Here's the biotech
riddle of the day: What do these three clinical-stage
drugs have in common: GPI 1485, XL 647, and ISIS
301012? They are in three different indication areas
(Parkinson’s, cancer, and cholesterol metabolism).
Three different biotech companies developed them
(Guilford — now owned by MGI Pharma, Exelixis, and
Isis Pharmaceuticals). GPI 1485 and ISIS 301012 are in
Phase II, and XL 647 is nearing the completion of
Phase I. Give up?
Answer: Each drug has
been temporarily carved out from the clinical
portfolio of its originator and financed
independently. In exchange for a large chunk of the
potential upside, the New York private equity firm
Symphony Capital is providing the nearly $250 million
required to move all of these drugs to their next
significant clinical milestone.
These deals and others
in the biotech industry carried out recently by
private equity investors such as Symphony represent a
welcome trend in an asset-rich industry ill served by
the one-size-fits-all structures of equity financings
or deals with big pharmaceutical companies. Indeed,
biotech development corporations (BDCs) — or
whatever these still-new deals come to be called —
reflect a fine-tipped instrument to delicately balance
sharing of clinical risk and reward.
BDCs reflect an
uncommon ability by these investors to see clinical
programs through two lenses at once: as assets that
can be separately securitized and, simultaneously, as
clinical programs embedded in companies with
experienced development teams and managers adept at
telling their story. Whatever happens in any one
clinical trial, both the company’s investors and the
private equity firm’s investors stand to benefit.
Carved-Out Clinical
Development: How It Works
Under the terms of each
deal, Symphony has provided the biotech company with
the financing needed for clinical trials for two or
more drugs. In the case of the Isis-Symphony deal,
this means a sum of $75 million. In exchange, Isis has
transferred to a BDC ownership of its Phase II
cholesterol-lowering drug ISIS 301012 and two
earlier-stage diabetes drugs. If the ISIS 301012
trials succeed, the biotech can repurchase rights to
the drug for a much higher amount that pays Symphony a
32 percent annual return for the four years of the
deal. In addition, Symphony receives a five-year
warrant to purchase up to 4.25 million shares in the
company’s stock. The warrant provides additional
upside to Symphony at no cost to Isis’ current
investors. It serves to strongly align the two
groups’ interests.
Importantly, the actual
clinical development remains under the control of the
two partners. Isis has its own clinical development
team for each drug, of course. For its part, Symphony
works with RRD International, LLC, a product
development company deeply experienced in
clinical-stage drug development. This model is a
strong contrast to its alternatives. In equity
financings, new investors buy the shares but provide
no hands-on help in development. Partnerships with Big
Pharma, meanwhile, sometimes lean toward the interests
of the bigger partner during trial design and
execution.
If a trial fails,
Symphony keeps the rights to some or all of the drugs
in multiple therapeutic areas. In addition to
retaining ownership, the firm protects itself by
including multiple drugs in each arrangement. It
carefully selects “traveling companions” in each
of its deals to ensure that there are compatible
timelines and risk profiles, allowing management to
choose which drugs to buy back.
BDCs differ from their
predecessors from the 1980s and 1990s, which were
known as “SWORDs” (stock and warrant
off-balance-sheet research and development
corporations), “SPARCs” (special-purpose
accelerated research corporations), and “R&D
limited partnerships.” SWORDs, for example, provided
publicly traded vehicles for specific drugs, but they
and the other vehicles fell into disuse for a number
of reasons, including changes in accounting rules and
the reluctance of partners to make public the
scientific details of the drugs under development.
Keeping Development
at Home
For biotech companies,
the trend toward clinical development financing comes
none too soon. Many biotechs encounter the largest
financial needs in their history at exactly the time
when they are least able to raise large amounts
painlessly from existing shareholders.
The most likely
candidates for these new financings are companies
facing a devilish dilemma. Their market value is
supported by their having multiple drugs in the
clinic, but there is not enough money available to
push all their drugs through to the point where
pivotal data is available. Financing the lead program
often means putting the second and third programs on
hold.
It is understandable
that existing investors might start to lose patience
with clinical development programs that run for long
periods and eat lots of cash. Isis Pharmaceuticals and
its investors are said to have invested many millions
in anticipation of cashing in when the “big score”
of clinical success occurs. But the most recent
milestone was the announcement of interim results from
a Phase IIa clinical trial, with additional Phase IIa
and all-important (and expensive) Phase IIb trials
still to come.
The two primary
alternatives for a company like Isis have big
potential disadvantages: The issuance of new shares
can depress the stock price in the short term and
water down the gains for all shareholders should the
drug succeed. The other choice is to partner the drug
with Big Pharma for the traditional mix of upfronts,
royalties, and milestone payments. But biotechs try to
leave such partnering as late as possible, to ensure
they get the best possible value from the deal. Prices
for Phase I drugs have been rising, but such
partnerships are still seen as highly speculative by
the pharmaceutical industry. Furthermore, turning over
the reins of a prized clinical program with
significant development work still remaining brings
the risk that the pharmaceutical partner will not be
as committed as the original owner is.
One of the few
downsides to the BDC scenario is the possibility that
financings like this might make it more difficult
later on for biotech companies to attract
pharmaceutical partners, since much of the early value
has already been reaped by the BDC partners. But upon
closer reflection, this argument is fallacious: What
pharma company would reject the next Lipitor — a $14
billion drug — at the conclusion of a successful
Phase IIb trial? There will still be plenty of upside.
Will BDCs become a
trend beyond the few deals done already? My opinion is
“yes.” According to Symphony, the fund is in
discussions with more than 60 biotech companies. While
many factors must align for a deal like this to work
out, and Symphony and its counterparts have to be very
selective in choosing which drugs to back, the upside
is dramatic. The first BDC success story will then
attract new players. Indeed, the contract research
firm turned pharma services organization Quintiles
Transnational Corp. announced in May that it has
increased the volume of its existing investment fund
NovaQuest so that, together with hedge fund TPG-Axon,
it can invest even more in clinical-stage products
themselves without diluting the company’s equity.
The invention or
reinvention of these vehicles reminds me of the
creation of stock options, index options, and other
derivatives. Investment vehicles like these have
become indispensable components in the securities
markets and investors have never looked back.
Steven Dickman is the founder-CEO of CBT Advisors, a boutique strategy consulting firm in Cambridge, MA, working with life sciences companies and their investors.
http://www.cbtadvisors.com/
|
