Deals of the Week: For Astex Shareholders, Will 8 1/2 Do?

A month after Otsuka Pharmaceutical agreed to buy cancer drug developer Astex Pharmaceuticals for $886 million, a top shareholder is challenging the deal. Sarissa Capital Management issued an open letter Oct. 2 to announce its opposition, lamenting a price it found underwhelming, an auction process it found flawed, and an executive team whose motivations it believes to be suspect. A separate shareholder class action is already pending, alleging that the deal won’t deliver fair value as proposed.

Sarissa is a life science-focused hedge fund operated by Alex Denner and Richard Mulligan, onetime associates of activist investor Carl Icahn. The fund’s operators believe its 5% stake in Astex is worth more than the $8.50 per share Otsuka agreed to pay in the Sept. 4 deal, and the firm is not planning to tender its shares. Moreover, the firm expressed surprise at the deal’s timing, saying it was “inexplicable and disturbing” that Astex would sell before it reveals key Phase I/II clincal data from oncology candidate SGI110 in December, with more data to come in 2014. The drug has shown promise in acute myeloid leukemia and myelodysplastic syndromes.

The letter also alleged that Astex failed to engage all potential bidders, and favored terms that would keep existing structures intact while rewarding top executives with individual long-term compensation incentives. Sarissa’s co-founders called the executive-retention terms “extraordinarily upsetting,” said the executives’ intentions were compromised, and accused management of trying to “hide important issues about [their] motivations."

Astex fired back with its own open letter Oct. 2. The Dublin, Calif.-based company described a sale process in which 33 potential suitors were engaged and five showed serious interest, but only Otsuka submitted a final proposal. Astex says it negotiated the $8.50 price up from $7.75, and received interest from another buyer in the $6 to $7 range. (Shares hovered between $5 and $6 for most of July and August.) Astex claims it hasn’t received any competing buyout offers since the Otsuka deal was revealed last month, and denied that it had discussed specific employee retention arrangements with the Japanese buyer.

Most of Astex’s speculative value is tied up in pipeline drugs SGI110, a DNA hypomethylating agent that reactivates gene expression, suppressing tumor cell growth; and AT13387, an HSP90 inhibitor targeting multiple cancers. The company also reaps royalties on sales of Dacogen (decitabine) for myelodysplastic syndromes, sold by Eisai in North America and Janssen Cilag elsewhere.

Could a solution come in the form of a contingent value right that could add a further payout to a deal long after it’s consummated? Astex’s SGI110 data presentation at December’s American Society of Hematology conference represents a near-term milestone that could tempt both sides to settle for a contingency, but SGI110 and AT13387 still have a long way to go. The two sides would have to settle soon; Otsuka’s offer is set to expire Oct. 10. Stalling might work, too. If the current deal falls apart but the December data are encouraging, additional suitors could line up as potential buyers or partners. Astex could then command a much higher price, with a somewhat de-risked asset in its pipeline. And even in the short term, the suggestion that Astex could be worth more might compel more shareholders to get on board with Sarissa’s demands. - Paul Bonanos

Even if your life isn't just like a Fellini film, we hope you enjoy la dolce vita this weekend. And please enjoy...

Johnson & Johnson/Effimune/Merus/CureVac/DCPrime: J&J's London Innovation Center announced deals between the Big Pharma and four European biotech companies on Oct. 3, timed to coincide with a meeting between J&J researchers and UK political and research movers-and-shakers at the six-month-old center. The center is one of four ICs around the world, set up to invest or collaborate with academics, entrepreneurs and early-stage companies. All four deals were concluded with help from the IC. In the first, J&J's Janssen Biotech Inc. entered into a global option and license agreement with French company Effimune concerning a preclinical pegylated anti-CD28 antibody fragment, FR104, which has potential in immune-mediated disorders. If the option is exercised, Janssen will make milestone payments and pre-specified royalty payments on worldwide net sales of the product. In the second deal, Utrecht, Netherlands-based Merus has received an equity investment from J&J Development Corporation as part of a €31 million ($42 million) extension to a Series B financing round that now totals €47.6 million. Existing investors include two other corporate investors, the Novartis Venture Fund and Pfizer Venture Investments, as well as Bay City Capital, Life Science Partners and Aglaia Oncology Fund. Merus is building a pipeline of single cell-derived human bispecific antibodies for use in cancer therapy. In the third deal, Germany's CureVac will collaborate with Janssen Pharmaceutica Inc.'s Crucell Holland to develop an influenza vaccine based on CureVac's RNActive technology. And lastly, the Leiden, Netherlands-based DCPrime BV has entered into a research collaboration and optional license agreement with Janssen Pharmaceuticals Inc. on a potential dendritic cell-based vaccine; one candidate has completed a Phase I/IIa trial in acute myeloid leukemia. - John Davis

Tri-Institutional Therapeutics Discovery Institute: With a personnel contribution from Takeda Pharmaceutical, three New York-based academic research institutions will team up to create the Tri-Institutional Therapeutics Discovery Institute (Tri-I TDI), a non-profit organization that will seek to expedite advancement of basic biomedical research into innovative therapies and treatments across a broad spectrum of therapeutic areas, including cancer. Initial work will focus on small molecules, but eventually the institute plans to branch out into monoclonal antibodies and molecular imaging agents. Announced Oct. 1 in New York City, the collaboration will bring together under one roof researchers from Memorial Sloan-Kettering Cancer Center, Rockefeller University and Cornell University’s Weill Cornell Medical College. This is hardly the first time these three institutions have come together for a joint research initiative. In 2011, each was among seven New York research institutes electing to partner with Pfizer in an initiative to apply open innovation toward the development of biologic therapies across all therapeutic areas. In addition, each institution has pursued its own tech-transfer deals with private industry over the years. The institute begins its work with $20 million in philanthropic funding. It has received a $15 million grant from Lewis and Ali Sanders and $5 million from Howard and Abby Milstein. In addition, the three institutions will make equal contributions to an operating budget, while Takeda’s initial investment will be in the form of medicinal chemists based at the institute. Carl Nathan, chairman of Weill Cornell’s department of microbiology and immunology, said Takeda’s participation will be unusual, in that the personnel it lends to the effort will perform medicinal chemistry and take those processes much farther along than would be possible at the academic level, but without any guarantee of an economic benefit to the Japanese pharma. - Joseph Haas

Intrexon/Sun: Fresh off an August initial public offering that raised $184 million, synthetic biology specialist Intrexon created a  joint venture with India’s Sun Pharmaceutical to discover and develop new drugs for eye disorders. The companies plan to unite Intrexon’s technology platform, including the proprietary RheoSwitch Therapeutic System to control protein expression, with Sun’s global specialty pharma development and manufacturing expertise, and target chronic disorders such as “dry” age-related macular degeneration, glaucoma, and retinitis pigmentosa. Intrexon’s business model is built on partnerships, typically providing novel in vivo and ex vivo biological engineering techniques to another company with a specialized area of focus. (It struck a separate deal with Oragenics this week, concerning new therapies for oral, throat, sinus and esophagus disorders.) Led by billionaire Randal J. Kirk, Germantown, Md.-based Intrexon has struck at least eleven deals since its formation in 2007 as GT Life Sciences. Financial details weren’t released, and neither Intrexon nor Sun would comment beyond a statement. It’s not clear whether the two parties are equal owners, nor whether they invested equal amounts. Although they will share in the profits, it’s also unclear how decisions guiding the JV will be made. - P.B.

Enteris/Nordic Bioscience: Enteris BioPharma inked its first-ever licensing deal, just three months after it was formed from the assets of defunct Unigene Laboratories. The Boonton, N.J.-based company licensed its proprietary oral formulation platform, Peptelligence, to Nordic Bioscience subsidiary KeyBioScience Sept. 30, in order to develop oral versions of peptide drugs targeting metabolic diseases. Terms weren’t released, although Enteris acknowledged that it will receive both fee-for-service payments and royalties on any products that result from the deal. Nordic previously formed a joint venture with Enteris’s predecessor in 2011, studying Unigene’s calcitonin analogs for type 2 diabetes, osteoarthritis and osteoporosis. Chicago hedge fund Victory Park Capital is the sole owner and funder of Enteris. The company was launched after Unigene, hobbled by debt and by negative regulatory decisions, was sold in pieces.  The company believed that Unigene had neglected technologies such as Peptelligence all along, and hopes potential partners will see its value in extending drug franchises with convenient formulations and renewed patent life. - Lisa LaMotta

Celgene/PharmAkea: Celgene is making a habit out of equity/option deals. The Summit, N.J. drugmaker’s latest arrangement gives it an opportunity to buy PharmAkea Therapeutics, a small-molecule discovery company created last year to develop drugs for fibroproliferative diseases. Celgene will invest $35 million over three years, take an equity stake in PharmAkea, and hold an exclusive option to acquire it.  The companies will explore three targets concerning connective tissue and the link between fibrotic disease and cancer. PharmAkea believes it can begin Phase I trials on two programs within three years; Celgene holds the option to extend the arrangement for 18 months or buy the company outright. The deal was announced simultaneously with PharmAkea’s $10 million Series A funding from Bay City Capital. It’s a now-familiar strategy for Celgene, a company that took a similar option to buy Quanticel Pharmaceuticals for $45 million after Versant Ventures incubated the company for several months in 2011. Celgene also paid $100 million for an exclusive option to acquire five-year-old epigenetics drug developer Acetylon Pharmaceuticals in July, after investing in the company’s Series B round previously. Celgene seeded PharmAkea last year, allowing it to recruit a management team that includes several executives from Amira Pharmaceuticals, sold to Bristol-Myers Squibb for $325 million upfront in 2011, and BrainCells Inc. - P.B.

DOTW Ponders Quality In The Wake Of Compounding Pharmacies, Hurricane Sandy,And A Deal

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Lots of news this week either directly or indirectly highlighted concerns about the quality of everything related to infrastructure, products, and services. Starting front and center with Hurricane Sandy, right down to our own neck of the woods, biopharma deal making, quality has become a high-profile and challenging priority for the industry.

It is hard to avoid discussion of Sandy when reflecting on the week’s events, especially as this columnist resides in Manhattan, where after the storm, a stark contrast emerged between electricity haves and have nots. The haves, while inconvenienced, were largely able to access the normal comforts of the modern world and every day stresses that go with it, while the most fortunate have-nots struggled through the mess, and the less fortunate continue to suffer greatly.

Hurricane Sandy tested the emergency response planning in the Northeastern U.S., where, like, elsewhere, dense populations inhabit a complex world combining state-of-the-art technology and decades, even centuries-old infrastructure. New Jersey, which has been a manufacturing, R&D, and management headquarters for the biopharma industry over many decades, was hit particularly hard by the storm. While the industry has diversified geographically over the years, the state remains an important center of biopharma activity. No one is even broaching the cost of overall business damages, and the storm may not have significantly disrupted the biopharma industry’s supply chain.

But the quality of that supply chain is under strain regardless, as witnessed in a high-profile article which appeared in The New York Times detailing the agency’s decision that a 300-milligram dose of bupropion manufactured by Impax Laboratories was not bioequivalent to the anti-depressant Wellbutrin XL. As a result, the agency said it would be more careful about monitoring the way generic drug makers make extended release drugs. “The Pink Sheet” has been tracking the issue for industry, but The Times article brought it to the mainstream public's attention. According to the Times, which obtained its information from IMS Health, 120 extended-release drugs were sold in the U.S. in 2011.

And that article came on top of rising concern about compounding pharmacies in the wake of a nationwide outbreak of meningitis due to fungal contamination of preservative-free methylprednisolone acetate produced and distributed by The New England Compounding Center. Compounding pharmacies play an important role in distribution of many medicines.

Of course, for investors, problems and shifts in trends are business opportunities. And Patheon Inc.’s announcement on Oct. 29 that it planned to acquire the N.C.-based contract manufacturer Banner Pharmacaps for $255 million is one indication that pursuit of high quality manufacturing is a business opportunity.  Patheon provides contract manufacturing and development expertise to the biopharma and generics industries.

A private equity firm, JLL Partners, owns 55% of the company, which is listed on the Toronto Stock Exchange. Patheon’s stock is trading near its 52-week high of $3.90 a share, but clearly, its owners have it on an ambitious track. More than a year ago, its board brought in James Mullen, who led Biogen-Idec Inc. for seven years, to undertake a strategic revamp, and he, in turn, has hired a group of high-level senior pharma executives to become part of his management team. As Patheon sees it, there’s an opportunity to do roll ups in what is currently a highly fragmented industry with about $12 billion in sales and a vulnerability to manufacturing gafus as the global supply chain gets more complex and buckles under to cost pressures.

In addition to manufacturing capacity for solid oral dosage formulations, Banner brings to Patheon a pipeline of technologies for developing higher-margin, value-added proprietary products and a strong presence in Latin America, particularly Mexico, where it sells OTC and prescription drugs under its own brand. This will enable Patheon to pursue more and larger customers, fitting with an industry trend towards forming strategy partnerships with CMOs to outsource capital-intensive manufacturing.

Patheon may not be focused on the industry’s bread and butter, innovative R&D, but it has ambitions to bring more modest technological innovation to the industry, namely in formulations and manufacturing.  In January, it partnered with a Columbian maker of soft-gel capsules, ProCaps SA, giving it rights to ProCaps’ proprietary soft-gel technology and manufacturing capabilities in Europe, the U.S. and Asia.

Although the industry has far too much manufacturing capacity in general, for both small molecules and biologics, it also faces a shortage of certain kinds of facilities, for things like state-of-the art sterile fill finish, points out Michael Lytton, Patheon’s EVP, corporate development and strategy, who previously was EVP, corporate and business development at Biogen. Patheon, by dint of its focus, has greater operational efficiencies, and can better manage complexity than larger companies focusing on new drug development, particularly for problem areas like sterile injectables, said Lytton. Because its processes are state of the art and highly automated, Patheon can provide high quality without great additional cost, Geoffrey Glass, EVP, global sales and marketing said.

Whether it’s easier for investors to win on the services side of the pharma industry than on the bread-and-butter of betting on R&D innovation remains to be seen. Meanwhile the search for innovation goes on.

GlaxoSmithKline/Vertex and Janssen Pharmaceuticals/Vertex: Vertex announced on Nov. 1 separate agreements pairing its nucleoside VX-135 with GKS's NS5A inhibitor and Medivir AB/ Janssen Pharmaceuticals’s protease inhibitor for Phase II trials. The deals end speculation about when the Cambridge, Mass., biotech would enter the intra-industry mix-and-match in search of an interferon-free combination regimen to treat hepatitis C. Both collaborations are non-exclusive, with an even split of expenses to support Phase II proof-of-concept trials to begin early in 2013. The deals did not provide for up-fronts or milestones, and the agreements cover only the trials.

Glaxo has not had a high-profile in the hepatitis C space, and Bristol Myers Squibb was thought the more likely candidate along with Janssen parent Johnson & Johnson for a Vertex clinical partnership. In fact, the clinical deal may be the first significant step into hepatitis C for Glaxo, an otherwise established player in the antiviral space.

The announcement solves the mystery of when and with which big pharma candidate(s) Vertex would test one of the few clinically viable nucleoside polymerase inhibitor candidates remaining in the industry. Attrition has been high for that antiviral class, exemplified by Bristol’s announcement in August that it would cease development its nuc BMS-986-094 following a Phase II cardiac toxicity incident.

The latest casualty is BioCryst Pharmaceuticals Inc.’s BCX5191, developed in house by the Research Triangle Park, N.C., biotech.

AstraZeneca/U.K. Academia: AstraZeneca  said Oct. 31 that it is expanding its dealings with academia in its latest experiment with new R&D models involving increased interaction with external partners. In late 2011, Britain’s second-largest drug maker made 22 compounds available to U.K-based scientists at no charge to see if they can develop new medicines from them. Academics submitted more than 100 proposals, from which the Medical Research Council on behalf of AstraZeneca selected 15 to further investigate for a range of potential new drugs covering Alzheimer's, cancer, and lung disease. Winners include a University of Bristol project investigating whether a compound originally evaluated for the treatment of prostate cancer could delay, or even reverse, the progression of Alzheimer’s disease; a team at the University of Manchester conducting a small clinical trial of a new treatment for chronic cough using a compound developed to treat heartburn; and scientists at the Royal Veterinary College, University of London hoping to re-purpose a lung disease drug to treat muscular dystrophies.

The 15 projects will be financed using £7 million ($11 million) provided by the MRC. Under the arrangement, AstraZeneca will retain its existing rights relating to the compounds and any new research findings by the academic institution will be owned by the academic institution.

The open innovation project is unique to Britain. It has already created a number of partnerships between researchers from academia and industry and should lead to future collaborations across the sector.--Sten Stovall

Astex/Cancer Research Technology/Newcastle University: Open innovation and knowledge sharing were major themes in Britain this week, during which U.S.-based Astex Pharmaceuticals TK inked a strategic cancer drug discovery alliance with Cancer Research Technology Ltd. and Newcastle University in northern England. Astex said that over the course of the partners’ five-year alliance it will provide £1 million ($1.6 million) annually to Newcastle University for research across biology, chemistry, pharmacology and imaging to identify new cancer drugs and associated biomarkers for diagnostic tests. The three-way pact builds on a previous collaboration between Astex, Newcastle and the CRT on fibroblast growth factor receptor, a key cancer target, which led to the development of a clinical candidate that Astex partner Janssen Pharmaceuticals recently took into Phase I clinical trialing.

Astex will retain options to exclusive worldwide licenses to develop and commercialize pharmaceutical products from each alliance project.  CRT is a non-profit organization that links discoverers of new cancer compounds to potential partners which can develop and potentially commercialize the compounds. The three-way partnership makes CRT and Newcastle University eligible to receive development and regulatory milestone payments on exercise of the options, and on products that Astex takes into development, and royalties on sales.  Financial terms of the milestone payments and royalties were not disclosed.--SS

Menarini Group/Oxord BioTherapeutics: Oxford BioTherapeutics Ltd. has entered a pact with Italy’s biggest drug maker, the family-owned Menarini Group, to jointly develop a portfolio of antibody-based oncology drugs, the firms announced Oct. 29. The deal covers five of OBT’s antibody and antibody drug conjugate (ADC) programs, each of which is in pre-clinical stages and focused on a different cancer indication using a different novel oncology target. Menarini, which has around €4 billion in annual revenues, says it is pumping €800 million into the collaboration, though would not divulge details on how that cash breaks down into R&D funding, access payments, and milestones. Its British president Andrew Slade says the deal resulted after Menarini’s main ADC hope turned out to be a dud, which sent him scurrying to find alternative assets and interviewing more than 100 companies. OBT won the contest on the strength of its discovery expertise using a platform for the development of antibody-dependent cellular cytotoxicity (ADCC) enhanced antibodies. Slade says the long view investment approach that family-owned drug makers can offer biotechs is very attractive in the current financing environment. Family-owned drug makers – most usually found in continental Europe – can offer stable management, access to long-term funding for long-term projects, and traditionally have low turnover of staff.--SS

Boehringer Ingelheim/Ensemble Therapeutics: The German pharma Boehringer Ingelheim became the latest drugmaker to strike a deal with privately held, Cambridge, Mass.-based Ensemble Therapeutics, which uses a proprietary chemistry platform to discover orally available macrocyle drugs that affect protein-protein interactions. The parties said the deal includes an up-front payment and research funding, as well as milestone payments that could bring its total value to $186 million plus royalties, if multiple drugs are developed, approved and commercialized. Specific details, including the number of drug targets covered, therapeutic areas involved, and size of the initial payments, weren’t released. BI will choose the targets, making the deal similar to Ensemble’s existing arrangements with Genentech, Bristol-Myers Squibb, and Pfizer. Ensemble chief executive Michael Taylor said that although the company’s 2009 Bristol deal covered eight targets, Ensemble has since pursued smaller partnerships. Eight-year-old Ensemble is also developing a pipeline of its own, including an interleukin-17 antagonist it expects to partner sometime in 2013. The company now subsists largely on non-dilutive capital, and is unlikely to raise more beyond the $38.5 million it took in two rounds from Flagship Ventures, CMEA, ARCH Venture Partners, Harris & Harris, Kisco Ltd., and Boston University.--Paul Bonanos