Financings of the Fortnight Ponders Haircuts and Waves Its Freak Flag High

There was an unexpected twist last weekend in the health care reform implementation: Docs based in the Delaware Valley got hit harder than expected. It was a rather freaky turn of events, and as of this writing, the boys from our nation's medicine chest (hey, how about working on a better anti-emetic?) are clinging to faint hopes that they can repel the upstarts from the world's biggest biotech hub, also home of some of the world's leading research on cannabinoid receptor agonists.

In its younger, rasher days, Financings of the Fortnight might have begun to gloat, but there's still more baseball to play. Our foam FOTFingers are crossed. Yes. We. Cain.

Away from the diamond, Aegerion Therapeutics has its fingers crossed, too. Its IPO is scheduled for this week, but as of noon Thursday, no word. If it can't get out, it'll be the firm's third IPO swing and miss. It withdrew efforts in 2007 and 2008, and now it's gunning for a $70 million debut. Its latest terms were 4.67 million shares for sale between $14 and $16 a pop. If it gets out, don't be surprised if executives doff their caps to reveal drastic haircuts.

Seven pure-play biotechs have gone public in the US this year with debuts that have averaged 28% below their original target. Add more discounts post-IPO, as six of the seven are below their debut price. It's not that investors are generally IPO-shy. Overall IPO returns are above 15% so far this year, with average first-day "pops" of 7%, according to Renaissance Capital. Yet there's still no clear path forward for biotech issues.

One biopharma-related firm managed to squeeze through the door this week: ShangPharma, a Chinese CRO whose contracts with GlaxoSmithKline and Eli Lilly account for 37% of its revenues, raised $87 million by selling 5.8 million depository shares and is now listed on the New York Stock Exchange. It priced at $15 a share, within its target range of $14.50 to $16.50.

Our advice to Aegerion as it steps up to the plate: Don't worry about the haircut, or even eine kleine chin musik. But fear the beard. Go Giants! It's another installment of...

Celgene: Celgene's $1.25 billion debt issue closed Oct. 7, and it tells us at least two things. First, the financing, its first big debt raise, cements Celgene as a drug company that can raise a ton of cash in an uncertain economy, something bigger brethren Amgen, Pfizer, Merck and Novartis have done during the financial crisis. If there were any doubts about Celgene in the industry's inner circle, dispel them. (Celgene is also under investigation for improperly fighting generic competition. We told you they're all grown up.) Second, and more interesting to this blog, is the debt issue as a tacit stamp of approval of Celgene's run of growth by acquisition. For many years Celgene shunned dealmaking; not so anymore, as our DOTW colleagues are more than happy to discuss. Celgene's long-term R&D partnership with Agios is certainly going to get some votes for "Deal of the Year." And Celgene seems to get more creative as it goes along; no doubt some of the $1.25 billion raised will go toward transactions. (It just sealed its acquisition of Abraxis BioScience that included cash, stock and -- speaking of creative dealmaking -- a tradable contingent value right coupon.) The Celgene debt is in three tranches: $500 million at 2.45% interest will mature in October 2015 and are priced to yield 2.481% ; $500 million at 3.95% will mature in October with 3.981% yield; and $250 million at 5.7% interest will mature in October 2040 with 5.713% yield. Citigroup, JP Morgan and Morgan Stanley are the underwriters. -- Alex "UUUU-RIBE" Lash

Pearl Therapeutics: South San Francisco-based Pearl Therapeutics, which spun out of Nektar in 2006, announced a monster $69 million Series C on October 19. According to Elsevier’s Strategic Transactions, the financing is the 5^th largest private placement this year, outclassed only by by Pacific Biosciences, Archimedes, AiCuris, and Immatics. The money, which comes from Pearl’s existing venture syndicate of Clarus, New Leaf, and 5AM Ventures and includes new investor Vatera Healthcare, will be used to support ongoing clinical trials of the biotech’s PT003, currently in Phase IIb trials for patients with chronic pulmonary obstruction disorder. PT003 is a combination of glycopyrrolate, a long-acting muscarinic antagonist (LAMA), and formoterol, a well-known long-acting β2-agonist (LABA), delivered via a metered dose inhaler (MDI). The drug is being positioned as superior to Boehringer Ingelheim’s Spiriva, the only once daily COPD medicine currently approved in the U.S. which generated over €1 billion in 2009 sales. PT003 will be administered twice daily, but Pearl’s interim CEO Howard Rosen doesn’t think that will curb uptake, especially if the data from ongoing head-to-head trials with Spiriva show superiority. Data will be available by year’s end. Of the backers, Vetara is a relative newbie in the staid, clubby world of venture, founded and funded in 2007 by Michael Jaharis, former co-founder of Kos Pharmaceuticals. Jaharis and his team should provide Pearl valuable commercial advice as the biotech moves PT003 along, having already successfully shephered combo products to market. -- Ellen Foster "Buster" Licking

Synosia Therapeutics: The Swiss biotech's latest round of equity funding coincided with a licensing deal, as Belgian biopharma UCB contributed $20 million of Synosia’s new $30 million Series C round while licensing a pair of Parkinson’s Disease drugs from the startup. Existing investors Versant Ventures, 5AM Ventures, Novo A/S, Aravis Venture, Investor Growth Capital and Swiss Helvetia Fund also participated in the round, which brings Synosia’s total funding to about $90 million. The UCB arrangement also included a non-dilutive upfront payment of undisclosed size, and milestone payments built into the deal could yield up to $725 million. The partnership covers adenosine A2a antagonist SYN-115 and 4-hydroxyphenyl-pyruvate dioxygenase inhibitor SYN-118 for Parkinson’s. Synosia will complete Phase II work on the two drugs on its own before handing them over to UCB for Phase III development and commercialization. The agreement also includes provisions for collaboration on additional drugs originating from either company, at terms to be negotiated in the future. Synosia, which typically obtains compounds abandoned by other pharmas including Roche, also has drugs in its pipeline targeting Alzheimer’s, cocaine dependence and bipolar depression. Aravis and IGC led Synosia’s CHF 32 million ($29 million) Series B round in January 2009. -- Paul "Babe Ross" Bonanos and John "The Count" Davis

Regeneron Pharmaceuticals: The antibody company tapped the public markets for $175 million in an oversubscribed public offering of 5.5 million shares plus 825,000 more for the underwriter, Citi. It's the first follow-on offering for Regeneron since 2006, when it also scooped up $175 million. Meanwhile, the firm secured a steady source of cash by partnering long-term with Sanofi-Aventis, a deal that turns Rengeneron into Sanofi's main source of antibody R&D; the big pharma has options on all molecules from the . The December 2009 extension of their relationship promises Regeneron $160 million a year through 2017, though Sanofi can dial it back to $130 million after 2013. The full skinny on the deal is here. So why the huge injection of dilutive follow-on cash? One answer lies in Regeneron's ambitions. It has programs outside its collaboration with Sanofi, the most advanced being Arcalyst (rilonacept), on the market for the ultra-orphan cryopyrin-associated periodic syndrome (CAPS) and in Phase III for gout. Officials make no bones about their goal of becoming a FIPCO; pushing Arcalyst to market in gout would get them a lot closer. -- A.L.

Financings of the Fortnight Needs a Haircut

The first time we used this awful image to the right was about three years ago, when seemingly well-positioned biotechs destined for snazzy IPOs were running into a wall of scissors and electric razors wielded by public investors.

It turns out that in most cases their arguments that biotech offerings were overpriced were pretty accurate, if you consider how those biotechs that went public during the 2005-2008 timeframe have performed in the market.

We presented the data below (click image to enlarge) at our Pharmaceutical Strategic Outlook meeting this week in New York. An investment in the collective IPOs from 2005-2008 would have returned only 6% as of this Tuesday. Keeping in mind the market value performance illustrated in this chart comes after the steep discounts demanded by public investors, it's an ugly picture indeed. The success stories (among which we'd include Pharmasset, the subject of that 2007 post) are few and far between. In addition to the companies represented by the bars below, eleven were acquired, but the vast majority of those deals were done at valuations well below where companies were when they IPO'd.

Which brings us around to this week's non-debut of Anthera, a closely watched pricing event that wasn't. Anthera was due to raise up to $64 million by selling shares to the public at $13-15 per. That offering was postponed on Wednesday, while investors chewed over a new $8-9 per share price tag that could raise $54 million for the company.

It didn't take long for Anthera to trim that price yet again. Today an amended filing says the biotech will raise up to $42 million by selling shares at $7 apiece. For those of you keeping score at home that's a 50% haircut from the midpoint of its initial range.

Anthera is being watched closely as a barometer for investor interest in biotech IPOs. It's not hard to see that interest isn't exactly rabid.

Eleven Biotherapeutics: This me-better biologics play raised $35 million in a Series A round led by Flagship Ventures and Third Rock Ventures on Feb. 17. Asked to describe whether this was the entirety of the Series A of if more was to come, CEO David St. Hubbins* replied* "Well, I don't really think that the end can be assessed as of itself as being the end because what does the end feel like? It's like saying when you try to extrapolate the end of the universe, you say, if the universe is indeed infinite, then how - what does that mean? How far is all the way, and then if it stops, what's stopping it, and what's behind what's stopping it? So, what's the end, you know, is my question to you." (*For a more accurate version of what Eleven's management actually said, check out this piece in "The Pink Sheet" DAILY.)--CM

Labopharm: Just two months after agreeing to a $25 million standby equity distribution agreement with Yorkville Advisors, this Laval, Quebec, firm took a more conventional route to fundraising, closing a follow-on public offering Feb. 18 that including the overallotment netted $21.6 million. Labopharm, which specializes controlled-release technologies will use the funds largely to prepare for launch of its second US product, Oleptro, a once-daily formulation of trazodone approved by FDA for major depressive disorder on Feb. 3. The company has said it is opening to licensing out the drug or doing some form of co-promotion, and that its FOPO cash would support those efforts as well as launch. Like many FOPOs of recent months, Labopharm’s deal is somewhat warrant-heavy. It sold 13.5 million shares at $1.70 per unit, with each unit comprising a full share and a warrant for half a share. During a 30-month period beginning six months from closing, warrant holders can redeem their warrants for up to 5.9 million additional shares in Labopharm, at $2.30 per share.--Joseph Haas

Tioga Pharmaceuticals: Just over four years after pulling in $24 million via its Series A financing, GI drug player Tioga Pharmaceuticals completed its Series B round on February 17, raising $18 million from new investor Genesys Capital Partners, which participated with previous backers Forward Ventures, New Leaf Ventures, and BB Biotech Ventures. Tioga is placing all bets on asimadoline, an oral selective kappa opioid agonist it obtained when it spun out of Merck KGAA in 2005. The European pharma had been developing the candidate for musculoskeletal pain, but it failed to show efficacy in early studies. Merck eventually saw more potential in treating the visceral pain and bowel motility associated with IBS and as part of a reorganization to focus on cancer and cardiometabolic diseases, sold the asset to Tioga (for more history on Tioga, see our START-UP profile). Since asimadoline had been extensively tested in the past, Tioga had an advantage that other start-ups typically don’t have, which is to almost immediately start a large-scale efficacy trial, and at a much lower cost. The Series B money will support a US Phase III trial--one of two registration trials needed to get the drug approved in the US—slated to begin in March in 600 patients with diarrhea-predominant IBS. Perhaps Tioga is following in the footsteps of Movetis, another GI-focused company that began operations with discarded large pharma GI assets; and that wouldn’t be such a bad thing–Movetis has managed to bring its chronic constipation drug Resolor to the market in Europe. It also pulled off a successful IPO this past December and is still trading above its IPO price.--Amanda Micklus

Financings of the Fortnight's Symphonic Overtones

Not to hijack FOTF for what is clearly DOTW territory, but how about that Alexza deal with Biovail, eh?

Alexza licensed its novel loxapine formulation, which is being developed for schizophrenia and bipolar patients with acute agitation and is delivered via its Staccato single-dose inhaler, to serial CNS in-licensor Biovail yesterday for $40 million up-front and--you know what? You'll have to wait for DOTW to get the rest of our take on the deal (or read up on it in Thursday's Pink Sheet Daily). [You could also come to our annual Pharmaceutical Strategic Outlook confab (Feb. 24th and 25th in NYC) and get the skinny straight from Alexza's CEO Tom King.]

But this being a financing post, what interests us most for now is how Alexza was able to get its drug candidate through the clinic in the first place. (It awaits an FDA decision later this year). The answer: project financing.


But here's the rub. Even though Alexza's drug has been quite successful in the clinic--and now on the deal front--the biotech's arrangement with Symphony didn't have its financier singing the sweetest of tunes.

In 2006 Alexza got $50 million from Symphony to push forward two projects, effectively forming a newco to fund their development (Symphony Allegro). Symphony also got 2 million warrants to buy Alexza shares at $9.91 apiece. AZ-004 and AZ-002 (the latter drug, a Staccato formulation of alprazolam, posted "inconclusive" results in a Phase IIa study in patients with panic attacks) could be repurchased by Alexza following proof-of-concept for a set price--nearly twice what Symphony paid. Alexza whisked 004 through the clinic pretty quickly, but for Symphony's model to work, Alexza's share price needed to rise enough for the biotech to access non-dilutive funding to take the programs back from Symphony (see the deal specs here).

And that didn't happen. Alexza's shares were waaaaay under water, despite the clinical success of 004. For the biotech to buyback its programs from Symphony Allegro, the terms of the deal needed to be renegotiated. In June 2009, the companies did just that: Alexza bought back 004, 002 and 104 (a low dose version of 004 for migraine, added to the deal in 2007) for about $18 million in a stock transaction that gave Symphony about a 23% stake in the biotech.

Symphony still hasn't earned back its $50 million, even on paper. Its 23% stake is valued somewhere around $33 million (its warrant coverage--under the renegotiation that's 5mm warrants to buy shares at $2.26 for five years--has bobbed above and below the surface since the terms were amended). Even the Biovail deal didn't seem to move investors, who pushed shares of Alexza lower on the news, to close at $2.62 on the day.

For more on Symphony's model--and the hard times it faces as investors are increasingly unmoved by positive clinical news--see this January 2009 IN VIVO feature and this June 2009 story from "The Pink Sheet".)

Symphony had seen the model work before (its deal with Isis, for example) but without help from the public markets, it was dead in the water. AZ-004 may get the nod from FDA later this year and turn into a success for all concerned, and a relief for Symphony. Allegro was much more of a project than it bargained for.


Ironwood Pharmaceuticals: Is it one of the financings of the fortnight? For sure. Have we already given you our take on this deal? Yes (blog), yes (Pink Sheet Daily) and yes (Pink Sheet). Are we going to do it again? Not so much. Eh, not yet, anyway.--CM

Alnara Pharmaceuticals: This Cambridge, Mass.-based biotech really brought home the bacon for liprotamase, its Phase III recombinant, non-porcine pancreatic enzyme replacement therapy, by raising $35 million in a Series B round that closed Jan. 28. (Click here for our Strategic Transactions deal record.) Liprotamase, being developed as an oral, non-systemic tablet for exocrine pancreatic insufficiency in cystic fibrosis patients, successfully completed its Phase III development program last fall. Currently available PERTs are made by harvesting pancreatic enzymes from pigs. MPM Capital, which led the Series B round, sees great potential in the product and will place its managing director, Ashley Dombkowski, on the company’s board. MPM was joined in the round by returning investors Third Rock Ventures, Frazier Healthcare and Bessemer Venture Partners. Noting that Alnara remains on track to file an NDA for liprotamase this quarter, Dombkowski hailed the medicine's “positive long-term safety and nutritionally relevant data” and said the filing will place Alnara “on the cusp of significant value creation opportunities.” In addition to the imminent filing, Alnara also is developing a second formulation of liprotamase for the pediatric CF population. --Joseph Haas

Syndax Pharmaceuticals: When START-UP profiled Syndax Pharmaceuticals in the 2007 A-List group, the young biotech had essentially just started operations with an HDAC inhibitor program in-licensed from Bayer Schering AG, and a platform built on theory that epigenetic changes to the tumor phenotype would restore targets that sensitize tumors to treatment and reduce resistance to targeted combination therapy. A few years later, investor interest in this cancer player has not waned--on February 3, Syndax filed a Form D revealing it’s raised an additional $9 million on top of the $40 million Series A from 2007. (MPM Capital, Domain Associates, and Pappas Ventures are among the company’s previous backers.) And Syndax could still draw down another $7 million in this tranche, bringing the Series A total potentially to $56 million. Syndax is still awaiting Phase II data on entinostat (SNDX275)--its lead candidate from the Bayer deal targeting the HDAC isoforms 1, 2, and 3--in combination with a number of drugs including erlotinib and azacitidine. Trial results are expected at the end of 2010. For venture backer MPM, this is the second big investment in epigenetics; the VC has also heavily backed Epizyme, which in October '09 announced its $40 million Series B.--Amanda Micklus

Merus BV: Corporate venture continues to be a relatively reliable source of funding for early-stage biotechs. (For our takes on corporate venture, see here and here). One of the most active corp VCshas struck again: the Novartis Option Fund (part of the Novartis Venture Funds) was a lead investor on Merus BV’s €21.7 million ($30.7 million) Series B financing, announced on January 29. Pfizer, Bay City Capital, Life Science Partners, and Series A backer Aglaia Oncology Fund also participated. Merus, a seven-year-old Dutch biotech, has two platforms (both derived from the MeMo transgenic mouse): one produces full-length bispecific antibodies; the other, called Oligoclonics, generates combinations of three to five monoclonal antibodies sourced from one clonal cell line (the PER.C6 line, exclusively licensed from Crucell NV in 2004). Merus believes this Oligoclonic mixture of multiple antibodies, which have the same immunoglobulin light chain variable so that all binding sites are functional, will be more efficacious than a single monoclonal antibody. The Series B is the first disclosed amount of venture financing for the company (it raised an undisclosed sum in its January 2006 Series A). With the current round, Merus expect to have enough cash to move its candidates for oncology, inflammation, and infectious disease into Phase I. Meanwhile, as is its M.O., NOF has secured an exclusive option to the cancer program in exchange for an up-front payment and milestones, all of which could total $200 million, plus sales royalties.--AM

flickr image by Lady T 220 used under a creative commons license

Vernalis Buys Back Migraine Drug's EU Royalties

For a small drug, Frova (frovatriptan) sure has had a busy couple of years. After it failed the entrance exam for a menstrual migraine label in the US late in 2007, Frova pushed its parent, UK biotech Vernalis, close to the edge of bankruptcy. (Frova's original parent, until 1994: SmithKline Beecham).

Fortunately, the likes of financiers Paul Capital Healthcare were to hand, willing to pony up emergency cash in exchange for future royalties on Frova in the regular migraine indication. Vernalis' April 2008 deal with Paul Capital brought the biotech a €18.4 million life-line, in the form of a loan, to be re-paid along with hefty interest with 90% of the Frova royalties that Vernalis was receiving from European commercialization partner Menarini.

After a good deal more asset-selling and cost-slashing, Vernalis staggered back to life. Ex-Acambis CEO Ian Garland took the reins in late 2008, creating a new management team around him.

So today, a more confident, nearly-back-on-its-feet Vernalis has agreed to pay Paul $32.57 million (£21 million) to regain 100% of those Frova royalties and wipe the debt off its books. Vernalis is seeking the funds to pay Paul off via a placing and open offer, designed to raise about £28.5 million after expenses. (The royalties would have gradually come back to Vernalis, according to a sales-linked formula, but not for another 3-4 years, and only if sales reached a certain level.)

Paul Capital, of course, has done well out of Vernalis' troubles. For starters, it charged a cheeky 42% or so interest on its initial loan--over which troubled Vernalis, with no option at the time of raising money from the disgruntled capital markets, would have had little negotiating power. Second, the financing group has nearly doubled its money in under two years--an ultra-fast return which likely helped the deal meet Paul's required internal return hurdle. "Paul Capital was under no obligation to do the [second] deal," explains Vernalis' CFO David Mackney, "and initially they didn't want to," he adds.

But Vernalis' new management didn't want, either, to miss out on the growth of one of its assets--Frova's sales were up 15% in 2009, to €32.4 million. And the last thing it needed, as a cash-burning biotech, was heavy debt on its books (although as Mackney admits, Vernalis wouldn't likely exist today if it wasn't for that initial Paul transaction). This deal, with the placing, eliminates Vernalis' debt, reduces its cash burn (since it doesn't have to hand money over to Paul anymore) and extends its cash runway beyond 2012, potentially for as long as four years.

As for dilution: who cares? This is a company starting from scratch, whose original investors have already lost out, but whose newer backers may have something to gain, if all goes to plan. Besides, UK pre-emption laws mean existing shareholders can avoid dilution if they want by putting up more money; Vernalis' existing major shareholder, Invesco, has agreed to increase its holding to up to 46% of issued share capital by subscribing to two thirds of the offer.

Vernalis plans to use most of the remainder of the placing proceeds (about £7, by our calculation) to invest in its own pipeline and/or to seize in-licensing or acquisition opportunities. Such a move would reduce the firm's cash runway, sure. But although having an enormous runway is a nice story, particularly amid the rest of the UK's rather shaky biotech sector, it's not really the point of the business, is it?

image by flickrer Artysmokes used under a creative commons license

Do We Have the Right Managers for the UK Innovation Investment Fund?

The UK government yesterday announced that Hermes Private Equity and the European Investment Fund (EIF) had been selected to manage the technology-focused UK Innovation Investment Fund (IIF).

Science & Innovation Minister Lord Drayson reckons the 15-year IIF will grow to £1 billion within 18 months, making it the largest technology-focused fund in Europe and helping close the VC funding gap between the UK and the US. Thus far, we're about a third of the way there: the chosen managers have raised an additional £175m (mostly from UK institutions) to supplement the government's cornerstone £150m, making the fund worth £325m.

It's the EIF that we're interested in, since they'll take £100 million of the UK government's money in a £200 million technology fund-of-funds, covering life sciences, digital/ICT and advanced manufacturing. Hermes is slated to manage a £125 million low-carbon and cleantech fund-of-funds (which will receive the UK's remaining £50m).

So how much will UK biopharma companies see? The EIF choice is interesting given its clear European remit: EIF is a public-private partnership whose shareholders include the European Investment Bank, the European Commission, and various European banks (including the UK's Barclays). It already manages about €3 billion. Will £100 million from the UK government really make much difference--and more critically, will it trickle through to actually be invested in the UK?

Yes, says Drayson. For one thing, he and his team have stipulated (while trying to keep political interference to a minimum) that at least £25 million of the government's contribution must go to life sciences. According to his team, "EIF have indicated that it will be more than that," and they've also indicated that nearly all the £200 million will go into UK companies.

We should hope so. After all, why should UK money simply go into a European pot (which the UK is already contributing to, indirectly)? EIF has already signed individual biotech-supporting agreements with national institutions in other countries. In November it agreed to put €26.7 million into a co-investment fund with Sweden's Karolinska Development AB. A few years back it put €10.4 million into Danish VC Nordic Biotech's venture fund.

There's presumably nothing to stop UK venture funds from securing similar deals directly, although Drayson didn't answer our question as to why those hadn't yet appeared. He did say, though, that the IIF "is complementary to work done by university funds and other organizations" in the UK. The IIF is special, he continued, because of its (predicted) size and long-term structure, ideally suited to life sciences investments. That, he infers, should be enough to avoid an overall skew towards, say, cleantech which, with the ongoing Copenhagen Summit and all, is particularly fashionable right now.

UK biotechs, then, should in theory start to see a freer flow of venture capital by early 2010. It will be longer, however, before they begin to benefit from another pillar of the government's innovation-stimulation package: a flat 10% rate of corporation tax on profits generated from UK-rooted biopharma patents, confirmed in the UK chancellor's pre-budget report also announced yesterday. That won't come into effect until 2013.

Still, "we expect to see companies re-locating their IP to the UK in order to benefit from this," Drayson told IN VIVO Blog. The reduced rate (down from 28% and which will apply to UK-domiciled patents across all sectors) is apparently "very competitive" with the US rate (although it doesn't quite match Belgium's 6.8%).

Financings of the Fortnight’s Pot Luck Supper vs Food for Thought from Tauzin and Kindler

This week we’ve got a little bit of everything out there for you FOTFanatics. Corporate Venture? Of course. Meaty FOPO? You got it. Odd restructuring? Why not. Sexy SEDA? Your wish is our command. And unlike last fortnight’s Eurolicious entourage, this week we feature some All-American talent. And a Canadian.

These guys--and their investors--obviously didn’t get the memo from PhRMA honcho Billy Tauzin and Pfizer CEO Jeff Kindle, who spent their podium time at yesterday’s Partnering For Cures meeting publicly worrying about the state of the States’ hospitality to the biopharma industry.

Tauzin woke us up as he railed at the state of the Food and Drug Administration, noting the regulator was no longer the premier drug agency in the world (that’d be EMEA, if you’re wondering); FDA didn’t take all the blame of course, to Tauzin some of its ineptitude was the fault of Congressional indifference. Meanwhile, someone please buy Margaret Hamburg and co. a DVD player, or maybe a TiVo?

"12:00 is blinking on a VCR at FDA, they are that far behind technologically," observed Tauzin. (No word on whether FDAers were sporting neon leg warmers while listening to Whitesnake while wearing out their Betamax copy of Top Gun on said VCR, but that’s what we were thinking.)

[NOTE: Keep your eyes peeled for coverage out of Windhover's ongoing FDA/CMS Summit in Washington, where FDA's John Jenkins just coincidentally unpacked and disputed the argument that FDA is more 'conservative' than EMEA.]

Other panelists at the breakfast session walked back the criticism. Bob Beall, president and CEO of the Cystic Fibrosis Foundation, commended FDA for its progress in clinical trials in the rare diseases space, noting that any path forward with the agency should begin with direct dialogue and not with confrontation, and not with Congress passing laws to tell it what to do.

And the earlier that dialogue begins, the better. With regards to personalized medicine, for example, he noted that a company can’t wait ‘til Phase III, or even IND stage, to start a discussion about biomarkers. He did lament the status of inter-agency harmonization between EMEA and FDA, but in the end with a wave in Tauzin’s direction said “I’m optimistic about the FDA.”

Founder and CEO of the Multiple Myeloma Research Foundation Kathy Giusti agreed with Beall. FDA, she said, had been “phenomenal.” And using an age-old technique she later suggested if only foundations could get academic and industry attorneys on the same page with contract language “we can all start using,” things would be so much better. As with most remarks that blame the lawyers, those words received a round of applause.

But in any case we shouldn’t be surprised when everyone relocates to Singapore, seemed to be part of the message from Tauzin. That’s something Pfizer’s Jeff Kindler alluded to as well.

During Partnering for Cures' lunch-time session, Kindler, fresh off the “pharma needs to own up to its mistakes to regain public trust” circuit of interviews and talks, sat down with FasterCures founder Michael Milken to discuss Pfizer’s attempts to shorten the timeframe of the drug discovery-development continuum.

Along the way he discussed some of Pfizer’s impressive feats—the creation of HIV specialist ViiV Health Care with competitor GSK, for example, or this week’s deal with Israeli biotech Protalix for its Gaucher’s disease treatment (we’ll leave it til tomorrow’s Deals of the Week to get in-depth on that one).

But he repeatedly invoked the strides made in emerging markets and industry hubs like China and Singapore to speed up clinical trial recruitment, for example. We in the US “have to be mindful of the fact that there are a lot of advances being made in other countries that are very interested in having those clinical trials done there, and that’s where a lot of innovation is going to occur. I think that’s where the big opportunity for speeding up bringing medicines to patients is.”

He later noted that governments in some emerging markets “are very ambitious and aggressive” in beginning to meet the unmet medical needs of their populations and “in encouraging innovation and research and providing incentives for companies like ourselves to locate manufacturing, research and clinical trials in those countries.” In case the message wasn’t clear he added: “And are doing so I might add in many cases with a coherent government/business collaboration that quite candidly we’re not seeing as much of in the United States as we’d like.”

He went on to talk about how China has headhunted Chinese-born young, ambitious, and eager scientists based in the US and elsewhere to return and set up shop in places like Shanghai’s Zhangjiang Park and elsewhere. This migration is “something we need to take account of as US policies are adopted that can have an impact on our ability to support what I consider to be a very important American industry,” he said.

Read more about Kindler’s remarks in today’s Pink Sheet DAILY (and for more on Pfizer's activity in China, see this IN VIVO feature). Then fly the flag for the companies below, this fortnight’s fancy financing phenomena. It’s …


Forma Therapeutics: It’s not that often you see a start-up raise more than $50 million in venture capital and pen two notable alliances with pharma companies within one year, but Forma Therapeutics has managed to do just that. The biotech—which according to this recent profile in START-UP may be onto a winner with its combination of structure-guided cancer drug discovery and proprietary cell-based screening capabilities—pulled in $25.5 million through a Series B financing led by Lilly Ventures (more corporate venture!), announced on December 1. Also participating were Novartis Option Fund and Bio*One Capital, investors in Forma’s January 2009 $25 million Series A. Forma has deals with Novartis (in oncology, signed shortly after it’s A round) and Cubist Pharmaceuticals (antibacterials). The latter deal included a note that converted into stock in the current Series B.—Amanda Micklus

Receptos: The $25 million Series A financing for newly formed Receptos is not as simple as it first appears. The San Diego firm targets GPCRs and described its initial financing as a two-tranche deal, $17 million now, maybe $8 million later. The full story is that Receptos purchased Apoptos, which had raised $28 million in its own relatively recent Series A in January 2008 (so it's more of a reinvention). Roughly $5 million left from that financing was included as part of the first tranche of Receptos’ round – along with $12 million from the company’s venture backers, explained Jim Schmidt, VP of finance and administration. Receptos can qualify to receive the second tranche of $8 million upon the filing of an IND for its lead candidate – a sphingosine-1-phosphate receptor candidate for multiple sclerosis. That filing is expected by the fourth quarter of 2010, says Chrysa Mineo, VP of corporate development. Participants in the new round were Venrock, ARCH Venture Partners, Flagship Ventures and Lilly Ventures. (There’s that corporate venture again!) Each of those funds received a seat on the Receptos board, with Venrock’s representative, former Biogen Idec Executive Chairman William Rastetter, serving as CEO and chairman.—Joseph Haas

Vertex Pharmaceuticals: According to Elsevier’s Strategic Transactions database, follow-on public offerings have increased substantially from a low of $3 million in the fourth quarter of 2008 all the way up to $1.6 billion in the third quarter of this year. While final fourth quarter numbers are not yet available, it looks to be on pace to beat Q3 thanks to a few big FOPOs completed this fortnight by Salix Pharmaceuticals ($128 million), Human Genome Sciences ($415 million), and namely yesterday’s $442.8 million stock sale by Vertex Pharmaceuticals. The small-molecule drug developer, which focuses on several therapeutic areas including infectious diseases, offered 11.5 million shares at $38.50, a price on par with what the company has been trading at for the past few weeks. The stock jumped 8% to $36.15 on November 2--and has been gradually increasing since then into the high $30s/low $40s--following news that 83% of HCV patients in each arm of Vertex’s C208 study had achieved a sustained-viral response with twice-daily telaprevir. Vertex is planning an NDA for the HCV protease inhibitor in the second half of 2010. Less than two months ago, the company monetized future European milestones it would have gotten from telaprevir partner Janssen in a deal with four investment funds, which bought $120 million in Vertex convertible debt and paid another $35 million cash in exchange for $250 million in regulatory and launch milestones. Earlier this year, Vertex completed another huge follow-on offering, which netted $314 million. Since 2008, the company has raised $1.4 billion through four FOPOs.--AM

Labopharm: The public markets are slowly warming to biotech—note Vertex and HGSI’s monster $400 million public offerings, UCB’s €500mm bond offering and Movetis’s announcement that it closed its IPO, bringing in €85m (with the overallotment yet to be determined). But for many of the smaller players capital is still a scarcity, making alternate financing arrangements like Labopharm’s $25 million standby equity distribution agreement (add SEDA to your bin of acronyms to name drop this holiday season) with Yorkville Advisors, an attractive prospect. Under the terms of the agreement, YA will provide up to $25 million during the next three years, available at Labopharm’s discretion via the purchase of new shares, issued at a predetermined discount (that maxes at 5%) to the prevailing stock price. In addition, limits prevent YA from owning more than 19.9% of Labopharm’s issued and outstanding common shares at any one time. The control offered by the SEDA—in addition to the biotech determining when to pull the trigger, it also determines the amount to draw down, with a built-in minimum price—is clearly attractive to smaller biotechs or specialty pharmas who might have cash-generating milestones on the horizon while simultaneously lacking the in-house resources to reach those events. The Quebec, Canada-based Labopharm fits the bill. The company had just over $14 million in cash and cash equivalents at the end of its third quarter, as well as roughly $21 million in long term debt payable starting in 2012. In addition, the company is preparing for the 2011 launch of its second product, DDS-04A, which is a once daily-formulation of the serotonin antagonist reuptake inhibitor traszadone that is currently awaiting a regulatory decision from FDA. In the SEDA-world (it’s not an obscure planet in a galaxy far, far, away) Yorkville has been an active player. This year alone, the company has inked SEDAs with Advanced Life Sciences, RXI Pharmaceuticals, Pharming, and Achillion. –Ellen Foster Licking

image from flickr user Jamie Anderson used under a creative commons license.

Financings of the Fortnight Has European Flavor, Movetis Roadshow Fever

Gas up, everyone, it's time for a European road trip. First stop, Turnhout, Belgium, where gastrointestinal biopharma Movetis is gearing up for a trip of its own.

This morning the Belgian J&J spin-out said it filed to raise up to more than €112 million in what could be Europe's first biopharma IPO since Italian biotech Molmed raised €56 million in February 2008 (sorry, MondoBIOTECH).

Is this the kind of discovery-oriented biotech listing that would announce the IPO window is open for the backlog of companies keeping warm by burning through VC cash from insider rounds? Not really.

Movetis spun out of J&J at the end of 2006 with about €60.8 million in Series A venture funding led by Sofinnova (Sofinnova Partners holds 22.5%, Sofinnova Ventures has 16%) and Life Science Partners (16.9%). At the time its lead asset, the newly-approved-in-Europe for a subset of constipation patients Resolor, was already in Phase III. (In exchange for pipeline, J&J held on to 21.2% of the company and received an upfront fee.)

Still this will be a good sign that public investors in Europe are ready to wade back into biopharma plays, even if backing the launch of a specialty product is more than slightly different than backing most other life sciences start-ups.

Movetis said this morning that the price range of the offering was set at €11.25 to €14.25 per share. The offering comprises a public offering in Belgium to retail investors and a private placement to institutions in Belgium and other ex-US territories. The offer opens on Monday and runs through December 2nd, with Movetis shares scheduled to hit the market on December 4th.

The company will spend its haul supporting the commercial launch and post-marketing regulatory commitments for Resolor (prucalopiride) in Europe. The drug, a selective 5-HT4 receptor agonist, received EMEA approval in October for the symptomatic treatment of chronic constipation in women in whom laxatives fail to provide adequate relief.

Movetis plans to launch and promote Resolor itself in markets where it can make do with a lean, specialist sales force. CEO Dirk Reyn told us after the drug's approval last month that in the UK for example, "GI specialists prescribe between 30 and 40 percent" of drugs for this market and where GPs prescribe drugs, they do so under centrally controlled guidelines from bodies such as NICE and local primary care trusts.

In other markets, where GPs have more freedom, Movetis will need to partner to access a primary care sales force. In Italy, for example, "it is more difficult to reach that audience with a targeted approach," Reyn said.

Before leading Movetis, Reyn was head of the worldwide GI marketing group and VP, new business development at J&J's Janssen-Cilag unit. He told us last month that although J&J realized Resolor was unlikely to serve the kind of large, primary care market it was initially intended to reach, smaller companies like Movetis could succeed in smaller, neglected sub-segments of the GI market.

Resolor's label, said Reyn, provides the necessary ingredients for success. By going after patients for which laxatives do not provide adequate relief, "it created the stronger probability of regulatory approval and, secondly, creates a target market that is very defined and which is also more palatable and digestible for payers."

We will see in a couple weeks whether it is also palatable for public investors, too.

Get back in the car, it's time for ...

ThromboGenics NV: Still in Belgium, now, for an hour long drive to the outskirts of Leuven. With significant funding from Belgian and international institutional investors, public Belgian biotech ThromboGenics seems to have gotten the momentum it needs to complete development of its Phase III biologic microplasmin for vitreomacular adhesion. The company announced on November 17 that it raised €42 million ($63 million) by selling 2.6 million shares--approximately 10% of its outstanding stock--for €16, a very slight discount to the 10-day market average. The raise lends weight to the idea that investors increasingly see ophthalmology as an area with large potential and unmet need, or at least an area where they can turn a nice profit. Microplasmin, a potential alternative to surgery also in Phase II for AMD, diabetic retinopathy, and diabetic macular edema, works by dissolving protein formations that link the vitreous to the retina. Beyond microplasmin, ThromboGenics has done a good job of monetizing other pipeline projects through dealmaking. Most notable is its long-term partnership with BioInvent International in which both companies can contribute candidates and split costs and revenues. Initially focused on ThromboGenics’ Factor VIII inhibitor TB402 for deep vein thrombosis and atrial fibrillation, the deal was later expanded to include Thrombo’s placental growth factor (PIGF) blockers. The partners’ work on the latter class of drugs paid off last year when Phase I cancer candidate TB403 from the PIGF program was exclusively licensed to Roche in exchange for €50 million up front and the potential for €450 million in development and commercialization milestones.--Amanda Micklus

NicOx: Three hour drive to Paris, now, where NicOx is tapping into the French government’s latest hand-out to help top-up a planned €30 million private placement. Still short of a US partner (and thus of a partner's money) for recently-submitted naproxcinod, the company says the capital increase will allow it to “significantly advance” its launch preparations for the drug. More specifically, in line with its long-stated goal of becoming a fully-integrated specialty pharma, NicOx will create a specialist sales and marketing infrastructure in the US. The government-supported Fonds Stratégique d’Investissement, set-up late last year to support local mid-sized companies in key growth sectors, will invest €20 million in total across the two-step financing (for a 5.1% stake in the biotech), which will include a subsequent rights issue (when market conditions permit) that may take the total fundraising up to €100 million. (That’s a fair chunk from the FSI, given that average investment size was initially slated at €5-10 million.) CEO Michele Garufi has long worked to secure a commercial partner for naproxcinod, but this now looks unlikely to materialize before the drug is approved. Despite the hit it will take on dilution, the company is right to raise cash while it can, particularly given its downstream ambition. But although this move shows NicOx’s confidence in its product, it should be wary of under-estimating approval risk--even for an anti-inflammatory drug that’s based on a well-known, proven NSAID, and claims better safety than naproxen.--Melanie Senior

4SC AG: And off to Munich, Deutschland! On November 16, Germany-based 4SC grossed €30 million ($44.7 million) in a collateral rights offering of 10 million shares to existing backers. Stock was sold at €3, a 10-day market average. In 2008 the medicinal chemistry and discovery company's drug development pipeline (and expenses) took off when it purchased eight oncology projects from Nycomed, which was exiting the space. 4SC expects the new funds will take it through 2011 and allow it to complete proof-of-concept studies for its two lead candidates: resminostat, an HDAC inhibitor for hepatocellular carcinoma and non-Hodgkin's lymphoma and 4SC101, an oral DMARD being tested with methotrexate for rheumatoid arthritis. --AM

Fate Therapeutics: OK, one stop in the US of A, so we'd probably better fly. Stem-cell concern Fate's $30 M Series B round was led by returning investor OVP Ventures and includes corporate funders Genzyme Ventures, Astellas Venture Management, and a mystery third company. (The corporate venture train keeps on rollin'.) Fate officials told us they won't need cash for two years, but from their list of activities it sounds like they'll spend every penny. One on side, they're racing to create a commercial supply of pharma-grade induced pluripotent stem cells, the kind drug companies can use for all kinds of screening and testing. (They're not the only ones who want to supply the world with stem cells or create screening tools.) Fate could help licensees differentiate cells, or sell them the pluripotent versions. CFO Scott Wolchko said to look for license deals in the next 12 months. The company will also be its own customer. It's got one small molecule in Phase 1 that aims to redirect hematopoetic stem cells and help cord-blood transplant patients recover faster. The drug, FT1050, is the first test of the company's proposition that it can modulate a patient's own stem-cell populations, using small-molecule triggers, for therapeutic effect. OVP's Carl Weissman joined the Fate board, and all the Series A subscribers joined the B round. -- Alex Lash

image courtesy flickr user mrlerone used under creative commons

Notes from BIO: Toast of the Coast--Incubator vs. Pfincubator

While an earlier session on raising capital in trying times was cancelled--as if to say "yes, it really is that bad!"--it was standing room only at yesterday morning's last-day session titled “Early Stage Investment Strategies: If Not Us, Who? If Not Now, When?"

Afterward, we overheard it called by several people in the audience the best of many sessions at this year’s BIO meeting devoted to getting technologies past the infamous valley of death and into the waiting arms of big pharma.

Of course these panelists didn’t exactly solve everyone's dilemmas, but attendees left feeling better after listening to Melinda Richter, Executive Director of the San Jose BioCenter, trade jibes with Mark Benedyk, who heads Pfizer’s La Jolla Pfincubator.

Richter good-naturedly claimed that Benedyk’s incubator companies are indentured while she shops for the best deals for her companies. Benedyk says his companies are grown in a hot house with no worries, while others have to make a go in wild fields.

Richter’s project was initially funded through San Jose’s economic development efforts, initially receiving $5-10 million from the city's redevelopment agency. In three years its fledgling companies from the BioCenter have brought around $3 billion to the area economy, she claimed.

The problem?"Our companies have been very successful at growing very quickly, but then they tend to leave the area," Richter said. "From an incubation perspective, very successful," but from the point of view of the incubator's investor, San Jose, not as successful.

So where are they going? San Jose's biotechs are forced to establish facilities further up the peninsula in the Bay Area – taking jobs and business with them - because the incubator has the only lab space in the San Jose area. --Shirley Haley

image from flickr user caveman 92223 used under a creative commons license

Notes from BIO: The Times, They Are a Changin'

"We’ve become the last or second last round investors, where as we used to be shunned from the pre-IPO rounds. Eight, nine years ago we weren’t part of the party. We were kicked out whenever we wanted to play." --Howie Furst, Deerfield Partners

The panel on private biotech financing is standing room only (IVB is actually sitting on the floor). When Tengion CEO Steven Nichtberger just identified himself as CEO of a cash-flow negative private biotech company and asked the audience if there was any other employees of comapnies like that in the audience, a lot of hands went up.

That's a lot of people chasing a lot less money than there used to be.

image from flickr user flungabunga used under a creative commons license

The Cost of Money

Just how tight is money in biotech?

Well, you could look at the number of companies trading below cash (81, per Rodman & Renshaw). Or the number of months without a significant US biotech IPO: 14, per Strategic Transactions).

Then there are the anecdotal measures. One recent anecdote of interest: Dyax’s $15 million debt royalty financing from Cowen. Dyax has been around forever (well, OK – since 1989) and hasn’t managed to get a drug to market yet (it isn’t alone in that, of course). It’s got one drug at the FDA now (DX-88, or ecallantide, for hereditary angioedema – an orphan drug candidate which hasn’t had the smoothest of development programs) and a couple of still preclinical candidates. But that’s largely because most of Dyax’s life was spent on developing its phage display technology and finding companies who wanted to exploit it.

The relatively predictable stream of revenues from the platform business, Dyax realized, could in fact help finance the pipeline and they turned to Paul Royalty, which in return for what now Dyax figures was a 25% IRR for Paul, borrowed $30 million against, and repaid through royalties on, the platform business’ proceeds (called the Licensing and Funded Research Program, or LFRP).

Fast forward two years. Paul Royalty’s Greg Brown has joined the newly set up Cowen Healthcare Royalty Partners and he does a new deal with Dyax – one that allows the company to pay off the final $35 million it still owed Paul with a new LFRP-secured $50 million loan, again repaid through royalties. The deal looks like a comparative bargain: a 16% interest rate (given the kind of money outfits like Paul could make, competition for providing royalty financing was getting competitive and rates were going down – see for example this piece from IN VIVO).

But now Dyax has gone back to the well, in a financing environment which has become considerably bleaker. Moreover, the future of Dyax’s big bet -- ecallantide – is looking a bit dicey. An FDA advisory panel voted that the drug’s risk-benefit profile supported approval in adults, but the vote was a narrow one (6-5, with two abstentions). They nixed approval for kids. Safety, they said, wasn’t adequately assessed – very tough in an orphan disease (See our Pink Sheet analysis).

Cowen’s loaned an additional $15 million to Dyax – but the interest rate is 34% higher (21.5% annually) and assures the financier of doubling its money, since Dyax can’t prepay the loan for 3½ years. Cowen also gets more security (it gets repaid with bigger chunks of the LFRP revenues) – and some upside through warrants.

OK, you gotta do what you gotta do. But let’s face it. Just as there’s no free lunch, there’s really no dilution-free financing, either. Especially now.

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

Apixaban: Bad News Highlights Good Strategy

The delay announced yesterday to Pfizer and BMS's apixaban blood clot prevention therapy is certainly a setback for the two pharmas, though they presented the news--and the market reacted--relatively smoothly.

Apixaban--pitted here in a head-to-head against current standard Lovenox, from Sanofi-Aventis, for the prevention of venous thromboembolism in knee replacement surgery patients--just barely failed to show non-inferiority, thanks to a much better than expected result for Sanofi's drug (see the companies' release for the statistical details). This was the first of eight Phase III trials planned for the compound, and ongoing studies aren't affected by yesterdays news, BMS apixaban program head Jack Lawrence told Reuters.

But still, the failure will add at least several months or more to the drug's development program and with rivaroxaban from Bayer/J&J already a half-step ahead, every little bit helps. An NDA for the compound, an oral Factor Xa inhibitor, won't be filed in 2009 as planned.

All of which validates Bristol's decision to go halvesies on the apixaban program with Pfizer in the first place, in a deal we've been fans of since it was announced back in April 2007.

To reacquaint you with the terms: in exchange for $250 million upfront cash and up to $750 million in development and regulatory milestones Pfizer gets an equal share of profits and foots an equal share of commercialization expenses, and Pfizer will fund 60% of any development costs from January 1, 2007 onward. (BMS's similarly risk-sharing and lucrative pact with AZ in the diabetes space provoked our admiration only a few months earlier.)

So with each setback, Bristol's strategy--sharing risk on important projects and increasingly biotech-like--seems cannier. That said, it's fair to ask just how many snafus Bristol's reputation can take before those nine-figure upfront payments dry up: after all, its other big risk-hedging adventure was on the now-dead muraglitazar PPAR deal with Merck & Co. back in 2004, which brought in $100 million upfront and at least $55 million in milestones before stumbling at FDA.

And it's not only Bristol among Big Pharma that's spreading the risk--and possibly the massive reward--on late stage development projects. We'll have more to say in the next IN VIVO about Eli Lilly's $300 million financing deal with TPG-Axon and Quintiles' NovaQuest on its two lead (Phase III) Alzheimer's disease treatments.

And who can forget our multiple pleas for your input on Amgen's potential future deal for denosumab? Certainly the project is now less risky/more expensive since Phase III results in its post-menopausal osteoporosis study were positive, but as Amgen's most important pipeline product in years perhaps (some day) the biggest sign that at least a few Big Pharma (and Big Biotech) now think differently about clinical and commercial risk.

Proteostasis Proves Platform Companies Still In Vogue

It pays to be fashionable. Anyone doubting that platform-based, big think biotech start-ups have gone by the wayside should think again. On Monday Proteostasis Therapeutics stepped out of stealth mode, announcing it had secured a cool $45 million in financing from a synidcate of backers that includes HealthCare Ventures, Fidelity Biosciences, New Enterprise Associates, Novartis Option Fund, and Genzyme Ventures.

The Cambridge Mass.-based company's Series A was one of the largest to date in 2008, eclipsed only by the $105 million raised earlier this summer by RaQualia Pharma, which spun out of Pfizer’s Nayoga research site with backing from the UK’s Coller Capital and Japan’s NIF SMBC Ventures.

But unlike RaQualia, which comes with three marketed products, six development programs, and a 70-strong team of researchers, Proteostasis is an early-stage platform company that is at least three to five years away from clinical candidates. The recent funding shows that at least some venture firms aren’t shying away from discovery-based companies, as long as there’s a potential platform that can be monetized.

Other companies announcing eyebrow-raising amounts of money this year include Constellation and Agios. In April, Constellation, a company focused on developing drugs based on an emerging field called epigenetics, pulled in $32 million in financing from Third Rock Ventures, The Column Group, and Venrock Associates. Meanwhile, Third Rock joined returning seed investors Flagship Ventures and Arch Venture Partners in July to fund Agios, which is focused on cancer metabolism and therapeutics targeting a poorly understood cellular process called autophagy.

Like Constellation and Agios, Proteostasis Therapeutics is of a type: A-list investors, top management, and hot science. Mention the company's scientific founders by name and VCs interested in staking high science start-ups morph into Pavlov's dogs. The three co-founders are Jeffery Kelly of Scripps Research Institute, Andrew Dillin of the Salk Institute, and Richard Morimoto of Northwestern University. Taking the helm as CEO is David Pendergast, who served as COO and CEO at Transkaryotic Therapies before its 2005 acquisition by Shire for nearly $1.6 billion.

Proteostasis hopes to develop first-in-class therapies for neurodegenerative diseases and certain genetic conditions by targeting the biological pathways that regulate the correct folding or placement of proteins within a cell. “It’s a fundamentally different way of looking at disease,” says investor Christopher Mirabelli, managing director of HealthCare Ventures.

To work correctly, proteins must undergo a poorly understood act of molecular origami that depends both on the primary amino acid sequence and the cellular milieu where the folding occurs. Once folded, the proteins must be sent to the right place in the cell – a process called trafficking – to do their job.

But mistakes happen in this complicated multistep process, and that’s when disease strikes. Misfolded proteins can overload the cell’s quality-control mechanisms, aggregating into toxic intermediates such as the debilitative amyloid beta plaques that are the hallmark of Alzheimer’s disease. When certain proteins – especially enzymes – misfold, they are no longer in the proper conformation to do their jobs. So-called molecular chaperones of the kind Proteostasis is interested in developing would cross the intracellular membrane and coax the misfolded molecules into their correct, biologically active conformations.

The company has spent the past 18 months in stealth mode, validating its hypotheses and generating small molecules that work in animal models and cell lines with a $1 million in seed money from HealthCare Ventures. Folks can get an early look at what might be the scientific rationale for the company. In the September 5 issue of Cell, Kelly's lab will publish a paper that shows that certain well known small molecule drugs can disturb the biological pathways involved in proteostasis.

If the company's business model sounds familiar, that's because it isn't entirely without precedent. VCs have been investing heavily in this space for the past several years in companies such as Amicus Therapeutics, which went public in 2007 and recently signed a licensing deal with Shire worth up to $200 million. Meanwhile, FoldRx, a company using molecular chaperones to treat diseases such as cystic fibrosis, Parkinson's Disease, and the rare neurodegenerative disorder familial TTR amyloidosis, also boasts Jeffery Kelly as a founder, and HealthCare Venures as a backer.

Mirabelli isn't worried, however, that FoldRx and Proteostasis will be competing either for partnerships or with potential therapeutics. "It's such a big space. There's room for a number of investment opportunities," claims Mirabelli.

In an interview, Mirabelli emphasized that the two start-ups are taking complementary approaches to the developing therapeutics based on protein homeostasis. While FoldRx has focused on salvaging individual misfolded proteins that play a role in disease, Proteostasis is taking a more global approach, attempting to use systems biology to track down regulators that involved in various diseases.

Though the company hasn't specifically outlined its therapeutic areas of interest, based on conversations with co-founder Kelly, Pendergast and Mirabelli, it seems that Proteostasis will also initially focus on different diseases than FoldRx, with a special eye on Huntington's Disease and the lysosomal storage diseases.

This focus on lysosomal storage diseases could make Proteostasis a direct competitor of Amicus-- if the technology bears fruit. And it's likely one of the reasons Genzyme Ventures got involved in the deal. Genzyme, after all, pioneered enzyme replacement therapy, developing Cerezyme for Gaucher Disease and Fabryzyme for Fabry disease. In 2007 alone, the two products generated over $1.5 billion in sales. Despite the fantastic success of these large molecule products, they don't work for all patients afflicted with the disease. Moreover, Shire's rich deal with Amicus suggests that Genzyme is attempting to hedge its bets by investing in a potential challenger.

The fact that Novartis Option Fund is also a backer suggests the potential breadth of Proteostasis's technology. As we described last year, Novartis Option Fund was designed to do two things: invest in early stage companies, but at the same time take an option on a promising therapeutic program, creating a cheaper "in" for the parent pharmaceutical company. Any potential licensing deal comes with a pre-negotiated price tag and can only be triggered by discreet events, such as lead optimization, pre-IND, and first-patient dosing. So that it's impossible for Novartis to exercise virtual control of a potention portfolio company, Novartis Option only invests in companies that have at least three programs.

The current market turmoil and difficulty exiting via the public markets mean Proteostasis's backers will likely carry the company for a long time. (It's worth keeping in mind that Amicus's backers poured at least $150 million into that company before it finally went public in 2007 after several attempts.) That's likely one of the reasons for the large Series A.

But Mirabelli insists that big science of this kind deserves big money. It was important he says, to have the company's executives focused on validating the theory and generating ideas. "We didn't want them to spend a lot of time on fund raising," he says.

(Photo courtesy of Flickr user malingerer via a creative commons license.)

Thought-Leadership in Hoosiertown: Lilly’s Innovations in Pharma Finance

It was hardly groundbreaking, as the Covance/Lilly deal was described by one of the PR flaks who’d pre-alerted us to the deal (you can read more of our Pink Sheet Daily coverage here).

But as one piece of the overall strategy Lilly has been fitting together over the last few years, it does indicate to us that those isolated Indianapolites are now the leading Big Pharma thinkers when it comes to financing R&D.

Let’s not go overboard here. The Covance deal isn’t a brand new concept. Aventis (and a few others) did more or less the same thing with Quintiles in the previous decade (see this piece, for example: you can get it for free and it will outline the key issues Lilly also had to wrestle with).

But add this deal together with Lilly’s recent three-way Alzheimer’s funding/development program with the private equity firm TPG-Axon and Quintiles’ NovaQuest unit, plus Lilly’s Asian forays in cooperative discovery (see this analysis, for example), and the company’s FIPNet notion is looking like a lot more than a marketing slogan.

Lilly, in short, seems almost uniquely serious about both variabilizing and off-loading development expenses. The first bit is pretty easy and relatively popular – all drug companies want to cut expenses. Lilly’s sale of a standalone drug-development facility and transfer of employees is simply one technique among many (like firing people, an activity with which Big Pharma has gotten a lot more comfortable over the last two years).

The second bit is harder: we haven’t seen any Big Pharmas except Lilly turn in a big way to private equity to help them fund high-risk R&D and share in the returns. (Lilly and other Big Pharmas have let NovaQuest take on some development risk in return for milestones and royalties, but those are pretty limited deals; Bristol has of course rather famously turned for financing and development help to other Big Pharmas).

There have certainly been plenty of discussions with PE – we ourselves know of several. But by and large the investors we’ve spoken with want more than just a couple of high-risk projects in these financing arrangements – they want a market basket of compounds, and so far as we know, no major drug company has been willing to share the upside that broadly. (Interesting that Mikael Dolsten, who was running an incipient Pharma-funding operation for Orbimed, gave up that job to run Wyeth’s R&D organization.)

In this regard, the Lilly/TPG deal was a compromise: two different Alzheimer’s compounds, both about ready to start Phase III trials, but hardly the four or five programs that would make most PE players comfortable with the development risk.

CROs, meanwhile, are anxious to take advantage of Big Pharma’s new attitude toward infrastructure and risk sharing. Their businesses are booming with Big Pharma’s boom in Phase I and II programs; they need more people to handle the additional trials. Getting them from Pharma in a friendly sort of way is good business for two reasons: the drug company pays the costs of their new employees for the first year or two; and it’s likely that the Pharma will be more inclined to send a preponderance of their new business Covance’s way. We very much doubt, incidentally, that other Big Pharmas will shun Covance because it is too cozy with Lilly: there’s simply too much momentum towards outsourcing in general.

If this merry-go-round of employee transfers stops – it’s fueled by the boom in early-stage productivity -- the CROs will be stuck with the firing duties and expenses of doing so, as was Quintiles when it ran into problems earlier this decade (problems which, among others, eventually led to its LBO). But in 2008 – unlike 1999 -- drug companies are pretty committed to outsourcing; should their mid-stage pipelines dry up any further, they’re as likely to layoff more of their own employees as they are to use them on work taken back from CROs.

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

Once in a Blue Moon: SGP's Stock Offering

When everyone and their pharmaceutical brother decides it's time to buy back their own stock, leave it to Schering-Plough to buck the trend.

The Big Pharma, fresh off the news it had emerged from the five-year old consent decree after righting all the wrongs at two manufacturing facilities ($500 million for the poorer, though), said it was selling a boatload of stock. The proceeds of this expected offering will cover some of the expense of its $14.5 billion cash takeout of Organon BioSciences, announced earlier this year (we covered the acquisition in depth, here).

The move marks the first time in months years decades? that a Big Pharma has decided to sell common stock to public investors (there have been plenty of debt financings and lots of cash raised via many divestments and spin offs, but zero equity offerings in a very long time as far as we can tell).

Schering-Plough is selling 50 million common shares (plus up to 7.5 million more in the greenshoe), which at yesterday's close would rake in nearly $1.5 billion toward the Organon tab. Simultaneously the company said it would sell $2.5 billion in convertible debt.

The fact is that Big Pharma rarely need to dilute shareholders since debt is readily available and they are often sitting on piles of cash that -- thanks to strong cash flow and goofy measures like the American Jobs Creation Act (oh yeah, how'd that go?) -- can resemble some of the minor peaks in the Alps. In fact most go out of their way to appease shareholders by buying back shares, the wisdom of which we question here.

But Schering-Plough has enjoyed success of late with Vytorin and Zetia, and has been growing both its top and bottom line nicely--so why not take advantage?