2011 Exit/Financing of the Year Nominee: Arteaus

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™.

 

Blink and you might have missed it, although our Pink Sheet colleagues didn't.

In October, Atlas Ventures made its first asset-financing play under the umbrella of its Atlas Venture Development Corp. (AVDC), teaming with OrbiMed Advisors to share the funding of Arteaus Therapeutics with an $18 million A round. Arteaus is one thing and one thing only: an in-licensed migraine drug; no office, no outside management, and no backup R&D programs.

As we've been discussing for a couple years now, funding single assets instead of entire biotechs is an intriguing model for VCs who don't want -- or can't afford -- to see a company through to a sale or an IPO. In fact, in this story we compared AVDC and CMEA Capital's Velocity fund before either had an asset under their roofs. (Velocity still hasn't announced a first project.)

We nominate Arteaus not only because it's the first out of the gate, but also because of its odd circumstances. The migraine drug comes from Eli Lilly, which has made plenty of noise in the past year or so about building a network of three "mirror" funds to do what Atlas is doing: take compounds that Lilly doesn't want to develop on its own, bring in outside funding help, and give Lilly a "clawback" option once the drug reaches an agreed-upon milestone. But wait a minute: Atlas isn't one of Lilly's mirror funds. Which either means Atlas and OrbiMed gave Lilly a deal it couldn't refuse, or the mirror fund thing is a bigger headache than first expected. Well, we knew the latter already, to some extent: Before launch, CMEA's Velocity was supposed to be one of the mirror funds; Lilly was even named as a strategic backer in the Velocity fundraising material. But those plans disintegrated in late 2010 or early 2011, and when Velocity formally launched in June, it was no longer a Mirror fund. (Velocity is being funded from the current CMEA VII, and the San Francisco firm has no plans to raise an eighth fund.)

Another twist is that AVDC will contract with Lilly's Chorus division, a semi-autonomous R&D group meant to drive proof of concept development faster than Lilly's traditional process, to run the migraine compound's Phase I and II trials. Lilly has an option to re-acquire the drug after proof of concept. If it does, Atlas and OrbiMed would be owed undisclosed payments and royalties, as well as an upfront payment that would allow them to exit (thanks to Arteaus being structured as a limited liability corporation).

The compound in question, by the way, is a monoclonal antibody that binds with calcitonin gene-related peptide, or CGRP, a potent vasodilator linked to migraines and implicated in transmission of pain. The larger point is that Lilly wanted to share the risk of developing it, and Atlas has provided a vehicle for doing just that, all while separating the value of the asset from the distraction of building a standalone company to house that asset. Or, you might say, the distraction of fighting for resources inside Lilly.

Photo courtesy of flickrer Quinn.Anya via a Creative Commons license. 

And Now A Word From Exit/Financing DOTY Winner Ablexis

Before bidding adieu to the acronym DOTY for eleven months, it seems only fair to offer our winners a chance to share their enthusiasm for joining that select group of companies worthy of The Roger. We now turn the microphone over to Larry Green, PhD, CEO of Ablexis, which hammered out its fab Pharma5 consortium while simultaneously raising a Series A.

Ablexis is honored to receive the Roger for Exit/Financing Deal of the Year and to be in the company of the other nominees, all of whom had outstanding deals of their own.

We start by thanking the wise and visionary group at the IN VIVO Blog for our nomination and the many people who voted for Ablexis.

The Ablexis-Pharma consortium deal started out as a simple concept, as a way to better assure an attractive near-term return for investors so that Ablexis could attract Series A investors. People said that we were crazy in thinking we could get five major pharmaceutical companies to all agree on anything.

In fact, negotiations almost broke down the first time we ordered lunch for delivery. (Really, who in their right mind wants to eat vegan pizza?) But we were -- and remain -- fortunate to have great pharma partners who worked with us rather than against us. Pharma partners – Pfizer and you four others (you know who you are!) – we thank you.

Of course, none of this could have happened without the vision and support of our investors. First were our seed investors, California Technology Ventures and Jacobs Capitol Group, who supported us while we rounded up the pharmas. Third Rock Ventures and Pfizer Venture Investments had the vision to say “Yeah, this sounds like a good idea.” We remain indebted to them (no pun intended) and look forward to giving them their IRR and more.

We couldn’t have closed the consortium and financing without the efforts, smarts, and long hours of our attorneys. But they received our thanks when we paid off all our legal bills. (Oy!)

We gratefully acknowledge the contributions of Peet’s Coffee and the Coca-Cola Company, which provided the extra oomph for us to plow through all the negotiations. We also thank United Airlines and the Star Alliance for the occasional upgrades out of cattle class when flying. Kudos to our spouses, children, and parents for putting up with and supporting us through our absences (both physical and spiritual), the sleepless nights, and the occasional irrational mood swings.

Lastly, let us not forget the AlivaMab Mice and those transgenic mouse platforms for therapeutic antibody discovery that have gone (and been acquired) before. Transgenic mice are the most successful platform for human therapeutic antibody discovery. Ablexis is making the next generation of mice to ensure that they remain as such. We look forward to being nominated for another DOTY award in the future.

2010 M&A DOTY Nominee: Endo/HealthTronics

It's time for the IN VIVO Blog's Third Annual Deal of the Year! competition. This year we're 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 (four or five 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™.

Endo Pharma CEO Dave Holveck has been emphatic about plans to diversify the company ever since taking the helm in 2008. But investors--and analysts--couldn't quite make the jump from pain to "pelvic health" defining the specialty pharma's May 2010 $258 million acquisition of HealthTronics, a provider of urological services and devices. Endo's share price barely budged after the deal was announced.

Still, this acquisition, which was the first of a 2010 Endo buying spree that eventually led to an uptick in the company's share price, illustrates how pharma needs to change given physician access grows tougher and differentiation may come by offering a continuum of products. It's for this reason Endo/Healthtronics merits a DOTY nod.

If investors failed to see the logic of HealthTronics, Endo's subsequent tie-ups, including a take-out of the generics firm Qualitest for $1.2 billion, were easier to parse, as was the August acquisition of drug deliver Penwest for $168 million. And Endo has been rewarded with a steadily rising share price: hovering in the low to mid-$20s for most of 2009 and the first half of 2010, the drug maker's stock was sitting pretty at $36-per-share by the close of business Dec. 8.

But there's also no denying the value HealthTronics has brought the spec pharma: about $185 million in annual revenues, and a new asset in a deal that is immediately accretive. Most importantly, it allows Endo to combine drugs, devices, and services in an area far less competitive than pain, providing the company new skill sets as health care reform and concerns about cost of treatment increasingly factor into strategic decision making.

This larger point eluded Wall Street, which tried to fit the acquisition in a framework solely related to advancing Endo's traditional drug business. Yes, the company has a drug for bladder cancer (Valstar), which its sales force details to urologists and a next generation drug, Urocidin, in Phase III. And yes, HealthTronics' strong ties to those physicians could result in a better understanding of this physician specialty's needs. But analysts saw the cross-selling opportunities for Endo's detail reps only as qualitative and indirect.

They failed to appreciate how HealthTronics provides a base that enables Endo to look for more acquisition opportunities that blend the various approaches to addressing urologists' needs. Specifically, Endo now has the option to get into the devices or auxiliary services if it believes these offerings represent the best proposition for patients, and therefore its business.

Down the road, this approach should enable Endo to provide a "care pathway" to physicians, which is an appealing concept for payors looking for “end-to-end” solutions and the ability to pay companies based on the best treatment outcomes for particular diseases. According to this strategy, a cancer patient ineligible for bladder removal could be given a generic drug infusion for chemotherapy followed by Valstar, and eventually Urocidin.

It's a concept other pharma companies are exploring – most rather timidly and as part of an effort to augment their flailing therapeutics sales, not as stand alone businesses. Sanofi’s forays in diabetes, especially its alliance with glucose monitoring company AgaMatrix, come to mind.

Endo’s need to change is particularly urgent. It is one of several well-capitalized small to mid-sized specialty pharma businesses that are ultimately fighting for their lives as they face an acute crisis: the drugs that underwrote their success are maturing and their model of in-licensing new drugs to augment their portfolio isn’t working as competition has increased for late-stage assets. Some companies in the space, such as Eurand and King, have been sold at less than optimal valuations.

But as Endo/HealthTronic shows there is a viable alternative, one that pushes specialty pharma out of its old comfort zone. Holveck, a former top executive at Johnson & Johnson, appears more comfortable than many pharma executives at mixing businesses, and some speculate he is modeling Endo for a sale to J&J. Whether Endo stays independent and grows, its valuation is on the rise.

Bright Idea courtesy of flickrer nhuisman, used with permission via a creative commons license.