Thursday, July 16, 2009

Financings of the Fortnight: Summer Madness

Welcome to a new regular post on IN VIVO Blog where we'll do our best to analyze the biopharma fundraising scene on an every-other-week basis, paying special attention to a handful of deals that particularly float our collective boats or are indicative of financing trends as we see them. Public, private, equity, debt, vanilla, creative, Series A, IPO (heh, sure), whatever.

This isn't meant to be a collection of every financing over the past two weeks (you can look those up in our Strategic Transactions database, you know); we're happily going to ignore some. Forgive us the alliteration but yes we're going to call it Financings of the Fortnight ('financings of the every-other-week' just didn't have that IVB zip to it).

As it happens in this inaugural edition, we're ignoring quite a few! Whatever the reason, summer madness, perhaps, life sciences investors have been active these past couple weeks, doing all manner of financing deals.

Our favorites are below, but first lets talk about Vertex and its for-sale telaprevir biobucks.

Oh hey look up there, it's a European milestone; looks like one of Vertex's. What would you pay for that sort of thing anyway? Sure it's big and looks nice, but you might get tired of it sitting around in the living room. Too big to be a paperweight, too small for a Stonehenge starter kit (we'll get back to that). A risky proposition. And believe it or not, we asked around. A lot of people we spoke with think we're not going to find out in a hurry.

Why? Because a deal is far from certain. For a typical royalty stream buyer--the kind of investor who might be attracted to this kind of revenue monetization deal--it's just too binary, too risky. We talked to a couple about Vertex's announcement and they suggested that reaching back into the value chain beyond, say, a registration-stage project was much more risky than their typical deals. But they also saw the logic: the markets just aren't recognizing the kind of value that royalties and milestones add. In particular royalties of course, which are more or less predictable when a product hits a certain level of maturity. But milestones too: whatever the odds you place on telaprevir making it to market in Europe those milestones will be worth more than $0.00--but in many cases investors ignore incoming revenue from royalties and risk-adjusted potential cash from milestones when valuing companies, so those companies sell it. We went into this in-depth here.

So we get why Vertex wants to sell--everyone needs cash, and the market doesn't reward you for these future payments. And we think telaprevir has a better-than-typical-drug shot at reaching the market. But what will they get for the stone? A couple dealmakers we spoke to said, essentially, not much. Or that they'd be surprised if Vertex's minimum wasn't going to be higher than an investor's maximum. "I would guess they wouldn't get more than one third the potential value," said one executive. "Probably less than that."

If the kind of investor that might take a look at a deal like this, a hedge fund, say, is looking for a high multiple return then unless the price was quite low it wouldn't be worth the risk. But what might be intersting--and here's where we get back to Stonehenge--would be lots of different milestones, a basket of diverse but relatively realistic biobucks IOUs. Say something with a combined potential value of a billion dollars. There the upside could be huge. "That might be worth a $200 million bet for a hedge fund," said the executive. Mmmm, tasty bio-derivatives. No way that ends badly!

We also raised the question about whether the sale of milestones or royalties decouples a company's incentive from its partner's incentive, and whether the kind of milestone monetization we're looking at here, if successful, could prompt deal lawyers to toughen up contracts with language about what a biotech could and could not do with future payments. Most people we talked to thought that would not happen.

Anyway, we digress. Welcome to ...

Viamet Pharmaceuticals: In a clear example of the increased participation by Big Pharma venture groups in early-stage biotech financings, Viamet Pharmaceuticals landed $18 million in a Series B round co-led by Novartis Option Fund and Lilly Ventures, both first-time investors in the company. According to its Form D filing, Viamet has initially sold $10 million in stock to the investor syndicate, which includes another corporate VC arm Astellas Venture Management, Intersouth Partners, Hatteras Venture Partners, and Lurie Investment Fund. The company, founded in 2005, is looking at validated metalloenzyme targets in cancer, inflammation, and infectious diseases to build safer and more effective and selective inhibitors. Its Metallophile platform generates analogues of existing metalloenzyme blockers--apparently a fairly uncommon drug target, according to Viamet, which says only 10% of marketed products are metalloenzyme inhibitors--that can bind better to metals such as zinc and iron. The Series B brings Viamet’s total money raised to approximately $25 million. For the past several years, Novartis' family of venture funds have stood out in corporate venture capital, investing in around 59 transactions since 2005. Lilly Ventures hasn’t been as active, only participating in approximately 18 fundraisings during the same time period (which is actually on par with the activity of other corporate VC arms with the exception of Novartis and to a lesser extent GSK’s SR One). But in the past few months Lilly Ventures has stepped up its biotech investments--in addition to Viamet, the firm has also recently participated in the D rounds of contrast agents developer Avid Radiopharmaceuticals and Aileron Therapeutics.--Amanda Micklus

Intellikine: The PI3k space continues to attract attention and money. On July 8 Intellikine announced a structured fundraising that could bring in up to $51 million ($28.5mm up-front) from round-leader Novartis Bioventures (there they are again!) and other new backers U.S. Venture Partners, Biogen Idec and FinTech Global Capital; founding investors Abingworth, CMEA, and Sofinnova joined in the fun. We last covered PI3k on IVB when Exelixis inked a big deal around the target with Sanofi-Aventis and noted then the $30mm that Calistoga had raised to finance its efforts around that particular signaling pathway. Intellikine's lead, INK128, a selective TORC1/2 inhibitor, should be in the clinic within 12 months.

XenoPort: On July 8 XenoPort raised $44.8 million in a public offering of 2.5 million shares offered at $19/share, a price $2.50 below its Tuesday July 7 close. The below price offering spooked the market, sending the stock price down more than 11%; while shares have rebounded slightly to around the $20 mark, the price is a far cry from the company’s 52-week high of $51.42. For investors, it seems the general attitude toward XenoPort is wait and see. Unfortunately that’s the same attitude potential partners are adopting. It’s looking more likely that the Santa Clara, CA-based biotech will overcome setbacks associated with its gabapentin prodrug, XP13512, being developed for diabetic neuropathic pain and restless leg syndrome. Last fall, XenoPort and GSK withdrew their NDA for the RLS indication after regulators requested that data from one study be reformatted. In January the partners resubmitted their NDA package and news broke in March that FDA had agreed to review the extended release medicine’s application. That was welcome news for XenoPort, triggering a $23 million milestone payment from GSK, and likely helped ease the sting of negative news one month later, when Phase II trials in diabetic neuropathy failed to meet their primary endpoint. Unlike many other biotechs, XenoPort is relatively well capitalized, with $143 million in cash and equivalents at the end of 1Q09 and a net cash burn for the year estimated to be $55 -$65 million. But with the company’s Phase II GERD drug, XP19986 still unpartnered and its recent decision to co-promote XP13512 in the US, the company needs all the cash it can get. The July offering is the second time in less than a year that the company has raised money: in December the company raised nearly $40 million in a direct offering that included Maverick Capital and Venrock Healthcare Capital.--Ellen Licking

Zosano: A 2006 spin-out from Johnson & Johnson’s Alza affiliate, Zosano recently raised $30 million in a Series B from existing backers Nomura Phase4 Ventures, New Enterprise Associates, HBM Bioventures and ProQuest Investments. Initially staked with $90 million in 2006 on the promise of its ZP patch and applicator system (the system and company both were called Macroflux at the time), Zosano will use the cash to fund Phase III development of ZP-PTH, its transdermal patch version of Eli Lilly’s bone-building Forteo, currently the only anabolic therapy approved for osteoporosis. That synthetic parathyroid hormone tallied $779 million in worldwide sales last year and is priced a premium to competing bisphosphonates, which only slow the rate of bone loss. Fremont, Calif.-based Zosano sees a strong opportunity for its needle-free, rapid-delivery version of the drug and the $30 million will Phase II clinical supply and provide a financial cushion while the company looks for a partner. “What we’re looking for is someone who will be a strong partner in all elements … commercialization, manufacturing, scale-up, clinical, regulatory,” CEO Gail Schulze said.--Joe Haas

unadulterated version of image by flickr user mackius used under a creative commons license

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