Thursday, May 06, 2010

Financings Of The Fortnight Can't Tell if You're a Kingpin or a Pauper

In a still-dodgy fundraising arena, the question for biotechs looking for royalty-stream financing is this: How much will you have to give it away now?

We ask after noting several royalty deals of late. It's no flood, to be sure -- and we should pause to extend our thoughts and wishes to the good folks of Nashville and beyond -- but the rising tide caught our attention. The most recent example was the April 30 transaction in which NeurogesX transferred rights to future sales of recently launched pain-management drug Qutenza to Cowen Healthcare Royalty Partners (that's CHRP, not RHCP) in exchange for $40 million.

According to Elsevier’s Strategic Transactions Database, only one such deal occurred in 2007, when Enzon sold 25% of its worldwide PEG-Intron royalties to Drug Royalty for $92.5 million, but 10 have occurred since April 2008, including three in the past two months. (In addition to the NeurogesX/CHRP tie-up, April saw Dyax sell future royalties from Pfizer on hemophilia A drug Xyntha for $12 million, and in March DRI Capital obtained Asian royalty rights to hyperparathyroidism treatment Regpara from NPS Pharmaceuticals for $38.4 million.)

If it's the front end of a big wave, perhaps we should move our chairs to higher ground. Royalty deals are a non-dilutive source of funds, usually a good thing, but they're no sign of industry health, says Raghuram Selvaraju, head of healthcare research for Hapoalim Securities.

"Royalty arrangements are typically entered into by companies stuck between a rock and a hard place,” Selvaraju told the IN VIVO Blog. “Companies stuck in mid-stage development with no near-term prospect of revenues resort to equity lines of credit, which basically mortgage their futures and can be prohibitively dilutive because they have minimum draw-downs."

“[A royalty deal] looks cosmetically attractive because it’s not dilutive financing,” Selvaraju added, “but if a company is trading near its 52-week high, I always prefer to see it raise money in the public markets than do a royalty-based deal.”

Take NeurogesX. With no U.S. commercialization partner for Qutenza, it had to launch solo despite limited funds. Selvaraju believes NeurogesX could lose downstream revenues from Qutenza for many years, since there is wide disagreement on how big a market the drug will find. Estimates of its eventual annual sales range from $150 million to $700 million.

Everyone has a handful of betes noires that prove the world is slowly going to hell in a handbasket: dogs wearing sweaters, for example, or airlines charging for baggage. Selvaraju said we might want to add royalty deals to the watch list. “I don’t think they're going to increase in frequency unless we’re talking about the gradual demise of the biotech industry, which I hope is not going to be the case,” he said.

Are royalty arrangements inherently lopsided, even predatory, as Selvaraju suggests? We've talked to university tech transfer officers quite happy, for example, with a massive upfront bounty that can be spent right away on new buildings and faculty salaries, instead of waiting for a highly speculative stream of revenue royalties through the years. It's a rousing debate, and one for another day. We're just glad we went an entire two weeks without seeing any dogs in sweaters, unless you count some recent deals. But that's a matter for our DoTW friends. This red hot chili pepper is the latest edition of...

Lycera: Towards the end of last year, we noted here a flurry of “top-ups” to biotech venture rounds. A spin through Strategic Transactions shows that so far in 2010 nine companies have done additional tranches, including Lycera, which added $11 million to the $10 million it’s already raised in its Series A financing. It's already a decent figure, and the immunology biotech says it's working towards $36 million total, quite high for a Series A. The second tranche came with a new board member from Clarus Ventures and a new VP of preclinical development and program management, former Novartis and ArQule exec Robin Goldstein. Lycera said it's poised to move its first candidate into human testing in 2011. Rather than working with biologicals, which often require injectable administration, the 2006 start-up is focusing on small-molecule immunomodulators targeting two autoimmune pathways: ATPase (the cellular bioenergetics program) against pathologically activated lymphocytes and Th17 (ROR-gamma) inflammatory mediators. -- Amanda Micklus

NeurogesX: We couldn't leave you hanging without the nitty-gritty details. The San Mateo, Calif.-based biotech obtained $40 million April 30 from Cowen Healthcare Royalty Partners to help finance the US launch of pain-management therapeutic Qutenza in the US. In exchange, CHRP gets ex-US royalties and sales milestones payable by Astellas Pharma, which bought ex-US commercial rights one year ago for $42 million. Qutenza, a dermal synthetic capsaicin patch, was approved by FDA to treat post-herpetic neuralgia last November and launched by NeurogesX in April. Qutenza also was approved last May in Europe. Both the royalties and milestones from the Astellas deal now go to CHRP until that firm recoups its capital plus a pre-determined amount of return on investment, said managing director Gregory Brown. Instead of an interest rate, CHRP is banking on ex-US sales of Qutenza to ramp up to deliver a return quickly. “The ‘interest rate’ really would depend on how quickly the capital comes in,” Brown said. “If you think of it as something in the high teens, that’s probably not unrealistic.” Once CHRP has recouped its investment and return, the ex-US rights revert to NeurogesX. US sales proceeds are not affected by the deal. -- Joseph Haas

Idenix Pharmaceuticals: We’re highlighting this antiviral drug developer’s FOPO not for its size. At $21.4 million net, or 6.5 million shares for $4.35 each, it’s piddling compared with FOPOs we’ve seen this year from Lexicon or AMAG. This is more about the rebound. Idenix was able to raise a decent amount of cash despite the hammer blow last year of its main partner and owner, Novartis, turning down an option on Idenix’s lead agent, HCV nucleotide prodrug IDX184. In a Roche/Genentech-like big-sibling structure, Novartis has options on all Idenix’s drug candidates after proof-of-concept as long as it maintains a 40% stake. Novartis owns 43% of Idenix post-FOPO, by the way. After the rejection last October, Idenix’s stock price tumbled to a low of $1.84. Thanks to favorable interim safety data from a Phase IIa of IDX184 in combination with pegylated interferon and ribavirin, the stock has recently gone back up as high as $4.76 a share. The company also announced positive Phase I results for another HCV candidate, IDX320. Meanwhile, the firm is broadly cutting costs and says that between the FOPO proceeds and milestones from GSK/Pfizer’s Viiv Healthcare (for the NNRTIs it partnered with GSK in 2009), it will have enough funds to sustain itself through the second half of next year. -- A.M.

MannKind: We usually don't discuss follow-ons in FOTF until the cash is in hand, but we couldn't help but note that MannKind, struggling to get its inhaled insulin through the FDA and onto the market, recently filed a shelf registration for up to $200 million. In the firm's most recent earnings call, MannKind CFO Matthew Pfeiffer disclosed it but said "currently, we have no plans to do an offering." "Currently" is such a useful word. Pfeiffer went on to clarify, kind of, by saying MannKind wanted the registration "in the event that an opportunity would arise such as financing or a strategic transaction, which would be in the company's interest to issue debt, equity, or warrants." Pfeiffer told analysts to expect MannKind first to draw down its line of credit from "Al" -- that is, Al Mann, the company founder. The line still has $145 million available. Not everyone is convinced. Oppenheimer & Co. analyst John Newman wrote in a note that MannKind will need more cash soon because the F.D.A. is likely to require new studies for Afrezza: "Although MNKD claims it has a line of credit that would negate the need for a cash raise, we note that the company raised cash in 2009, despite the credit line." -- Alex Lash

Production notes: Joseph Haas played bass and wrote the introduction this week, and Amanda Micklus (drums) and Maureen Riordan (mellotron) provided invaluable research help. The photo is courtesy flickr user mararie.

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