Biotech Values

[DewDiligence]

Yet another AMD player:
Soon to be part of Pfizer

[From Thursday’s WSJ. I know nothing about this drug beyond what's in this write-up, which isn't a lot of detail.]

http://online.wsj.com/article/0,,SB110617316075830584,00.html?mod=yahoo_hs&ru=yahoo

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Pfizer Nears a Deal
To Acquire Angiosyn,
Pad Eye-Drug Roster

By ANN GRIMES and SCOTT HENSLEY
Staff Reporters of THE WALL STREET JOURNAL
January 20, 2005

Pfizer Inc. is close to an agreement to buy Angiosyn Inc., a La Jolla, Calif., biotech start-up working on a drug to ward off blindness, in a deal potentially valued at $527 million, according to people familiar with the situation.

The transaction, which could be announced as early as this week, spotlights the interest among the largest pharmaceutical makers in purchasing fledgling biotech concerns.

The move would be Pfizer's second biotechnology acquisition in about a year and would increase the giant New York pharmaceutical company's lead in drugs for eye diseases.

With pipelines dry and megamergers difficult to pull off, some of the biggest drug makers are looking at entrepreneurial biotech concerns like Angiosyn to add new products and cutting-edge scientific know-how.

At the same time, venture capitalists who back such companies and entrepreneurs who run them have become more amenable to early buyouts as an alternative to the uncertain and often expensive path to an initial public offering of stock.

The deal for Angiosyn is particularly chancy for Pfizer, which has never been a big player in biotech, because the tiny company's drug hasn't even been tested in humans. Its experimental drug to treat macular degeneration, the leading cause of blindness in people older than 50, has been tested only in mice. But Pfizer's hunger for new drugs to replace aging blockbusters is driving a new approach.

Reporting a jump in fourth-quarter earnings yesterday, Pfizer warned that patent expirations on some big-selling drugs could soon begin to crimp sales and profit growth. Drugs that account for a quarter of Pfizer's U.S. sales are set to lose patent protection in the next few years, including the antidepressant Zoloft and the antibiotic Zithromax. Sales of some of its other drugs slipped in the latest quarter because of generic competition.

One reason for the growing interest in early-stage companies is that they are much cheaper, albeit a gamble. Licensing deals for drugs either on the market or late in development have become expensive as large drug companies, eager for new products, have bid them up. Three years ago, Bristol-Myers Squibb Co. set a new benchmark with a $2 billion licensing deal with ImClone Systems Inc. for rights to Erbitux, a colon-cancer treatment that was still in clinical trials.

Jumping directly into the arms of the pharmaceutical giants is a big change for biotech companies, which in the past have preferred licensing deals or minority investments. Large drug makers also seemed content to let the start-ups bear the risk until products seemed like sure things. Kenneth Clark, an attorney at Wilson

Sonsoni Goodrich & Rosati in Palo Alto, Calif., which represents Angiosyn, says he is working with several other companies on deals that could involve outright acquisitions, though how many will come to fruition remains uncertain. "Before, pharma didn't want to pay upfront for" new drugs, he says.

Pfizer now sees these bite-size deals for biotech drugs as supplanting monster transactions, such as the nearly $60 billion acquisition of Pharmacia Corp. two years ago. "Our focus is going to be on small, targeted acquisitions," David Shedlarz, Pfizer's chief financial officer, said last year. Pfizer bought Esperion Therapeutics, a start-up company working on treatments for high cholesterol, for $1.2 billion in a deal that closed in early 2004.

Pfizer has company. Early last year, Merck & Co. bought Aton Pharma Inc., a closely held cancer-drug developer in Tarrytown, N.Y., for undisclosed terms. In May, Johnson & Johnson bought antibody specialist Egea Biosciences Inc., of San Diego. These closely held companies elected to sell out to a drug maker instead of attempting an IPO, generating significant returns for venture capitalists who have pumped billions of dollars into the life sciences lately.

Mergers and acquisitions in the biotech sector jumped to 605 deals that raised $76 billion in 2004 from 514 that raised $55 billion in 2003, according to data tracker Thomson Financial. One reason, industry experts say, is that "a lot of big pharmas have huge holes in the drug-development pipeline," says Tracy Lefteroff, who manages the life-sciences-industry practice for accountants PricewaterhouseCoopers.

But another reason is that the IPO outlook for biotech companies isn't that rosy. In 2004, there were 49 biotech IPOs, about 20% of the year's total. But as a group, those companies averaged only a 16% rise from their offering prices through the end of the year, compared with about 26% for all other sectors, says Richard J. Peterson, chief market strategist at Thomson Financial. "About a third of those biotech deals now stand below their offering price, compared to about 19% of all other sectors," he says.

The Angiosyn acquisition will resemble a licensing deal, with money paid out as milestones are reached over five to 10 years, according to people familiar with the situation. Pfizer has agreed to make a small payment upfront and additional payments later, bringing the total to as much as $527 million based on progress in Angiosyn's drug-development program, plus royalties on future sales. The structure mitigates Pfizer's financial risk but allows it to grab hold of a promising, potentially commercial drug. The deal is expected to close in the current quarter.

With Angiosyn, Pfizer aims to broaden the scant offerings to treat macular degeneration, which affects an estimated 15 million people in the U.S. alone. This month, Pfizer will begin selling Macugen, co-marketed with developer Eyetech Pharmaceuticals Inc., for $995 per injection. QLT Inc.'s Visudyne, is marketed by Swiss drug giant Novartis AG.

A number of start-ups and established drug makers, including Genentech Inc., are racing to develop better drugs for the condition, which is estimated to be a multibillion-dollar market.

Angiosyn is the brainchild of Paul Schimmel, a scientist and entrepreneur who co-founded Cubist Pharmaceuticals Inc., a Lexington, Mass., biotech company developing drugs that fight infections. Angiosyn was funded in May 2003 by Alta Partners, which put less than $10 million into it. People close to the situation say the first payment from Pfizer is in the "double digit" millions.

In recent months, biotech start-ups in the preclinical stage have begun to attract larger amounts of venture funding. So far this year, Nereus Pharmaceuticals Inc. raised $42.6 million in a fourth round of financing for clinical trials to test its anticancer compounds. Vitae Pharmaceuticals Inc. raised an additional $34 million, bringing its total venture capital to date to $75 million. It has four drugs in the preclinical stage of development. Vitae Chief Executive Jeffrey Hatfield says that when he went out to raise more capital, he found venture capitalists "very receptive."
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