Thursday, December 04, 2008

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.

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