Thursday, August 12, 2010

Financings of the Fortnight Struts and Frets but Finds No Exit

Places everybody! Settle down, please. Welcome to the FOTF Playhouse, and thanks for coming to our first-ever audition. I'm your director, and the woman holding the clipboard is my editor. Rule #1: Do not make her angry, or you'll be off this stage faster than you can say "Kelsey Grammer in a kilt."

As you all know from the audition call, we're putting up something no one's ever tried before: An absurd tragicomedic musical drama about biopharma financing in four acts. Good thing we've got some of the best writers around, especially when it comes to the existential dilemma of the modern private biotech. That's our playwright in the fifth row with the notepad and the ashtray. Don't bother waving; he can barely acknowledge his own existence, let alone yours.

So what are we looking for? For the first act, which we're calling IPO or Die Trying, our characters are stubborn, perseverant, and they've got a bit of the huckster in them, a crucial element given the need to convince investors to buy stock in a company that has no revenues, no marketed products, and is subject to massive regulatory power. And they could also use some cash. A lot of cash.

As the curtain rises on Act I, we see our heroes going to their investors in Silicon Valley, asking them to buy shares in their upcoming IPO. A chorus of bankers wails in the background, knowing their commission dwindles the more the insiders buy the IPO. Our heroes' VC friends press their Blackberries to their foreheads, trying to divine wisdom.

It's a universal dilemma, as old as the Greeks and as breathtaking as King Lear out in the storm. If the VCs agree, they're saddled with more stock, and who knows how liquid it'll be in the next two years. But if they don't agree, they might never exit at all, and they'll be forced to sit in this little room, the walls close and sweaty, the muted TV tuned to the 24-hour celebrity-news channel, like the waiting room of a doctor who sneaks out the back to play golf and doesn't bother with decent magazine subscriptions. Think Sean Hannity's vision of Obamacare meets Dante's Inferno enlivened with a little Waiting For Godot.

How did we get here, the investors ask? Who are we? We're talking big questions here, and an excuse to break into a wavering minor key version of Once In a Lifetime.

If you're auditioning for the VC roles, here's some helpful background. There's another kind of exit taking place these days: Of the 153 US venture firms with a biopharma focus that made investments in 2008, 10 didn't invest in 2009, a 6.5% "dropout" rate, according to DowJones Venture Source. Of the 143 that invested in 2009, 39 have yet to make an investment in 2010. That's more than 25%. There's still time for the drop-out rate to decline to last year's rate, but for that to happen about 30 of those 39 laggards will have to pony up in the next four and half months.

Now we come to Act II of our little drama, and we get into a kind of Hair thing: This is the dawning of the age of the post-genome! or something like that. We haven't finalized the libretto. When VCs drop out, what happens? Do they tune in and turn on? Become management consultants? Baristas? Curtain rises, and we meet a former VC who one day hopped the fence to become CEO of a company he helped found as an investor. (He will be playing himself, by the way. That's one of the perks of raising a $25 million B round.)

Acts III and IV are riffs on the old phrase "Neither a borrower nor a lender be," turning that classic nugget of questionable advice on its head.

Got it? Good. Let's start the audition, and remember "all the world's a stage" which is always our motto. But you knew that, because you're a regular reader of...

Trius Therapeutics: Antibiotic developer Trius launched an initial public offering Aug. 2, selling 10 million shares at $5 each after postponing the issue for several months. Whatever momentum Trius had when it registered to go public in November was blunted by two forces: the weakening general economy, now prompting midsummer whispers of a dreaded double-dip; and the Food and Drug Administration, whose evolving guidance on antibiotic trial design for skin and soft tissue infections led Trius to revamp its crucial Phase III trial protocols in March and postpone its IPO. The firm detailed the redesign in June and the IPO was back on, but with a lot of help from existing investors, who bought more than half of the shares issued. Trius is testing oral and IV versions of its lead candidate, torezolid phosphate, as a better treatment for skin and soft tissue infections often caused by methycillin-resistant Staphylococcus aureus, better known as MRSA. We wrote in November about antibiotic developers pushing into late stage trials despite murky design guidance from FDA; so far Trius is the highest-profile example of a company whose business strategy hit a bump because of the regulatory landscape. Citi ran the offering with help from Piper Jaffray, Canaccord Genuity, and JMP Securities. They had to forgo discounts and commissions on more than half the stock sales. -- AL

Dicerna Pharmaceuticals: In a deal more than eight months in the making, the RNA interference platform startup Dicerna said Aug. 1o it has secured $25 million in Series B funding from a syndicate that includes first-time investor Domain Associates. Repeat investors Oxford Bioscience Partners, Skyline Ventures and Abingworth also joined in the round. Former Oxford partner Doug Fambrough, who led Dicerna’s seed round for the firm, became the startup’s CEO in May. Fambrough also was among the early backers of Sirna Therapeutics, a pioneering RNAi company Merck acquired for $1.1 billion in 2006. Dicerna is developing gene-silencing therapies via a platform that works with slightly longer double-stranded RNA than those used by Sirna or RNAi stalwart Alnylam Pharmaceuticals, typically with more than 25 nucleotides. Dicerna’s strands interact with an enzyme called Dicer that cleaves the strands into small interfering RNA, which can mute the expression of genes selectively. Dicerna has a preclinical oncology drug candidate, a partnership with Kyowa Hakko Kirin to develop more drugs and an agreement with Ipsen to explore uses of its peptide program for intracellular delivery of therapeutics in both oncology and endocrinology. Dicerna’s Series A round arrived in two tranches totaling $21 million during 2007 and 2008. -- Paul Bonanos

Gilead Sciences: Even with $1.8 billion in product sales during the second quarter, Gilead has a significant need for cash. The firm has irons in many fires, including a pair of ongoing Phase III trials for its experimental “quad” pill for HIV and a previously announced $5 billion share buyback initiative. In late July the biotech undertook a complex series of transactions in which it sold $2.2 billion in convertible senior notes, proceeds from which are intended to retire convertible notes expiring in 2011 and 2013 and finance about $1 billion of the share buyback plan. It sold $1.1 billion of 1.00% convertible senior notes due in 2014 and another $1.1 billion of 1.625% convertible senior notes due in 2016, netting approximately $2.166 billion. Both series of notes will pay interest twice annually, on May 1 and Nov. 1, until they mature. The initial conversion rate for the 2014 notes will be 22.1845 shares of Gilead common stock per $1,000 principal amount of notes, the company said. That translates into an initial conversion price of $45.08 per share, a 35% premium over Gilead’s July 26 stock price. The 2016 notes will convert to 22.0214 shares of Gilead stock per $1,000 principal amount of notes, a conversion price of $45.41 per share and a 36% premium over the Gilead’s July 26 stock price of $33.39. -- Joseph Haas

Arena Pharmaceuticals: The publicly traded Arena tapped creditor Deerfield Management for a $60 million stock sale, taking advantage of a massive stock boost as its lead obesity drug lorcaserin approaches a key FDA advisory committee meeting in September. As of the close of trading Aug. 11, Arena shares had jumped more than 80% since July 15, the day obesity rival Vivus' Qnexa got a negative review from the same FDA committee. Arena said Aug. 6 it agreed to sell nearly 9 million shares to Deerfield at $6.70 a share, with $30 million of the $60 million gross proceeds used to prepay a Deerfield loan that was due in July 2012. If FDA approves lorcaserin by July 2011, Arena can defer a $20 million repayment due at that time to Deerfield until June 2013. Previous obesity drugs have run into cardiovascular safety problems, and the FDA committee reviewing lorcaserin on Sept. 16 will spend the day before reviewing cardiovascular risks in obesity drugs in general, which might not bode well for Arena, according to a Pink Sheet analysis of the obesity regulatory landscape. -- Emily Hayes and AL.

Photo of the Prairie Fire Theatre Summer Camp courtesy of flickr user Nic's Events.

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