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TELIOS NEGOTIATING OSTEOPOROSIS PEPTIDE PROJECT WITH MAJOR DRUG PARTNER; TELIO-DERM CLINICALS COULD BE COMPLETED IN THIRD QUARTER; $41 MIL. IPO PLANNED

Executive Summary

Telios Pharmaceuticals is in preliminary negotiations with "a major international pharmaceutical company" to apply the start-up company's research with the small peptide RGD (arginine-glycine- aspartic acid) to the treatment and prevention of osteoporosis. "Published research indicates that RGD-containing peptides may interfere" with the destructive effect of osteoclasts on bone matrix, Telios explains in a recent filing for a 3.4 mil.-share, $41.4 mil. initial public offering. Using a "specially-designed, soluble RGD-containing peptide," Telios says it is attempting to design a product to compete with "RGD-containing molecules in the body" and "counteract unwanted cell-matrix interactions." The discussions with an osteoporosis partner build on a previous $15.2 mil. agreement with Genentech in the thrombolytic field. As part of that agreement reached in January 1991, Telios has licensed to Genentech development and marketing rights for RGD peptide platelet aggregation products. Genentech will have worldwide rights outside of the Far East, which Telios has retained. Telios does not disclose the potential osteoporosis partner, but the field is very active with a number of companies pursuing early-stage commercial projects. Among the prominent multinational firms which are aggressively cultivating the field are Ciba-Geigy, Rhone-Poulenc Rorer and Sandoz. All three, especially Sandoz, have shown recent interest in research and licensing deals. The Genentech project is still in the preclinical stages, Telios reports. However, the companies have identified a lead compound (TP-9201), described as "a potent peptide-based antagonist...highly-selective to the IIb/IIIa [platelet specific] integrin receptor." Telios reports that the firms have begun to develop the "manufacturing process to satisfy clinical trial requirements." As of mid-February, Genentech had paid Telios $3.7 mil. of the total research commitment. That figure meets a minimum required amount under terms of the deal. "Preliminary studies in animal models indicate that TP-9201 works synergistically with Genentech's thrombolytic drug, Activase, and has an attractive safety profile," Telios maintains. Telios is on the verge of a patent fight to protect its approach to inhibition of platelet aggregation. The firm reports that it "intends to file in February 1992 documents to request the declaration of an interference relating to cyclic RGD peptides (which includes the field of inhibition of platelet aggregation)." Telios will challenge an issued U.S. patent "held by a major international pharmaceutical company" and a patent application filed by another major international company. Telios holds exclusive rights to 11 U.S. patents, three foreign patents and 35 pending U.S. applications. The company derives the patent rights from two agreements with the La Jolla Cancer Research Foundation (LJCRF). The foundation helped start the company: the president of LJCRF, Erkki Ruoslahti, MD, is a co-founder of the company and a co-discoverer of the matrix peptide technology; the company's senior VP and scientific director, Michael Pierschbacher, PhD, worked with Ruoslahti at LJCRF and is also a co-discoverer of the technology. LJCRF is a private research organization with 235 employees; the foundation will hold 13% of the Telios outstanding shares after the initial public offering. LJCRF was issued two patents on aggregation in 1991. One of the patents (#5,041,380, tetrapeptide) describes "a method of inhibiting platelet aggregation comprising contacting platelets with a polypeptide including the amino acid sequence Arg-Gly-Asp- R, wherein R is an amino acid such that the polypeptide has cell attachment-promoting activity, in sufficient concentration to inhibit platelet aggregation." Telios is also searching for a partner to market a development stage product for dry-eye. Ocu-Nex, in early Phase II trials, "is a sterile solution that contains an RGD-containing peptide attached to a naturally occurring biopolymer, chondroitin sulfate." The company says that the product works by restoring "normal cell populations and general corneal structure." The first stage of Phase II trials is predicted for completion "in the third quarter of 1992." The Telios project farthest in development is a wound healing product, Telio-Derm. At one point, the company was predicting an introduction for Telio-Derm in late 1992. The company now hopes to file "in early 1993" a PMA (premarket approval application) with FDA for review of the product as a medical device for chronic dermal ulcers and skin graft donor sites. Clinical trials of Telio-Derm are being conducted in "over 25" U.S. medical institutions. The trials should be completed by the third quarter of this year and will eventually encompass data on about 250 patients. The firm reports that it "expects to perform an interim analysis of these clinical trials as early as April 1992 for purposes of determining if an adequate sample size has been studied." The Telio-Derm product is being handled as a device, Telios explains, because FDA views it as an "interactive structure that enables cells to move in an organized manner into the wound, but [with a function that] does not involve a metabolic action." Telio-Derm is "a viscous, sterile gel that contains a small, synthetic RGD-containing peptide which is attached to a naturally- occurring component of the skin, hyaluronic acid." VHA Supply will act as a marketing arm for Telio-Derm during the first six months following its approval for the chronic dermal ulcer indication. The SEC filing explains that "the product will be promoted exclusively" to the 800 hospitals affiliated with Voluntary Hospitals of America for the first six months after approval for the treatment of chronic dermal ulcers." The majority of the proceeds from the public offering will go to fund the clinical development of Telio-Derm and Ocu-Nex. The firm projects that the funding should suffice for two more years of operation. Cash and short-term investments were about $11.8 mil. at the end of last year, down from over $16 mil. the year before. The company is building a 67,000 sq. ft. research, administration and manufacturing facility in San Diego. A 10% downpayment of $1.2 mil. on the leasehold improvements and capital equipment costs of that facility will also come from the proceeds of the offering. First occupancy of the building is expected in March. To date, the company has been funded by a series of preferred share sales and corporate alliances. The preferred share offerings have generated $38.2 mil. since the company's founding in 1987. Major shareholders include H&Q Life Science Venture Partners (22.5% after the offering), LJCRF (12.5%), Ono Pharmaceutical (8.5%), Norsk Hydro (7.6%) and Delphi BioVentures (5.3%). Hambrecht & Quist and Morgan Stanely are the U.S. underwriters for the offering. The Japanese firm Ono is a partner with Telios in the development of a glomerulonephritis indication for a product to modulate growth factor TGF-beta. Ono has Far Eastern rights to that product, Decorin, and a broad access to the company's pipeline (other than Telio-Derm and platelet aggregation inhibitors). ONO has made a $10 mil. equity investment in Telios and is committed to put at least $2.5 mil. (and as much as $5 mil.) in a follow-up transaction in August. Ono also contributed direct research support of $3.5 mil. in 1990 and 1991. The agreement with the Japanese firm could bring in as much as $7.5 mil. if all milestones are met. Telios is also developing Necorin for excessive dermal scarring. Excessive TGF-beta activity is also implicated in diabetic nephritis, adult respiratory distress syndrome, cirrhosis, heloid scarring and central nervous tissue fibrosis In Europe, Telios is working with Norsk Hydro. That $10 bil. diversified company has invested $7.5 mil. in Telios stock and has commitments to put another $7.5 mil. into Telios equity at two purchase dates later this summer.

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