Optioning Your Drugs

ﾩ PHOTODISC

In the 1980s, while at the San Francisco law firm Shearman & Sterling, Mark Kessel realized that an investor and a biotech company could share the financial risks and rewards of an investment deal outside the traditional routes of either selling off equity to venture capitalists or licensing to pharmaceutical companies. Kessel?s idea was to license the intellectual property (IP) surrounding a single compound in development and work in-house or with partners to get it through a clinical trial. The biotech would get access to needed cash without having to sell a large percentage of the company. It would also have the option to buy back the IP at a predetermined price at a specific time. If the company chose not to exercise this option, Kessel would need to look for an alternative buyer for the IP (or swallow the loss).

Throughout the 80s and 90s, Kessel did 22 of these deals with companies that included Alza, Genzyme, and Centocor. In a deal with Genzyme, for example, Kessel bought the rights to six drugs and founded the company Neozyme to develop them. Kessel and his investors put in $53 million, and after approximately 2.5 years Genzyme bought back the IP rights for the drugs for $100 million. The investors also received warrants for Genzyme stock worth an estimated $25 million to $50 million. One of the drugs, Thyrogen, was approved in 1998 for treating thyroid cancer; in 2005 the drug brought in $78 million in sales for Genzyme.

In all of Kessel?s deals, he says the companies bought back their IP, about two-thirds at the agreed prices and one-third at renegotiated prices. While this did not guarantee a profit for each deal because of development costs, "if you viewed all 22 deals as a portfolio, then the investor would have done very well," says Kessel.

Thus, the idea for Symphony Capital, started in 2001 with his former business associates, was born. The firm raised $315 million for its first fund, which launched in 2004. Symphony has since put $135 million of that into four different investments, each of which operates as a separate company. Kessel says that Symphony?s limited partners have since exercised options to match the fund?s investments, so the total amount put into the partnerships is actually about $270 million. Symphony is looking for further investments at a time when biotechs are closed out of initial public offerings and hungry for money.

Symphony stays away from compounds that it thinks are not strategically important to its collaborator. Instead, it hangs its business success on identifying priority compounds in the pipeline, which a collaborator will likely buy back. Finding these compounds is half of its art; the other half is Symphony?s ability to shepherd them through clinical trials with its contract research organization (CRO) partner, RRD International.

Berkeley, Calif.-based DynaVax Technologies did a deal with Symphony, creating Symphony Dynamo to develop second-generation therapeutics for hepatitis B, hepatitis C, and cancer. Jane Green, vice president of corporate communications at DynaVax, explains that DynaVax is currently pouring most of its money into two late-stage programs. The biotech firm looked at all the traditional financing options, but decided that the risk-sharing agreement with Symphony was the optimal way to take its younger programs forward.

With cash tight, DynaVax was able to secure $20 million from Symphony in April and a guarantee for another $30 million in April 2007, and it can buy back rights to the products at a purchase price based on a 27% annual percentage rate. Symphony also receives warrants to purchase two million shares of DynaVax stock at variable rates within five years. "We would not have been able to take these second-generation products forward without the Symphony deal," says Green.

Isis Pharmaceuticals of Carlsbad, Calif., entered a deal with Symphony for a different reason: to develop its lead compound, ISIS 301012, in Phase II trials for lowering cholesterol. Symphony paid $75 million to license ISIS 301012, as well as two preclinical diabetes products, under financial terms similar to the DynaVax deal (Isis gave Symphony warrants and can buy the products back at a 27% compounded APR). This lead compound is vital for Isis, and it needed to make a deal to keep it alive. Stan Crooke, CEO of Isis, says he looked at selling equity to fund the drug?s internal development as well as collaborating with a pharma company, and he "made a bet on Symphony." Crooke anticipates partnering with a pharma in the future, but he expects to get much better terms after the Symphony-funded Phase II trials than he could get now.

Crooke went with Symphony also because of the quality of the people. "Their due diligence is as good as Big Pharma?s, and they?re really smart guys with a good model," he says. Starting in late September, Symphony will gain even more expertise when clinical pharmacologist Alastair Wood from Vanderbilt University joins the firm full-time. Why is Wood, who has lead clinical trials, chaired FDA drug advisory committees, and was drug therapy editor of The New England Journal of Medicine for 20 years, among many accomplishments, now turning full-time to financing?

Wood says he sees the troubles that companies have because drug development and raising money are intrinsically tied together. He says that sometimes a company will go forward with a trial even if it isn?t ready, in order to get money from a milestone payment. Such a long-term drug development plan that is tightly tied to raising money might not necessarily be dangerous to patients, but the company does lose flexibility, he says. "Symphony?s model of financing drug development gives flexibility with an intellectually driven development plan rather than a purely financially driven plan," says Wood.

Sometimes, though, even this amount of flexibility is not enough to absorb corporate acquisitions. That is what happened to Symphony?s first investment partner, Guilford Pharmaceuticals, which MGI Pharma acquired while clinical trials were ongoing. Guilford and Symphony collaborated to develop growth factors for treating Parkinson disease, but MGI is not interested in diseases of the central nervous system. Symphony is currently looking to license the growth factors elsewhere, or be left with a losing investment.

DynaVax?s Green believes that innovative models for financing product development are "important new options" for the biotech industry as a whole, and she is not alone (see Table). Quintiles Transnational, the world?s largest CRO, began investing in the development of other companies? drugs in 2000 through its subsidiary Pharmabio Development Group, now called NovaQuest. In this endeavor, NovaQuest takes advantage of its parent company?s access to companies with drugs in development through leads from Quintiles. The main difference from Symphony?s model in the development phase is that there is no transfer of IP to NovaQuest. The firm puts up cash and services in return for milestones and royalties.

Bram van Rossum, Solvay Pharmaceuticals? head of clinical development in the Netherlands, confirms that was exactly what attracted his firm to partner with NovaQuest in 2004. "We looked at venture capitalists and banks, but the risk factors were better with NovaQuest," he says. Von Rossum believes that, especially for midsize companies, these product development-financing deals will happen more often. "There are always more products than the R&D budget can handle," he says. "Often early-stage compounds get left behind."

Click here for a list of firms that finance product development.