Friday, February 12, 2010

DotW: Shovel Ready

We've been observing and reporting for months now as various industry finance types predict the end of the recession and in particular the biotech funding drought. Call it what you like -- new beginnings, green shoots, fluffy-tailed optimism -- it has come in many forms. Some have pointed to the robust demand for follow-on offerings. Others saw glimmers of goodness in the fourth-quarter venture data. Last week, Ironwood Pharmaceuticals' IPO made some hearts go pitter-patter, though not enough to buy shares at $15 a pop.

No one's turning cartwheels yet, and probably won't anytime soon for fear of drawing the glare of suspicious regulators or, gulp, Paul Volcker. But let's face it, those who do God's work can't help but look on the bright side of life. Forgive them their happy-go-lucky trespass.

On the other side of the fence we terminally skeptical journalists tend to look askance at casually thrown glass-half-full assessments -- or at least we should -- so our ears prick up whenever we hear anything to the contrary.

Apparently the big storms this week (if you insist upon a hyperbolic descriptor, IVB prefers "Snowzilla") put a damper on more than federal bureaucrats and travel plans. It's a bit harder to find green shoots under all that white. At the BIO CEO & Investor conference panel this week in New York, a spasm of rational non-exuberance actually broke out. A Lazard banker admitted that the IPOs so far "haven't been very encouraging." A managing director of a private equity fund said confidence is returning to the market in general, but for volatile sectors like life sciences, "it will take longer."

The panelists went on to note that VCs in a Lazard survey said they're starting to return to early-stage companies. (Overall, ninety biopharma companies raised $1.2 billion last quarter according to DowJones Venture Source, which helped boost 2009 above the $4 billion mark.)

Color us skeptical on that one. So many indicators are pointing in the other direction. The ten-year return data for venture capital as an asset class remains ugly. Only the 2002 vintage class shows a positive net return to LPs, according to Cambridge Associates. Hey, optimism! Just like now, 2002 was a year to get in at the bottom, right? Sure, if you think 1% is a tidy little return. And unlike more recent vintages, 2002 investments should be maturing by now, so it's hard to see that 1% getting much better. Let's face it: venture as an asset class is damaged goods. Firms had a hell of a time fundraising last year, and even the head of the National Venture Capital Association predicts a major shakeout this year.

We just don't see how you can sustain a vibrant biotech startup ecosystem with a lot less venture money washing around, unless a bunch of the surviving funds get that ol' time early-stage religion. On a conference panel several years ago, one West Coast VC teased an MPM Capital partner by giving him the nickname "Go big or go home." Are we now going to hear VCs publicly chide each other with "Let's Get Small!"?

Let's just say we're not counting on that jalopy for a ride to the prom. So who's going to pony up for the startups? Merck business-development exec Barbara Yanni said something at the BIO confab this week that caught our eye: "The prices for licensing deals have gone up, and I'm talking about the real money, not the biobucks," she said. "The upfront money has increased for Phase I deals [and] Phase II deals as well."

Pharma's corporate venture largesse helped during the recession. Could its BD budgets also help fill the startup funding gap? We ran a few searches in the indefatigable Strategic Transactions database to see if Yanni was right. It looks like total upfronts for Phase I deals have indeed risen the past three years but not in a trumpets-and-hooves, to-the-rescue kind of way. Seventeen Phase I deals that reported an upfront payment in 2007 totaled $782 million, 17 deals in 2008 totaled $1.1 billion, and 21 deals in 2009 totaled $1.15 billion.

For Phase II, 40 deals in 2007 totaled $1.7 billion in upfronts, 34 deals in 2008 totaled $1.4 billion, and 39 deals last year totaled $1.8 billion.

We'll check back in a few months to see how 2010 is playing out, but so far there's no evidence that pharma companies are shifting tons of cash into upfront payments for early-stage partnerships. They certainly didn't do so this week. Deal-making was yet another thing muffled by the Blizzard King. Perhaps biz-dev poobahs were too busy having snowball fights. Whatever the case, it makes for an awfully quiet...

Novartis/Debiopharm: Novartis is hedging its hepatitis C bets with this deal for Debiopharm's Phase IIb cyclophilin inhibitor Debio 025 (alisporivir). Novartis is on the threshold of approval for the albinterferon alfa-2b Zalbin, which it licensed from Human Genome Sciences, but Debio 025 has a completely different mechanism of action, targeting a human protein that is co-opted by the virus to help it replicate. It's the second cyclophilin inhibitor for Novartis, which also has the earlier-stage program NIM811 in its pipeline. No surprise Novartis is trying more than one approach; it has already suffered two failures of other in-licensed HCV treatments, as our Pink Sheet colleagues noted this week. For Debio 025, the Phase IIb study now under way will assess longer-term safety and efficacy in combination with standard of care in treatment-naïve patients with HCV genotype 1, the most common variant of the virus in the Western world. Novartis gets worldwide rights except for Japan, but other details or terms weren't disclosed. The companies don't expect a marketing submission before 2014. -- John Davis

Biovail/Alexza: Contuining its pursuit of specialty CNS opportunities, Biovail will pay Alexza $40 million upfront for U.S. and Canadian rights to the inhaled antipsychotic AZ-004 (Staccato loxapine), its lead program. Alexza submitted the product, reformulated with its rapid-acting single-dose Staccato inhaler to quickly calm agitated schizophrenic or bipolar patients, for U.S. marketing approval in December. Loxapine was originally approved in the 1970s but taken off the market last decade. It's the second deal of the year for Biovail in CNS, and both hinge upon a delivery device. The Canadian firm licensed Amgen's glial cell line-derived neurotrophic factor in January for therapeutic uses in CNS indications. Biovail then partnered with MedGenesis Therapeutix to use its catheter system that delivers drug to the brain. A side note from the deal: It comes nearly six months after Alexza bought out its private-equity funding partner Symphony Capital, which had put up $50 million in late 2006 to develop AZ-004 and two other programs in a separate venture called Symphony Allegro. Symphony's project financing model has borne mixed results, but it had to switch gears when Allegro fell apart. Alexza last August bought back its programs from Symphony for 10 million common shares and 5 million warrants to buy stock at $2.26 a share. Alexza will also pay Symphony an undisclosed slice of the partnering cash from Biovail. Get the full backstory on the Symphony-Alexza drama at today's Financings of the Fortnight, a.k.a. DotW's Smarter Brother.

Merck/AnaptysBio: On Monday San Diego biotech AnaptysBio announced its second deal in as many months, saying it would discover novel antibody therapeutics against an undisclosed disease target for Merck & Co. AnaptysBio will apply its somatic hypermutation (SHM) platform to generate candidates and Merck will be responsible for worldwide development and commercialization; AnaptysBio gets upfront cash, plus potential milestones and royalties. For the details on the biotech’s technology, check out our November 2007 Start-Up profile. The short version: it aims to replicate the natural process of mutagenesis occurring in B cells, involving steps of immunoglobulin recombination, mutation, affinity maturation and selection. The Merck deal follows closely on the heels of a similar pact with Roche signed in January. (See the Strategic Transactions record here.) Getting as close as possible to how B-cells react to antigens to create antibodies is clearly very promising and is also at the heart of another biotech’s platform. Adimab, which employs engineered yeast to discover antibodies with the Made-in-B-Cells label, also has deals with both Merck and Roche. Ah-ha. AnaptysBio was initially backed by Avalon Ventures. In late 2007 it raised a $34 million Series B led by Novo AS, with Avalon, Frazier Healthcare ventures and Alloy Ventures, Numenor Ventures, WS Investment Company, and Nick Lydon, PhD, the former pharma scientist and biotech entrepreneur who advises Avalon and sits on AnaptysBio’s board. -- Chris Morrison

Boehringer Ingelheim/SSP: BI's tender for the remaining 40 percent of its Japanese subsidiary SSP will allow the German pharmaco to "more aggressively" pursue OTC switches, the company said Feb. 10. At 710 yen ($7.89) per share, which Reuters estimated at $365 million total, the offer comes a few months before Boehringer's patent exclusivity for its benign prostatic hyperplasia drug Flomax (tamsulosin) expires in April. BI is one of many big pharmas looking to diversify into consumer health and boost its "switch" skills. Two mega-mergers early last year (Schering-Plough/Merck, Pfizer/Wyeth) brought the trend to the forefront, and other firms followed their lead, such as Sanofi-Aventis’ acquisition of Chattem. The BI buyout would give SSP an overseas avenue to market its products, including cold medicines, vitamins and an OTC insomnia medication. SSP also will gain access to Boehringer's research and development capabilities. The tender offer closes April 13. Boehringer said it would merge SSP with another subsidiary, Boehringer Ingelheim Japan Investment. SSP will be the surviving company. -- Elizabeth Crawford

Novavax/ROVI: Better yet, ¡No deal! That's because Madrid-based ROVI was supposed to license Novavax's vaccine technology to develop seasonal and pandemic flu vaccines, and the Spanish government was supposed to build the country's first flu-vaccine plant in Granada (lovely town, by the way). The deal called for a $3 million upfront plus milestones and royalties. ROVI was to get marketing rights in Spain and Portugal. Not so rapido, folks. Novavax announced rather curtly on Feb. 8 that the companies could neither agree on "acceptable terms" nor "obtain the necessary funding commitments."

Merck/Anacor: The partners advanced through Phase II Anacor's treatment AN2690 for onychomycosis, a fungal infection of the nail and nail bed, but the new expanded Merck decided to give the program back to Anacor, the Palo Alto biotech said Friday, Feb. 12. Anacor says it will kick off Phase III tests as soon as the rights are transferred back. It cut the original deal with Schering-Plough in 2007 when AN2690 was in Phase IIb. It received $40 million upfront, the right to sell $10 million to S-P in equity, and the promise of as much as $505 million in milestones. No word immediately how many of those 'stones rolled Anacor's way. It is looking for a new partner for the program.
Photo courtesy of flickr user oddharmonic.

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