Deals of the Week is Not Optional

Early in 2009, Cephalon purchased for $100 million an option to buy a smaller biotech, Ception Therapeutics, for $250 million. This week, Ception investors had their big pay day.

Cephalon's decision was dependent upon successful results from Ception's lead project for eosinophilic asthma, the anti-IL-5 antibody Cinquil (reslizumab). An earlier opportunity to exercise its right to buy was thwarted when the same drug didn't pass the muster in a related condition, eosinophilic esophagitis.

The news should cheer private biotech investors, who are largely resigned to accepting downpayments of one type or another to get their exits-by-acquisition deals sealed. In 2009 nearly every acquisition of a private biotech comprised a downpayment plus contingent value rights based on development, regulatory, reimbursement or commercial milestones.

These option-to-acquire deals are designed to similarly share risk and potential upside. And we argued at this week's Pharmaceutical Strategic Outlook meeting that these structures are only becoming further entrenched as biotech investors continue to struggle and the IPO climate remains chilly at best. Outcomes like Ception's help demonstrate that option-structures aren't necessarily low-value deals, which may momentarily stop the handwringing of some venture capitalists.

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Pfizer/Merck/Lilly: Recognizing the merits of pre-competitive collaboration, the three pharmacos announced Feb. 23 the launch of the not-for-profit Asian Cancer Research Group, which will gather pharmacogenomic data on Asia's most prevalent cancers. Initially, ACRG will focus on identifying biomarkers for lung and gastric cancers in Asia. Unlike another pre-competitive venture Pfizer, Merck and Lilly have stakes in--Enlight Bioscience--the ACRG is not-for-profit. The companies hope to gather 2,000 tissue samples from lung and gastric cancer patients in the next two years, at which point the data will be made publicly available to researchers through non-exclusive licenses. Within five years, the database will be updated with clinical data, including quality of life and survival data. "The beauty is that we'll be collecting all the clinical outcome data associated with patients that will really give us an extensive understanding of whether a genetic signature will be linked to either a good or poor prognosis," Pfizer oncology CSO Neil Gibson told PharmAsia News. Lilly will be responsible for managing the open-source data from its Singapore Center for Drug Development site, which it established in 2002 in partnership with Genzyme for research in diabetes and biomarker discovery in cancer.--Daniel Poppy

GSK/Regulus: Call this the collaboration so nice, they did it twice. GlaxoSmithKline and Regulus Therapeutics, a pioneer in the microRNA field, announced a new collaboration Feb. 25, through which they will co-develop and commercialize therapeutics targeting microRNA-122 in hepatitis C and other indications. The deal occurs less than two years after the Carlsbad, Calif., biotech and GSK signed a strategic alliance to discover, develop and bring to market novel microRNA therapies for inflammatory and immunological indications (See our coverage of that deal from “The Pink Sheet” DAILY). Regulus, a joint venture between two pioneers in oligonucleotide technology, Alnylam and Isis, has access to plenty of IP and scientific skills in this fast-moving field. GSK was drawn to additional collaboration with Regulus because it has gotten an inside view on the potential microRNA therapeutics and how they work and because Regulus has done significant preclinical work with “the dominant IP” in the space, Regulus president/CEO Kleanthis Xanthopoulos told us. Regulus could earn more than $150 million in upfront and milestone payments over the course of the partnership, the companies said, although they did not disclose most of the deal terms. Like the previous transaction, this deal breaks the upfront payment into two components – cash and a convertible note that can be transformed into Regulus equity at a time of the company’s choosing. In the first deal, Regulus got $15 million in cash plus a $5 million convertible note. The upfront “essentially covers all of our R&D costs so far to bring the compound to the preclinical stage,” Xanthopoulos said. He said the remainder of the $150 million will be spread out “evenly and at frequent intervals.”--Joseph Haas

Astellas/Basilea: Just a few days after losing one partner, Swiss biotech Basilea on Feb. 24 pulled in another. When Johnson & Johnson exited a five-year partnership on antibiotic ceftobiprole on Feb. 19, most analysts saw this as good news for the biotech, given that the partners were in arbitration over J&J’s allegedly shoddy trial data management and subsequent regulatory delays. Basilea’s fortunes then continued to shine when Astellas stepped in with CHF 75 million ($69.4 million) up front and up to CHF 478 million in milestones for rights to the biotech’s other Phase III candidate, anti-fungal isavuconazole—widely perceived as now more valuable than ceftobiprole anyway. Astellas will lead (and thus fund most of) development and commercialization of the drug, but, significantly, Basilea will participate—paying a minority of development costs and retaining a option to co-promote isavuconazole, which is in development for invasive fungal infections, in the US, Canada, major European countries and China. In fact such participation was a pre-condition of the deal, according to Basilea’s management; not surprising, perhaps, given the extent to which the biotech was apparently left out in the cold in the J&J deal. Astellas’ funding provides a welcome cushion for Basilea given the uncertainties created by a contractual year-long transition period with J&J, and the biotech’s commitment to the European rollout of its severe hand excema drug Toctino. As importantly perhaps, it provides validation of both Basilea’s pipeline, and its attractiveness as a partner despite the unusually acrimonious J&J relationship. --Melanie Senior

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

2009 M&A/Alliances DOTY Nominee: GSK/Concert and the Option-Based Orchestra

It's time for the IN VIVO Blog's Second Annual Deal of the Year! competition. This year we're presenting awards in three categories--that's 300% more fake prizes than last year!--to highlight the most interesting and creative deal making solutions of the year. The categories are: Big Pharma Deal of the Year, M&A/Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (roughly half a dozen in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.
We’re cheating a bit on this one. For even though the nomination goes to GSK’s deal with Concert—a harmonious June deal indeed—it’s also a nomination that represents the Big Pharma’s entire 2009 listing of option-based deals. Why do they deserve your vote? Because they’re flexible, low-cost, risk-mitigating, pay-for-performance-oriented and, frankly, we think just rather clever. They’re also a very definite sign of the times.

In brief: GSK (or whomever; they’re not the only ones doing these deals, but they’re among the most prominent) pays a small fee up-front in order to take an option, or several options, on one or more partner compounds (typically pre-clinical). This secures for GSK a pre-defined licensing deal down the line—but only if it wants it, i.e. if the data look good. If they don’t, GSK has only lost relatively small change. If they do, GSK not only secures an asset that would otherwise very likely attract other interest, but does so at a pre-agreed price, which would arguably otherwise be higher. And the partner runs (& funds) the R&D program in the interim.

The Concert deal’s on the rich side, but typical in structure (and that’s why it’s such a perfect template): GSK paid $35 million up front (including $16.7 million in equity, another way to spread risk) for options on three projects, the most advanced of which started Phase Ib in November this year, the least advanced of which hadn’t even been selected at the time of the deal. GSK can opt into these programs at clinical proof-of-concept (or slightly earlier, at Phase I, for the lead). If it does, Concert begins to access various slugs of milestone money, mostly tied to clinical and regulatory achievements. So the biotech got $12 million a month or so ago for starting Phase Ib on the lead; its total milestones may reach over $1 billion.

This isn’t just a risk-sharing deal structure, it’s risk-sharing deal content, too: Concert’s compounds are mostly deuterated versions of existing molecules (the lead is a version of Bristol’s HIV drug atazanavir, for instance)—meaning it has replaced hydrogen atoms with deuterium atoms, creating new, patentable chemical entities that skirt existing IP and that may even be safer and/or more effective than the originals.

Beyond the Concert deal GSK has an orchestra of others: Chroma (Jun 09), Protea Vaccine Technologies (Jun 09), Vernalis (Aug 09) or SuperGen (Oct 09) for example. And don't overlook the dual-melody rare disease pact with Prosensa (Oct 09), which comprised a straightforward licensing deal and an option component. For a recent addition to the group, check out the November GSK/Nabi deal, which includes $40 million up-front for the option to license smoking cessation vaccine NicVAX, currently in Phase III.

image from flickr user greenbloodman used under a creative commons license