Bayer/Direvo: Platforms Trump When It Comes to Exits

Yesterday, Bayer HealthCare announced its intent to spend €210 million to acquire Direvo Biotech, a privately held start-up with a promising next-generation protein-engineering platform.

Bayer is the latest in a string of pharmas to bolster its large molecule capabilities via the acquisition route. Other privately held companies with novel technology platforms snapped up by Big Pharma in recent years include GlycArt (Roche), GlycoFi (Merck), Domantis (GlaxoSmithKline), Adnexus (Bristol-Myers Squibb), Agensys (Astellas), Morphotek (Eisai), and CovX (Pfizer). (Are you beginning to see a trend here?)

START-UP recently undertook a comprehensive review of private biotech M&A, analyzing 184 deals that took place from January 1, 2005 to August 31, 2008 to identify possible trends, including age at acquisition, as well as the clinical status and therapeutic focus of a start-up's most advanced program. (You can read the whole article here.) Interestingly, fewer than half of the acquisitions reviewed resulted in a reliable exit for investors, and those numbers appear to be trending downward.

But if M&A has become not so much an exit opportunity as a chance to revamp one's business card, there's one group that has continued to hold value in the eyes of acquirers: the platform biotechs, especially those capable of generating multiple therapeutic products of the large molecule variety. In all, 56% of the private companies acquired during the 2005-2008 time period were platform-based. And of those companies that made healthy exits, nearly 60% were platforms. (See chart above--click to enlarge.)

And that's been very good news for the private investors who've ponied up the cash for these start-ups. For instance, HBM Bioventures, Atlas Venture, Polaris Ventures, Flagship Ventures, and Venrock poured $54.5 million into Adnexus from 2002 until its acquisition by BMS in 2007. But they netted an almost 8-fold return in the process. (And if the company realizes certain developmental milestones, earn-outs could drive the return up nearly 10-fold.) Meanwhile, CoGenesys's backers, which include New Enterprise Associates and OrbiMed Advisors, invested $55 million into the Human Genome Science's spin-out and earned a 7.3x return on their investment when Teva purchased the company earlier this year.

Direvo, too, netted quite a nice return for its backers, which include TVM Ventures, Danisco Ventures AS, S-Equity Partner, and Mulligan BioCapital. (A full list is here.) The company, which spun off from Evotec, has raised more than €30 million over three private rounds since its 2000 founding; by our calculations that's an ROI of 7x.

One reason the return for TVM and others was so high: the sale of Direvo was apparently a competitive process. "There were several parties in the race," Direvo President and CEO Dr. Thomas von Rüden told the IN VIVO Blog.

Late in 2007 and early in 2008, Direvo also inked research agreements with both Pfizer and MedImmune. Financial terms of those deals weren't disclosed--and probably didn't generate a tremendous amount of money for Direvo. But it's clear those deals served their purpose, helping validate the technology in the marketplace. "It put us on the landscape," admits von Rüden.

Certainly Bayer, which has been somewhat late to the biologics party, didn't have the capabilities Direvo was offering. "We can optimize antibodies, proteases, other proteins, and do glyco-engineering. Nobody else offers all this together," notes von Rüden, who will be staying on until year's end to aid the start-up's integration into Bayer Schering.

It's true the pace of acquisitions of these monoclonal- or protein-centric outfits has slowed somewhat. Direvo is only the second such company to be acquired in 2008; back in May, Daiichi-Sankyo purchased another German stand-out, U3 Pharma AG, for €150 million. Still, Big Pharma's desperation to quickly add biologics expertise means we're likely to see out-sized returns for platform start-ups of this type.

And despite a worsening M&A climate, that's definitely good news for the VC community.

image from flickr user bk-robat used under a creative commons license

Deals of the Week: Not Quite Exits, But OK Given the Circumstances

It’s hardly news that most biotechs can’t buy an investor. So it’s nice to see a few signs of progress.

Take pharma-ignored cell therapy. The stem cell world got a boost as two smart guys from biotech – Paul Grayson from Sanderling and John Mendlein, most recently CEO at biological-platform play Adnexus (sold for $500 million to Bristol-Myers Squibb) -- joined a bunch of scientists at Fate Therapeutics.

Elsewhere in the cell-therapy world: we’ve been wondering (in this post, for example) why big biotech deals so often cause biotech shares to drop. But not at Cell Genesys, whose Takeda deal started the company’s stock up a satisfyingly steep incline, virtually doubling as investors absorbed the news that somebody in Pharma, finally, had seen the value of cell therapy (albeit a pretty pharmaceuticalized version). Now it’s done the smart thing – raising $30 million from shares and warrants in a one-investor PIPE. It probably still feels the financing came at a pretty dilutive rate (something like $330 million pre-money) but hardly the dismal barely-above-cash-value price it was trading at a few months ago.

Now with that ringing endorsement we bring you ...

Intercell/Iomai: And as for exits – or quasi-exits: from the outside, things looked pretty bleak for vaccine-play Iomai, which had less than a year of cash when the Austrian Intercell said on Tuesday that it was buying the patch-tastic drug and vaccine delivery company for $6.60 per share, valuing the company at $189 million. Intercell gets a few mid-to-late-stage patch-vaccine programs from Iomai, including one for travelers’ diarrhea that may enter pivotal trials as soon as the first half of next year, as well as a second deal with Merck & Co. around Iomai’s patch with an undisclosed vaccine. Deal doesn’t do much immediately for the major investors, presumably the VCs like New Enterprise Associates and Essex Woodlands who have been stuck in the stock since taking it public in 2006 at $7/share at about an $85 million pre-money. They’ve got to take Intercell shares for their stake (which are at least far more liquid than Iomai’s were). We noted the predicament of these VCs and others who have found themselves ‘marooned in the public markets’ only last month in START-UP.

Antisoma/Xanthus: Similar issue for backers of Xanthus. Antisoma, the UK cancer-focused biotech, is acquiring the Boston-based start-up for ₤26.8 million in stock. Antisoma seems to have gotten a great deal. On a total of about $90 million invested from its VCs, Xanthus has managed to create a real pipeline, largely through in-licensing. It’s put four drugs into clinicals, with two leading the way: Xanafide is starting a Phase III trial in secondary acute myeloid leukemia under an SPA; and FDA has accepted Xanthus’ filing for oral oral fludarabine, to which its got US rights (the product is marketed in Europe and elsewhere). Most of Xanthus’ pipeline was spun out of Schering AG in a series of deals as that firm was integrating into Bayer, a deal we chronicled here in 2006. (Interestingly, before that, Xanthus had managed to grab another, earlier stage asset (P2045), a peptide coupled to a radioisotope which had originally come from biotech Diatide—which had been run by Xanthus CEO Richard Dean, PhD, and VP of development John Lister-James, PhD.) Xanthus’ backers won’t get free of Xanthus immediately: they’re putting about a third of the $42 million or so in new money Antisoma is raising simultaneously with the deal.

Merck/Ranbaxy: Now for something completely different. On Monday, Merck announced a partnership with Indian drug giant Ranbaxy in the anti-infective space. For an undisclosed up-front fee and milestones potentially totaling more than $100 million, Ranbaxy will search for anti-bacterial and anti-fungal compounds, taking compounds through Phase IIa before handing them back to Merck for additional human studies and commercialization. Merck won’t release details but Mervyn Turner, PhD, SVP for world-wide licensing and external research at Merck assures IN VIVO Blog that the proper incentives to keep both sides motivated have been built in. Still, it’s anybody’s guess what happens if Ranbaxy’s compounds don’t pan out. Does Ranbaxy get them back? Is the company still eligible for monetary compensation? “It’s all covered under the agreement,” says Turner.

This most recent deal comes on the heels of two other similarly structured deals Merck has inked in India: a November 2007 agreement with NPIL Research and Development (formerly part of Nicholas Piramal) in the oncology space and a 2006 partnership with Advinus Therapeutics in the metabolic disease arena. For Merck, the deals are all about expanding pipeline and pipeline capacity. Merck doesn’t have to fund much development, so doesn’t take a big P&L hit, but still has the right to step back in if something interesting results. We’re likely to see more such deals in the future. Increasingly Big Pharma is thinking virtual: companies once proud of their FIPCO status are openly discussing their desire to transform themselves into FIPNets (fully integrated pharmaceutical networks). Lilly, in particular, is a big proponent, and we have more on their strategy in a story in the May IN VIVO along with another piece in the same issue on Pfizer’s ideas for externalizing its pipeline.

BMS/KAI: We’ve already noted here the tie-up between Bristol-Myers Squibb and Kai Pharmaceuticals on an acute-care IV-delivery heart attack drug, KAI-9803. KAI had reformulated the compound from the original intra-coronary version it had licensed and gotten back from Sankyo, following that company’s merger with Daiichi, but the deal is also the second in Bristol’s so-called string-of-pearls strategy (after its Adnexus acquisition in 2007). No longer as big a Cahuna in the drug world as it once was, Bristol has been transforming itself into a specialist player, looking to layer in externally sourced next-generation R&D programs. If they’re good, they’ll come at a Big Cahuna cost, however -- pretty much just as Plavix is losing patent protection and with it a huge chunk of Bristol’s current operating cash flow. That’s why the company is trying to raise money now to fund its strategy, selling off Convatec ($4.1 billion) to a couple of private equity groups and IPO’ing Mead Johnson, keeping 10-20% and reaping maybe $900 million - $1.7 billion (with the possibility of selling off more over time).

Venture Round: Finding the Exit

This week brought on a flurry of news reports about venture capital firms setting out to raise new funds. VentureWire Lifescience reported that Atlas Venture, Scale Venture Partners, Pappas Ventures are at varying stages of raising new funds.

Toss in the news about Orion Healthcare Equity Partners hiring some new personnel, and the list of firms setting out to raise new funds just gets longer. (We first reported on Orion here and talked about other fund raisers Interwest Partners and Versant Venture's fund raising here)

It’s always nice to read about the flow of fresh new capital coming into the sector. Eventually, these articles will be followed up with new ones on fund closing. (Hello, this week's news about Split Rock Partners and last weeks' post on Kleiner Perkins Caufield & Byers.)

But who’s watching the dollars after they’ve been invested? Well, we did this month.

Our April issues of START-UP and IN VIVO offer some unique, data-driven insights on the opportunity for exits in the biopharmaceutical and medical device industry. The pieces are written by our fearless leaders Roger Longman and David Cassak, who are aided with data from our own Strategic Transactions Database and other sources.

Roger’s Valuation Watch takes a look the status of biopharmaceutical companies that have gone public since 2003. We’re sorry to say, the picture is not pretty for the companies or their investors. Hence the headline, “Marooned! VCs Stuck in the Public Markets.”

Among the group of 76 still-independent biopharma-focused biotechs (only a small number of recently public companies have been acquired and only a handful of those have been acquired at even a moderate profit for their investors), 61 companies are trading below their IPO price. The average trades 24.3% below its IPO price, the median 46% below.

The report names names, offering a list of the most troubled companies and the VCs who look like they’re might be in store for a good soaking.

David, meanwhile, examines both big and small cap mergers and acquisitions in the medical device industry. After pouring through piles of transaction data from our database, David opens the story with this:

To anyone with a vested interest in medical devices, investors and company executives alike, anecdotally, the past several years have felt like good times. And, in fact, by one standard alone, the total dollar values of M&A in devices, things have never been better. Total M&A dollar volume in the period 2005-2007 was up almost three and a half times that of the three-year period just prior, 2002-2004. And while a couple of very large deals, most notably Boston Scientific Corp.'s play for Guidant and the private equity takeout of Biomet Inc., have helped to push deal values up, dollar volumes over the past three years would still be much higher, even if those outliers are factored out.

But it's one thing to say that payors are paying more for device companies than they ever have. It's another to ask, What exactly are they paying for?

David’s report goes onto answer those questions and more. Deal Analyst Amanda Micklus, meanwhile, compiled some impressive tables showing what companies have been the most active buyers and, more intriguing, on what disease or conditions are those buyers spending their dollars?

There you go, you’re all caught up. Not only do you know who is raising funds, but now you’ve got the means to find out what is happening to venture bucks already invested.

As always, if you have any private suggestions, tips, or if you would like to meet up at Heart Rhythm 2008email me here.

(Image courtesy of Flickr user Paulbence Photography through a Creative Commons license.)

For IPO and M&A Exits, One Hand Washes the Other

At VC meetings like Atlas’s St. Tropez shindig (about which you can read more here and here), the heroes are the guys who have most recently sold their companies for big bucks. In St. Tropez, that guy was John Mendlein, of Adnexus.

Scientist/Lawyer Mendlein had followed the now well-worn path of filing for an IPO while simultaneously pursuing the opportunity that ultimately led him to embrace Bristol-Myers Squibb’s $415 million-plus marriage proposal.

No real difficulty to that decision—an IPO at maybe $200-250 million pre-money; an acquisition for twice that amount.

We’re told there was plenty of appetite for the IPO—Mendlein had done what every biotech CEO should do, but doesn’t, in spending plenty of time telling the Adnexus story to the usual crew of IPO buyers (for more, see here and, more in-depthly, here), giving them the reverse valuation argument they like (here’s terminal value X and why you, Mr. Investor, should be willing to pay NPV value of Y at our IPO).

But since there was such interest in the IPO, shouldn’t Mendlein’s choice between going public and selling out have been a little bit more difficult: given the possibility of that kind of purchase price, shouldn’t investors competing for those shares – not just with each other, but with Pharma -- have been willing to pay a higher price at the IPO?

At the Atlas meeting, your blogger showed a slide (available in this presentation) indicating the gap between how IPO buyers value private companies and how Big Pharma does, thus defining the arbitrage opportunity for investors. But according to an investor panel at the meeting, there is a fundamental-as-gravity law that dictates the minimum size of that gap, underpinned by at least four basic facts.

First, Big Pharma has a much lower cost of capital than any investment fund—practically a zero cost of capital given their cash flow and virtually unleveraged balance sheet, noted one investor. Second, any biotech will need its investors to pony up additional cash to get the job done—which means, uggh, dilution. Third, drug companies can recoup cost synergies because they can fire redundant workers; investors can’t because, theoretically, the only workers in the company are those necessary to get the job done. And finally, drug companies can sign CDAs with biotechs they’re interested in acquiring, collecting a ton of crucial investment information unavailable to fund managers.

We can’t find much wrong with the first three reasons, though we’d contend that pharma’s cost of capital is rising as it sends more of its cash back to investors in the form of share repurchases and dividends. But yes, it’s still lots lower.

But the biggest issue is the information asymmetry between a strategic buyer and a financial one. And that, we’d contend, is often less significant than it appears. Certain acquisitions are simply predictable—like Adnexus’s--based on the obvious needs of the buyers (very little large-molecule discovery) and the advantages of the seller (large-molecule discovery; the ability to move into desirable IP space with improved fast-follower products).

We won’t speculate here on who we think might be equally likely purchases…

…OK, yes we will. Maybe Ablynx, which just filed for an IPO on Eurolist—one of the usual messages signaling a for-sale sign. And its deal with Boehringer Ingelheim, which has plenty of bioprocessing but precious little discovery certainly offers an idea of who might be in on the auction (GlaxoSmithKline also has a stake in the company, via its VC arm SR One, and might want to pin its biologics hopes on more than simply the Domantis platform). And then on the public side, ImClone, which has a couple of underutilized manufacturing plants, a pipeline beyond Erbitux, for which natural acquirer Bristol is paying 39% royalties. The fact that Jeremy Levin just jumped from his senior biz dev job at Novartis to an even more senior and more-than-biz-dev job at Bristol indicates at least to us that Bristol, already one of the more innovative strategic thinkers in the industry, might be thinking more aggressively about its large-molecule options.

Granted we could easily be wrong on both of these – but the logic is reasonable and more importantly based on completely public information.

And similarly we’re willing to stand out on a limb and say what we think won’t happen – again based on public info. We stand in as much awe of Carl Icahn’s money-making ability as anyone, but we just don’t see how Biogen Idec—in which he took a stake earlier this year, sending the stock price spiraling upwards—can be affordably acquired at anything like the price it’s trading at. We’ve heard the rumor that it’s engaged Goldman Sachs to investigate “strategic alternatives,” but since any acquirer would have to share Rituxan with Genentech and since Elan has a change-in-control right to buy Tysabri, it’s not likely a drug company looking for biologics would long consider Biogen, particularly at a likely takeover price of $30 billion.

So…yes, there should be a difference between IPO valuations and average acquisition prices of private biotechs (or more generally, between what investors might see as the intrinsic value of biotech shares and their strategic value to buyers). But the difference has been shrinking: IPO pre-money market caps are up this year because investors are finally understanding the arbitrage opportunity. That’s good news for biotechs—because as IPO valuations increase, M&A prices – the competition for IPOs – creep up, too, giving more headroom for IPO prices, which pushes up M&A prices….

Vive la difference!

On the Beach at St. Tropez

Oh please, please Brer VC, please don’t make me go to St. Tropez.

But he did, and your blogger has endured the vins de Provence, smoked salmon and paté, chevre and Roquefort, moules mariniere, and breast of duck of Atlas Venture’s Riviera hospitality to provide you some personal takeaways from its Life Sciences retreat.

We’re not quoting attendees or speeches thanks to our journalistically questionable promise to ascribe none of the chit-chat to particular attendees—a promise we assume doesn’t apply to IN VIVO Blog's own presentation, which is available here for free downloading (thanks to Atlas’ Kevin Clancy for preparing the slides).

And oh yeah, it also doesn’t apply to the other day’s Myogen vs. the VCs post.

So what did we learn midst gawking at boats the size of our house?

The increasing leverage of biotech. Everyone agrees that the pivot point of deal values is proof-of-concept (for more on why, see here and here).

But will the prices continue to increase? Yup. Despite Big Pharma’s relatively rich early-stage pipelines, thanks in part to a better understanding of chemical challenges, the biological risk has soared—and with it the attrition rates. While we at least believe in the possibility that collaborations are now inching toward the asymptotic endgame of full value, one top Big Pharma executive argued--with the authority to do so--just the opposite: given the appetite from his and other companies for post-proof-of-concept candidates, deal prices will continue to rise on just about the same steep slope they’re on now.

No end in sight to the Big Pharma biologics appetite, whetted by lower perceived risk, higher pricing, and—thanks to the regulatory Berlin Wall against biosimilars—longer product lives. (For an in-depth analysis of pharma strategies here, see the upcoming October issue of IN VIVO). Particularly mouthwatering: technologies—like Adnexus’s Adnectins—which open up the IP spaces around validated mechanisms targeted by antibodies to improved fast-followers.

But not so fast. Let’s at least admit we really don’t know the risk of biologics, at least not in quantity. Think first about manufacturing, cautioned one former research chief. Are companies whose QA/QC processes were built around the relatively straightforward chemical characterization of small molecules really prepared for the kind of QC necessary for parallel bioprocessing of perhaps a dozen biologics (a slide on Pfizer’s pipeline, chock full of biologics, showed just how possible a flood of biologics might be)?

Then think about their commercialization. Given that more and more of these biologics will end up being used chronically (after all, Big Pharma wants to replace post-expiration chronic-care small-molecule drugs and most acute-care biologics won’t fill their revenue shoes).

Suddenly, said the ex-research boss, the number of patients on large molecules will dramatically increase the likelihood that unforeseeable signals will show up – like the two PML cases which yanked Tysabri off the market for a time and which would have been impossible for any approval statistics to uncover. At least with small molecules, we’ve got the tests for the likely toxicities, allowing us to shoot compounds in the head before they ever get developed. So with biologics: what signals are companies setting themselves up to look for?

Now let’s talk pricing and patents. Our reading of the meeting’s consensus opinion: BIO made a colossal mistake in stalling a pathway to approval for follow-on biologics, pulled by the nose—accused a variety of meeting attendees--by its richest members (Amgen, Genentech, Biogen Idec, J&J) while ignoring its smaller members. A panel on Washington matters was utterly dominated by the subject, with most of the audience (or at least the many in the audience who voiced their displeasure) apparently convinced that the biotech industry had thrown away its political white hat in favor of the guise of intransigent profiteers.

The political chance lost: a Republican majority which could have at least passed a bill reasonably attractive to biologics innovators while allowing in lower-priced competition. Now it’s payback time: a Democratic majority, more closely tied to a few large-ish generics players, heel-dragging for a bill with relatively minimal exclusivity provisions, speculated attendees.

We'll have more to say about the retreat once we’ve been to the gym to repent our hedonism.

IPOs: Just Another Facet of the M&A Auction

It's pretty much official now: filing an S-1 is just another part of an M&A auction.

BMS' acquisition of Adnexus, like Merck's recent acquisition of NovaCardia, demonstrates that Big Pharma, when nudged a bit by the prospect of a target hitting the public markets, is prepared to pounce.

We won't get into the details of the $415 million (plus earnouts) BMS/Adnexus deal right here--plenty of other blogs have covered the deal well (see the WSJ Health Blog or Pharmalot). Plus we're going to cover the Big Pharma biologics (and next-generation biologics) land grab in depth in the next issue of IN VIVO. And on top of all that, we're going to have Bristol's CSO and president of R&D Elliott Sigal, MD, PhD, up on stage at this week's Pharmaceutical Strategic Alliances shindig, and we'll surely get into the deal then.

But lets take a peak into the near future (tomorrow's PSA talk from Roger Longman) and look at both flavors of biotech exit; acquisitions and IPOs.

In 2007, M&A continues to climb in both total value and number of deals, while IPOs seem to have reversed a downward trend both in terms of valuations and pre-money step ups.

So which companies in the IPO queue are teeing up M&A exits simultaneously? Adnexus and Bristol's previously struck $240mm deal made BMS the biotech's logical acquirer--BMS' lack of a large molecule discovery engine greased the skids a bit for sure. Who else is angling for a public exit that could provide pharma with a similarly lacking discovery platform?

Maybe Archemix, the aptamer play without any significant Big Pharma ties could fill that kind of hole. And while Ablynx has yet to file for an IPO, its recent broad strategic alliance with Boehringer Ingelheim both gives it the pharmaceutical validations prerequisite for public investors and sets BI up as a logical acquirer should the biotech go that route.