Venture Wrap: No IPOs? Luxury!

You'll pardon us if we don't run shrieking down the streets after the National Venture Capital Association issued its recent mayday about the state of venture capital-backed IPOs.

Yes, the fact that no VC-backed companies went public in the second quarter isn't good, and we were interested in learning that such a thing hasn't happened since 1978

But we’ve got longer memories.

A decade ago, the vast majority of venture capitalists renounced biotechnology and medical device investing, opting instead to focus on the Internet and telecommunications.

Many of the dearly departed even suggested that no venture capitalist could make money investing in biotechnology and medical device companies, both which required a bit more time and attention the dot-com foolishness of the age.

Life sciences companies couldn't even think about going public then. All seemed lost until IPO investors started spreading their dollars around to an equally speculative industry, genomics.

The point is times were tough then, and they're tough now. And although the past quarter was historically bad, it's still just a quarter. Isn't the venture capital business all about long-term vision?

The NVCA is doing its job, using the single quarter to lobby for changes in Sarbanes-Oxley, which supposedly is making going public too expensive. We agree with those who don’t totally buy the argument.

Instead, we give much more weight to the other reasons presented by the NVCA.

This cost, coupled with a decreased market appetite for smaller cap companies, a lack of analyst coverage, and a lower investor appetite for technology stocks, has raised the bar considerably for venture-backed companies hoping to go public. The median age of a venture-backed company from founding date to IPO hit a 27-year high in 2007 at 8.6 years.

To us, this sounds less like a crisis and more like a new reality that venture capitalists are learning to manage, at least on the life sciences side of the house. It doesn't do much good to bemoan the "skittishness" of investors.

Instead, the best venture capitalists will be finding innovative ways to grow their companies--or buy some cheap shares in later-stage companies--so they're ready to go when the next bubble forms.


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It's hard to see how Johnson & Johnson's Ethicon Inc. won't follow through on the potential deal to sell its professional wound care business to private equity firm One Equity Partners. After all, it was Ethicon that put the business on the market, picking the One Equity bid as the best. The terms of the deal haven't been disclosed, but with annual revenues of $270 million it's difficult to see how this won't be $1 billion-plus deal.

We reported in IN VIVO the magazine about private equity firms circling the medical device industry earlier this year. So we'll be watching to see what other deals come along. Meanwhile, if One Equity sees this as a roll up opportunity this will be good news for those hearty VCs investing in wound care companies, another issue we recently covered in START-UP.

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Because no one ever gets tired of hearing about Boston Sports Teams (How about them Tampa Devil Rays), the Boston Globe reported recently that Celtics owners--and health care VCs--Wyc Grousbeck and Mark Wan might be raising a venture fund aimed at sports business opportunities.

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Speaking of...

... blue chip health care firms that rose from the ashes of the VC-migration from life sciences, VentureWire Lifescience reported that Versant Ventures is closing in on $500 million for its fourth fund.

... the ongoing IPO crisis, Foundation Medical Partners may be benefiting from the successful IPO of CardioNet Inc. We asked one of the firm's partners about a new fund and he issued an immediate no comment, which suggests fund-raising is afoot. CardioNet is now trading at $28, btw, $10 over its offering price from its March IPO.

DotW: Broken Record

The news just keeps getting worse: the economy is bleeding jobs and the band-aid that is interest rate cuts will likely do little to stop the hemorrhage of foreclosures and late mortgage payments. While executives from the Big 3 drove to Washington in their green cars to beseech Washington for a bail-out, reports from biopharma land were equally depressing. (So much for a recession proof industry.)

Your broken record, bad news round-up sounds something like this: Sanofi Aventis announced it was cutting hundreds of sales reps in the US (the ax fell in France some months ago), adding to the growing list of pharmas scaling back on their commercial organizations. Meanwhile BMS laid off workers at its Dewitt manufacturing plant and the outlook for Merck remains...murky after this week's guidance update. (Maybe the company should team up with Schering-Plough to find a way to use Zetia as an alternative fuel source. Now that's innovation--and a way to get rid of excess inventory.)

As Big Pharmas struggle with their lack of research productivity, Goldman Sachs offers a ray of hope, according to the Financial Times: the London firm is apparently in talks to provide hundreds of millions of dollars of funding to a large pharmaceutical company--and it's not AstraZeneca--to create a hybrid R&D model built around the co-development of certain medicines. Hmm, could this be a step forward in the evolution of pharma's business model?

It's not just pharma that needs a new business model. Trouble appears to be brewing in the VC kingdom as well. Rumors continue to abound that limited partners--hit hard by redemptions--have asked various venture firms to delay capital calls while they right their alternative asset allocations. Meantime, Venture Wire is reporting that Sofinnova Partners, which managed to raise a significant portion of its 6th fund, did so with an increased number of LPs, suggesting that even when investors could be swayed to part with their money, they weren't willing to ante up as much as in prior years.

Tired of this monotonous drum beat? We are too. Thankfully it's time for...


J&J/Mentor: J&J is buying aesthetics leader Mentor for $31 per share--or $1.07 billion. They win this week's award for biobucks and curry favor for their recessionista outlook, as they aim to snatch up good assets on the cheap. Since September '08, Mentor’s stock has declined from around $28-per-share to just $16.15 the day before the Dec. 1 announcement. The tie-up makes a lot of sense, given that 90% of Mentor’s revenues come from its breast implant business, and the current plan is to incorporate Mentor firmly within J&J's Ethicon surgery division. Even before the effects of the sub-prime mortgage crisis were fully felt, aesthetic (and other elective, out-of-pocket) procedure volumes had begun to drop. In a depressed economy, Mentor’s large, diversified parent cushions it from the downturn, allowing it to build up its portfolio of office-based products for plastic surgeons and dermatologists—dermal fillers, skin care products, and lipoplasty products. J&J gets into a business that’s adjacent to other core skill sets—surgery and wound care—with good long-term growth prospects. Consolidation in the industry had already begun in early summer—when the industry saw the takeout of LipoSonix by Medicis Pharmaceutical, and the merger of Thermage and Reliant. Now, while shoring up Mentor’s defenses, the J&J acquisition removes a major consolidator from the aesthetics field, at a time when small companies in the space will have a tough time weathering the financial crisis--Mary Stuart.

Novartis/Evotec: Not every Big Pharma is going to Chindia to outsource its R&D. This week comes news that Novartis has teamed up with the Germany-based biotech player Evotec in an early stage research collaboration to identify and develop small molecule therapeutics. As part of the collaboration, which will run for three years, Evotec will be responsible for programs up through preclinical development, with Novartis taking over responsibility--and cost--for the project once the molecules enter human testing. The money certainly isn't huge--for it's cutting edge science, Evotec garners an undisclosed milestone payment and preclinical and clinical milestones that could exceed a whopping $28 million. (Novartis will also pay royalties on sales of any marketed products resulting from the collaboration.) But in these straitened economic times, that's not chump change either, providing the German biotech with important non-dilutive funding to drive forward its four clinical programs--including EVT 201, a partial positive allosteric modulator (pPAM) of the GABAA receptor complex for the treatment of insomnia. Jorn Aldag, president and CEO of Evotec, positively bubbled in a press release announcing the news: "We are excited to be leveraging our drug discovery expertise with such a world class company."

Cephalon/Alkermes: Cephalon and Alkermes parted ways on the future prospects for Vivitrol, a monthly injection for alcohol dependence launched in 2006. Alkermes announced Monday that it had acquired full commercialization rights to the extended-release injectable suspension formulation of naltrexone. The deal was nearly a wash for both parties: Cephalon will pay Alkermes $11 million to cover losses related to the product over the next 12 months, while Alkermes will transfer $16 million to the Bristol, Pa., firm to purchase manufacturing equipment. With its strong cash position--Alkermes has nearly $426 million in cash and cash equivalents currently--the company says it plans to continue marketing Vivitrol on its own, with a 12-month commercial strategy of increasing utilization among doctors who already prescribe the drug, streamlining product access and reimbursement, and enhancing continuity for patients transitioning out of the treatment setting. But driving adoption has been difficult, in part because historically the problem has not been recognized as a treatable disease. Alkermes' VP of Corporate Communications Rebecca Peterson puts it this way: "Standard operating procedure was not to use medication [to treat alcohol dependence]; that is changing over time." But even if doctors and payers are more willing to entertain the idea that alcohol addiction can be treated with a pharmalocologic agent, it's likely Alkermes will need every person on the 70 person Vivitrol commercial team it now controls--especially the 55 sales reps--espousing the message at detox centers in order to boost prescription sales. In "The Pink Sheet" DAILY, Peterson admitted that Vivitrol sales have not been "as robust as maybe we had originally expected," adding that the product's main challenge was not in the areas of reimbursement and payer acceptance.

NitroMed/Archemix: To be fair, this really ought to be characterized as a "No Deal?". News surfaced this week that Deerfield Management aimed to scupper Archemix's proposed reverse merger with struggling NitroMed by launching it's own bid--at a whopping $0.50-a-share-price--for the troubled Lexington, MA-based company. In donning the mantle of "black knight," Deerfield's managing partner James Flynn made of point of telling NitroMed shareholders that it has not been one to "wage contentious public debates." But he also insisted that the proposed NitroMed/Archemix tie-up, which basically exchanged NitroMed's cash and NASDAQ listing for a 30% stake in the newly merged entity, placed Deerfield in an "untenable position." "NitroMed shareholders have been allotted a scant 30 percent of the combined company in exchange for NitroMed's cash," he wrote in a letter filed with the SEC. By Deerfield's calculations, the $0.50-a-share price on the table represents a 200 percent premium to NitroMed's closing share price on Dec. 3. It's also approximately double the price of NitroMed's shares in late October, when the company announced the sale of BiDil to JHP Pharmaceuticals for $24.5 million in cash plus additional payments for product inventory. Deerfield's proposed price for NitroMed represents its own calculation of what the biotech would be worth if it continued to sell off the combo heart medication BiDil as planned and then wound down the company, distributing the cash to existing shareholders. Certainly, the news comes at a time when many private biotechs are looking at potential shell companies such as NitroMed as attractive acquisition candidates in order to access non-dilutive cash. Remember Replidyne? But as we've argued in previous posts, even successful companies such as Infinity and MicroMet have been hard pressed to pull off a successful reverse merger event. It's hard to say what's next for Archemix--the company is saying nada publicly about the news. Certainly it could face a tough and very public battle, one that leaves its new investor base less inclined to stick around in a turbulent market. It's possible the company could try the reverse merger route again, with a different troubled entity (We hear Cell Genesys has a lot of cash and little in their pipeline after the official termination of its deal with Takeda). Or maybe Archemix will opt to stay private--there's really no benefit in being public these days anyway--pushing onward with the roughly $20 million it has on hand.

Photo courtesy of Flickr user william kunz through a creative commons license.

Financings of the Fortnight Has Its Eyes On the A's

Our sister publication START-UP starts up every new year with The A-List, a review of the previous year’s Series A life-science financings, which we feel are an excellent proxy for gauging investor enthusiasm for new biomedical ventures and measuring the shifts in what’s getting funded, and who’s doing the funding. 

But we can’t wait for the end of the year to peek, so we’ve tallied year-to-date Series A financings using Elsevier’s Strategic Transactions. (Two weeks ago, we did the same with follow-on public financing.) The top-line result: In dollar terms, we’re on pace to equal 2010, a particularly glum year with $876 million total raised in Series A money. To match last year’s modest rebound of $1.1 billion raised, Series A funding must pick up with alacrity, a trend that’s hard to imagine as the Euro crisis continues to bubble and the U.S. loses its economic momentum from the spring. 

Here are the numbers: In the first half of 2012, 33 Series As across the biopharma, device, and diagnostic industries totaled $423 million. The majority of the first half’s total comes from the biopharma sector, mainly US and European companies. (24 financings, $345 million.) That’s just $30 million fewer raised than in the first six months of 2011 from the exact same number of transactions. So it’s fair to say biopharma isn’t lagging as much as the device sector. Still, biopharma numbers to date are not on track to reach the full-year 2011 biopharma figure of $887 million from 63 deals.

The average fundraise in the first half is $15.1 million, slightly higher than 2011’s full year tally of $14.1 million. But wait: the higher total is, ahem, warped by Warp Drive Bio’s $125 million investment from Third Rock Ventures, Sanofi, and Greylock Partners in January. Warp Drive is researching the medicinal properties of naturally occurring microbes with R&D support from Sanofi through a separate collaboration. It’s one of the most intriguing deals of the year so far, not just for the cash considerations, but for the unusual structure that gives Sanofi a nonexclusive option to acquire Warp Drive if certain milestones are achieved. At the same time, Warp Drive has the right to force a sale of the company if other milestones are met. It’s a brave new world when Series A-funded companies and their investors are locking in future acquirers. 

We’re also seeing a lot of solo Series As, a sign that the VC shakeout has left fewer viable syndicate partners for early-stage deals. Ten Series As were solo-backed, and the largest was Third Rock’s $41 million infusion into Global Blood Therapeutics, a firm developing candidates that alter key blood proteins, with an initial target in sickle cell disease. Third Rock is no stranger to solo A-rounds, notching SAGE Therapeutics, Blueprint Medicines, and Lotus Tissue Repair in 2011.

But the Boston and San Francisco firm also knows that good syndicates are hard to find: it joined Bessemer Venture Partners and Frazier Healthcare in a $10 million financing for Alcresta, which is working on a nutritional supplement that contains more digestible and absorbable forms of long-chain polyunsaturated fatty acids. Alcresta was the syndicate’s third go-round together, all with the same management team. The same phenomenon cropped up this year with the investment trio of Astellas Venture Management, InterWest Partners and Sutter Hill Ventures, who are now on their fourth venture together. It’s not rocket science for people who’ve made money together to revisit the formula, but the reduced pool of investors makes it all the more likely.

While oncology and peripheral vascular disease start-ups dominated the 2011 biopharma Series As, Series As the past six months were focused mainly on neurology, gastrointestinal, musculoskeletal, and metabolic disorder companies, which together made up 40% of the financing. Neurology led with seven financings bringing in $64 million, or 17% of the first-half dollar total and nearly a third of the deals. Four GI-related financings followed, while metabolic and musculoskeletal players had three deals apiece.

Biopharma Series A's By Therapeutic Category, January-June 2012

 

Note: The total number of deals is greater than 24 as several financings involve companies in multiple therapeutic areas.

SOURCE: Elsevier’s Strategic Transactions

Even though CNS start-up Cerecor’s $22.5 million round was shy of the $30 million raise the company had forecasted a year ago, the transaction topped the list as highest raise in CNS and third-largest Series A in the first half of 2012. Counting the second half of 2011, we’ve now seen 16 A-round neurology deals the past year, which perhaps holds counterbalance to Big Pharma’s well-documented exit from the CNS space.

On the device side, six Series A rounds raised $49 million. The dollars and number of deals lag the full-year 2011 total of $151 million raised in 24 transactions. In vitro diagnostics have tallied $27 million in three deals, slightly better than the 2011 pace, which finished with $48 million from 10 transactions. It’s worth noting that corporate venture played a role in three of the  biggest device and diagnostic Series As. Merck Serono Ventures along with KPCB and TPG took part in the first tranche of the Series A raise for Auxogyn, a company focused on infertility assessment using noninvasive devices that determine embryo viability. Novartis Ventures Fund led a $12.5 million first round for ImaginAb, with participation from Merieux Developpement (bioMerieux’s venture arm) and other investors. ImaginAb is developing engineered antibody fragments for diagnostic imaging, initially in cardiovascular diseases. And the molecular diagnostics company Xagenic pulled in $10 million in a  January round that included Dutch diagnostic giant Qiagen.

Now if you'll excuse us, we're shifting our attention away from data dives and toward springboard and platform dives. But first, many thanks to the Olympian effort of Amanda Micklus and Maureen Riordan for this week's column. It's time to raise the torch for another edition of...

  
California Institute for Regenerative Medicine: California's state agency that funds stem-cell and other regenerative medicine R&D announced July 26 $150 million in grants for translational projects that are expected to file an IND or complete an early-stage clinical trial within four years. Only one of the awards goes to a for-profit entity, the San Francisco Bay Area firm StemCells Inc., which wants to use stem cells to treat spinal cord injuries in the neck both in patients with new injuries and in patients who have been paralyzed for months or years. The other six awards are going to academic or institutional researchers and range from $14 million to $20 million per project. The lack of private sector recipients underscores the challenges of turning stem-cell-related research into product candidates. Three years ago, CIRM handed out $225 million in grants to move 14 preclinical projects toward the clinic; only one of the 14 was based at a for-profit company. -- Alex Lash


Bluebird Bio: Once an area that drew great skepticism, gene therapy is now drawing big money. Cambridge, Mass.-based start-up Bluebird Bio raised its third big round of funding since the beginning of 2010, tapping a diverse syndicate of investors for $60 million in Series D money that will support ongoing trials of gene therapies for rare diseases. It comes just as European regulators have approved the first gene therapy product in Europe, another strong sign of the advances the field has made the past decade. The Bluebird deal includes contributions from public and private growth investors Deerfield Partners and RA Capital, hedge fund operator Ramius Capital Group, and two unnamed public investment funds, as well as strategic backer Shire. They join returning venture firms ARCH Venture Partners, Third Rock Ventures, TVM Capital, and Forbion Capital Partners. Bluebird Bio raised $35 million in a Series B round in early 2010, then was slated to take $30 million in two tranches of Series C capital in an April 2011 agreement. The startup, however, held a call option which it never exercised on the second tranche; its VCs instead put that $15 million into the Series D round at a higher price, according to Bluebird CEO Nick Leschly. The firm plans to conduct a Phase II/III study of a treatment for childhood cerebral adrenoleukodystrophy and a Phase I/II study of a beta-thalassemia and sickle-cell disease therapy. Both are built on Bluebird’s lentiviral technology, in which a patient’s own bone marrow stem cells are genetically modified and returned to the patient, potentially obviating the need for a transplant. – Paul Bonanos

Alimera Sciences: The publicly-traded ophthalmic company said July 18 it has grossed $40 million in a sale of preferred shares to Palo Alto Investors, Sofinnova Ventures, and New Enterprise Associates. The trio gets 1 million preferred shares and warrants to buy 300,000 more, with each preferred share convertible into 13.75 common shares. Investors can trigger a conversion at will, outside of a lockup period and other constraints. The preferred shares entitle their holders to dividends and other distributions pro rata with the common stock, as well as unspecified downside protection. The shares can also convert to common if Alimera’s lead product gains regulatory approval or if Alimera raises additional equity at predefined share prices, Sofinnova partner Garheng Kong told the IN VIVO Blog. Kong was among Alimera’s original investors at Intersouth Partners and is now one of the partners investing Sofinnova’s new $440 million life-sciences-only fund, up to 25% of which could go toward positions in public biotech companies, Kong said. (Alimera is the fourth investment from the fund.) Alimera’s lead product is Iluvien, an eye implant that delivers drug up to 36 months to treat vision loss associated with diabetic retinopathy. It is approved in France, Austria, Portugal, the U.K., and of this week, Germany. The US FDA asked for more clinical data last November, the second time it has issued a complete response letter for Iluvien. No new PDUFA date has been disclosed. The private stock sale must be approved by a majority of common stockholders; as of July 17, holders with 56% of the common stock had agreed to vote in favor, according to Alimera. – A.L.

Durata Therapeutics: With a handful of biotechs knocking on the IPO window this fortnight, only one as of this writing has gotten through. Antibiotic developer Durata on July 18 raised $68 million by selling 7.5 million shares at $9 each. The firm missed its original goal of $75 million by pricing below the intended $11 to $13 per share range, but it sold more shares to bridge part of the gap. Existing investors Domain Associates, New Leaf Ventures, Aisling Capital, Sofinnova Ventures and Canaan Partners agreed to buy 3.8 million shares, more than 50% of the offering, to get the deal done. That’s par for the course these days. It’s rare for a biotech to go public without insider participation, as we detailed in February. Nothing’s changed since then. If biotech backers want to reach liquidity, they’ll more than likely need to help get the glass half-full. Investors are adding not subtracting Durata shares, but their holding times to date have been relatively short. Durata was founded less than three years ago from the ashes of Pfizer’s nearly $2 billion acquisition of Vicuron Pharmaceuticals. In Pfizer’s hands, one of Vicuron’s main products, the antibiotic dalbavancin for skin and soft-tissue infections, received three rejections from the FDA. But with the agency rolling out new regulatory guidelines for certain antibiotics, Durata feels it can do it right this time and recoup the rewards of bringing a once-weekly intravenous gram-positive antibiotic to market. It is currently conducting two Phase III trials. BofA Merrill Lynch and Credit Suisse led the underwriting team, which has the option to buy 1.1 million additional shares for 30 days following the IPO. – A.L.

CoDa Therapeutics: The San Diego wound-healing firm is the first to benefit from venture firm Domain Associates’ new strategic alliance with the Russian sovereign fund Rusnano. On July 24, Domain said CoDa has completed a $40 million Series B financing, with contributions split equally between Rusnano and a Domain-led syndicate of CoDa’s current investors. These include the Australian VC firm GBS Ventures and the New Zealand firm BioPacific Ventures. Domain and Rusnano said in March they were each committing up to $330 million over the next three to five years to fund Domain portfolio companies. CoDa came first because it needed financing, according to Domain partner Brian Dovey. It is in Phase IIb trials for a wound-healing compound aimed at venous leg ulcers and in Phase II trials for the same compound for treatment of diabetic foot ulcers. Domain companies that receive Rusnano funds are obligated to license exclusive rights to sell their products in Russia and the CIS regions to NovaMedica, a new Russian company that Rusnano and Domain are spending up to $190 million to create. The partners claim it will be Russia’s first fully integrated, innovative domestic drug firm, and will be structured as a joint venture between Rusnano and Domain. As a condition of its Series B financing, CoDa has licensed exclusive rights to its lead product and related technologies in Russia and the CIS to the new company, in exchange for undisclosed royalties on sales. Domain is one of several U.S. life sciences venture capital firms that are working with Rusnano, a five-year-old $10 billion sovereign fund charged with helping Russia jumpstart domestic high-tech industries, and as profiled this spring in START-UP's Capital Matters column, it has been aggressive making investments in Western biotech, both directly and through other funds such as Domain and Burrill & Co.  – Wendy Diller

Photo courtesy of the International Olympic Committee.

Financing Deal of the Year Nominee: Rusnano/Domain and CoDa Therapeutics

It's time for the IN VIVO Blog's Fifth 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™.

How about voting for a deal that turns conventional wisdom on its head.

The biopharma industry has looked to emerging markets for near-term revenues and cost efficiencies, but not for scientific or commercial innovation. An umbrella deal between Rusnano, a five-year-old $10 billion Russian sovereign fund, and the US venture capital firm Domain Associates, announced in March, and a subsequent tie up with Domain portfolio company CoDa Therapeutics, goes some way toward erasing those misperceptions. At the same time, the partners’ tie up reflects sovereign funds’ increasingly important role in shaping the life sciences industry.

And it does so in such a creative, enticing way that Russia, not typically known as a life sciences innovator, is generating excitement among US VCs and biopharma companies. Rusnano is linked to Russia’s Pharma 2020 program, which is already impacting Big Pharma’s development decisions, as indicated by their deal-making activities in the country. At the same time, Domain’s commitment to the joint effort has also been intense, but the relationship is worth the effort because it’s potentially so lucrative, according to Domain partner Brian Dovey.

The size and structure of the partners’ deals are noteworthy: Rusnano, which has a mandate to broadly invest in nanotechnology around the globe, and Domain, the quintessential US VC, are investing up to $330 million each in Domain’s portfolio life sciences companies and up to $190 million to build a manufacturing facility in Russia for the products that would be sold in Eastern Europe out of the Domain companies.

The aim is to “spur modernization of the Russian healthcare market” by providing that country, along with Eastern Europe and the former Soviet Commonwealth of Independent States, with next-generation pharmaceuticals, medical devices and diagnostic products, Rusnano executives said at the time of the announcement. Under the agreement, roughly 20 existing and potentially new US-based Domain portfolio companies will benefit from the collaboration, and the partners can also co-invest in third-party technology.

In July, after months of review, the partners announced their first beneficiary: Domain’s wound-healing biotech CoDa Therapeutics. The San Diego-based company is licensing rights to its technology in Russia and the CIS to the new Domain/Rusnano-backed Russian pharma company. In exchange, Domain, along with current CoDa investors GBS Ventures and BioPacificVentures, and new investor Rusnano, committed nearly $40 million to CoDa, closing a Series B financing that began in 2011.  The VC syndicate and Rusnano are each contributing equal amounts. CoDa, as with all Rusnano life sciences investments, has to establish R&D operations in Russia as well.

Domain isn’t the only US investor Rusnano is working with, nor is Rusnano the only tool the Russian government is working with to entice US venture capitalists and biotech entrepreneurs. It’s also established a business school and life sciences incubator, Skolkovo, in a collaboration with Massachusetts Institute of Technology, and has other stimulus programs aimed at building a biotech industry. But by bringing in US innovators and offering them the carrots they need most: attractive financing, potential market opportunities, and acknowledgement of American’s entrepreneurial savvy, Russia may be demonstrating a new model for building a much needed ecosystem.

--Wendy Diller

image via

$80 million upfront? About Average

So Synta’s PR firm were pushing today’s deal with GlaxoSmithKline at us as “one of the biggest product deals this year” and indeed “among the largest in the industry”…and it’s true, the $80 million cash up front deal for an anti-cancer compound that’s entering Phase III isn’t at all bad.

But $80 million up front isn’t off the scale, either. In fact, it’s looking about average these days for an asset on the cusp of Phase III—Merck in July paid Ariad $75 million up front for its cancer compound, Novartis put the same on the table for Antisoma’s similar-stage oncology asset in April, and outside of cancer, GSK paid $75 million for XenoPort's Phase III RLS compound in February, Shire that same magic figure for Renovo’s late Phase II wound care treatment in June.

Indeed, $80 million even begins to look measly alongside the $102 million that GSK forked out for Genmab’s Phase III antibody, or the $165 million that Johnson & Johnson coughed up for ex-US rights only to Vertex’s then-Phase IIa Hepatitis C gem.

Ok, so these were outliers. Genmab’s contained the antibody premium; Vertex’s was special, too. But the point is, three-digit up front payments for late-stage assets will soon be common, so don’t waste the hyperbole.

And don’t forget to look behind the curtain, either. Milestones: “Up to $1.01 billion in potential payments," our PR friends say. We all know this trick, though. That’s the if-everything-goes-to-plan-across-all-indications-and-the-moon-goes-blue (or biodollar) figure. Think $135 million in pre-approval milestones.

This, according to Synta’s CEO Safi Bahcall, is more than enough to cover the costs of the compound’s Phase III trials and US submission, which Synta stays in charge of.

And that—control—is the bit that’s interesting in this deal; more interesting than the amount of cash that’s changing hands (most of which GSK can capitalize, incidentally--so it doesn't immediately hit the P&L and thus crimp any R&D budgets). Synta will pay for and finish Phase III, and take the compound past the US regulators for metastatic melanoma. That allows the biotech to boast about the “confidence GSK has in our ability to conduct a pivotal trial and register the drug,” as Bahcall explained. But it also allows GSK to hedge risk and be absolutely sure the compound gets past regulators in the first indication before committing any of the $300 million of potential commercial milestones, or much of the $450 million in potential development and regulatory milestones in other cancers.

Still, Bahcall’s right in saying that “it’s unusual, given GSK’s experience, that they allow us to take the lead” in development and regulatory. Typically Big Pharma would want to take the reins, re-do the Phase III trial design and start talking to regulators. (Especially, you might think, given recent biotech casualties at FDA like the one that hit GPC Biotech when it tried to get satraplatin past.) Not this time—no doubt the compound’s fairly straightforward clinical trial design, with an objective end-point of progression-free survival, helped.

And if Synta gets the drug past regulators, it gains credibility in the next stage of the relationship: co-commercialization. That feature’s about average, too, for deals these days—many biotechs want to have their own sales forces, despite all the future problems and complexities and costs those forces bring.

In reality, pharma-biotech co-promotes are usually a nightmare, as we discussed in this IN VIVO feature. But Bahcall’s confident that the partners have learnt from what’s gone before, with specific prescriptions and conditions for how the co-promote would work, plus measures to ensure that Synta doesn’t lose out on the tiered profit share, thought to start at 40% and rise to 50%, based on annual net sales. (Profit shares can bite small partners if pharma ramp up their cost of sales to reduce what’s left to distribute.)

There are also provisions in the deal, according to Bahcall, allowing for Synta to assume more responsibility for commercialization in the future—once the drug has been out there for a couple of years, for instance (IN VIVO Blog speculation, not his comment). In other indications, the partners will share development in and outside US, with Synta eligible for double-digit royalties on ex-US sales.

Don't get us wrong: for all our talk of 'average', Synta’s got a good deal, all the more so given it’s the company’s first. Shareholders started celebrating earlier this week on deal speculation. They needed a party; Synta’s shares have done very little since its February IPO.

Bristol Says Buh-Bye to Formula for Stability, Hello to Buyback

It's no secret that Bristol-Myers Squibb has spent the last couple years solidifying its stance as a pure biopharma play. We've documented the moves as they've happened: spinning out orthopedics (Zimmer) in 2001, jettisoning OTC, medical imaging, and wound care (Convatec) in 2005, 2007, and 2008 respectively, and inking deals to divest variety of emerging markets businesses this year and last.

And we like a contrarian argument--BMS is zigging toward focus as the rest of the industry zags toward diversification. Is the company better positioning itself for sale? Going all in on the only thing it thinks it does well to try to stick it out for the long haul ahead of a monster patent cliff? Whatever, it's ballsy, and we think they're all the more interesting to watch because of it.

And we really thought Bristol was onto something interesting when they IPO'd Mead Johnson earlier this year. Back then they convinced us of the merits of offloading a smallish chunk of the nutritionals unit that it is now essentially using to fund a stock buyback. Let The Pink Sheet explain:

In the stock swap transaction, Bristol investors who choose to tender their shares will receive approximately $1.11 of Mead Johnson shares for every $1 of Bristol. Bristol won't receive cash for the deal, but the transaction will be accretive to earnings in 2010 by reducing the number of Bristol's shares outstanding, thus increasing earnings per share. The exchange offer will also be attractive to shareholders because it is expected to be tax free.

So Bristol's 170 million Mead Johnson shares, if all exchanged, would give the biopharma company a ten-cent pop in EPS next year. Plus with all those shares retired, the company will improve its cash flow by paying out $350 million less in dividends (er, that's provided it doesn't raise its dividend on the remaining shares). MJN shares are way up since the IPO, so why not take advantage of that valuation bump and allow management to focus on growing the core business and build on the 'string of pearls' strategy with the $10 billion it expects to have by year end?

Because with or without this buyback BMS has that $10 billion. And management focus was more or less guaranteed when it sold 13% of the company in February 2009. What BMS loses when it takes its Mead Johnson stake down below 50% is the ability to consolidate the unit's sales and earnings. It also loses a relatively strong emerging markets business (Mead's second largest market is China).

The move prioritizes short-term gain over long-term stability. Since BMS sold Zimmer in 2001 the orthopedics company's value has doubled while BMS's has more than halved. The IPO strategy would have worked well there--BMS could have held on to some of that value and cash flow--and it seemed to be working well with Mead Johnson. The cash flow gains from this buyback are a band-aid on the wounds inflicted by the loss of exclusivity on Plavix and Avapro (40% of 2008 revenues). Why not pursue some middle ground while keeping a majority stake in the company?

Back to the 'Sheet for Bristol CEO Jim Cornelius' answer:

"We've always said that one of the main considerations in retaining our ownership position in Mead would be our confidence in the strength and sustainability of our biopharma business in 2013 and beyond," Cornelius said. "The split is a sign of that confidence, as we have made excellent progress in advancing our biopharma business in addition to the new product portfolio."

We aren't arguing that his confidence is misplaced. But BMS could continue to strengthen its biopharma business even with Mead's as an outrigger.

image thanks to flickr user joel p under creative commons license

Pharmaceutical Strategic Alliances: The Advantages of Scale, American Soccer, and the Cost of 'Virtual Critical Mass'

We concede that our blog post title is a little confusing but bear with us. This morning during one of the first sessions of our Pharmaceutical Strategic Alliances meeting we held a debate around the question of whether supersizing pharma provides a compelling strategic advantage in R&D.

Let us say right away that even before various points of view were aired, the bigger-is-better crowd on stage (Merv Turner from Merck & Co., Thomas Hofstaetter from Wyeth, and Elsevier's Roger Longman) out-numbered the small-is-beautiful gang (Elsevier's Melanie Senior and Ipsen CEO Jean Luc Belingard; as a consultant it was noted that fellow panelist Raj Garg from McKinsey would argue for both sides), and the conversation for the most part reflected that.

The discussion was interesting and touched on many points--some outside the scope of R&D, but all on the Big/Small topic: how to maintain focus in large organizations, various models for creating smaller units within larger organizations, externalization, regionalization, etc. Talk eventually wound around to how smaller companies could hope to compete in particular therapeutic spaces without necessary size, and really maximize the value of their medicines for shareholders and patients.

The Big Pharma contingent, not unsurprisingly, argued that without the necessary critical mass both industry and patients lose out, particularly in primary care indications. Belingard countered that there was plenty of 'virtual critical mass' out there--development and commercialization partners can be found, though this comes at a cost--provided you had the right asset (he used the example of Ipsen's GLP-1 analogue). The panel agreed, though some argued this cost is in some cases prohibitive even as such moves act as a hedge against development risk.

Merv Turner made the point that especially in primary care you needed size to absorb the shocks common in the pharmaceutical business--the Vytorins and the Vioxxes--to which Melanie raised the point that in any case isn't pharma moving away from its primary-care centric business model. Diseases, from cancer through heart disease, after all are increasingly recognized as multifactorial, heterogenous groups of related maladies, and in the future may be treated as such.

As he is wont to do, Turner, head of strategy at Merck, came up with a soccer (football/fussball, whatever) analogy.

"You can reduce cardiovascular mortality by 50%" by using statins, he said. "That means 50% cardiovascular disease is unsatisfied. Is that 50 different small diseases or one large one? Personalized medicine is like soccer in the US: it's the game of the future and always will be."

To which we say, somewhat sarcastically: you just wait til Philadelphia Union takes the field next year ...

Check out IN VIVO Blog, 'The Pink Sheet' DAILY, and our various twitter feeds (@invivoblogellen, @invivoblogalex, @invivoblogchris, @ebiwendy, @pharmalot) for more missives out of PSA.

Deerfield to Nitromed: Not So Fast, Not So Cheap

A few weeks ago we asked aloud why the investors in a public shell company would benefit from a reverse merger with a privately held biotech company.

Today, Deerfield Management--a 12% stakeholder in Nitromed--said it decided it would definitely not benefit from Nitromed's decision to become a public shell for Archemix by divesting its only asset of consequence, the combination heart failure drug Bidil. Our Pink Sheet Daily coverage of that reverse merger deal is here.

And Deerfield has a solution: it will buy Nitromed itself, for $0.50 per share, what Deerfield figures Nitromed would be worth if it sold off Bidil as planned and wound down the company and distributed the cash to shareholders. By Deerfield's calculations that's approximately 100% above the price of NitroMed's shares prior to the announcement of the Bidil asset sale and a 200% premium to the shares' closing price on December 3rd. (See left, click to enlarge.)

Deerfield Managing Partner James Flynn's letter noted that Deerfield has always remained a passive investor during its 15-year history, and not one to "wage contentious public debates." But:

"Unfortunately, the decisions of the NitroMed Board have placed us in the untenable position of neither being able to sell our shares at a reasonable price, nor receiving any value for the company's assets which are being entirely divested. Instead, the Board has determined to sell all of the BiDil assets and apply the proceeds of that sale, together with existing cash balances, for the benefit of a company that will be 70% owned by shareholders of Archemix."

Flynn goes on to note that Archemix, as a company whose lead asset is in Phase I, would have to break the mold for Deerfield and other Nitromed investors to benefit.

"NitroMed shareholders have been allotted a scant 30% of the combined company in exchange for NitroMed's cash, implying a value for Archemix of approximately $100 million. There are virtually no examples of public biotechnology companies with only Phase I data which have a comparable economic value today. In fact, we believe that in the current financing environment a majority of these companies have negative enterprise values. Even looking at biotechnology companies with credible products in Phase III development targeting large markets and retaining full economics, a high percentage have economic values lower than that proposed for Archemix."

After our post a few weeks ago we spoke with a variety of people about the up- and down-sides to reverse mergers from all perspectives--the private biotech, it's investors, and the public shell investors. Let's focus on the latter group--we think there is consensus on why private biotechs and their backers go after these deals (recall that Replidyne had more than 120 suitors for its cash and Nasdaq listing).

Flynn notes in his letter the basic argument against: significant dilution now, next to zero liquidity now and post-merger, and near-certain further significant dilution down the road when more cash is needed to push Archemix's projects through the clinic.

He also notes potential conflicts of interest:

"The person conducting the negotiations had the choice of losing his job if shares of NitroMed were sold or to become the CEO of a new company if a transaction were structured to keep the cash in the company. And, we understand, several members of the NitroMed Board have economic interests in Archemix."

Well, then.

But what about the upside? Archemix is certainly a well-funded and well-managed firm that in most markets would likely have pulled off its attempted IPO; it boasts near-exclusive access to therapeutic aptamers, a technology platform with potential to combine the best features of small molecules and antibody therapeutics; Nitromed shareholders--most of them--mightn't have had the opportunity to invest in Archemix, a private company, at any price without a reverse merger deal. One observer put that last point to us this way: "When I put my money into a company, I don’t put it in saying ‘if that asset fails, i want my money back’ ... if I invest in the management and the assets, then I’m willing to take their recommendation, they have access to more deals than I do."

Deerfield apparently sees things differently and is ready to cut its losses in a once-promising investment. Despite its better efficacy in African American patients, BiDil has proved a commercial disappointment; in late October, the company announced it had sold the business to JHP Pharmaceuticals for $24.5 million in cash and additional payments for product inventory, setting up essentially a Nasdaq-traded cash shell ripe for a reverse merger. Competition for NitroMed's estimated $35 to $40 million in cash was reportedly fierce, but Archemix ultimately won the day.

If Deerfield has its way, what next for Archemix? The company has raised $105 million from SV Life Sciences, Prospect Venture Partners and Atlas Venture and others since foundation in 2001 and has a variety of strategic alliances with the likes of Merck-Serono, Takeda and Lilly. It will probably have about $20 million without NitroMed's dowry.

Could it raise more cash privately? Probably, but the dilution would be tough to swallow. Another shell? The clock is ticking.

2013 Deals Review Finds Spec Pharma, Bolt Ons Dominated M&A

 

As the door shuts on 2013 and we reflect on the year’s biopharma M&A activity, what’s most noteworthy is the activity of specialty pharmaceutical and big biotech companies, which supplanted Big Pharma as the year’s most aggressive buyers. An optimist might argue that industry’s largest players are savvy avoiders of overvalued assets; another possibility is that they’re simply losing the battle to acquire tomorrow’s growth-drivers.

Amgen Inc.’s $9.7 billion (net of cash) purchase of Onyx Pharmaceuticals in October was the industry’s largest of the year. It reflected the value Onyx built up over years as it grew a successful R&D and commercial operation, and, most notably, the potential of its key asset, Kyprolis (carfilzomib), which gained U.S. approval for treatment of multiple myeloma in July 2012.  After receiving the offer in June 2013, the biotech tried for several weeks to push up Amgen’s original proposed price of $120 per share ($8.7 billion) and finally agreed to a price of $125 a share. Analysts had predicted that Onyx would get $10 to $30 more per share than the original offer, but uncertainty surrounding Kyprolis’ peak potential kept buyers’ enthusiasm in check.

Of 92 biopharma-related M&A deals that closed in 2013, nearly 15% – including half of the top ten deals by upfront price – involved specialty pharma buyers. Of these buyers, Valeant International Inc., Endo Health Solutions Inc., Opko Health Inc., and the much-reconfigured Elan Corp. PLC were particularly active, with each pursuing two or more acquisitions. 

Valeant, Perrigo Co. and Actavis PLC were the top three spenders, while Valeant’s acquisition of privately held Bausch & Lomb for $8.7 billion came in as the industry’s second largest acquisition of the year. B&L will continue to operate as a separate subsidiary within Valeant, which has led the way within the industry in favoring financial efficiency over R&D innovation as a driver of M&A. Valeant in April also acquired the mid-sized dermatology-focused pharma Obagi Medical Products Inc. for $418.4 million.

Deals Of The Year

Our editors have selected what they view as the most significant and intriguing deals of 2013 in three categories – in addition to M&;A, we’ve included alliances and financings – and invite readers to vote on their favorites. Please view profiles of our nominees at http://pages.elsevierbi.net/DOTY/2013.  Polls are open until noon ET on Jan. 7.

Perrigo and other less traditionally visible buyers also reflected the strength of specialty pharma companies. Gastroenterology-focused Salix Pharmaceuticals Ltd. is in the process of buying specialty pharma Santarus Inc. for $2.1 billion, while the latter, in a surprise move, bought Elan for $8.3 billion. 

Also notable was the complete absence from M&A of some of the industry’s biggest companies; Merck & Co. Inc., Forest Laboratories Inc., Novartis AG, and Pfizer Inc., among others, were nowhere to be found among buyers. Those that did surface didn’t make huge waves. Bayer AG’s $2.4 billion proposed acquisition of its Xofigo (radium-223 dichloride) partner Algeta ASA in December consolidates ownership of a potential blockbuster;  AstraZeneca PLC’s smaller acquisitions of fish-oil specialist Omthera and respiratory company Pearl Therapeutics were so-called ‘bolt-ons’ that added near-market but me-too products to its portfolio.

About 10% of acquisitions, or nine, involved rare disease companies. In one of the year’s biggest deals, Shire PLC announced in November that it is buying rare disease company ViroPharma Inc. for $3.3 billion on ambitions of becoming a leading rare disease player. In January, Shire also acquired LotusTissue Repair, which focuses on wound care and dermatology, for $49.3 million upfront and another $275 million in potential earnouts.--Wendy Diller

Credit to the PAXsims blog by Rex Brynen for the image