Thursday, August 27, 2009

Financings of the Fortnight: Throwing in the Towel?

Amidst the general thirst out there for capital to support R&D we can think of one biotech that isn't itching to get into IVB's Financings of the Fortnight: Cardiome.

Four-and-a-bit months on from their $60 million up-front deal with Merck & Co. for a mix of rights to the oral and IV forms of their atrial fibrillation drug vernakalant, the company seems to be making good on some promises made while the ink was still damp on that alliance agreement. On Tuesday the biotech said it was planning to buy back $27.5 million worth of its own shares.

Now, there are arguments in favor and against doing share buybacks, but those typically relate to cash-rich and cash-flow-rich Big Pharmas or Big Biotechs that have spent billions upon billions to buy back their own stock. We tend to--having been convinced by a guy who has forgotten more about biotech and pharma banking than we'll ever know in the first place--fall in the 'against' camp.

But none of those arguments even apply to loss-making biotechs. How could they? Biotechs spend money to discover and develop drugs. Lots and lots of money. Bank heist kind of money. Richie Rich money. Some biotechs make money, sure, but small companies with drugs in Phase II tend to rack up losses, at least for a long while, and Cardiome is no exception (although that loss has narrowed significantly since it offloaded its development expenses onto Merck).

After Cardiome inked its Merck deal in April, CEO Doug Janzen said something that suprised us, though. Janzen talked about how Cardiome wanted to de-risk its business from a financial perspective given the awful financial times and the high cost of capital. Can't argue there. He noted that Cardiome was willing to sacrifice a bit of green on the front end to get Merck to take care of the full development expenses. OK, makes sense.

But then the needle came off the record. "We're a development company, but we don't believe in the risks of building our own pipeline at this point," he said. "Three years ago we would have been delighted about spending the returns from such a deal on the pipeline, but that's not where we are right now." Cardiome was going to consider share buy-backs and shelve R&D. Forget the back burner, Cardiome was going to hock the stove, and give investors the pawn shop cash too.

Don't get us wrong: we fully understand that there are times when a biotech should throw in the towel and return money to shareholders. We've argued for just that instead of doing reverse mergers, for example. But Cardiome isn't a failed company.

To be fair, Cardiome had $82 million in the bank as of mid-year, and it's only buying back $27.5 million in stock. Analysts liked the move too. But the message from that April conference call is coming through loud and clear: we're getting out of the biotech business, because its too risky.

Here are a few companies that kind of disagree. They've done the deals that make us dance, and collectively they are rewarded with:

Cell Therapeutics: This Seattle-based oncology company is listed as the top market cap gainer for the year among medium- and large-cap biotechs by Rodman & Renshaw in its Aug. 24 Biotech Balance Sheet report. Based on a share price of $1.69 at the time R&R made its estimate (Cell Therapeutics’ share price since has declined slightly to the low $1.60s), the firm’s market cap was estimated at $915 million, a better than 1,100 percent gain over the year. CTI, which earlier this year sold off its interest in disappointing non-Hodgkins lymphoma drug Zevalin to partner Spectrum Pharmaceuticals, has narrowed its clinical focus to another NHL drug, pixantrone. During the process of filing an NDA and readying for a European submission of the novel topoisomerase II inhibitor, CTI also has raised cash four times this year, bringing in more than $100 million, a crucial accomplishment for a company that ended the second quarter with just $12 million in cash. During its second-quarter earnings call Aug. 6, CTI noted it had reduced total operating expenses by 24%, year over year, mainly through a 54% reduction in R&D spend during the quarter. In its most recent transaction, CTI netted $28.5 million through a registered offering of shares and warrants to a single institutional investor. In July, CTI netted $41.6 million through a follow-on public offering that sold 33.7 million common shares (and warrants)at $1.30 apiece. A pair of private placements of shares and warrants in the spring brought in another $34 million. All that dilution represents a major gamble on pixantrone, which CTI says has a molecular structure that will present a better cardiac safety profile than the anthracyclines typically used in lymphoma, leukemia and breast cancer. The biotech expects to learn its PDUFA data on Sept. 4.--Joseph Haas

D-Pharm: Just the second biopharmaceutical company to go public this year, Israel’s D-Pharm, plans to begin pivotal Phase III trials of its lead program, DP-b99, in acute ischemic stroke. In a transaction that yielded nearly $23 million (85 million New Israeli Sheckels [NIS]), D-Pharm split the offering between an IPO of NIS 28 million ($7.4 million) and a rights offering of NIS 57 million ($15.0 million). The company reported Aug. 17 that the IPO was oversubscribed, with a unit price of NIS 133 ($35.03), a 13% premium over the low end of the price range. D-Pharm said in June the FDA approved an IND for the Phase III program for DP-b99. The trial is slated to enroll 770 patients with moderately severe ischemic stroke at more than 100 medical centers in Israel, North America, Europe and South Africa. DP-b99 is a small-molecule lipid analog developed through D-Pharm’s proprietary Membrane Activated Chelator technology platform. D-Pharm also is studying the compound in traumatic brain injury and brain damage resulting from coronary artery bypass graft surgery. The IPO and rights offering brings to about $75 million the total amount D-Pharm has raised since its inception – in 2006 it raised $10 million in a private financing round led by Clal Biotechnology Industries, Israel Healthcare Ventures and Pitango Venture Capital, with participation by Care Capital, Gemini and Polar Communications.--Joseph Haas

Pacific Biosciences and Complete Genomics: (Two-for-one special!) The lure of faster and less expensive genome sequencing has certainly captured investor interest. Pacific Biosciences last week got an additional $68 million in financing from new and returning shareholders—including agricultural firm Monsanto, plus Wellcome Trust and Sutter Hill Ventures—bringing its Series E round total to $188 million, the largest venture round yet in the genome sequencing space. In 2010 the company plans to launch its SMRT (Single Molecule Real Time) system, a technology originating at Cornell that is being developed to map the human genome for the cost of $1,000 under a grant from the National Human Genome Research Institute. Pacific had developed sequencing technology using chips with thousands of zero-mode waveguides, an extremely small detection volume that makes it possible for real-time observation of a single DNA polymerase as it synthesizes DNA. With all this cash in its pockets--the four-year-old company has raised $260 million to date in private equity--and backers who are likely antsy for an exit, PacBio could be prepping for an IPO in the next year, coinciding with SMRT’s launch. The start-up is looking to catch up with Helicos in the market for single-molecule sequencers. (Incidentally Helicos was the last DNA sequencing firm to go public—in 2007 it sold 5.4 millions shares at $9 each. Its stock price had tumbled below $1 despite the hype of its True Single Molecule Sequencing technology, but recent news that Stanford scientist and company founder Stephen Quake, PhD, mapped his own genome within a few weeks for $50,000 sent the stock up.)

Complete Genomics, a 2006 start-up that was in stealth mode until 2008, raised $45 million in Series D financing from first-time backers Essex Woodlands and OrbiMed Advisors, which each contributed new board members; existing investors Enterprise Partners, OVP, Prospect, and Highland Capital also participated. Instead of selling customers the actual instrument that sequences DNA, Complete Genomics is taking a service approach by analyzing samples using its third-generation technology and providing pharma and biotech researchers with the combed-over human genetic data—packaged in a report--at a $5,000 price point. The company is building what it claims is the biggest center in the world for human genome sequencing. It plans to open the facility, located in Northern California, at the start of next year and is using the current fund raise to prepare for large-scale sequencing projects. The Series D was Complete Genomics’ first publicly disclosed financing; the firm has brought in $91 million to date.--Amanda Micklus

Poniard Pharmaceuticals: On August 20, Poniard Pharmaceuticals secured an alternative financing option by taking a committed equity line of credit from investment firm Azimuth Opportunity. Over the next 18 months the public cancer company may sell up to $60 million in registered common stock to Azimuth at a pre-negotiated discount. Poniard recently finished enrolling patients in its pivotal Phase III SPEAR trial evaluating picoplatin as a second-line treatment for small cell lung cancer. The intravenous cytotoxic platinum compound has been in Poniard’s hands since 2004, when the company—then called NeoRx--licensed the candidate from AnorMed. (The deal was expanded to worldwide rights in 2006, right around the time AnorMed was in the midst of a bidding war between Millennium and Genzyme.) Putting all of its eggs into the picoplatin basket, Poniard envisions the drug will evolve into a platform itself, spawning picoplatin products in various formulations and drug combinations for multiple indications (the candidate is also in Phase II for metastatic colorectal cancer and metastatic hormone-refractory prostate cancer, and in Phase I in the oral form for solid tumors). On June 30, 2009, Poniard had $50 million in cash and investment securities, $10 million less than it did at the end of the first quarter, but still enough, says the company, to support it through the first quarter of 2010. KPMG, Poniard’s auditor, however, has been skeptical for a while that the company will have enough cash to sustain operations.--Amanda Micklus

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