(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.

Back in the day

Riddle me this: What do hedge funds and steroids have in common? Both have undercut the significance of breaking long-held records, first in baseball (See Barry, above) and now venture capital.

The slew of venture capital surveys this week reported impressive totals for health care companies. In each case, biopharmaceutical and medical device companies finished the first quarter with record totals.

Why? The general press says investors finally have recognized that baby boomers will benefit from new technologies being developed by the companies. Yeah, well, most informed folks recognized that a very long time ago. But what’s really going on are hedge funds, private equity players and venture capital firms that are morphing into one or the other are pouring big bucks into companies with products, revenues and a legitimate shot at going public in one or two years because public investors are eagerly buying into these companies.

This is venture capital today, and there’s nothing wrong with that. This isn’t a traditionalist rant pining for the old days of day games, the reserve clause and start-ups built around pre-clinical products. But what’s off-putting is when venture capital counters include financings like the $110 million raised by CardioNet Inc. into the figures. In that case, a syndicate of hedge fund investors put up significant capital in exchange for discounted shares in the company’s pending (they hope) IPO. (For more complete terms see article in your April Start-Up.)

If the company goes public—and it should file this year—it’s a great deal for the company and its venture investors. But should deals in which public investors are pouring huge dollars into privately held companies simply to obtain the right to buy cheaply into an IPO be counted as a venture capital investment? Probably not. Should they be banned from venture capital figures just as steroids have been banned finally from major league sports? Hard to say. But just as Barry Bond’s assumed steroid use is tainting his charge to be the all-time home run king, big-ticket financings backed by hedge funds with their eyes on IPOs skews the record fund-raisings of today when they’re matched against years past.