan, Ipsen’s key commercial competition in the botulinum toxin space. The candidate discovered under those partners’ second collaboration in 2006 is due to report Phase II results next year in PHN and overactive bladder. Lee says it’s not a problem, because the Allergan and Ipsen deals represent “different uses of the [Syntaxin] technology.” In the Allergan deal, Synaxin’s effectively re-targeting botulinum toxin, applying its Targeted Secretion Inhibitor technology to “target cells of our choice for inhibition of secretion in that cell....in the PHN and OAD settings,” says Lee. The Ipsen deal involves exploring the potential further uses of natural botulinum toxins (neurotoxins that inhibit neurotransmitter secretion from nerve cells) “as we unravel the biology of botulinum.” – Melanie Senior

Merck-Serono/Newron: Merck Serono, the pharmaceuticals division of Merck KGaA, isn't waiting for the Phase III program on the role of Newron's safinamide in Parkinson's disease to be completed in another six months. The German company surprisingly announced October 21 that it was returning safinamide to Newron because it believed the product had less market potential than it originally anticipated. The announcement immediately put the intended merger of Italy's Newron with Finland's Biotie Therapies, announced only a month ago, in doubt. Executives from Newron and Biotie were participating in a joint investor roadshow on their intended merger when Merck dropped its bombshell, and are now having to consider how best to proceed. Perhaps the writing has always been on the wall: since the original agreement was brokered in 2006, Merck's clinical trial program has only evaluated safinamide as adjunctive therapy in Parkinson's disease, while originally it was thought the molecule could have potential in other therapeutic areas, including Alzheimer's disease. And Merck has been busy of late re-prioritizing its R&D pipeline and making organizational changes following the late-stage failure of its MS therapy, oral cladribine, development of which was finally terminated in July 2011. -- John Davis

PSA Update: Dealing with Diagnostics

Last week, we added Mike Pellini, CEO of the cancer genomics start-up Foundation Medicine, to our Pharmaceutical Strategic Alliances Conference panel that will be discussing strategies for sharing risk in relationships between pharma companies and diagnostics developers. Mike was president and COO of Clarient Labs until its sale to GE Healthcare last year – one of several notable M&A transactions involving CLIA lab-oriented assets.

We recruited Mike after Iain Miller, head of theranostics strategy and business development at BioMerieux, told us he was taking a new position as global head of personalized medicine at GE Healthcare, where he started this week. Iain will still be at PSA to talk about Biomerieux’s deals with Ipsen and GSK around predictive cancer biomarkers and now, also a bit about his new role at GE, which includes the challenge of leveraging the value of Clarient and bringing additional assets in around it. With Iain’s move and Mike’s addition, we maintain a balance on the panel between larger and smaller company perspectives. Rounding out the session are Nic Dracopoli of J&J and Risa Stack of Kleiner Perkins Caufield & Byers, an early and frequent investor in companies developing complex, high-value diagnostics, the vast majority of which are performed in the CLIA setting.

The potential value a CLIA lab brings to pharma as well as other players like GE is a subject we’ve discussed in several IN VIVO features this year, including in the current (Sept.) issue, where we ask the question “Is Diagnostics the New Biotech…and Will Pharma Embrace It?”

The two fields share obvious historical parallels including common starting points, first with the use of antibodies as targeting agents and probes, and later with genomics. In both cases, the same core assumptions existed around using those tools to unlock the power of the biological perspective. And there was a need for physicians, potential development partners, and regulators to get their arms on a unique and innovative set of promising technologies.

Pharma’s interest in the new wave of complex diagnostics is two-fold. It clearly needs to be able to ensure the development and distribution of companion diagnostics for its targeted therapies – why some argue risk sharing is inevitable, if not yet in evidence. For some, diagnostics also appears to have regained its appeal as a way to diversify: think Novartis with Genoptix or Eli Lilly with Avid Radiopharmaceuticals.

Unlike big box diagnostics companies, which are primarily interested in running as many tests as possible on their platforms, the developers of complex diagnostics tend to be vertically oriented. They feature the kind of narrow and deep focus on a specific disease state that is required for adoption and payment of high-value offerings. Those capabilities fit well with – and some would argue are essential to – the biomarker discovery efforts now woven into virtually all of new drug development. On the commercial side, they also offer the potential to leverage the value of a specialized sales force.

Pharma has danced with diagnostics but also maintained its distance, much as it did with biotech in its early days, keeping in touch via alliances until the emergence of product franchises it could acquire. But unlike biotech, where products and franchises are basically additive to a portfolio, there’s a co-dependency with diagnostics, at minimum in the area of companion diagnostics and potentially more broadly, as an increasing number of diagnostics and related services emerge that help direct the choice and management of therapy over all.

The question is: What business models best address this evolution. Is collaboration and risk-sharing the way to go? Are diagnostics franchises now becoming investible assets for pharma such that they will be swallowed lock, stock, and barrel (and if so, which underlying tools and technologies will be most sought after)? Let’s see what the experts at PSA have to say.

Join us September 23.

Let's Fall in Love (With New Business Models)

How does the song go?

Adimab does it / Ablexis does it
Even Stemmer's Amunix has done it
Let's do it / Let's find a new corporate structure that allows us to separate drug discovery from development so that we can sell the assets more easily!

Ahem.

It needs work. Cole Porter's version was a little snappier.

But our toes are tapping because, yet again, an early-stage firm with a promising technology -- or in this case, an experienced drug-discovery team -- is launching with a novel structure tailored to the new reality of the biotech business. The firm is Inception Sciences, and its two founders, Brad Bolzon and Peppi Prasit, are fresh off the pending sale of Amira Biosciences to Bristol-Myers Squibb, which you can read about here.

The next edition of "The Pink Sheet" Daily will have a more detailed explanation of Inception, which, like the movie, is a bit tough to get the old noggin wrapped around. In general, however, Inception follows in the footsteps of other biotechs that want to:

- Keep the platform or discovery technology in a holding company and the development-stage assets in separate corporate entities, thus creating the opportunity for more streamlined acquisitions.

- Let investors invest "a la carte."

- Find a way to return cash to investors faster without selling the underlying science.

There are several variations on the theme, as our little ditty above indicates. Amunix has created a half life-extension technology now behind products in two spin-outs: Versartis and Diartis. There's also Nimbus Discovery, which our START-UP colleagues wrote about here, and the antibody platform firm Adimab and its clone Arsanis.

Still, not everyone can hum the tune: the extra layers of administration and bureaucracy can be too much for a lean biotech with inexperienced backers. But in a business where the people with the cash are growing ever-more impatient, it's not a trend going away soon.

Down On The Pharm: Implications of the Merial/Intervet "No Deal"

Merck and Sanofi-Aventis’ joint decision March 22 to shelve the planned merger of their animal health units may have left the other big pharmas playing in the space acting a bit like … well, chickens with their heads cut off.

Some industry observers may view animal health as -- dare we say it -- small potatoes. But a quick look at 2010 sales growth rates for big pharma animal health units indicates such business is not a poultry (er, paltry) matter.

A little over a year after the two companies revealed they would combine Sanofi’s Merial division with Merck’s Intervet to create a business with over $5 billion in annual sales, the pair decided there are just too many antitrust complications to make the joint venture worthwhile. Originally hoping to complete the merger within 12 months, Sanofi and Merck earlier this year announced it would not be finalized earlier than third-quarter 2011.

Market analysts expected a set of divestitures totaling about $500 million would have been necessary to pull off the deal, with Dow Jones reporting that the combined company’s holdings in poultry vaccines likely would have attracted antitrust scrutiny.

In a joint statement, Merck and Sanofi said each company would retain its current, separate animal health assets and businesses – there is no break-up fee and each company will cover its own expenses for the past year’s due diligence. (Isn't it nice when a planned deal unwinds so easily?)

The two companies were partners in animal health previously, jointly owning Merial, but Sanofi bought out Merck’s share of that business in 2009 as part of the antitrust review that eventually okayed Merck’s merger with Schering-Plough. Intervet was among the assets Merck acquired in that transaction, meaning the New Jersey pharma essentially stepped out of and back into the animal health business simultaneously.

Seven of the 12 publicly traded big pharma companies participate in the animal health business, along with privately held Boehringer Ingelheim. On March 15, Eli Lilly made an undisclosed offer to buy out Johnson & Johnson’s relatively small, Europe-based animal health business. But will Merck and Sanofi’s abandoned deal and the relative parity within big pharma animal health lead to additional M&A or some of the players exiting the space?

Pfizer, which acquired Fort Dodge Animal Health in 2009 as part of its merger with Wyeth, has talked recently of selling off units and focusing more on core businesses under new CEO Ian Read. Might it want to sell off its animal health unit, which generated $3.58 billion in sales, overall a bit more than 5% of the entire Pfizer enterprise, last year?

If so, would Lilly, at roughly two-fifths the size of the world’s biggest pharma company, be both willing and able to absorb Fort Dodge? Likewise, could smaller animal health players Bayer HealthCare and Novartis be looking to grow their divisions?

It’s worth noting that all of the five big pharma companies that reported their animal health revenues for 2010 recorded sales growth during the year, ranging from 2.6% for Sanofi to a very healthy 29% for Pfizer. (Pfizer’s number needs to be rationalized, though, with the reality that its growth was generated partly by the acquisition of Fort Dodge, not just sales increases.) Bayer and Lilly both enjoyed animal health sales growth in the 15% range, indicating why the firms’ may be interested in expanding that portion of their businesses.

By Joseph Haas

Image courtesy of flickrer terrydu used with permission through a creative commons license.

What Lipitor? Pfizer's Strategic Shrinking Solution

Investor pressure on Pfizer to downsize radically has been rising for several months, controversial as it is, but Sanford Bernstein analyst Tim Anderson's jarring note on Monday underscored how serious Pfizer's new CEO Ian Read is about shaking up the ship.

"If we hadn't been there ourselves to hear it firsthand, we would not have believed it, but it seems from our recent meeting with CEO Ian Read that Pfizer may be destined for a significant shake up in the form of shrinking its behemoth ~$67 billion yr. revenue base," Anderson wrote. "No final decisions have yet been made, but all options appear to be on the table and through a series of major potential moves the "new" Pfizer might end up with annual sales of ~$35 to $45 billion/yr, something Read terms the 'innovative core…'"

The timing of such talk is hardly coincidental. Read was appointed CEO Dec. 5, almost exactly a year to the date from when Pfizer's leading drug Lipitor goes generic. What better way to deflect attention from that cataclysmic event than to rip up a company that just underwent a two-year reorg?

True, Lipitor may not face the worst kind of blood bath encountered by many small molecules once they go off patent, given various global six month exclusivities and extensions and Pfizer's own mapped plan for bolstering its sales in emerging markets. But analysts are projecting that the brand will lose at least 80% of its $5 billion in U.S. sales within a year.

And, if Pfizer spins out its $10 billion Established Products Business Unit – one of the plans under consideration -- even the 20% remaining revenues may no longer belong to it but to the new entity, in whatever shape that entails. Other moves in play include spinning out non-core consumer health, nutritional and/ or animal health businesses, which together make up about 15% of the company's total sales.

Underlying the yakking is a lingering disappointment in Pfizer's 2009 acquisition of Wyeth for $68 billion, as the company clearly has struggled to meet financial targets it set when it first announced the deal. A series of late-stage R&D failures also hurt. And there's the observation that even if the pipeline pans out, in an era of targeted therapy no one drug can move Pfizer's swollen needle. The stock therefore has barely budged, even as management cut spending, closed manufacturing sites, and shaved the once-generous dividend to help pay for the Wyeth acquisition.

Given all the challenges Pharma faces, the fierce discussion underway about right-sizing pharma is appropriate. But until now, deliberately downsizing an industry leader by taking $25 billion in sales off the table wasn't considered a viable option. Recall the debate that consumed Wall Street when Pfizer originally announced its Wyeth deal and Pfizer's then CEO Jeff Kindler's adamant argument that getting bigger was the best way forward.

In part, the sentiment underlying Pfizer's options – as Anderson points out -- could be the grass is greener in my neighbor's yard kind of wishful thinking, given how well the much smaller Bristol Myers Squibb has done as a focused company, which made a killing by spinning out its Mead Johnson nutritional subsidiary in early 2010. It could also be a response to investors looking for any sort of creative strategic idea to raise Big Pharma, and Pfizer in particular, from Wall Street's dumping ground.

Or, maybe it's all part of some brilliant rational plan. Two years ago, an unnamed source spoke to IN VIVO magazine about shrinking Pfizer: "But if Pfizer had wanted to do the spin-offs, they could have," one executive close to the transaction said. The tax problems with spin-offs, he believes, are no more challenging than those Pfizer is incurring by repatriating perhaps $8 billion in off-shore profits, which will likewise increase Pfizer's tax bill. In fact, this executive and others suspect that spinoffs will be in any event the longer term result of Pfizer's acquisition [of Wyeth]: after all, if Pfizer is serious about keeping its five business units managerially independent, each responsible for its own P&L, they'll also be larger and theoretically more sustainable–and thus better candidates for spin-offs."

No matter what course Pfizer takes, none of it gets the company off the hook for the need to improve its R&D. And there's no guarantee that shrinking will help that effort; while disciplined focus is helping Bristol on pharma innovation, it certainly isn't doing Lilly wonders (note the latter's recent efforts to bulk up its non-core animal health business, albeit on an entirely different scale than Pfizer's). But once again, the story will play well on Wall Street, which is waiting for some new ideas from pharma executives. -- By Wendy Diller

Versartis: So Cutting Edge

Early Wednesday, Versartis said it had raised a $21 million B round and, at the same time, spun out its lead molecule, an extended-release version of the type-2 diabetes drug exenatide, into a new company. Dig a little deeper, and you'll find the deal encompasses two cutting-edge trends in biotech financing.

First, Index Ventures, the firm that backed Versartis' Series A in 2009, is also investing in the new company, Diartis. It would love to match what it did with PanGenetics: create companies around single molecules with a leaner, cleaner path to exit. With PanGenetics, Index successfully sold one compound but saw the second fail in 2010. Last year, Index funded Mind-NRG, essentially one person and one asset, with an initial tranche of €1.5 million. This asset-financing vision is one Index has embraced, with other VCs cautiously following, as more traditional venture strategies are buffeted by continuing financial pressures and rare exit opportunities.

Second, the carve-out of Diartis from Versartis creates a second investment for Amunix, the platform company behind each firm's extended-release technology. The technology is the pegylation-like XTEN, which Amunix co-founder Willem "Pim" Stemmer wants to apply to a whole host of proteins. He says the firm is focused on a list of "20 to 30," some already commercial like exenatide, some "fallen angels" that failed in the clinic, and some addressing new targets. The idea is to get them ready for clinic, then either sell them directly or create new, Versartis-like companies around them.

It's a platform-only model, once dismissed as unworkable by investors who didn't see enough value creation to build a viable exit. But it's gaining traction. As this blog first reported last month, yeast-based antibody company Adimab is licensing its technology to newcos that will do the drug-development dirty work. First up is Arsanis, in Vienna, Austria.

We have a lot more on the deal in the next Pink Sheet Daily, including more thoughts from Stemmer -- who's been named a recipient of the 2011 Draper Prize, the nation's most prestigious engineering award -- and Index partner Kevin Johnson -- no, not that Kevin Johnson! -- plus a comparison of the Diartis GLP-1 diabetes molecule to other next-generation diabetes treatments. -- Alex Lash and Chris Morrison

Photo courtesy of flickerer LollyKnit.

Pfizer vs. Merck and the Future of R&D: Deja Vu All Over Again

Pfizer and Merck begin 2011 with brand new CEOs and not a whole lot else in common.

Merck's new CEO, Ken Frazier, took over the reins as part of a planned succession on January 1. Ian Read took over as CEO of Pfizer much more suddenly, when Jeff Kindler resigned abruptly in December.

Both faced essentially the same challenge as 2011 began: how to deal with unrealistic expectations for growth in 2012.

By now you know the story. Pfizer's Read responded by acknowledging that revenues would not meet expectations, but pledged that earnings would, thanks primarily to some deep cuts in R&D. Frazier, in contrast, said simply that Merck would no longer stand by its guidance, taking the position of defending R&D spending rather than sacrifice new opportunities for relatively short term earnings targets.

Ah, its good to have Merck and Pfizer posing a strategic dichotomy in R&D again!

A dozen years ago, Pfizer (under CEO Hank McKinnell) and Merck (under Ray Gilmartin) waged a similar battle for the hearts and minds of investors during an earlier (and much, much smaller) patent cliff period.

Remember when Pfizer swooped in to buy Warner-Lambert away from American Home Products? Though Pfizer wasn't the loudest advocate of the view, the acquisition put the company in the camp of those who argued that the future of R&D depended on "critical mass"--building the scale to allow huge investments across a range of therapeutic areas and targets to drive growth for the decade ahead. Pfizer followed the Warner-Lambert deal with the acquisition of Pharmacia, and built its position as the biggest of Big Pharma in that era.

Merck, on the other hand, declared its intention to eschew big mergers, with Gilmartin saying any mega-deal would be a "distraction" from the core business of delivering organic growth from internal R&D supplemented by licensing or small, targeted acquisitions. And Merck stood by its guns, become the first Big Pharma to weather a genuine patent cliff (Zocor, primarily) without making a big acquisition (or being bought up itself).

So who was right?

Well, its hard to argue that "critical mass" was such a great idea, what with Pfizer's Read taking the scissors to his company's bloated R&D budget. On the other hand, it isn't like Merck did so well with that organic growth thing either; the company's acquisition of Schering-Plough two years ago, was if nothing else a repudiation of the "distraction" argument.

The fact is that neither company succeeded in delivering a sustainable product flow over the decade that followed the strategic divergence. That is why both are in the pickle they are in today.

Read and Frazier are now charting different paths. It seems unlikely that both are right. But history says both could well be wrong.

image from flickr user mtsofan used under a creative commons license

Adimab, Arsanis, and Platform Cloning -- a New Biotech Model?

Adimab, the yeast-based antibody discovery company that has amassed a strong portfolio of partnerships and skyrocketed to a north-of-$500m valuation, has always said it had no plans to do its own development work. If only the company could clone itself, perhaps it could venture down the development path without getting distracted from its discovery platform opportunity -- and the high multiples that can be extracted from a company that doesn't need a ton of development financing.

Enter the clone, Arsanis.

Arsanis is a biotech essentially seeded with Adimab's technology platform that will apply this yeast-based antibody discovery engine to developing drugs against infectious disease targets. The company will run research out of Vienna, Austria and plans to hire 20-25 employees in the next few months, according to founder and chief scientist Eszter Nagy, MD, PhD.

Adimab doesn't own Arsanis (though it stands to make money if Arsanis succeeds), but Adimab's investors do. The new company has raised about $10 million from SV Life Sciences, Orbimed, and Polaris, three Adimab backers. We've spoken to all those firms, to Adimab, and to Arsanis' Nagy, who hails most recently from Intercell. We'll have more on Adimab's strategy, the new company and the advantages of the model for its venture backers in a forthcoming issue of START-UP.

For now suffice it to say that Adimab has enabled a newco with its technology, helped put together a familiar syndicate to back it, and those investors can now put more money to work behind that Adimab platform. If Arsanis is successful we bet you'll see additional Adimab clones in other therapeutic spaces where Adimab's brand of faster/cheaper/better antibody discovery can yield "an unfair advantage," as one of Adimab/Arsanis' venture backers puts it.

How the company defines success remains to be seen. The $10 million should see the company all the way through to "compelling preclinical proof of concept" for a couple of antibody programs against unmet needs in infectious diseases, the players tell us, all within the next two years.

Nobody involved with Arsanis has suggested this strategy is new to biotech, but we haven't seen it work exactly like this before -- perhaps the closest comparator are the twin antibody firms Medarex and Genmab.

Meanwhile, Tillman Gerngross and Errik Anderson, Adimab's CEO and COO (founders and board members at Arsanis), have with their team transformed Adimab from a C-corp to an LLC, something we reported in December, and plan to expand the company's slate of discovery collaborations. The LLC transformation -- no easy feat according to all involved -- allows the biotech to return money from forthcoming collaborations to shareholders in a tax-efficient way.

It also dispels the notion, Gerngross says, that Adimab is for sale. "We're completely uninterested in short-term liquidity. We don't want what has happened in the past, where the company gets bought and then has a limited impact," he says. "We have a greater ambition."

Guest Post: The Next Feeding Frenzy? VCs Rush Toward Diagnostics (!?)

Steve Dickman is the CEO of CBT Advisors. He blogs about biotech, VC and personalized medicine at Boston Biotech Watch. Interested in guest blogging for In Vivo? Drop us a line here.

There was a time not long ago when no amount of persuasion could have made most venture capitalists do a diagnostics deal. The reasons abounded: markets were too limited; margins were too low; and the number of potential acquirers too small. So imagine our surprise when the most upbeat session of this year’s c21 investor conference in late May was a panel discussion focused on – you guessed it – molecular diagnostics.

If this is not a feeding frenzy, then at least it seems to be a period of high marketability for private diagnostics companies seeking acquisition exits. Session chair Bill Kreidel of Ferghana Partners described four sell side diagnostics assignments his firm is working on for which multiple bidders had appeared.

What sells? Proprietary content, improvements in speed or sensitivity/specificity, robust datasets, and large markets. Who are the buyers? Clinical labs like Labcorp, naturally, but also instrumentation companies in the imaging business like General Electric that “see diagnostics cannibalizing some of their revenue” and are trying to capture it back, said panelist Dion Madsen of Physic Ventures.

The advent of acquirers such as GE has caused venture firms to change their tune. The three venture capitalists on the panel certainly weren’t diagnostic neophytes. Madsen, Dr. Rowan Chapman of Mohr Davidow Ventures, and Dr. William Gerber of Bay City Capital have all made numerous investments in diagnostics and personalized medicine including Tethys Bioscience and CardioDX, clinical lab companies that recently reached commercial status.

And there have been some impressive diagnostic exits driving venture interest. Switzerland-based HBM Partners, for instance, announced last September that it had earned a 21.6x multiple on its investment in Brahms, a Berlin-based diagnostics company acquired by Thermo Fisher.

But the information asymmetry that led to that deal has begun to recede now that investors have woken up to the opportunity. Still, in today’s market, where the environment is driven by cost constraints rather than spending, the locus of value is shifting earlier, toward diagnosis and away from treatment. In other words, knowing in which patients a therapy will work is as important as knowing whether it will work at all.

One common approach is for a company to walk into a VC firm and say “We are the next Genomic Health”, a Nasdaq-listed company (ticker GHDX) with OncotypeDX, a commercial breast cancer test, as if that were an appropriate role model. But Genomic Health, its stock down 25% in the last quarter, is not only not a role model, it’s a bad example, Madsen said.

“We still get companies saying they will be the next Genomic Health and we say, we don’t WANT you to be that!” emphasized Madsen. Gerber, whose fund did not invest in that biotech, added “Their first study was published in ’04 and it’s six years later and they are just about to break even!”

Circumstances have drastically changed both for IPO exits and for reimbursement in the interim. At the moment, an IPO is an unlikely dream for companies that do not have tens of millions of dollars in revenue. And reimbursement is complicated by both the murky regulatory situation and the unlikely circumstances that allowed the company to get reimbursed at unprecedented levels. “Breakeven [for Genomic Health] is predicated on a $3,000 price point,” Kreidel observed, “not something most diagnostics companies can aspire to”--except, we would argue, in oncology.

Adding to the complexity is a lack of clarity on the regulatory front. At the rate the Food and Drug Administration is moving it will be 2011 before companies offering algorithm-based tests like OncotypeDX have a clear path forward. (When will the regulations arrive? “There are as many answers to that question as there are consultants in Washington,” quipped the fourth panelist, Bruce Cohen, CEO of VitaPath Genetics.)

So VC-backed companies are working on building proprietary content strong enough to stand up to any level of regulatory scrutiny. What does content mean? (See here for a blog post explaining Madsen’s views on the subject and his criteria for what makes a “doable deal” in diagnostics.) Put simply, “content” is the unique ability to make a diagnosis or link a drug to efficacy in a particular patient in a reproducible way.

Three quick examples of the content-driven, data-intensive approach:

• VitaPath Genetics, a Mohr Davidow portfolio company developing a cheek-swab test for spina bifida risk early in prior to pregnancy. It ran a 2,100-subject study to validate its test and hopes to go commercial by 2011 on a modest $15 million.


• On-Q-Ity, a Boston-area company invested in by both Physic and Mohr Davidow is another example. To develop a commercial test to inform physicians when to treat cancer aggressively or even which chemotherapeutic agents to deploy, On-Q-Ity will require an “intensive analysis of tumor samples” and a “huge bioinformatics exercise,” he said.
  


• A third company, mentioned but left unnamed by Kreidel, has apparently achieved a remarkable level of sensitivity and specificity in predicting ovarian cancer, an area of huge unmet need where a better test would help thousands of women avoid surgery – and help insurers avoid paying for it.

So the new VC recipe goes like this: Find a potential market for which reimbursement is uncertain. Define a plan based on capturing reliable data from the vagaries of human biology. Invest VC dollars to collect the data. Crunch the numbers. Then see what you’ve got.

Hmmm. The risk profile sounds almost like …drum roll, please… therapeutics investing.

But it’s actually better – fewer dollars in, earlier clinical signals. And now, more likely exits with no need for an IPO. No wonder there are more investors than ever in this space. Some of them are likely to go home winners.– Steve Dickman

image from flickr user chamer80 used under a creative commons license

Ikaria Execs Don't Need IPO for Big Payout

Two biopharma firms filed to go public Thursday, marking the first drug-company registrations this year. That's rather remarkable considering the biotech IPO window has cracked open a bit.

The more notable of Thursday's filings comes from Ikaria. That New Jersey-based firm is actually two businesses brought together in 2007 by a deep-pocketed syndicate of investors. The first business actually makes the combined company profitable, selling a nitric oxide inhalation therapy for critical-care patients. It's approved for babies, often near-term*, with hypoxic respiratory failure but used in other settings as well. The company earned $13 million last year off of $274 million in revenue.

The 2007 merger that created the company was designed as a bid to create a self-funding drug discovery model while also acting as a magnet for further bolt-on critical care products already in the marketplace.

Thus the second business is drug R&D, on which the company spent $75 million last year, up 10% from 2008. Its lead program, for hepatorenal syndrome, is expected to enter a pivotal Phase III trial this year. But the current program with the most funding is IK-1001, a formulation of hydrogen sulfide that's meant to slow down a severely injured patient's metabolism by triggering a hibernation-like mechanism and give doctors a chance to save tissue that's been cut off from blood supply. It's been tested in three Phase I trials so far, and the lead indication for IK-1001 is to prevent tissue damage from blood supply returning to tissue after a heart attack.

Turns out that Ikaria's 12 executives and directors have fashioned a nice payday for themselves whether the IPO happens or not. According to the S-1, the company will distribute a $130 million dividend to them this quarter, payable from a new $250 million loan. The company insists it's a one-time deal:

"We have not declared or paid any other cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business and, therefore, other than the special cash dividend described above, we do not intend to pay cash dividends to our
stockholders in the foreseeable future."

Curious investors should also know that majority owner New Mountain Partners, a private equity firm in New York whose founder met his wife in a most unusual way, will continue to call the shots after the IPO with as many as three board seats. New Mountain bought 47.5 million shares -- half the company -- at $4.63 as part of the Series B round that helped form the company as it exists today.

* A previous version of this post mistakenly described the approval for pre-term babies. Pre-term babies are not an approved indication for INOMax. IVB regrets the error.

Notes From BIO: Pim's Cup Runneth Over

Greetings from Chicago! Fantastic weather for early May, an economy on the upswing, not to mention a certain conference that's in town, make the City of Big Shoulders particularly lively this week. One way to take the temperature of a conference -- and last year's BIO in Atlanta barely broke a sweat -- is to check in with the folks scrambling for deals and having hushed conversations in discreet corners.

Before BIO got fully underway Monday morning, it was already hard to find a quiet place to sit. One of our first chats was with Willem "Pim" Stemmer, the inventor of the DNA shuffling technology that underpinned Maxygen, which last year transfered most of its assets into a joint venture with Astellas Pharma, and the recently-IPO'ed biofuel firm Codexis. (Maxygen also birthed the next generation protein play Avidia, which Amgen bought in 2006 for $290 million plus earnouts.)

Stemmer's latest endeavor also aims to squeeze several companies from one. The parent, Amunix Inc., is working on two things. The first is an ion-channel research program, with Pfizer as the first customer. The second, which started as a side project, is a half-life extension technology called XTEN that adds a recombinant polypeptide chain to known molecules, without the manufacturing and safety concerns of pegylation. That's the claim, anyway, and it was enough to convince European VC Index Ventures to solely fund a spin-out, Versartis, charged with developing Amunix's lead compounds, the first of which is an XTEN-enhanced version of the diabetes drug exenatide.

Now comes a second spin-out called Ios, so newly dubbed that it doesn't have a Web site. Ios will hold Amunix's ion-channel program, which Stemmer told IVB he wants to become a "research hub" with several pharma partners and a goal of being acquired in the next two to four years. For drug leads, it is testing venom toxins against ion channel targets, using XTEN for half-life extension. Stemmer was in Chicago this week unfurling the Ios banner and scouting for discovery deals to replace or supplement the existing three-year deal with Pfizer that expires at the end of the year.

Unlike Versartis, which is strictly a product development company, Ios will include Amunix's microprotein platform technology, Stemmer said.

Photo courtesy of flickr user paraflyer.