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.

Look! Up In The Sky! It's Financings of the Fortnight!

It's a bird (yum!), it's a plane... no, sorry kitty, it was the year's first blast of biopharma IPO activity that we spied in the winter sky this past fortnight. As in 2010, there were several underpowered liftoffs, a couple failures to launch, and, if you'll pardon our mixed multimedia metaphor, very little catnip for public investors.

The first debut, Pacira Pharmaceuticals, went public just as our previous thrilling FOTF episode was going to press. The 2007 spin-out of SkyePharma PLC’s injectables business grossed $42 million by selling 6 million shares at $7, half the price of the low end of its anticipated $14 to $16 range. Since then, Endocyte and AcelRx Pharmaceuticals have also reached public orbit but, as with Pacira, only by bending to public market pressure and selling more shares at a lower price than they hoped for.

Other biopharmas couldn't get out at all. Clarus Therapeutics, a developer of reformulated oral testosterone replacement therapy, postponed its IPO on February 11; it hoped to sell 5 million shares between $11 and $13. And Italian antibody producer Philogen canceled its second attempt to list on the Milan stock exchange after partner Bayer HealthCare Pharmaceuticals terminated a license agreement for Philogen’s two Phase II cancer candidates, radretumab and darleukin.

It's worth noting that beyond biopharma, sequencing firm Fluidigm and diagnostic maker BG Medicine went public, as did Israeli company RedHill BioPharma on the Tel Aviv Stock Exchange, though its 51.6 million shekels ($13.6 million) raised were barely a blip. (Still, it's always fun to say, "That's a lot of shekels!")

Haircuts or not, companies at least are raising money. But what about investors? We've been following post-IPO stock performance, but it doesn't tell us much about the recent debuts. So now that the year's first IPO fusillade is over and no life-science debuts are pending, let's take a different measure. Of the 16 US biopharma companies to go public since the window re-opened in late 2009 (excluding PE-backed Talecris Biotherapeutics Holdings and biofuels company Amyris), the average step-up, defined as pre-IPO valuation divided by the private money raised, for the group is 1.65x. But that figure includes the outlier Cumberland Pharmaceuticals, which privately raised $16 million but had a pre-money IPO value of $291 million. That specialty pharma ended up with an IPO step-up of 12.5x, way above the mean. Remove Cumberland, and the average for the current class drops to 1.54x.

How does that compare to acquisitions? We found 21 biopharma acquisitions in the same period of time for which we could obtain venture data. Two were outliers: Marcadia Biotech, which raised $15 million from VCs and sold to Roche for $292 million in December; and AkaRx, which raised $11 million in venture and sold to Eisai for $255 million in late 2009. The rest of the group produced a step-up of 2x, slightly better than the IPO group.

Now, we fully realize that the IPO isn't an exit, it's -- let's say it together -- just another round of financing. So those IPO step-ups are strictly theoretical. That's why we'll keep monitoring post-IPO stock performance. By the time the lock-up ends, a new public company's stock price these days has often given its venture holders heartburn to go along with their haircuts. As of last week, the 15 biopharmas in the class of 2009-2011 had seen their post-IPO share prices fall an average of 5%. (Only four days public, AcelRx isn't included, but as of this writing it's lost 20% of its IPO price.)

At a time when markets are buoyant -- heck, even the Nasdaq biotech index is up 16% since the Jan. 1, 2010 -- the cumulative loss for the recent biopharma IPO class is disheartening. As Atlas Venture partner Bruce Booth tweeted this week, "It's tough out there."

Well then. So who’s on deck? Supernus Pharmaceuticals is a spin-out of Shire Laboratories’ drug reformulations unit with two extended-release versions of generic epilepsy medications in Phase III. Ambit Biosciences, a cancer company that has partnered with Astellas on its Phase II kinase inhibitor for relapsed/refractory acute myeloid leukemia, also submitted an S-1 in December. Other companies that filed in 2010 include Cutanea Life Sciences and Horizon Pharma.

Ready for liftoff? Remember, folks, in space no one can hear you scream, especially when you're reading...


Conatus Pharmaceuticals: Liver disease specialist Conatus announced a $20 million Series B round that remains open to additional investors. First-time backer AgeChem Venture Fund of Montreal joined Conatus’ existing investors, Aberdare Ventures, Advent Venture Fund, Bay City Capital, Gilde Healthcare Partners and Roche Venture Fund. The round builds upon the startup’s $27.5 million Series A from 2007. Formed by former executives at Idun Pharmaceuticals after Pfizer acquired that startup in 2005, Conatus’ funding needs increased last summer, when it bought at fire-sale prices Idun’s assets, which the Big Pharma left idle as a result of its reorganization. Nonetheless, Conatus says most of the new money is intended to support ongoing trials on CTS-1027, a Phase II hepatitis C therapy it licensed from Roche in late 2006. The former Idun pipeline includes emricasan, a Phase II candidate that was also investigated for hepatitis C, and other drugs designed to inhibit caspases, proteins that induce apoptosis. In conjunction with the new preferred stock round, Conatus also converted promissory bridge notes issued in the interim between rounds into Series B stock. AgeChem, which typically invests in therapeutics targeting disorders related to aging, took a Conatus board seat. -- Paul Bonanos

Optimer Pharmaceuticals: How's this for a movie tagline: "In a world of drugs versus bugs, the drug side just got richer." Optimer netted $73 million in a follow-on public offering that closed February 16, and it'll put at least part of the cash toward the launch of fidaxomicin. The narrow-spectrum antibiotic is aimed at Clostridium difficile, a gram-positive bacterium that infects the gut and causes severe diarrhea. Often acquired in hospitals and nursing facilities, C. diff infection often occurs after other antibiotics have been administered, upsetting the naturally occurring flora in the intestine. Optimer officials said recently fidaxomicin is expected to improve on the observed relapse rate of 20% to 30% in patients treated with standards of care vancomycin or metranidazole. With a priority review underway and a PDUFA date of May 30, Optimer could be looking at a roll-out of fidaxomicin in the second half of the year. In the secondary offering Optimer sold 6.9 million shares at $11.25 each, 10.5% below the closing price of its stock on February 10, the day it announced the offering. The cash raise, with Jefferies & Co. as lead underwriter, adds to the $68 million upfront Optimer is receiving from Astellas Pharma Europe for development and commercial rights to fidaxomicin in Europe and selected countries in the Middle East, Africa and Eastern Europe. Optimer retains rights in the US and Asia. Oh, and in the movie, we recommend that Jean Reno plays C. difficile. -- Alex Lash and P.B.

e-Therapeutics: The publicly traded British drug discovery firm netted £16.6 million ($26.7 million) on Feb. 15 in a placing with new and existing investors, including Invesco Asset Management, Gartmore Investment and Octopus Investments. The funds will be used to move e-Therapeutics's first potential products into clinical trials. In the placement one of the company's long-term investors, the UK hedge fund RAB Capital PLC, sold most but not all of its shares at a profit, CEO Malcolm Young told our "Pink Sheet" colleagues. The firm, which went public in 2007, placed 67.7 million shares at 26 pence each, a 2% premium to the closing price of 25.5p one day earlier. e-Therapeutics uses real experimental data to develop network analytics and identify a set of protein interactions thought to produce a beneficial effect. Compounds are then evaluated to see if they can produce that particular set of effects. It is a complex and laborious process of analysis, and not a simulation exercise or in-silico computer-added drug design, Young said. Compounds can also be evaluated for effects on healthy cells, so reducing the likelihood of side-effects. As an example, e-Therapeutics started to look for substances that would turn off the protection against apoptosis that cancer cells appear to have. Its researchers identified the regulatory proteins and promoters, then found a molecule that inhibited their protective effects. This compound, ETS2101, is expected to enter clinical trials later this year. The firm's advisor Panmure Gordon said that although Invesco will now hold 47.7% of e-Therapeutics, it does not intend to run the company or make an offer for the remaining shares, which under UK law would normally be required of investors that acquire 30% or more of a company. Instead, Invesco has obtained a waiver from the UK's Takeover Panel. -- John Davis

Versartis/Diartis: Versartis' $21 million Series B round and spin-out of its lead drug into a new company made for a lot of moving parts, but well worth tracking for at least two reasons. First, Versartis is in the middle of an asset-financing experiment that could point the way for other venture investors. The motto of this new movement could be, "Buyers want drugs, not companies." To that end, Versartis was initially a one-compound company funded by Index Ventures, the European firm out in front on asset-centric financing. But with a long-acting version of Type 2 diabetes drug exenatide on board, Versartis had the option to bring in two more compounds from Amunix, the extended-release technology firm that supplies Versartis' pipeline. With a second compound -- a human growth hormone treatment for kids -- in-house and ready for the clinic, Versartis' backers decided to spin the diabetes drug into Diartis and keep each entity focused on one drug. Theoretically, the separate structures will make each more attractive to potential buyers. Index and Amunix are clear that Diartis will be for sale once Phase 1b data is in hand, perhaps next summer. To push the HGH product forward, Amunix and Index rounded up new investors New Leaf Venture Partners and Advent Venture Partners for Versartis' Series B. Amunix is now the largest Versartis shareholder, according to Amunix co-founder Willem "Pim" Stemmer. -- A.L. and Chris Morrison

Amanda Micklus crunched numbers and wrote this week's intro. Thanks, Amanda.

Photo of LOLFOTFcat courtesy of flickr user LOLren.

Financings of the Fortnight: Follow-On Fever

This week's IPOs from Cumberland Pharmaceuticals and Emdeon may have garnered all the headlines. But for portents of a future biotech IPO market--as opposed to a market in IPOs for profitable, less risky companies like Cumberland and Emdeon--look instead to what seems to be an all-of-the-sudden-white-hot follow-on market.

But one more word about IPOs before we get to the FOPO-fever. We don't mean to suggest that this week's pioneers have zero impact on or relation to investors' appetites for riskier drug discovery and development plays. For now any connection is likely psychological, but not unimportant: investors are regaining their taste for new life-sciences companies. Soon enough they'll move down the risk continuum. One correspondent suggested to us that it was like eating dry roasted peanuts: "Once you start ...". We agree, but argue that VCs need to be building more pistachio-like companies if they really want to get the ball rolling.

These days though, investors are positively nutty (sorry) about biotech follow-ons. Since our last FOTF column two Thursdays ago--which highlighted FOPOs from HGSI (net $357mm) and Orexigen ($75mm)--the floodgates have opened. We've chosen to highlight Micromet and Mannkind (see below), but there were others as well, to the tune of about $600 million worth of follow-on shares sold. And that doesn't include PIPEs. At least a dozen deals in the past two weeks brought in a total of about $100 million.

Some of the big 'uns: This morning Seattle Genetics announced underwriters had exercised their overallotment option, bringing the biotech's gross haul to $136 million. Onyx raised at least $120 million (plus at least $200 million in convertible debt). And Inspire Pharmaceuticals grossed $115 million.

The prices on these deals were pretty good too; none of the firms that raised big money were languishing near 52-week lows. If investors' appetites for biotech follow-ons remain unsated, IPOs of R&D focused companies may not be too far behind.

That said, we're not holding our breath for a flood of S-1s. But investor interest in biotech shares has other, more immediate, ramifications beyond increased underwriting revenues for investment banks. As biotech capital markets begin to thaw, pharmaceutical acquirers may become more active, sensing a market that has hit bottom and realizing that biotech prey (and the prey's investor syndicates) may eventually have other exit options. More M&A will generate more interest from investors. And thus, the cycle begins again.

But let's not get ahead of ourselves. For now content yourselves with ...

Micromet: With $49 million on hand in cash and equivalents, Micromet enhanced its cash position by netting $75 million from a follow-on public offering Aug. 4 to fund development of its pipeline of four clinical-stage antibodies. Micromet priced its offering at $5 a share on July 30 – the stock had closed trading at $5.59 the day before -- and underwriters also sold the overallotment, taking the gross haul over $80 million. The Bethesda, Md.-based biotech plans to start a pivotal trial of its lead compound blinatumomab in acute lymphoblastic leukemia next year, and two weeks ago received orphan designation for the project in Europe. It recently regained North American rights to blinatumomab from previous partner MedImmune--surely increasing its development expenses even as MedImmune continues to pay to manufacture clinical supply. Micromet also has adecatumumab in Phase II for colorectal cancer with partner Merck Serono. Each antibody is also in Phase I in a different indication: non-Hodgkin’s lymphoma for the former and metastatic breast cancer for the latter. This is by far Micromet's biggest fundraising haul, reflecting the maturation of its BiTE technology pipeline. After going public through a reverse merger with CancerVax in 2006, Micromet raised cash three times through PIPE deals. Most recently, it sold 9.4 million shares at $4.25 a share (an 8% discount) to funds including Index Ventures Growth, Abingworth, DAFNA Capital Management and Merlin Nexus, grossing $40 million. A June 2007 PIPE brought back $25.3 million and a July 2006 deal yielded $8 million.--Joe Haas

MannKind: Not giving up on inhaled insulin any time soon, MannKind has just raised $62.2 million in a follow-on public offering of 8.4 million shares including the full exercise of the overallotment. Chairman and CEO Alfred Mann, who has previously invested over $900 million of his own money into the company’s fast-acting insulin candidate Afresa according to an interview last year with IN VIVO, bought one million shares for $8.11 (the price equal to the market value immediately before the FOPO) while the remaining stock was sold for $7.35/share. Both prices are pretty good considering that in early March shares were trading around $2 and have gradually increased since MannKind submitted the NDA for Afresa on March 16, reaching a high of $8.54 on June 25, right around the time the company completed the purchase of Pfizer’s bulk insulin inventory for $3 million. Since it went public in 2004, MannKind has raised a ton of cash—$884 million, including the present deal-- through private placements and follow-ons. Most notably it brought in $401 million from a 2006 FOPO of 23 million shares, at the much higher price of $17.42 (at the same time it raised $115 million in debt). Now that Exubera has failed, and without companies like Lilly or Novo Nordisk in the picture, MannKind is the only firm left pursuing a late-stage inhaled insulin (MAP, which coincidentally also completed a follow-on recently, and Vectura/MicroDose each have candidates in Phase I). Afresa appears to have a tough road ahead and it’s clear the drug will require a REMS in light of the Exubera fall-out, as well as mandatory post-marketing studies if approved. MannKind remains in the hunt for a partner.--Amanda Micklus

Constellation Pharmaceuticals: Epigenetics player Constellation Pharmaceuticals made news this week, pulling in the third tranche of its Series A and hiring a new CEO, Mark Goldsmith, to replace acting chief and Third Rock Ventures Partner, Mark Levin. The biotech, which formed in 2008 with great fanfare, raised $14.8 million in funding from its backers last year, and closed on the remaining $17.2 earlier this month. No new investors were announced with this final tranche: in addition to Third Rock, Venrock and Column Group co-led the Series A, and Altitude Life Science Ventures also participated. The financing, which should last the company into well into 2010, will be used to push forward Constellation’s most advanced programs--still tightly under wraps—and to hire additional scientists, while building the management team. Goldsmith’s acceptance of the top spot marks the beginning of the long-promised moves by Third Rock partners away from the day-to-day management of the company. Goldsmith most recently was an entrepreneur-in-residence with Prospect Venture Partners, after stints as SVP of Genencor and CEO of Cogentus Pharmaceuticals, which officially closed shop earlier this year. A scientist-physician trained in microbiology and immunology, he’s had to immerse himself in the field of epigenetics, an emerging field of science that aims to understand how misregulation of a second layer of genetic information—the packaging of DNA into chromosomes—can result in human disease. His near-term goals, he says, are to advance the top projects (sorry no additional details yet but the focus is still on histone methyltransferases and histone demethyltransferases), enhance the platform (which he calls a product engine), and “put in place one high quality strategic corporate alliance.” He’ll have his work cut out for him. In addition to Constellation, another well-financed start-up, Epizyme, is gunning for the top spot as “the epigenetics company.” Like Constellation, Epizyme is also built around the discoveries of leading scientific thinkers, boasts top-tier managerial talent, and has A-List backers. (For more on both companies, check out this feature from March 2009's START-UP.) Beyond these two companies a number of start-ups are attempting to develop inhibitors to histone deactylases (HDACs), an enzyme family also implicated in epigenetics. And coincidentally the start-up Acetylon landed roughly $7 million in financing this week as well.--Ellen Foster Licking

XDx: Perhaps motivated in part by Human Genome Sciences’ recent positive Phase III data for lupus candidate Benlysta, Bristol-Myers Squibb last week led a $14.4 million venture round for molecular diagnostics company XDx. Earlier this year, Bristol partnered with XDx, tasking the Brisbane, Calif., biotech to identify biomarkers for systemic lupus erythamatosus. Bristol's Orencia (abatacept) is in Phase III trials for lupus, a disease that hasn't seen a new therapy in generations; a companion diagnostic could give Orencia a market edge if it is approved for lupus (it's currently sold for RA). XDx, which markets the AlloMap HTx assay to help identify heart transplant patients with low probability of organ rejection, has been working on applying its molecular expression testing technology to lupus since licensing gene expression intellectual property from the University of Minnesota two years ago. In addition to Bristol, the early-August round was financed by XDx’s existing investors: Burrill Venture Capital, Duff, Ackerman & Goodrich, Integral Capital Partners, Intel Capital, Kleiner Perkins Caulfield & Byers, Sprout Group, and TPG Biotechnology. XDx filed an IPO in October 2007 but withdrew it last September citing poor market conditions; the current financing is its seventh venture round. Between December 2004 and May 2007, the biotech raised approximately $72 million in Series D, E and F financings. XDx said it will use the Series G proceeds to support new and ongoing R&D projects and commercial activities related to AlloMap. CEO Pierre Cassigneul said the firm hopes to expand the market for AlloMap, which it says can reduce the need for invasive biopsies and potentially lower dosing of immunosuppressant drugs in transplant patients, and predicted the firm would break even financially next year.--Joe Haas

image from flickr user Joe Seggiola used under a creative commons license

Health Care IPOs: Is that A Breeze?

Just one day after Cumberland Pharmaceuticals priced its shares, Emdeon followed suit, setting industry watchers abuzz. Could it be it's time to resurrect the acronym IPO? (Just in case you need a reminder, it's pronounced 'eye-pee-oh' and stands for initial public offering and yes, we'll use it in a sentence.)

There was clearly more investor enthusiasm for Emdeon's New York Stock exchange offering than Cumberland's NASDAQ listing. Cumberland priced it's shares $2 below the estimated range, and opened flat in its first day of trading, resulting in an $85 million raise. In contrast, the health care IT company, which processes half of all electronic medical bills in the U.S., debuted at the top of the estimated $13.50 -$15.50 range, and increased by 10% the number of shares sold to meet investor demand. The upshot? The company (founded only in 2006) and its PE backers sold 23.7 million shares--just under 11 million and 13 million respectively--and raised a total of nearly $370 million in the process.

Did someone just open a window? Was that an IPO breeze we felt?

Michael Brinkman, managing director of healthcare investing at Piper Jaffray & Co. thinks so. In an article in BioWorld Today, he proclaimed "the market is open." Based on interviews with roughtly a dozen buy-side investors, Brinkman thinks there are buyers for good biotech IPOs right now, but cautioned said financiers might not say the same thing 90 days from now given the fragility of the market.

How 'bout that for confidence? As we said in this post we're hard-pressed to proclaim a renaissance of biotech IPOs based on Cumberland offering. And Emdeon's IPO doesn't change our opinion one bit. Neither company, after all, shares many traits with the majority of cash-hungry discovery and development firms in venture capitalists' stables.

Take Cumberland, not so much a biotech as a specialty pharmaceutical play, founded back in 1999 with little internal research capability. The outfit currently markets three approved but largely undifferentiated products, including an antidote to acetaminophen poisoning. Acetadote, and an intravenous version of ibuprofen called Caldolor. Sound like a biotech to you? (If you said yes, we have another factoid worth consideration: Cumberland is profitable.)

Then there is Emdeon, another company with products and revenues--$444.4 million in the six months ending June 30, up 5% from the same period one year earlier. With its focus on linking health care providers like hospitals, pharmacies, and docs to private and public insurers, the start-up appears to provide a much needed solution to the overabundance of paperwork contributing to skyrocketing healthcare costs. And whatever health care plan is ultimately adopted by Congress, technical solutions like Emdeon's are a no-brainer and can count on bipartisan support from legislators. But Emdeon ain't biotech; it's information technology applied to health care.

It's not too surprising that the first US IPOs we've seen since ARYx raised money in 2007 are fully baked companies with products and revenues. Their less risky business plans fit the appetite of investors who are keen to avoid the gambles associated with drug discovery, especially after the financial jitters of the past year. Moreover, the offerings continue a trend started in February, when Bristol-Myers Squibb spun off its nutritional and infant formula maker, Mead Johnson, in an oversubscribed IPO worth $720 million.

For VCs, who've been saying for the past year (at least!) that they are building companies for acquisition not IPO, neither the Cumberland or Emdeon IPO is likely to spark a wholesale change in strategy. Let's be honest: neither company fits the profile. It took ten years to bake Cumberland, hardly a time frame that would capture VC interest. Emdeon may have only incorporated three years ago, but the technology has been around for far longer since it was cooked up by Healtheon, one of the grand-daddies of e-medicine.

And neither outfit listed venture backers as principal shareholders in their SEC filings (yes, we do read them). Aside from individuals, Cumberland's largest shareholder was S.C.O.U.T. Healthcare Fund, which is managed by Lawrence Greer, a Cumberland executive director. Emdeon's principal shareholders include private equity plays General Atlantic Partners and Hellman & Friedman.

Still, VCs are likely to welcome the news as a sign that the public markets, which have been frozen since well before the financial collapse of 2008, are finally thawing. Both offerings are a necessary first step if investors are ever going to return to funding more traditional biotech start-ups and are in-line with the increase in secondary offerings and traditional venture commitments we've been seeing recently (see our regularly Financings of the Fortnight edition for more on those deals).

Indeed, that's the reaction of many VCs we canvassed in a highly informal email blast after Cumberland announced its offering Monday night. One source replied:

"The venture industry is back to producing some high quality companies and public investors will realize they can buy these at relatively low prices, hold, and sell later at a higher price. The market is moving that direction again. IPOs will return, starting with the later-stage, lower-risk, lower-return companies, and moving towards earlier-stage, higher-risk, higher-return companies."

Who else is likely to test the IPO waters near-term? NycoMed, which earlier this week inked a deal with Forest Labs for its Phase III COPD drug Daxas, and also counts private-equity among its backers, is one possibility. Talecris, the blood plasma products developer that filed to go public last year and then shelved its offering because of a proposed merger with the Australian hemostasis player CSL, is another obvious candidate. Recall that planned tie-up fell through earlier this summer after the Federal Trade Commission opposed the deal. It's no secret the company's backers, Cerberus Capital Management and Ampersand Ventures, are eager for an exit. Need more prooof? In late July, Talecris filed updated registration statements with the SEC.

Notice some themes here? PE is looking for exits. Neither company is exactly a start-up biotech.

We'll likely know in a few months if the gentle breeze strengthens to a mighty IPO wind. Here's hoping.

(Image by flickrer rachelcreative used with permission via a creative commons license.)

Cumberland's IPO: Is It the Day After the Day After Tomorrow?

Well, well, Mr. IPO. It has certainly been a while. You don't call, you don't write ...

Cumberland Pharmaceuticals said late last night that it priced 5 million shares at $17 apiece for a gross haul of $85 million (the company will net closer to $75 million after expenses and "discounts" and could bring in more money with a 750,000 share greenshoe--ah, the IPO lingo returneth too). The IPO is the first "biotech" new issue in a couple years.

Cumberland isn't exactly a biotech, of course, it's a specialty pharma. It markets a laxative and an antidote to acetaminophen overdose, and recently gained approval for an IV formulation of ibuprofen. It licenses in drugs that are either already marketed or near-market, and isn't burning through wads of cash on drug discovery. In short, Cumberland is exactly the kind of small pharma that you'd think would be able to IPO after such a long break in the action.

We have been noticing the uptick in follow-on offerings (something we'll talk more about in our financings of the fortnight column later this week) and had wondered whether we'd see an uptick in IPO filings. Cumberland's success has been a long time coming--more than two years ago it estimated it would price the offering at $14-16/share, and a lot has happened since then, not least the approval of Caldolor (that's the injectable ibuprofen) in June 2009. Still, today's price is $2 less than the low end of the range the company was hoping for. But just maybe it will also contribute to this emerging thaw. (Emdeon, an IT services play--they do roughly half the electronic medical billing in the U.S.---which also plans to price it IPO this week, can only hope.)

Just don't expect a Spring flood.

image by flickr user slack12 used under a creative commons license.

Financings of the Fortnight: Sunshine Breaking Through?

No one we know would say that biotech’s financing drought is ending. Hardly seems possible.

But conversations are taking on--dare we say it-- a slightly more optimistic tone. The Nasdaq biotech index, for one thing, continues its upwards trajectory. Most of that performance, we admit, stems from good news out of big-cap players like Elan, Amgen, Gilead and maybe a few others. It’s not a sustained small-cap phenomenon – yet.

Certainly no one’s predicting the imminent opening of an IPO window (closest thing we’ve seen to a pharma IPO filing is Vitamin Shoppe).

Indeed, there are plenty of what we’d probably call financings-under-duress, the kind of deals both investors and companies have to do to keep fighting. Oxigene, for example, followed the Alexza pattern in buying back, at a discount, its financing partnership with Symphony Capital – saddling Symphony with a lot more stock in Oxigene, and thus a lot more risk. More upside, too, of course – but that wasn’t what Symphony’s model was designed for.

We’d also note that pharma continues to provide not merely the only exits for biotech, but a fairly substantial percentage of its financing, too. Corporate VC remains at center stage – with the Avila financing from the Novartis Option Fund only the most recent example.

But a few bits of unexpectedly good news are at least quickening the industry’s pulse. Human Genome Sciences surprised the market by meeting the primary endpoint in the first of two Phase III trials on Benlysta, the first lupus drug in years to actually show real clinical results. HGS acted fast and raised more than $300 million – the industry’s biggest common-stock offering since Vertex raised $320 million back in February. Orexigen, too, raised a not-too-shabby $75 million after it announced that its obesity drug Contrave had met virtually all of its clinical goals in its Phase III programs.

And deals like Amgen’s with GlaxoSmithKline on denosumab likewise indicate why biotech does have an argument or two in its long-term favor. GSK paid a ton of money for a relatively limited set of rights – indeed, most surprisingly, agreeing to split indications on the drug with Amgen (you’ll remember that Amgen virtually destroyed the split-indication deal nearly a quarter of a century ago with its EPO deal with Johnson & Johnson).

And for those cock-eyed optimists in the group, there is some talk about IPOs. Quiet talk, perhaps. But at least a few people have speculated about Portola, which thanks to big deals with Novartis and Merck, doesn’t have to worry about financing expensive later-stage trials for the next several years and can instead focus on advancing its earlier-stage programs. And should either elinogrel (with Novartis) or betrixaban (with Merck) prove particularly interesting, well, there’s a nice little tinge of acquisition in the air to entice an IPO investor.

So, on that optimistic note, let’s get to some of the more interesting deals we’ve seen over the last fourteen days.




Avila Therapeutics: In a deal that combines equity financing with an option on an early-stage research program, Novartis Option Fund led a $30 million Series B financing on July 27 for Avila Therapeutics, which uses its proprietary Avilomics platform to design and develop covalent drugs in the areas of cancer, autoimmune disease and viral infection (you can see our write-up from The Pink Sheet” DAILY, here). NOF is a $200 million fund that seeds innovative companies through initial and follow-on investments – the initial investment is coupled with a program option to provide early validation of the company’s technology. Avila says it will use the proceeds to advance its first program into clinical development – its lead programs are a protease inhibitor for hepatitis C (AVL181) and a molecule targeting the Btk kinase (AVL291), an emerging target in oncology and autoimmune disease. The Waltham, Mass.-based company did not say which of those programs would advance to clinical development first, and neither company identified the therapeutic target of the program for which NOF has option rights. Avila says its drugs work through protein-silencing – the molecules’ covalent nature enables them to bond strongly, selectively and resiliently to disease-causing proteins, theoretically producing superior therapeutic outcomes. The drug candidates’ covalent bonding also makes them effective against mutations in disease targets, according to Avila. Participating with NOF in the Series B were Avila’s original investors – Abingworth, Advent Venture Partners, Atlas Venture and Polaris Venture Partners. The four VC firms staked Avila with $21.3 million in Series A funding in 2007, and also made a convertible debt purchase this past May that initially brought Avila $5 million and eventually could yield $15 million. – Joe Haas

Limerick Biopharma: South San Francisco, Calif.-based Limerick recently raised $15 million in a Series C round with its existing investors to begin advancing its Cellular Transport Pump Activators into clinical development. Giving the company some additional credibility, Corey Goodman, co-founder of Exelixis and Renovis and more recently the head of Pfizer’s Biotherapeutics and Bioinnovation Center, took on the chairman’s job (he’s served on Limerick’s board since 2007). Limerick’s CTPAs offer promise both as chaperone therapies and in monotherapy for cholesterol disorders. Primarily, CTPAs are intended for adjunctive use with existing or experimental drugs to improve their side-effect profiles and efficacy by activating cellular transport pumps to redistribute drugs away from areas where they have adverse effects. In theory, this will minimize toxic side effects without reducing a drug’s intended activity. While testing its candidates in the areas of immunosuppression and pain, however, Limerick also discovered that CTPAs remove cholesterol from peripheral and pancreatic beta cells, lowering serum cholesterol and glucose. The company’s secondary goal, therefore, is to develop CTPAs as therapies for hypercholesterolemia and hyperglycemia. Founded by Wendye Robbins, a Stanford professor and former president of NeurogesX, Limerick has raised $35.5 million total since 2006. The July 15 Series C was led by OVP Venture Partners, which previously was known only for leading seed and Series A rounds. In addition to OVP, Limerick’s other returning investors include Altitude funds, Arch Venture Partners and Sevin Rosen Funds. The firm hopes the current round can provide funding through proof-of-concept of one of its lead programs – one is set to begin Phase I study in immunosuppression this year, while another that could enter the clinic in 2010 will be targeted at metabolic disease. – Joe Haas

Cognition Therapeutics: There are a few drugs on the market that treat symptoms of Alzheimer’s disease, but the goal is to actually stop disease progression. Along with the actual scientific challenge of figuring out how to treat the disease, there’s also the problem in testing candidates: trials for such drugs are expensive and long. Plenty of costly failures litter the way (like Myriad Genetics’s Flurizan in Phase III—closely following Lundbeck’s lost $100 million up-front payment in their deal for the candidate). But the medical need and economic opportunity for solving the Alzheimer’s problem keep producing big new deals. For proof, just see Pfizer’s deal for dimebon and J&J’s recent investment in Elan’s Alzheimer’s immunotherapy program including bapineuzumab. Financing for biotechs breaking into the disease-modifying arena is picking up too (see Satori Pharmaceuticals), and now Cognition Therapeutics has pulled down a $1.2 million Series A financing—through the sale of equity and conversion of notes--from investors led by Ogden CAP. Founded in 2007, the company is developing small-molecule inhibitors of toxic beta amyloid oligomers, which are associated with memory loss and neurodegeneration. The start-up’s drug libraries were licensed from California State University Channel Islands where they were designed by former Amgen medicinal chemist Gilbert Rishton, PhD, who is now Cognition’s chief scientific advisor. Rishton’s chemical conditioning method takes extracts from terrestrial and ocean plants and adds chemical reagents to produce the low molecular-weight candidates, which are eventually screened in cellular assays that monitor the toxic oligomer’s effects on biological functions in mature primary hippocampal neurons. Cognition was seeded in 2007 with $200,000 in funding from Pittsburgh Life Sciences Greenhouse, which also participated in the current round.—Amanda Micklus

OxiGene: On July 21 OxiGene announced two financing events that will keep it alive for another year -- through the third quarter of 2010. The company, which works on vascular disrupting agents, closed a registered direct offering that grossed $10 million. It sold 6.25 million shares at $1.60, a 20% discount based on the ten-day pre-announcement average, as well as short- and long-term warrants to purchase up to 5.6 million in common shares. It also managed to grab another $12 million by buying back Symphony Vida Holdings, an off-balance sheet entity created with private equity firm Symphony Capital Partners. In October 2008 Symphony provided Vida with $15 million in cash to support development of OxiGene’s Oxi4503 (combretastatin A1 diphosphate), which is in Phase I for solid tumors, and Zybrestat (fosbretabulin) in ophthalmology. At the time, Symphony granted OxiGene a four-year option to acquire Vida for twice the amount that Symphony invested in the entity. But Sympony would only make that money if OxiGene lasted that long. So OxiGene is issuing Symphony $12.5 million in stock to pay for Vida ($2.5 million less than Symphony actually put into the financing vehicle) to get the $12 million cash still in the vehicle -- with Symphony now into OxiGene a lot more deeply than it ever planned to be (it owns 44% of the biotech). More or less the same thing happened with Symphony’s original deal with Alexza – which likewise bought back the Symphony vehicle for a big slug of stock, giving Symphony a 23% stake.—Amanda Micklus


Image from Flickr user Magh and used under a creative commons license.

(Final) Deals of the Year Nominee: Lilly/TPG-Axon/NovaQuest

Ah, awards season. Why should film critics have all the fun? And voting! It's not just for presidential elections. This year your IN VIVO Blog team is nominating a handful of alliances, acquisitions, financings, regulatory negotiations and legislative compromises in our First Annual DOTY competition. And then you, dear readers, will vote (early and often, we hope) for the winner. Imaginary federal and international biopharmaceutical statutes prohibit us from awarding a monetary prize. But our winners, when they die, on their deathbeds, they will receive total consciousness. So they've got that going for them, which is nice.

Aaand, last but not least: It's not just cash-poor biotech firms that need the occasional helping hand to finance their drug development efforts. Even for the likes of Eli Lilly (and, say, Bristol-Myers, which has blazed this particular trail among larger companies), hedging pre-market risk is part of the game plan when cash is becoming more expensive and clinical development and regulatory affairs more uncertain.

In July, Lilly announced an agreement with TPG-Axon Capital and Quintiles Transnational Corp.'s NovaQuest partnering group under which Lilly's partners will pay up to $325 million in development funding for its two lead Alzheimer's disease compounds, a gamma secretase inhibitor and an A-beta antibody, each ready to begin Phase III testing.

In exchange, TPG (which provides the bulk of the capital) and NovaQuest (10% of the funding and strategic development advice) will receive success-based milestone payments and mid-to-high-single-digit royalties on future sales of the two compounds. Quintiles CRO arm will act under a traditional fee-for-service contract. Finally, to sweeten the deal and hedge the risk shouldered by TPG and NovaQuest, those partners will also receive an additional undisclosed royalty on a third, unidentified product that Lilly has out-licensed to a third party. (See our coverage of the deal here.)

Not to show you how the sausage is made, but there was some internal dispute here at IVB over what this deal signifies within pharma, if not its overall importance.

See, on one hand, the deal is forward-thinking and increasingly necessary in a difficult R&D climate; with the cost of capital increasing even for the likes of Lilly and its Big Pharma brethren it allows Lilly the flexibility to take multiple shots on goal in Alzheimer's or other diseases. It's also the first publicly announced deal (we've heard rumors of deals signed but still private) in which a private equity player takes a big financing role in a Big Pharma's development program -- something they've done in small and mid-sized companies (e.g., Symphony Capital) but which Big Pharma has always shunned.

There will now likely be further variations on this theme: former AstraZeneca CFO, now Goldman-Sachs partner Jon Symonds says he's working on putting together a pool of PE capital for developing Phase I and II Big Pharma (and maybe other) compounds, which could be pulled together as soon as January. That structure, incidentally, addresses one of the big problems for PE players (and probably one of the big sticking points of the Lilly/TPG negotiations, which apparently took about a year and a half): how do you put together a marketbasket of enough develop-able compounds to offset the awful odds facing any single on of them. The drug company wants to put as few as possible in the basket; the PE investor wants as many as it can get.

On the other hand, there is something odd about offering deal-of-the-year honors to a Big Pharma company for creative financing to mitigate risk during the year when a lot of people who are supposed to be the experts in this kind of thing are bankrupt, unemployed--or begging the taxpayers for assistance.

And it is especially odd, given that (as we wrote here) Lilly is a model of a Big Pharma company that is focusing on innovative products--rather than diversifying into OTCs or related business like some of its peers. The logic of focusing--that investors want to diversify for themselves, rather than turn their money over to Novartis management to diversify for them--seems to apply here too. Shouldn't Lilly's investors just hedge for themselves, rather than have Lilly management do it for them?

Still, everyone agrees that the deal allows Lilly to shed risk (in return for a smaller reward) in this notoriously difficult therapeutic space in a creative transaction that could prove to be a model for private equity/pharma deals going forward. It's just that we don't agree about whether that's a GOOD THING.

So there you have it--your last IN VIVO Blog Deals of the Year! Nominee. Got it in just under the wire. Why Lilly/TPG/NovaQuest? For the new-model dealmaking, for the sexy private equity angle. For the Controversy!

We'll see you later, at the ballot box.

image by flickr user jacob.theo used under a creative commons license.

Deals of the Year Nominee: Vertex/Undisclosed Investors

Ah, awards season. Why should film critics have all the fun? And voting! It's not just for presidential elections. This year your IN VIVO Blog team is nominating a handful of alliances, acquisitions, financings, regulatory negotiations and legislative compromises in our First Annual DOTY competition. And then you, dear readers, will vote (early and often, we hope) for the winner. Imaginary federal and international biopharmaceutical statutes prohibit us from awarding a monetary prize. But our winners, when they die, on their deathbeds, they will receive total consciousness. So they've got that going for them, which is nice.

Your next DOTY nominee is the best example we can think of from 2008 of a phenomenon that will surely gather steam as biotech firms search around for non-dilutive sources of capital: Vertex's June 2008 sale of the royalty stream on its HIV protease inhibitors (which are marketed by GSK) to a group of undisclosed investors.

How much for that money in the window? This time, $160 million. We discuss the concept of royalty and revenue financing in-depth in this IN VIVO feature from June.

Vertex's deal is part of its plan to dispose of non-core assets and shore up its balance sheet as it invests in its hepatitis C franchise; back in June the need to secure capital was less obvious, so Vertex also gets serious points for timing. (What's more, in September, before the economy really began circling the drain, Vertex finalized the terms of a $25.50/share follow-on public offering which eventually netted the biotech $220 million.)

"Receiving a $30 million royalty in 2011 is less relevant for the company" compared to potential future product revenues, Vertex CFO Ian Smith told us back in June. "Our belief is that we should get that money on the balance sheet now, and invest it in R&D. Money that has less significance to us in two or three years," when Vertex could be marketing its own blockbuster HCV protease inhibitor, lowers the company's financial risk today, he pointed out.

Amprenavir (Agenerase) and fosamprenavir (Lexiva) royalties totalled $34 million on sales of $242 million in 2007, but it wasn't like the market was attaching significant value to that royalty stream. Other biotechs are recognizing similar unappreciated or underappreciated revenue or royalty streams and looking to sweep up some cash while they can. Hey it beats selling shares or scrounging for debt, now more than ever.

And there's no shortage of buyers. Beyond the specialists like Paul Capital Healthcare and Cowen Royalty Partners et al., hedge funds are getting into the game as well (see TPG-Axon's April 2008 purchase of half the royalty stream to CV Therapeutics' A2A adenosine receptor agonist regadenoson (Lexiscan), the injectible stress agent, for $185 million).

Expect to hear much more in 2009 about this brand of alternative financing. The phenomenon is by no means new--but it's gathering steam, and it's not just cash-desperate biotechs that might find such deals beneficial, as Vertex's $160 million demonstrates.

"We've never been busier," Paul Capital Healthcare partner Lionel Leventhal told the audience at this years' PSA meeting. "The pharmaceutical industry is a vociferous user of capital and it doesn't matter how the markets are doing - they still need capital." With equity markets down and debt less than an ideal way for the industry to obtain the money it needs, royalties and revenue-interest financing is become more mainstream, he added.

image of bank$y graffiti art by flickr user guano used under a creative commons license.

And How Would You Like to Pay for That, Mr. Lechleiter?

Check please?

When Carl Icahn (whom we probably owe an apology since we thought a $70/share bid was a pipe dream) first announced that Imclone had a mystery bidder willing to fork over $10/share more than Erbitux partner BMS, he suggested that bid was subject to due diligence, but not financing.

Well, Lilly must have left its moneyclip in its other pants, because here comes the credit card. And it's too late to play credit card roulette.

Just how easy it will be for Lilly--or anyone for that matter--to tap the credit markets for a few billion dollars here or there remains to be seen. The newly passed-into-law $700 gagillion bailout hasn't exactly greased the lending wheels just yet.

Our comprehensive coverage of the deal is at Pink Sheet DAILY, where Jessica Merrill notes that Lilly "intends to finance the acquisition with a combination of cash and debt. The firm expects the debt portion to amount to $2 billion to $3 billion. With today's tight credit markets, funding deals has become far from a sure thing, but Lilly said it remains 'confident' about its ability to finance the transaction."

Lilly shareholders? Maybe not so much. True it was a particularly bleak day for the markets yesterday (with the exceptions of Imclone, Dendreon, and, probably, Campbell's Soup), but Lilly shares were taken to the woodshed, down nearly 3% on the day. (In comparison, Bristol-Myers was only down 1%, its own fall cushioned by the $1 billion cash it stands to gain from its own 17% stake in Imclone.)

If pharma's rock is the credit crisis, its hard place is the fact that it will likely need to keep spending a ton of cash to access the medicines it has failed to develop on its own. So how will Big Pharmas like Lilly reconcile the two competing realities? Maybe Uncle Sam will help.

Remember the hilariously titled American Jobs Creation Act that allowed companies to repatriate vast sums of cash at much friendlier tax rates? (Ostensibly this was to lead to job creation but in reality the cash flowed mostly unimpeded to shareholders via dividends and share buybacks.)

Pharma has already succeeded in restarting its stalled R&D tax credit, which was tucked into the bailout bill (now known by the gentler acronym TARP), perhaps it is also hard at work lobbying for another AJCA so it can bring home more cash to pay for the alliances and acquisitions it so badly needs to bolster its own R&D.

Meanwhile the debate about whether Lilly paid too much for Imclone will continue. Lilly has clearly signaled its intentions to be part of the upper echelon of oncology companies--along with just about every other Big Pharma--and what you think of Lilly's $70/share Imclone offer will probably boil down to the faith you have in Imclone's pipeline (and Lilly's ability to hang on to the next-generation EGFR inhibitor 11F8).

image from flickr user lennonisgod used under a creative commons license.

While You Were Advancing

Despite Saturday's game three hiccup the Fightin' Phils advanced to the NLCS this weekend with a 6-2 win over Milwaukee to cap a 3-1 NLDS victory, taking the sting out of another Iggles loss at the Linc. (Celebrate while you can, Ramsey, St. Louis is tough coming off the bye week ... OK maybe not.)

It's nearly enough to take one's mind off the economic crisis--now spreading even further--and the potential impact that broader financial malady might have on the health care world. For those of you keeping score at home more than two out of three of our respondents agree that the industry universe is shrinking.

While you were dusting off your Beat L.A. signs from 1983 ...

• We get a lot of crazy ideas (support of Philadelphia sports teams can do that to blogger) so we're not normally ones to throw too many stones. But we simply can't get our heads around this 'fast track IPO' proposal described in this Guardian article from last week. Please, anyone, explain it to us. Does this make any sense whatsoever?
• OSI and Genentech report that Tarceva plus Avastin didn't improve survival in advanced non-small cell lung cancer patients better than Tarceva alone, though there was a clear improvement in progression-free survival.
• Genome sequencing is getting cheaper. Harvard's George Church, an adviser to Complete Genomics, the company that this morning announced it could lower the cost of sequencing your As, Ts, Gs and Cs to a cool $5k, called the price "shockingly low." In this economy, George? Call us when we can buy a kit at the Dollar Store.
  
• Biolex this morning bought OctoPlus's 50% commercial rights to the companies' Locteron interferon alfa, which is in Phase II in HCV. Octoplus gets $11mm upfront and up to $138mm in milestones. Meanwhile Biolex also said it raised $60 million in Series D funds in a round led by Clarus Ventures.
  
• Oh yeah. It seems Lilly is buying Imclone. You may have heard about this one. But why do we feel like there's going to be a some sort of Scooby-Doo-esque plot twist at the end of this too-long drama? As of 5a ET still no official word from the companies nor any last minute rubber mask reveals or muttering about getting away with it if it weren't for those meddling kids. Yet. [UPDATE: 7am, and it's official. the deal values Imclone at $6.5bb, or $70/share.]
  

game 2 photo from flickr user nickhall used under a creative commons license.

Venture Round: Looking for the Bright Side

What if this is the best thing that could have happened for venture capitalists and their companies?

By “this” we mean the complete and utter destruction of Wall Street, and by “best thing” we’re obviously thinking long, long-term impact here. Clearly, things will be rough for a long time coming.
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But venture capitalists have been squealing about how Sarbanes-Oxley has regulated them right out of the IPO business, saying the costs and oversight were too much for their little start-up companies to bear.

Then, the bulge bracket banks—the big guys with the bankers, analysts and cash—began turning their eyes to bigger, exciting and, yes, revenue-generating deals, leaving their little biopharma and device companies that could under-covered and forgotten in the eyes of many VCs.

Well, those days are clearly done. The question now remains, what will rise from the ashes? Will the banking and analyst staff that once populated the highest offices in Manhattan find their way to some of the boutique banks that have made themselves a nice little business putting together smaller deals, bringing the experience and resources to grow those institutions?

Furthermore, as one institutional investor tells us, venture capitalists could help themselves and this nascent boutique banking industry by steering some of the choice work toward smaller investment banks, eschewing the cache and hoopla associated with one of Wall Street’s blue chip names.

Uh, former blue chip names.

PE Hub had a similar conversation about small tech companies with Paul Deninger, vice chairman of the investment bank Jefferies & Co. We're not buying all that he's selling, but read it here, including the blistering comments. (BTW, we'd hardly consider IPC The Hospitalist Company, a tech company. It's a health care company thanks very much.)

So, is this the end of the world as we know it? Or has the past few weeks been a necessary—and admittedly painful—cutting of the larger trees that will allow some sunshine and rain wash over the growth underneath?

***

As we said the short-term is pretty bleak. Witness this week's announcement that the spin-out of Angiotech Pharmaceutical is in danger, which likely means no investment by Ares Capital or New Leaf investment.

Also, VentureWire Lifescience and others reported on the recent fund-raising by Kalobios, which didn't include previous investor Lehman Brothers.

"We were all set to close on Friday of last week, until Lehman filed for bankruptcy," said KaloBios Chief Executive David Pritchard. "They had several million committed to the round, and while we only lost one business day...we had to rush to make that up."

Lehman had led KaloBios' $20 million Series C round in July 2007 through its health-care venture capital group. That group invests directly off the firm's balance sheet, unlike Lehman's IT-oriented venture partners group, which closed a $365 million fifth fund in September 2007. Randy Whitestone, a Lehman spokesman, said the venture partners group is part of the firm currently being auctioned off, and he said the firm is not certain of the health-care group's fate.

Pritchard described embattled Lehman as "a great investor and very supportive of the company." Jeffrey Farrell, a senior vice president at the investment firm, was an observer on KaloBios' board.

Pritchard said many of the round's other investors stepped in over the weekend to fill the hole left by Lehman, contributing above-pro rata shares. New investors Genzyme Ventures and Mitsubishi UFJ Capital led the round, joined by existing investors Alloy Ventures, 5AM Ventures, GBS Ventures, Lotus Bioscience Ventures, MPM Capital, Singapore Bioinnovations and Sofinnova Ventures.

***

Fred Wilson, general partner at Union Square Ventures, has an interesting little post on his A VC blog about how the New York Times came to profile his firm. The serendipitous origin of the article must broil PR pros who would kill to get their clients such a profile, but more often than not this is how such profiles come together.

Anyway, the article relays how Union Square Ventures is willing to take small stakes in tiny start-ups, exclusively in tech. That's easier to do with a $165 million fund, but it got us thinking. We wrote extensively about how larger venture capital firms are maintaining their early-stage medical device flow by committing small bits of capital in ventures started by proven entrepreneurs who are affiliated with the fund. But are there any life sciences VCs who exclusively make similarly sized bets in untested start ups?

Hurricane Devastates Galveston; Heads for Biotech

At the end of this unprecedented week we are still too shell-shocked to have probed deeply into the implications of the Wall Street meltdown on our corner of the economy.

But we’ve done enough thinking to disagree with the majority of respondents to our IN VIVO Blog poll, 83% of whom think the effects on their companies will be merely mild to moderate. And disagree too with those still-in-denial private-equity investors our fellow blogger visits with here, who apparently think that our industry is a nice, safe place to put their money.

OK, that may be true for Big Pharma. After all, as in previous times of market turmoil, investors may vote Pharma because they see the companies as defensive plays, where demand for products is relatively independent of the economy. And indeed most drug firms have done, during this disastrous week, a bit better than the S&P 500 (though pretty much everyone is still down).

But Pharma looks a lot less defensive than it used to be. The generic cliff is way too steep and R&D way too unproductive. The traditional side-benefits of pharma investing, too, look kind of iffy. With cash flow likely to shrink, dividends are at risk – even more so the absurd stock repurchase programs into which, like some vast currency shredder, drug companies have continued to throw their money. And just a small issue: the dollar has been gaining value, and is likely to gain more. That means US companies won’t be able to simply rake in some incremental revenues. So maybe pharma is a better short-term bet than much of the S&P – but better ain’t great.

Far more worrisome, however, is biotech – which to some degree looks a lot like these incomprehensible derivatives. Like the buyers of subprime mortgage securities, buyers of biotech stocks have by and large invested on faith. Our bet is that few investors really understand the science they’re buying. Hell, we’ve met too many biotech CEOs who don’t understand their own science. How else, other than faith, do you explain why people continue to invest in an industry which over three decades has swallowed a lot more public money than it's returned?

And in a world in which investors will shun risk for a good long time, particularly risk they don’t understand, biotech is about as attractive as Galveston after Ike. Like other high-risk/high-return businesses, biotech attracts the extra cash investors have in their funds. And there’s going to be precious little excess cash for at least the next several months. And the fact that there are now three fewer banks to help biotechs with funding, stock coverage, and M&A advice isn’t particularly happy news, either. (Anybody want to bet how long Morgan Stanley is going to remain free-standing?) An IPO year which has started out as badly as any in recent memory – just two US biotechs managed to raise money, and paltry money at that -- will finish as the worst since the late 1980s.

Not that history is going to provide any answers, says Fred Frank, the vice-chairman of Lehman Brothers and soon to be a Barclay’s employee. This isn’t 1998 or 1988, he told us in a phone call today. “This is a whole new day for biotech. Don’t interpret by [historical] analogy; interpret with analysis.”

So here’s what we see. At the top end of the valuation pyramid, we’d bet PEs like Celgene’s – 51, at last viewing – are pretty vulnerable. Maybe those companies will recognize their currency is overvalued and will use it to buy some real cash-flow producing assets. (Not cash-starved early-stage biotechs, incidentally).

At the other end, what has been a relatively steady flow of start-up activity will slow to a trickle. Start-ups have been a tough investment argument in any event, given the dismal IPO market. But at least acquisitions have provided some fine returns over the last three years. The problem is that even before the Wall Street tornado hit, the M&A door had begun to close, (for our in-depth analysis of returns from acquisitions of private biotechs, see this Start-Up article). We suspect you’ll see health-care VC move towards devices and maybe services – avoiding new investments even into the kind of biologicals platforms Big Pharma has been snapping up over the last few years (for example, check out our write-up of the Bayer/Direvo deal here).

And in the middle: we have now come around to the notion that we’ll finally see a significant number of biotechs just close their doors. (Neose, for example, sold off its assets today.) Like everyone else, we’ve been amazed at the ability of many end-of-life biotechs manage to raise just a bit more money to keep the lights on and a program or two bubbling along. But we just don’t see that in the climate ahead. The investors won’t be there. Like the sensible Galvestonians, they’ve fled to higher ground.

Image from flickr user juliemwood used under a creative commons license.