|Follow Venture Capital to Big Gains in Biotech: Peter Johann|
|By George S. Mack of The Life Sciences Report|
|Friday, 06 July 2012 05:01|
The Life Sciences Report: NGN is a venture capital firm, but I note that you also do private investment in public equities (PIPEs). Could you briefly describe how PIPEs are structured? When you create a PIPE, what do you get in return?
Peter Johann: Starting with the second question, usually we acquire common shares plus warrants. Sometimes there are no warrants, but usually a PIPE returns shares plus anything from a quarter of a warrant up to and in some cases more than 50% in warrants, which are exercisable within a certain time period at a price fixed in advance. In principle, when we started our first fund in 2004, we determined that up to 20% of our investments could be PIPEs. We saw a lot of opportunity in undervalued companies. The private valuations were usually higher than the public ones.
PJ: Thank you. We invested about six months after Micromet merged with CancerVax Corp. The share price was lower than when Micromet was privately held. We knew the company before the merger and we had done our due diligence. When the opportunity came we negotiated a PIPE deal and updated our due diligence within a short period of time.
We also did a PIPE with Resverlogix Corp. (RVX:TSX). We came across Resverlogix while performing due diligence on another company and found Resverlogix' product RVX-208 was far more advanced. We followed the company for some time, started talking and when it raised money, we went in, did due diligence and structured a PIPE.
TLSR: The PIPE appears to be a way for activist investors to get involved with a company. Perhaps the company is undervalued, but it needs capital to realize its improved valuation. Is that the case?
PJ: Yes. PIPEs are a way to raise cash to move companies to the next value inflection point, as private rounds do in nonpublic companies. When we do PIPEs we always look at the shareholding structure and who else joins in such a round.
TLSR: What type of exit strategy do you prefer for your portfolio companies—initial public offering (IPO), acquisition or something else?
PJ: An IPO is a way to access capital that is unavailable to a private company, because large institutional investors can put money in. That is why Micromet did a reverse merger with a U.S. company, and then went to the U.S. capital markets. Without this access, Micromet might not have been as valuable as it was at the end. If it had stayed in Europe, access to capital would have been limited.
On the other hand, even if a company goes public and raises the money it needs to get to its next goal, it will still need a value inflection point, where a pharma or medical device company gets interested enough to buy the company. The IPO is the step in between.
TLSR: I've noticed that companies are being acquired and original investors are receiving milestone payments later. Has it been that way all along, or am I just starting to notice it?
PJ: These types of deals are happening more often. Outright acquisitions were the name of the game until four or five years ago. Meanwhile, pharma and device companies became more risk-averse. Now they want to share risk with investors by telling companies they can get more cash, but only if certain milestones are met. I would not say this is the standard now, but in many cases you find this acquisition structure. It largely depends on the kind of milestones set forth, and the timeframe expected to reach the milestones, as well as the financial situation the small company is in.
TLSR: Do you believe the IPO will return as the normal exit strategy for biotechs, or has the duration of drug development changed the exit model for startups? Is an IPO even rational for a startup or a biotech with a product in phase 1 or early phase 2?
PJ: In those instances, I would say an IPO exit is unlikely. Verastem Inc. (VSTM:NASDAQ) is an example of a company with an early-stage product that was a good story. We did an IPO with Horizon Pharmaceuticals Inc. (HZNP:NASDAQ), which was the product of a merger between Horizon Therapeutics Inc. and Nitec Pharma AG, a company we had invested in before. The combined company then had two late-stage assets, Duexis and Lodotra (Rayos in the U.S.). It got approval from the U.S. Food and Drug Administration (FDA) for Duexis, a product to treat signs and symptoms of rheumatoid arthritis (RA) and osteoarthritis (OA), and for Lodotra, which is currently marketed in Europe for the treatment of moderate to severe active RA accompanied by morning stiffness. What you find is that institutional investors want derisked assets when they invest in an IPO, which they found in the case of Horizon. The tendency is toward later-stage, derisked assets before a company seeking investment can get access to capital in an IPO at a reasonable valuation.
TLSR: As a venture capitalist, do you put yourself in the same position as a big pharma? Do you want to see a company derisked to a certain degree before you invest in it?
"Institutional investors want derisked assets when they invest in an IPO."
PJ: We have a diversified portfolio. We invest in some early-stage assets—those that are preclinical—when we have good models and can see whether a concept is working. But you still have the risk of drug toxicity and the issue of efficacy in humans, which can only be seen down the line. Therefore such companies represent a smaller piece in our portfolio and are only companies with a real breakthrough potential. Preferably we invest in companies that already have products with demonstrated efficacy. In oncology, as with Micromet, we saw a cohort of patients that had responses while the product was still in dose-escalation. When we invested in Nitec Pharma AG, its RA product Lodotra was already in the approval process, so it was derisked and late-stage. We prefer that kind of asset because we do not have long development times. If you invest preclinically, you could be talking up to 10 years before you see a return, depending on the data you, as a strategic acquirer, want to see. That is far too long for many venture capital companies and their limited partners.
TLSR: Horizon has real revenue visibility and derisked products that have been on the market for a long time.
TLSR: And then you have the investment in Resverlogix, which is more speculative but does have clinical-stage programs. Are you diversifying that way?
PJ: Yes. We saw the marker data in RVX-208 from a phase 1 study as a basis when we invested. We saw the ASSERT trial later, which unfortunately had a p-value of 0.06—which is close to statistical significance but just missed it: 0.05 would be statistically significant. It was just the primary endpoint on the ApoA-1 (apolipoprotein A-1) increase that missed; HDL increase was statistically significant. The data showed the concept was working, and we'll see more studies and more data that will, hopefully, confirm the hypothesis soon. With regard to Resverlogix we said, "OK, it is higher risk, but it will have very high rewards when it hits." From a venture-capital portfolio perspective, you need a balance of high-risk, high-return and lower risk with median return.
TLSR: What are you looking for in pharma and medical device companies?
PJ: We are about 50% in pharma, and have about 50% of our portfolio in medical devices, diagnostics and, to a lesser extent, in services. There are some highly attractive companies in our portfolio that could consider an IPO route to build growth, or could take the merger-and-acquisition (M&A) route. However, acquirers seek companies at a certain stage. For medical devices, the feedback we get is that strategics want CE-mark safety plus a certain level of revenue in Europe, and/or FDA approval in the U.S. [Editor's note: CE refers to Conformité Européenne, which attests that a product has met the European Union's health criteria.] An acquisition at a preapproval stage in devices or diagnostics is very rare and mainly found with breakthrough technologies. Pharma also is looking for breaktrough technologies early, or for products with proof of concept in clinic.
"From a venture-capital portfolio perspective, you need a balance of high-risk, high-return and lower risk with median return."
In pharma, you want a platform that people think is promising. Thus you have the Sirna Therapeutics acquisition by Merck & Co. Inc. (MRK:NYSE). The antisense field looked very promising, and Merck made that move. Also, Roche Holding AG (RHHBY:OTCPK) did a big deal with Alnylam Pharmaceuticals Inc. The deals reflect the assumption that you can develop good products on antisense/RNA interference platforms. On the other hand, when a biotech company has a new platform potential, pharma partners want to see clinical validation—especially when there are new targets. Once a company has demonstrated clinical proof of the platform and has a pipeline behind, then it is a much more attractive buy, and is of much higher value for an investor.
TLSR: Speaking of antisense drugs, Isis Pharmaceuticals Inc. (ISIS:NASDAQ) has filed Kynamro (mipomersen sodium), designed to reduce LDL cholesterol, for review in both the U.S. and Europe. If it receives approval, would you consider that validation of the platform?
PJ: It would be a validation of the platform in one sense, but it is only one product. There are a couple of others in clinical development that show good data. With the optimization of the technology and delivery—getting antisense drugs into the cells—we have the potential for more products coming out of this platform.
TLSR: We have mentioned several public companies in your portfolio. Can we talk about them more? Which would you like to start with?
PJ: Let's start with Resverlogix. Its RVX-208, which treats atherosclerosis, is in two clinical phase 2b studies. We look forward to seeing proof of concept—reducing plaque volume—in clinic. The company started out as a cardiovascular company, with additional programs in inflammatory disease. Atherosclerosis is 50% inflammation. The lead compound was developed in the cardiovascular space, and that is why we invested. As recently announced, Resverlogix has a whole new basis with its epigenetic platform technology, which modulates protein production, and RVX- 208 is the lead compound on this platform. New products expanding out of the cardiovascular field into many different fields, including oncology, can be expected from that platform. That adds additional value to the company and a broader basis. We firmly believe RVX-208 is a first-in-class small molecule for treatment of atherosclerosis. It has a completely different function than cholesteryl ester transfer protein (CETP) inhibitors.
TLSR: RVX-208 is an inducer of apolipoprotein A-1 (ApoA-1). We are used to looking at protein inhibitors in drug development. Why do you think it has taken so long to look for agonists or inducers?
PJ: The screening field has been based on inhibiting a process. If you induce a process, you need to understand what you are inducing and what the potential side effects could be. That is a relatively new paradigm and has taken a long time to emerge. Now that we understand both the genome and gene function better, and also have a better understanding of how you can modulate genes, it is easier to start in this field. The whole epigenetic field is just emerging, and we are just seeing the first big deals from it. It is a whole new way to develop new drugs.
TLSR: How long do you think it will take to find out if RVX-208 might actually prevent exfoliation of vulnerable plaques?
PJ: We will have the first data in Q1/13 from the ASSURE trial. Then we will see to what extent we can cause plaque to regress. If there is an indication after six months that it is reducing plaque, we can look at outcomes in phase 3 studies.
TLSR: It is hard to make direct observations of the growth of vulnerable plaque, except on autopsy perhaps. It will have to be a data- and time-driven endpoint. It is going to take a long time to figure out if RVX-208 actually prohibits the sudden heart attacks that kill people who appeared perfectly healthy until the day they died.
PJ: You can identify risk now with new intravascular ultrasound (IVUS) imaging. With the new systems, you can also identify the composition of plaques. A physician can then determine whether the plaque is vulnerable or not. It will take a while for the drug to work because you need to induce ApoA-1. It will take a couple of days to start the gene up-regulation, produce the protein and then reverse cholesterol transport. RVX-208 is not an acute treatment, but chronic and prophylactic.
TLSR: Perhaps it won't be this first-generation drug RVX-208, but do you imagine this type of technology could ultimately render statins obsolete?
PJ: I wouldn't think so. We think the treatment will be used in combination with statins. A physician would reduce low-density lipoprotein (LDL) with a statin, and on top of that build up high-density lipoprotein (HDL). LDL alone is not a decisive factor in cardiovascular events. They are also a function of HDL—functional HDL—which we want to elevate. If you have a good ratio of LDL to HDL, you have a combined excellent effect. That is why we do studies of RVX-208 on top of statins.
TLSR: When you first talked about Resverlogix, you mentioned that it started out as a cardiovascular company, but there were obvious synergies with other disease-causing inflammatory processes. How far are these other anti-inflammatory products from the clinic?
PJ: They are preclinical, so I cannot give you an exact timeline. It is a matter of focus for the company, obviously. But they could be developed into clinical compounds within a reasonable time period.
TLSR: And, of course, ApoA-1 is also important in brain health.
PJ: Right. That is worth exploring in Alzheimer's disease, so that could be another opportunity for the company on top of the cardiovascular.
TLSR: Investors aren't giving any valuation to these distant projects yet, but the possibilities are interesting.
PJ: Absolutely. At the moment the key value driver is RVX-208, because you have two events coming up pretty shortly. One is the SUSTAIN trial, reading out in Q3/12, and then, obviously very important, the ASSURE trial, with intravascular ultrasound measuring changes in atheroma volume. If we see plaque regression there, we can easily deduce that treatment results in fewer cardiovascular events. You would have a development candidate for approval studies.
TLSR: Can the IVUS examination of these plaques differentiate between wall thickenings and actual vulnerable plaque formation below the endothelial layer of the vessel?
PJ: Yes. With the modern intravascular ultrasounds systems, physicians can view imaging that shows composition and whether a deposit is calcified already, or whether it is more liquid. When it is more liquid there is a higher risk. I doubt whether you can see this with computed tomography (CT) scans.
TLSR: Can you talk about Horizon?
PJ: We were previously invested in Horizon's merger partner, Nitec Pharma AG, along with some other venture capital firms. Its product, Lodotra (delayed-release formulation of low-dose prednisone), is already approved in Europe. It has launched in about 17 countries, including Israel. It has a marketing partner in Europe, Mundipharma AG. In the U.S. it is pending approval, and the Prescription Drug User Fee Act (PDUFA) date is set for July 26, 2012. We are looking forward to that. It will be marketed under the brand name Rayos in the U.S.
The other compound, Duexis (ibuprofen and famotidine [Pepcid]), which came from the Horizon side, is a single tablet for treatment of rheumatoid arthritis and osteoarthritis that also decreases the risks of gastrointestinal (GI) ulcers. One might ask, why not take two tablets? Feedback suggests that patients get tired of taking too many tablets and might forget about the protective part. Patient compliance is very important to the physician, therefore we think the combination tablet is a real benefit for the patient and the healthcare system.
TLSR: Horizon stock has been on fire since about June 12, when I saw the inflection point on the chart. It doesn't appear to be market-related. It looks like a genuine high-relative-strength stock. Are investors craving lower-risk opportunities in a nonblockbuster product category? Are they looking for more revenue visibility?
PJ: After the Q1/12 report came out, which announced that Duexis had been launched and was being prescribed, people got more confident that it is being sold. In addition, Horizon announced an increase to its sales force and did a copromotion deal with Mallinckrodt on Duexis in the U.S., as well as a licensing deal with Grunenthal in Latin America, both validating the product. Investors look favorably at these growth stories and credible management behind them.
TLSR: The company is starting to develop revenue, but is cash-burn going to be a problem?
PJ: Horizon was successful in raising money in an IPO. It raised an additional $50 million (M) in a private placement and got a $60M senior-secured loan facility. It paid off existing debt and got new debt in. With revenues increasing, I think it is well on track to break even, but we have to see.
TLSR: Peter, are there any other public companies that you wanted to mention?
PJ: There is one in Europe, Santhera Pharmaceuticals (SIX:SANN.SW). It produces Catena (idebenone), which is approved in Canada for a rare disease, Friedreich's ataxia. It is being tested for a rare eye disease, Leber's hereditary optic neuropathy (LHON), and it has been filed and is under regulatory review for marketing approval in Europe. The decision by Europe's Committee for Medicinal Products for Human Use was expected in H2/12. Catena is in phase 3 trials for treatment of Duchenne muscular dystrophy, and we have to wait for the data as the study is still recruiting. The company also has exploratory studies running in MELAS (mitochondrial myopathy, encephalopathy, lactic acidosis and stroke) and PPMS (primary progressive multiple sclerosis). If the company gets approval in LHON in Europe and the Duchenne trial proves successful, we could expect a significant upside for Santhera.
TLSR: Peter, I've really enjoyed talking with you. Thank you.
PJ: Thank you. Any time.
Peter Johann is a managing general partner of NGN Capital. He joined NGN after leaving Boehringer Ingelheim, where he was the division head of corporate development. Dr. Johann has established a worldwide network in the biotech and pharmaceutical industry. His responsibilities at Boehringer Ingelheim included strategic planning, strategic projects, mergers and acquisitions, business development and licensing. He identified and evaluated several licensing, M&A and copromotion deals. Prior to this Dr. Johann served at Hoffmann-La Roche as global business leader, where he led global business teams and was responsible for marketing oncology products, as well as the evaluation of pipeline products from internal and external sources. Dr. Johann joined Roche from Boehringer Mannheim, where he was head of business development and marketing for molecular medicine. Besides marketing activities he was involved in setting up and managing joint venture companies as member of the supervisory board. He was also responsible for licensing activities in this field. Dr. Johann held marketing, sales and business development responsibilities at Boehringer Mannheim Biochemicals, among others, for collaborations in the field of biopharmaceuticals. He has additional experience in business development and marketing of pharmaceutical products with Kaneka Corp. in Japan, and with Röhm in Germany in the field of industrial enzymes.
Dr. Johann obtained his doctorate from the Technical University Munich. He currently serves on the board of directors of Resverlogix Corp., Noxxon Pharma AG, Vivaldi Biosciences Inc. and Exosome Diagnostics Inc. He previously served on the board of directors of Micromet Inc. (acquired by Amgen Inc.), Horizon Pharma Inc., Jerini AG (acquired by Shire Pharmaceuticals) and NaniRx Therapeutics, and as an observer on the board of Santhera Pharmaceuticals AG and Cerapedics Inc.