Financings of the Fortnight Is Innocent Until Proven Guilty

Welcome to the jury service edition. We were called in to do our civic duty this week, and we were stunned when we made it through the voir dire and found ourselves on our feet, raising our right hand and taking an oath to well and truly try the cause before us.

Now impaneled for the first time and deciding the fate of a fellow citizen, your columnist is struck by how difficult -- and important -- it is to remember that a person charged with a crime is innocent until proven guilty. Everyone likes to think of himself or herself as open minded, but the real challenge is to keep the mind open in the pressure cooker of a criminal trial: sealed into a room, artificially separated from the outside world, and bombarded with new jargon, complicated timelines, and tangled facts, or egregious lack thereof.

We're also finding the process fascinating in the age of social media. All of us are constantly encouraged to be insta-pundits. Indeed, 140-character snap judgments are not just encouraged, they're lionized, but a juror's job is the opposite: You must banish the snap judgments. No, better yet, be skeptical of them, then gather them, shape them, and rework them into a coherent latticework of reason.

It's a weird out-of-body experience. It's also a lot like journalism, though with very different rules. While I've been deliberating with eleven others, my colleagues committed a small act of heads-up journalism, digging up notice in a Cephalon regulatory filing that the firm is starting its own in-house venture group. In case you missed it, here's our report. Cephalon joins Merck-Serono, Boehringer-Ingelheim and Shire, all recent joiners of the corporate venture club.

Any holdouts? The biggest, or so we thought, is the American Merck. Consider this response from Merck's SVP of worldwide licensing David Nicholson at last year's Pharmaceutical Strategic Outlook conference, when he was asked if Merck would ever create a biotech venture fund:

Look, there are some really fantastic VC folks out there and that's their business. Our business is discovering and developing drugs. At least to date, have we contributed to VCs and to their firms? Yes, absolutely. All parts of the various legacy companies of Merck have done that. That's something that we remain interested in. Are there concrete plans to set up a VC fund at Merck today? No. Does that rule it out forever? Who knows?

"Who knows" has arrived. Without fanfare, the big pharma has launched what it calls the Global Health Innovation Fund, a $125 million vehicle with five staffers who report into Merck's executive committee and chief strategy officer. The group's mandate is to invest beyond drugs: diagnostics, devices, information and health management tools, site-of-care services. The fund is run by Bill Taranto, who came to Merck from Johnson & Johnson, where he was most recently in charge of health care strategy and alliances. Taranto's been out stumping for the fund at conferences like this.

We asked about the fund's investments so far, and we got a tight-lipped response: Nothing yet disclosed.

Another holdout that comes to mind is Celgene. Though it's done one-off investments like the one Cephalon made in Japanese firm SymBio Pharmaceutical, which we describe below, Celgene doesn't have a venture group. But as we report in the upcoming issue of IN VIVO, executives certainly have been thinking about it -- and larger questions of how to tap into outside innovation -- as the big biotech grows more attuned to its size ($3.6 billion in 2010 sales), its dependence on one product (Revlimid, $2.5 billion in 2010 sales), and the pitfalls of having investors who want some of that cash back, dammit, instead of seeing it plowed into R&D (28% of fourth-quarter revenues) or marquee deals.

We're often accused of bringing you, dear reader, tasty little tidbits from the financial front. You can call us innocent, you can call us guilty, but you can't deny that you're reading another edition of...


Acetylon Pharmaceuticals: A few weeks back, we’d heard that oncology startup Acetylon was looking to tap a broad network of angels for an upcoming round of funding well into the double-digit millions -- a lot more money than can fit on the head of a pin. Now Acetylon has taken the first step, revealing in an SEC filing that it’s raised the first $12.4 million of a planned $30 million Series B round. Although it hasn’t revealed details about its investor group, CEO Walter Ogier said in a recent START-UP feature that Acetylon wanted to avoid working with traditional VCs. Rather, it planned to seek capital from friends and colleagues of its existing angel network, which includes The Kraft Group, a family philanthropic organization and holding company tied to the owners of the New England Patriots. The strategy appears to be working: The filing says 23 investors are already involved with the new round, more than twice the number involved in its $7.2 million Series A during 2009. (A $2 million convertible note followed last year.) Founded to investigate new drugs in the class known as histone deacetylase (HDAC) inhibitors, Acetylon is aiming to move its first drug candidate, multiple myeloma treatment ACY-1215, into the clinic. The company published and presented encouraging preclinical data about the drug in December. In a new wave of HDAC inhibitors in recent years, only two have been approved: Celgene's Istodax (romidepsin), which it nabbed in its takeover of Gloucester Pharmaceuticals; and Merck & Co.'s Zolinza (vorinostat). Both were approved for cutaneous T-cell lymphoma. -- Paul Bonanos

Tengion: Raise or fold: Those were the two options in the cards for organ and tissue regeneration firm Tengion. On March 1, two months away from running dry, the firm raised $31.4 million in a PIPE by selling 11.1 million shares at $2.83, a 13% discount to the ten-day average. Tengion also issued five-year warrants for another 10.5 million shares at $2.88. Tengion announced last month it only had enough cash to last through April, which would mark the one-year anniversary of the firm's 2010 initial public offering. The company priced 6 million shares at $5, though it wanted a stock price twice as high with fewer shares sold. The stock has since traded between $3 to $5 except for two days in mid-February, when it got a boost supposedly from rumored discussions of a stock-for-stock merger between Tengion and an undisclosed publicly traded company. But the price spike caused the potential buyer to pull out of those negotiations, according to Tengion. Device giant Medtronic was the big name in this week's stock sale. It bought 2.5 million shares and received a right of first refusal that expires Oct. 31, 2013 to Tengion’s Neo-Kidney Augment, a preclinical cell augmentation candidate designed to prevent or delay dialysis or kidney replacement by regenerating kidney tissue. Upon first glance Medtronic’s investment seems out of the ordinary, but Medtronic has been trying to build a regenerative biologics business. This past August it paid $118 million for Osteotech, which produces demineralized bone matrices, bone grafts, and structural allografts. -- Amanda Micklus

Advanced BioHealing: ABH is looking for a smoother road than what Tengion has experienced in the public domain. The Connecticut firm, also working on regenerative medicine products, has filed for an IPO with a $200 million placeholder. Just a placeholder, mind you, but it's at least a rough gauge of what the company and its advisors think of its prospects. It sells a bioengineered skin substitute called Dermagraft used to treat diabetic foot ulcers, and it would like to expand the product to treat venous leg ulcers. It's also working on a skin treatment for severe burns. This year started with a flurry of IPOs that mainly followed last year's trend of discounted pricing and, post-IPO, lukewarm reception for shares. It's something ABH's shareholders must be keenly aware of. Canaan Partners owns 41%, Safeguard Delaware 28%, and Wheatley Partners 15%. -- A.L.

SymBio Pharmaceuticals: Plenty of Western biopharmas have found interesting compounds sitting on Japanese drug makers' shelves. SymBio turns that formula on its head. The Tokyo-based specialty pharma in-licenses foreign products and brings them to the Japanese market. It just raised a ¥ 2 billion ($24 million) Series E round, which makes the company sound ancient. Not so; it was founded in 2005 by the former head of Amgen in Japan, and it shepherded the lymphoma treatment bendamustine to approval in Japan last October within four years of starting a Phase I study. The F round was led by Cephalon and JAFCO, with Cephalon boosting by an undisclosed amount its 17.5%, which it gained in its 2009 deal with SymBio to take over bendamustine rights in China and Hong Kong. Cephalon also has US rights to the drug through a deal cut by Salmedix, which Cephalon acquired in 2005. (Salmedix got the rights from Fujisawa Deutschland in 2003.) There's a lot of ink devoted to SymBio in our colleague Mel Senior's IN VIVO feature on Japanese specialty pharma here. The story is four years old -- note the reference to a "burgeoning private equity sector" -- but quotes like this one from SymBio CEO Fuminori Yoshida are timeless: "Many [non-Japanese] companies in niche areas, looking for partners in Japan, visit Japanese pharma firms, take their executives to a nice restaurant, and think they have a deal. Twelve months later, nothing happens." -- A.L.

Image courtesy of flickr user mira66 under a Creative Commons license.

Cephalon Joins The Corporate Venture Party

For the start-up community --and increasingly certain distressed VCs -- the birth of a new fund devoted to early stage biopharma investing is an event to be celebrated. And, as we've noted before, pharma, through so-called corporate venture divisions, is increasingly the cause for the celebration.

With deep-pocketed parents to ensure available follow-on funding, these groups can invest where traditional VCs have curtailed their efforts, while simultaneously giving pharmas an inside track on pipeline programs of interest as the competition for outside innovation increases. It's the perfect alignment of strategic intent and financial return, and the impetus for a wave of new CVC starts from the likes of Shire to Merck Serono to Abbott (though that's mostly device-oriented.)

The latest pharma to join the corporate venture party appears to be Cephalon, a one-time specialist in neurodegenerative diseases that’s diversified considerably over the years. In a regulatory document filed last month, Cephalon announced the retirement of executive vice president of technical operations Peter Grebow, but indicated he would continue to work for the specialty pharma as a consultant, during which time he would “assist with the establishment of Cephalon Ventures.” (Bolding courtesy of IN VIVO Blog.)

Grebow's "retirement" -- hey, it's kind of like a staged acquisition-- kicked off yesterday. And, according to the SEC docs, his consulting career -- with the ability to bill $750 per hour, with a maximum of 1,000 hours over the course of a year! – began today. (Like many contractors, he doesn't get benefits--and healthcare is expensive.)

This is the first concrete reference to Cephalon Ventures, but it's likely the division has been in existence for for several months. Grebow’s online bio lists him as EVP of Cephalon Ventures, although a previous reference to the organization’s existence beginning in April 2010 in an older bio has been stricken from the official version. An attachment to the filing adds that Grebow “shall make himself available to the Company to assist with respect to Cephalon Ventures, including advice with respect to the formation of N-Versx Pharmaceuticals and the review and selection of Cephalon and third party compounds for licensing.”

Cephalon’s 10-K, also released last month, doesn’t mention N-Versx, and an afternoon of intrepid reporting (including the requisite Google search) turns up nothing linked to the start-up beyond the filing.

Adding to the intrigue, Cephalon is also listed (pdf) as one of the lead investors in SymBio Pharmaceuticals' new $24 million Series E funding, although nothing in SymBio's announcement suggests that the investment came from Cephalon Ventures versus the corporate parent. Moreover, the company already held a stake in SymBio based on an existing licensing agreement for oncology drug bendamustine hydrochloride.

We’ve reached out to Cephalon for clarification, seeking not just confirmation of the venture group's existence but additional information regarding important details like the size of the fund, its investment thesis (a strategic imperative or a financial return--or both?), and whether the unit will also be creating newcos with existing Cephalon assets. We haven't yet received a definitive response, but we promise to report back when we do.

In the interim, it seems like a bit of good news for early stage biotechs --especially those developing therapies in areas of strategic interest to Cephalon. It's also potentially good news for Cephalon, a company that's logged a strong 2010 with $2.8 billion in sales, but nevertheless faces challenges.

CEO Frank Baldino passed away in December, leading to a management transition, and the company is set to lose patent protection for sleep disorder drug Provigil (modafinil), its top seller. Since the beginning of 2010, Cephalon has inked a number of acquisitions and alliances, giving it rights to branded generics (Mepha), a stem cell therapeutics program (Mesoblast) , and pipeline drugs for leukemia, asthma and back pain.

At the risk of being a bit premature, IVB offers its official welcome to Cephalon Ventures. May your party be just beginning.

Image courtesy of flickrer calsidyrose via a creative commons license.

Radius Bone Drug Delivers--Will Novartis Bite?

Radius Health yesterday released top-line Phase II data from its osteoporosis hopeful BA058, demonstrating statistically significant increases in bone mineral density (BMD) versus placebo in the lumbar spine and hip.

Big deal, you say. Well, it kind of is, since Novartis has an option on the compound, exercisable following Phase II evaluation, which is happening now. These days, option deals might be ten-a-penny, but back in 2007, when the deal was signed, they were less common. And Novartis took the option at the same time as the MPM/Novartis 'Strategic Fund', a joint program between the VC firm MPM Capital and Novartis' pharmaceutical business unit, made a $10 million equity investment in Radius. (Read this for background.)

Novartis has since signed option deals on a bunch of other assets, and created a separate venture fund, the Novartis Option Fund, which also inks option-based deals. (For more on their recent activity and the pursuits of corporate venture groups generally, check out this START-UP piece.)

The souring economy and the travails of traditional venture capitalists have made the MPM/Novartis experiment one worth watching. As the first product officially up for grabs, its hard not to see Novartis' decision to exercise--or not--its option to BA058 as a test case for the viability of this particular mix of business development and corporate VC. If Novartis says no, won't traditional VCs and biotechs think harder about the potential taint of an option spurned? Won't an early 'no' also make it harder for the side-by-side fund to ink future deals, especially if the capital markets come roaring back and traditional VCs put money to work again?

Radius' CFO Nick Harvey confirmed to The IN VIVO Blog that "Novartis do now have the Phase II data," but isn't revealing the time period granted to the Swiss group to decide whether to bite. Earlier this year, Joe Jimenez, Novartis Pharma's CEO, included BA058 in an email description of Novartis' osteoporosis development portfolio, suggesting Radius (and its investors) were onto a winner.

But at a recent Elsevier Business Intelligence conference, Novartis' head of BD and Licensing ,Tony Rosenberg, was more circumspect. Moreover, he downplayed the significance of the BA058 decision on the viability of the option model. According to Rosenberg, it would be naive to expect the drugmaker to exercise all the options it has currently taken. "Phase II compounds have a 20 to 30% success rate. If we do five deals, we should expect one or two of them to pay off," he argues.

Do investors buy Rosenberg's logic? Maybe. According to Biogen Idec's Michael Lytton, who invested in Radius while still at Oxford Biosciences and who has become a convert when it comes to these kinds of deals, there's still a bias against such transactions because of their potential to curb a biotech's future deal-making activity. In the case of Radius, Lytton says "co-investors partially accepted the answer that with a primary care product such as Radius' osteoporosis drug, Novartis was one of the few logical acquirers anyway." And after a thorough analysis, they grew more comfortable that the deal's economics were a reasonable approximation of what the biotech might hope to gain from a future partnership.

If it works, BA058--which is parathyroid hormone-related protein--will compete with Lilly's teriparatide (Forteo), a form of parathyroid hormone, and the only bone-building, or anabolic, drug on the market currently. (Check out this START-UP feature for some background on the space.) Appropriately, then, the Phase II trial included a Forteo arm, and, according to Harvey, the highest dose of BA058 boosted BMD at the hip (femoral neck) significantly more than Forteo. (Hip fractures are rarer than spinal ones, but more debilitating and thus costlier.)

Still, since "the trial was designed and powered to show a primary endpoint vs placebo," the Forteo-related statistics are therefore being regarded as "exploratory, rather than pre-planned," Harvey clarified. But he and CEO Richard Lyttle declare themselves pleased with the data, which they say looks "as we expected". Of particular interest: findings show only half the occurrence of hypercalcemia in the group taking the highest dose of BA058 versus those taking Forteo.

Radius reckons this is because BA058 has less effect on bone resorption than Forteo, which means it's less likely to lead to high blood calcium, currently a dose-limiting factor for parathyroid hormone--and the key reason NPS' Preos, for instance (a full-length PTH), never made it onto the US market.

Forteo sold about $800 million in 2008 despite a black box warning related to osteosarcomas, inconvenient administration, and a refrigeration requirement. Radius thinks it has a better molecule, one that's room-temperature stable, and which may be more convenient (Radius is working with an undisclosed partner on a transdermal delivery form).

So will all this plus the crucial Phase II data be good enough for Novartis? We may find out soon--although MPM has said it will support the company whatever the Big Pharma's decision. As to whether there might be any half-way house outcome, other than an opt-in or opt-out scenario, "we could never anticipate that there wouldn't be something [possible] in between," says Harvey.

(Image courtesy of flickr user rachel_r used with permission courtesy of a creative commons license,)

The IN VIVO Blog Podcast: Corporate Venture

Your amazing IN VIVO Blog team does it again--if we do say so ourselves. (And since we are incapable of humility, we will.) Another day. Another podcast.

Yesterday McAllen, Texas. Today the world of corporate venture capital, based on a comprehensive article Ellen Licking wrote for the May issue of START-UP. (Click here to take a gander at the story.)

Sadly, no word yet on whether President Obama has mandated this particular piece as required reading in the West Wing. Somehow we'll survive...

Don't feel inclined to dig into the story right now? Click the button below and listen to the podcast summary of what Roger Longman calls a "magnificent piece." Trust us, Roger never says that--unless he's trying to get a writer to do even more work. And don't forget, you can access the podcast via iTunes also.

VentureDance: The First Round Capital Card

First Round Capital isn't an active investor in the life sciences, but that doesn't mean you can't enjoy their holiday card.



Yes, it's a direct rip off of the Dancing Guy, but it's still fun to watch. Thanks to PEHub.com for the link.

Deals of the Week: Don't Worry Be Happy

Because life needs an optimistic soundtrack. This week In Vivo Blog is adopting the "Don't Worry, Be Happy" motto made famous by Bobby McFerrin in the 80s on the sage advice of Christoph Westphal, CEO of GSK's Sirtris.

At MassBio's annual event on Dec. 9, Westphal urged audience members to think about the opportunities the current financial crisis has created. "I think many of you who are well-financed [also] are going to be able to build even stronger teams and do exciting things," Westphal said, according to "The Pink Sheet" DAILY. His other piece of wisdom? "I think the important things is to always be very well financed and to keep on a momentum path, so that the venture guys don't get nervous on you," he said.

Ah, sweet mystery of life. At last I know the secret of it all.

Sadly, Westphal's recipe for success came too late for folks at Emisphere, XTL, Panacos, and Elan, which all officially joined the ranks of IVB's "troubled biotechs" list this week. The fall-out for Elan was swift and particularly ugly. You can bet CEO Kelly Martin is having a hard time making "Happy Talk" these days. On Friday, the firm announced it was cutting 114 jobs and closing its Tokyo and New York offices, as it attempts to offset the slower growth of its lead drug Tysabri and strengthen its balance sheet. Whether or not the move goes far enough to appease increasingly angry shareholders remains to be seen. (On Thursday, Jack Schuler, former president of Abbott Labs and a 1% stakeholder in Elan, wrote a letter to its board expressing frustration at money wasted on private jets and an excessive number of company offices.) If it doesn't, Martin may have to change his tune to "You're not the boss of me now".

Certainly, Merck executives are clearly in "why worry now?" mode; after all there should be laughter after pain. Clearly their new initiative in follow-on biologics is going to be the answer to recent slower growth of Gardasil and the on-going fall-out from the Vytorin mess. Sadly, the same can't be said for Eli Lilly, which got caught flat-footed at its analyst day. When asked about Lilly's own potential interest in FOBs, CEO John Lechleiter clearly wasn't prepared for the question. “We’re very much considering it. It’s something we’re looking at,” he replied. GEEZ. IVB's response: De do do do, de da da da is all I want to say to you.

We bet next time Lechleiter get asked that question he won't be fooled again. If the news has got you singing the blues, we have the solution (and maybe even a lyric). It's that time again...



BMS/Exelixis: At Exelixis, it's love the one you’re with. Exelixis first began collaborating with Bristol back in 1999 – when the biotech was still basically a platform operation, using worm and insect models to define mechanisms for Bristol compounds. As the relationship deepened, Exelixis leaned heavily on Bristol to help it step up to a product development strategy – swapping, for example, targets and access to its biology platform for access to Bristol’s combinatorial chemistry and a later-stage cancer compound (see this 2002 In Vivo analysis for more). In the next deal, Exelixis paid back virtually the entire price of its X-Ceptor acquisition by selling Bristol a couple of X-Ceptor cardiovascular compounds. A year later it turned once again to Bristol to sign a more elaborate oncology agreement on some early-stage assets. So it was only natural that when GlaxoSmithKline turned down its option on a small collection of Exelixis cancer compounds, including the Phase III XL184 – presumably because of a mechanistic overlap with another Exelixis compound GSK had already optioned – the biotech would turn back to its most important partner. And their long relationship no doubt accounted for Scangos’ confidence, as he implied to IN VIVO at the time, that he’d be able to partner the product before year-end. In the current confidence-less market, Big Pharma partnerships are again becoming key – but ultimately informationless -- imprimaturs for the value of small company technology. The news of the Bristol deal (in return for rights to XL184 and the Phase I XL281, Bristol will pay $195 million upfront; $45 million guaranteed next year and fund most of the development expenses for XL184, all for XL281) prompted investors to return almost exactly the same amount of share value that the GSK “no thank you” had prompted them to subtract two months before. The equivalence is surprising: since the inception of their relationship in 2002, GSK has spent a total of $260 million with Exelixis (including an $85 million loan). The latest Bristol deal alone will put a guaranteed $240 million into Exelixis’s bank account (roughly $2 a share in cash – though since the stock was up only $1.22 on the day, you could actually argue that investors see the deal as value destroying). Or to put it another way: Exelixis got paid twice – first by GSK; and now by Bristol. Good deal. Kind of odd investors don’t get that.

Valeant/Dow Pharma: Valeant executives are likely crooning "I've got you under my skin" this week, after acquiring privately-held Dow Pharma, a Petaluma-based derm company founded in 1977, for $285 million in cash, plus another $200 million in milestones. Ever since Valeant scored a $125 million up-front payment from GSK earlier this summer for its late-stage epilepsy drug retigabine, the company has been buying up dermatology-focused companies in a valiant effort to solidify its standing as major derm spec pharma player. In mid-September the company paid $95 million for Coria Laboratories, a division of the privately held spec pharma DFB Pharmaceuticals, to gain its marketed acne products and the CeraVe skin care line. In November it spent another $12 million on DermaTech, which sells a number of over-the-counter products for sunburn, warts, and dry, itchy skin. This latest deal--at roughly 4.5 times Dow's annual revenues--shows the amount of money companies are willing to shell out for revenue-generating entities. (It also shows just how bad things are out there--it used to be that kind of multiple--while not small--wouldn't have raised many eyebrows. Not in this climate.) In addition to an approved topical drug for mild-to-moderate acne called Acanya, Dow also has a healthy service business providing topical formulations to other pharmaceutical companies. In 2008 that side of Dow's business generated $25 million in revenue, helping to offset the company's internal R&D burn. In addition to Acanya, Valeant gains five development-stage dermatology products and a revenue stream from previously out-licensed products that runs about $20 million annually. Valeant clearly believes that by morphing into a derm player it might have more success, particularly given the safety-first regulatory climate and penny-pinching payers. Topical products are less likely to raise red flags at the FDA because they are not absorbed systemically and private-pay line of cosmetics avoids the reimbursers (though the recession might make the out-of-pocket market significantly less attractive). Dow's venture backers clearly aren't complaining: Essex Woodlands, Galen Partners, and Skyline Ventures, which invested $36.5 million in the company in 2005, are more than in the clear given Valeant's proposed purchase price.

Novartis Option Fund/Ascent: Employees at tiny Cambridge, MA-based Ascent, which was in stealth mode until last month, are likely rocking out to U2's "It's a beautiful day." The company announced that Novartis, together with its option fund, had signed a deal to develop drug candidates against a specific GPCR target. The aggreement includes an undisclosed upfront fee and potential milestones totaling over $200 million, as well as royalties. It's also some validation for the biotech's nascent so-called Pepducin technology. GPCRs are one of the biopharma industry's favorite targets when it comes to developing new therapeutics (according to some sources, 40 - 50% of all marketed drugs target this protein class). Problem is that many of the seven-membrane-domain proteins have proven undruggable--at least with traditional medicinal chemistry approaches. Enter Ascent, which has a nifty technology that allows it to generate short lipopeptide molecules capable of acting as highly specific GPCR inhibitors. To date the company has generated 15 such GPCR inhibitors--at least in vitro--and CEO Rick Jones claims its scientists haven't yet found a receptor they couldn't antagonize (or didn't like). The biotech, which announced a $19 million Series A in November with backing from Novartis Option Fund, Healthcare Ventures, and TVM Capital, plans to identify one suitable IND candidate by mid-2009, probably in inflammation or oncology. As we wrote here, Novartis Option Fund is one of two option funds recently launched by Novartis. Both buy equity in companies and simultaneously secure options on other products, adding a business development spin to the funds' more traditional venture functions.




Unilever/Phytopharm: Unilever, retailer of Dove soap and Pond's cold cream, sang a modified version of "I'm Gonna Wash That Man Right Out Of My Hair'' this week, when it announced it was washing its hands of Hoodia, a functional food extract for weight management developed by Phytopharm. All the orignal patents and rights will revert to the UK-based Phytopharm; in addition, Unilever has granted the company a "non-exclusive, perpetual, irrevocable, worldwide, royalty-free licence, with the right to sub-license, to any Unilever patents, intellectual property rights and know-how connected with the Hoodia programme" according to a press-release. Whew, I'm sure that makes Phytopharm's board feel much better. Phytopharm's chairman Alistair Taylor announced the news in true British fashion--with a stiff upper lip--and did his best to spin the "disappointing" news positively: "We are pleased to have agreed [on] termination terms with Unilever which enable us to take the product forward with another partner. Phytopharm continues to believe strongly that there are alternative product formats and applications for the commercialisation of Hoodia." Maybe, but this isn't the first time a partner has given the extract back to Phytopharm. According to FDC-Windhover's Strategic Transactions database, Phytopharm first licensed Hoodia from South Africa's Council for Scientific and Industrial Research in 1997, then offered Pfizer worldwide development and marketing rights to the compound in 1998. Following the closure of its nutraceuticals group, Pfizer returned its rights to Phytopharm in July 2003.

AZ/Infinity: Infinity execs are channeling their inner Soup Dragons--or maybe they prefer the Stones' rendition?--this week. Yes, readers, they are free to do what they want with their HSP90 inhibitor program, thanks to the pocket full of cash (not kryptonite) they recently received from Purdue Pharma and its affiliate Mundipharma. As we reported in "The Pink Sheet" DAILY, Infinity will pay AZ nothing upfront to get back full control of its Phase III injectable, IPI-504, as well as its Phase I oral compound, IPI-493. As part of the break-up, AZ will pay its development obligations for another six months; if Infinity manages to launch a product, it will owe AZ a single-digit royalty. Although some have speculated that AZ saw something it didn't like in the ongoing HSP90 trials, there's no indication currently of increased clinical or regulatory risk associated with program, which includes a Phase III study in refractory gastro-intestinal stromal tumors and earlier stage studies in other indications. Instead, the break-up appears to be a case of an evolutionary incompatibility, marking the definitive end of a deal Infinity had originally signed with MedImmune, then an independent company. AZ certainly wasn't gettin' sentimental over the terms it inherited-- in particular, the 50/50 profit split MedImmune accepted because it lacked small-molecule and oncology expertise. Moreover, AZ didn't feel it particularly needed Infinity's expertise given it's world-leading oncology franchise primarily focused on small molecule drugs. It's not unreasonable to assume the two companies were in discussions to renegotiate the terms of the partnership--the current financial crisis has made such discussions commonplace. But Infinity's deal with Purdue in late November gave it the freedom to change the nature of any on-going talks. Thanks to Purdue and Mundipharma largesse--they agreed to fund virtually all of Infinity's R&D through at least 2013 and bought $45 million worth of equity at a 100% premium in return for ex-US rights to Infinity's pipeline (the exception being the HSP90 program)--Infinity can afford to re-acquire the program, gaining full rights to a relatively late-stage asset. Indeed, given the generous terms Exelixis got from Bristol on another Big Pharma-rejected Phase III cancer program -- see note above -- Infinity execs are undoubtedly practicing an up-tempo version of "Hey Big Spender".

(Photo courtesy of flickr user jovike through a creative commons license.)

Venture Round: And now the bad news

It’s popular to suggest that the venture capital world is somewhat insulated by the turbulence on the public markets, but let’s get real. That’s not the case.

Last week, we offered a potential "bright side" scenario. The likelihood that boutique investment banks will finally get the sunlight and the attention to grow large enough to support a small, revenue-poor industry like life sciences.

But such a development, while positive, will take a while. Until then, we’re looking at a number of potential negative impacts, many of which we’ll explore in our upcoming magazines.



Fundraising: Three words. Forget about it. If you’re not a top-quartile, blue-chip fund you’re going to have a terrible time trying to raise a new fund.

And those firms that have raised new funds aren’t off the hook. One venture firm with AIG as an limited partner still hasn’t heard whether or not the insurance giant's commitment will be honored.

Even those firms with limited partners not being bailed out by the government could face some problems down the road as they begin to call down portions of the fund. Some LPs may simply say, no, sorry we don’t have the cash—or even the appetite—any longer.

This might lead to fund reductions, similar to what we saw after the technology boom busted. But in this case, GPs won’t be giving capital back for lack of investment opportunities. They’d be doing it because of lack of support from LPs. (In fact, one professorial type told PE Hub that VCs should be nice and give some of their money back. We're not really buying that one.)

Early-stage investing: Big funds probably won’t be doing it. Why should they when they can have their pick of later-stage companies that will be hungry for capital. As for the angels, well, they’ll obviously be a little risk averse given the current situation. But they too will have the option of investing in “later” early-stage companies, the kind of companies that VCs backed until now. We’re not sure if angels can provide enough of the capital those more established start-ups need, but they’ll be given the opportunity to invest.

Mid-stage investing: So you have a product about to start clinical trials, which puts it on track for commercialization in five or six years, maybe, after some serious infusion of cash? Good luck with that.

Late-stage investing: This could be a blood bath. VCs with capital will be obligated to find bargains in this market. At this point, no one is willing to admit this, but we’re expecting some serious hammering on existing investors. To be sure, VCs can’t be too cutthroat since they too have companies that will require outside capital, but if they can get a late-stage company at early-stage prices then they have to do it. And look for more and more PIPEs. (BTW, we ass-U-ME-d incorrectly last week. The Angiotech deal involving Ares and New Leaf Ventures is not dead yet. We're told something may indeed happen.)

Exits: It’s been said that we’ve been through IPO droughts before, and that’s true. But this isn’t just a drought. Somebody blew up the pipeline and poisoned what's left in the reservoir. As for the corporate buyers, yes, pharma and medical device companies SHOULD be buying. But will they? And if they do what sort of prices will they be seeking. Just as venture firms have to answer to LPs, corporates have shareholders who demand value when it’s available.

In fact, VentureWire Lifescience released some sobering statistics today. We’re back to 2003.

Health care companies have created $3.01 billion this year through IPOs and M&As, down from $8 billion at this point in 2007, a 62.2% drop. That's the worst nine-month performance in five years. Through September 2003, life sciences companies had produced $1.33 billion in M&A and IPO liquidity.

It’s worth pointing out that health care accounts for most of the liquidity activity since the entire venture industry generated $4.3 billion from sales and IPOs in the first three quarters of this year. PriceWaterhouseCoopers Money Tree report offers a similarly glum outlook.

Readers of START-UP already know our take on the acquisition of privately held biopharma companies. Colleagues Ellen Licking and Chris Morrison supplied an exhaustive study in the current issue.

So yes, we’re not dead yet. (We're keeping with the Monty Python theme.) But keep an eye out for the cart hauling dead folks. Oh that reminds us, we see one more significant development.

The Rise of Secondary Buyers: We already reported on their rise in our July START-UP. But, whether it's portfolio companies or stakes in general partners that LPs no longer want, secondary buyers likely will have an easy time finding bargains. Firms like Saints Capital will prosper.

Are we missing any?

S.R. One 2.0?

Andrew Witty hasn’t officially taken over the reins at GlaxoSmithKline from Jean-Pierre Garnier. But already there are signs of significant change. Last week came news of an impending management reshuffle. Now IN VIVO Blog has learned that Witty wants to create a new corporate venture fund that could have as much as $500 million at its disposal.

The eponymously named GSK Venture Fund, which hasn’t formally been announced, will have a two-fold agenda: First, the group will make strategic investments outside the company that will bolster the pharma’s internal R&D strategy; second, the venture group will commit capital to build start-ups around assets that GSK has deprioritized.

Russell Greig, currently GSK’s president of Pharmaceuticals, International, will take control of the fund on June 2, reporting directly to Witty. Prior to running Pharma International, Greig was senior VP of world-wide business development for GSK. No doubt he has a Rolodex—or even an Outlook folder—filled with contacts that will serve him well in the clubby world of VC. Rumor has it, he’s already off to an aggressive start: Greig apparently has spent the past few months renewing or establishing contacts with East and West Coast venture capital firms as part of the diligence required to start the new fund.

This isn’t GSK’s first foray into the world of corporate venture. Back in the 1980s, the pharma established SR One, an evergreen fund that to date has invested $550 million in 125 companies Those investments have been primarily passive—in other words, SR One hasn’t actively sought to gain rights for GSK to the products or technologies of the companies in which it invests. "We don't take options and there are no call-backs," said managing partner Joyce Lonergan, at Windhover's March Pharmaceutical Strategic Outlook meeting. "Our mission is to be on the outside edge of where GSK's BD guys are," said Lonergan.

It seems likely that won’t be the exclusive modus operandi for the GSK Venture Fund, of which SR One will now become a part. Rumor has it that one reason Witty is so keen to start this new fund is that SR One's investments haven't had much impact for GSK. Said one insider, SR One “doesn’t move the needle for GSK.” Certainly, Greig and his team will have unprecedented access to GSK’s top brass, something SR One has never enjoyed. (Until this restructuring, the SR One group reported to GSK’s head of business development, Ad Rawcliffe, who in turn reported to Moncef Slaoui, GSK’s head of R&D.)

GSK is just the latest pharma to take a more active interest in corporate VC. As we reported back in November, big pharma is reaching far and wide for new business development strategies that might help them fill their pipelines without having to overpay for the best licensing and M&A deals. They're are eager to function more like traditional stand-alone venture capital firms, with an eye toward locking early into the best deals and identifying new industries that might help them broaden their product portfolio. Pfizer Inc.'s venture group, for example, is investing heavily in diagnostics while Novartis' venture group is investing in medical device companies. In addition, Novartis company also has a $100 million option fund for investing in companies with early stage platform technologies. The idea: at the time of investment, the fund takes a no-cost option on a given start-up's program--usually after its reached clinical proof-of-concept--giving the pharma (theoretically) cheap access to new compounds.

Nor is GSK unique in looking for new ways to monetize low-priority assets. Every major pharmaceutical company we’ve talked to recently is thinking aggressively about out-licensing and risk-sharing options. (Even Pfizer, which made news last week with the spin-out of Esperion 2.0. We’ll have more about that Big Pharma’s BD strategy in the upcoming May IN VIVO.)

The new bus dev mantras? First, out-license products for cash and royalties, preferably with an option to buy back the product if it’s successful. Alternatively, consider teaming up with another Pharma—preferably one with deep pockets that is willing to share development and commercialization costs—and therefore the risk—much the way Bristol Myers Squibb did in its deals with AZ (two diabetes compounds) and Pfizer (the anti-coagulant apixiban). Pharma companies are also looking to start new companies around non-strategic assets, getting equity in the newco in return for contributing the compounds.

The creation of the GSK Venture Fund raises numerous questions. First, what happens to SR One? The group has been making venture capital investments for more than two decades. Just how will the fund will function as part of this newer, larger GSK Venture Fund entity isn't clear. It's worth noting that despite its 20-year history, management of SR One has seen some significant turnover ever since founder Peter Sears left the group.

Second, GSK already had tried and failed to build a program to license unwanted assets. The now-defunct GSK Ventures had been set up to invest not money but GSK assets--technologies, early-stage compounds, patents--into new venture-backed companies. The program took a hit when its founding managers left GSK to start their own firm. But observers tell us GSK's R&D group simply balked at providing the assets. This is where Greig's direct report to Witty might help just a bit.

Finally, how far afield might GSK Ventures go? Will the group look outside of its core industries as Pfizer and Novartis have done? Could diagnostics, devices, or even services be part of the group's future portfolio?

Strange Bedfellows: Novartis Marries VC & Business Development

We’ve been following the two Novartis VC funds for some time now, more extensively here in START-UP and also, in August, here at the Blog. The older of the two funds is a more traditional corporate VC group, reporting ultimately to the CFO.

The second, called variously the MPM Pharma Strategic Fund and the MPM Bio IV NVS Strategic Fund LP, is a joint program between MPM and Novartis’s pharmaceutical business unit, run by Thomas Ebeling.

What’s unusual is that both funds want to get options on research programs along with their investments. The first is looking for options on very early-stage programs and has already managed to sign several deals. But the pharma group’s fund wants options on the far more valuable later-stage candidates.

Now that second fund has closed its first deal: a $10 million equity investment in Radius Health and an option on Radius’s Phase II osteoporosis candidate, BA058.

The press release seemed to imply that the option came as part of the investment. Not true – although that’s originally what Novartis wanted, according to one source.

The Novartis-affiliated MPM fund bought its equity at the same price Radius’s venture investors (including MPM) had paid in its $57.5 million second round, which closed in April. But Novartis is also paying an undisclosed option fee, says Radius CEO C. Richard Lyttle, PhD, plus providing some “in-kind services”--access to Novartis expertise, presumably in the development of osteoporosis drugs. As for governance, Lyttle was a bit cagey: Novartis wouldn’t get a board seat “as a direct part of this deal.”

The option gives Novartis a few months (we estimate 90 days) to look at Radius’s Phase II data once it’s collected– during which time Radius can’t show it to anyone else. At the end of the option period, Novartis can say “no” and walk away (leaving Radius to shop the product to anyone they want)—or “yes” and trigger a pre-negotiated deal.

That deal is worth some $500 million in fees and milestones, $125 million of which go back to Ipsen—the French drug company from which Radius originally licensed the peptide, an analog of the natural peptide human parathyroid hormone-related protein. The terms, says Rich Lyttle, are equivalent to the money they would have gotten had they already had the Phase II data. He knows this, he says, because he talked to a number of Big Pharmas before signing the option agreement with Novartis, getting a good sense of what they’d be willing to pay.

Maybe. As most dealmakers will tell you, the dynamics of an auction aren’t predictable. It’s quite possible that Radius could have gotten a better deal when more companies were hooked with real Phase II data for a bone-building product.

But Lyttle says that even if they could have gotten a few extra dollars in an auction, the process of negotiating a deal would have taken months, delaying the Phase III primary-care trials Radius certainly can’t afford on its own, and ultimately destroying value. If Novartis triggers the option, he says, the program can start right away—and patients will get the drug faster. Certainly, Novartis would be motivated to move it along, he notes, since BA058 dovetails nicely with the Swiss company’s Aclasta, approved in various countries outside the US for Paget’s disease but in trials for osteoporosis (BA058 apparently builds bone rapidly; Aclasta prevents bone loss).

In any event, it’s certainly not a bad deal—the other VCs in the deal wouldn’t have let it happen if it had been obviously harmful to their interests. But it is nonetheless highly unusual, maybe unprecedented (we’d love to hear from you about any previous recent examples of minority investments bringing options on later-stage drug candidates—we don’t know of any).

Indeed, Novartis has managed to combine true business development with a venture-capital strategy. That’s clearly been a goal of many corporate VC programs: get some early looks at interesting technologies which have sometimes led to later transactions. But rarely if ever has the initial investment come with an option. The granddaddies of corporate VC, GlaxoSmithKline's SR One and Johnson & Johnson's J&J Development Corp., have been religious in observing the divide between the medical businesses of their parents and their own investment activities. They’ll facilitate deals—but not if they compromise their investment roles.

The MPM/Novartis fund is, on the other hand, a true melding of business development and VC. And that’s why the outcome will be important to watch. If the Radius deal is more than a one-off example, the fund will provide a popular model for product-poor Big Pharma to gain preferred access to the pipelines represented by VC portfolios. On the other hand, if the deal is seen as preventing Radius from getting a profitable exit for its investors, serving Novartis' needs at their expense, corporate VC will go back to the drawing board.