Financings Of The Fortnight: Is Buoyant Biotech IPO Scene Altering Private Biotech M&A Trends?

When the IPO spigot runs dry, there’s M&A aplenty, and when the IPO wine is flowing, M&A slows down, right? FOTF tackles some conventional wisdom; plus deals from Acadia, Neurocrine, Aquinox, and Human Longevity.

Despite a slight slowdown, there’s considerable cash already sloshing around the biotech IPO space. There’s (still!) plenty more stacked up in investor suitcases from California to the New York Island just waiting to back anything with a pulse. The momentum is here! This land grab is your land grab!

All of which should mean that biotech boards weighing exit options the past year or so have had choices that didn’t exist for most companies in the preceding four or five years (Also see "Biotech Investor: “We Have Suitcases Of Cash”" - Pink Sheet, 10 Feb, 2014.). Remember the lean times? The doldrums? You don’t?

That revived optionality should translate into fewer companies agreeing to pharma takeovers. For the ones opting for the warm embrace of a bigger drug company, it also should translate into leverage. Those biopharma start-ups that choose to pull the M&A exit cord should be driving better bargains. But data we compiled from Strategic Transactions suggest neither is true. At least not yet.

It's worth remembering that even during the coldest days of the Biotech Winter, when asset prices were at their most depressed, pharma companies flush with cash didn't really go on a shopping spree. Volume of private biotech M&A never really spiked (Also see "Dealmaking When Pharma's the Only Game in Town" - In Vivo, 1 Sep, 2009.).

Sister publication In Vivo reported that in 2009, and it pretty much held true the next few years. Why? Assets were cheap, but pharma was picky. Prices slackened a bit, and it won’t be surprising if they tick up now as biotech booms (despite this week’s hiccup among the larger issues). But volume has stayed fairly constant.

In fact, the roughly two-dozen private biotech M&A deals from 2013, compared with the past five years or so of data, slot in at just about average. (See Exhibit 1.) Part of this might be due to company-building strategies, born or embraced in the lean years, which emphasized capital efficiency, single-asset structures and baked-in-buyouts. Those were good ideas for the lean years, and they’re still good ideas for these times-o-plenty.

Exhibit 1

Acquisitions of Privately Held Biotech Companies

Strategic Transactions

Now, what about prices? Data are limited, of course; not every acquired company discloses a price tag, and absolute values tend to be worthless unless you know how much money went into the target prior to a deal. Instead, we looked at step-up multiples, and by-and-large, those haven't changed much either. (See Exhibit 2.)

Exhibit 2

Average Step-Up Multiples for Private Biotech Acquisitions

Strategic Transactions

Instead, upfront deal values on average have bounced around the 3x line for quite a while, and that’s roughly in line with, and perhaps a bit better than, the average pre-money to post-money step-ups seen lately in the biotech IPO space. But acquisition multiples are where we’ve heard, anecdotally, that things may be changing. So long as biotechs have the kind of optionality that public investors provide – i.e. not just getting onto the market but raising enough cash to fund a credible alternative to a pharma partnering deal or outright acquisition – those upfronts might start sliding up. Or perhaps, instead, biobucks that are locked-up in earn-out payments will become easier to attain.

Acadia Pharmaceuticals

Just a week after reporting in its fiscal 2013 results that cash on hand at year’s end totaled $185.8 million, thanks mostly to a $108 million secondary offering last May, Acadia Pharmaceuticals Inc. increased its cash position again on March 4, netting $171 million in a follow-on offering of 6.4 million shares for $28.50 [See Deal].

The company, which could realize an additional $27 million if underwriters buy up to 960,000 shares in the overallotment, is preparing to file an NDA in late 2014 for pimavanserin in psychosis associated with Parkinson’s disease and is working on pre-launch activities.

Acadia presented pivotal Phase III data last March at the American Academy of Neurology meeting. Studies showed the serotonin 5HT2A antagonist/inverse agonist significantly reduced psychosis over placebo (the primary endpoint) and helped maintain patients’ motor control. There also were clinically meaningful benefits in measures of nighttime sleep, daytime wakefulness and caregiver burden. At the end of 2013, Acadia began testing pimavanserin in Phase II for Alzheimer’s-related psychosis. The company also recently advanced into preclinical studies a muscarinic agonist for glaucoma through its deal with Allergan Inc.[See Deal].

Neurocrine Biosciences

The San Diego biotech focused on neurological and endocrine-based diseases priced a follow-on public offering Feb. 26 to sell 8 million shares at $17.75 each, with net proceeds of $133.5 million [See Deal]. Neurocrine Biosciences Inc. said it would use the proceeds to fund its R&D.

Primary among its programs is NBI-98854, a wholly owned vesicular monoamine transporter 2 (VMAT2) inhibitor in Phase II for tardive dyskinesia. In 2012, the biotech reported mixed results from a Phase IIa study of ‘98854 in which patients at one of eight sites fared better on placebo than study drug. Neurocrine has said it plans to keep that program for itself as it attempts to evolve into a fully integrated pharmaceutical company.

If successful, it would be quite a turnaround story. In 2006, the firm was rocked by FDA’s refusal to approve its insomnia drug indiplon, then partnered with Pfizer Inc. Its comeback began in earnest with strong clinical data from its gonadotropin-releasing hormone (GnRH) antagonist elagolix, which is now partnered with AbbVie Inc. and in Phase III for endometriosis and Phase II for uterine fibroids (Also see "AbbVie’s Gaps Are Neurocrine’s Gains" - Pink Sheet, 11 Feb, 2013.).

This is the second large FOPO by Neurocrine in slightly over two years – it raised $83.2 million in January 2012 by selling 10.9 million shares at $8.10 apiece. This time around, it granted underwriters Jefferies and J.P. Morgan a 30-day option to buy up to 1.2 million additional shares. The stock closed trading March 5 at $17.84 per share, with a 52-week high of $20.29 and a low of $8.57.

Aquinox Pharmaceuticals

IPO activity slowed the past couple weeks, but Aquinox Pharmaceuticals Inc. debuted March 6 by selling 4.2 million shares at $11 each [See Deal]. It hit the midpoint of its proposed range, but ended up selling 14% more shares than originally intended.

Aquinox’s lead compound, AQX-1125, is in Phase II for two indications, chronic obstructive pulmonary disease and bladder pain syndrome. Both trials started in 2013 after the firm pulled in an $18 million Series C round led by Johnson & Johnson Development Corp. and with participation from new investor Augment Investments and returnees Pfizer Venture Investments, Ventures West Capital and Baker Brothers Investment.

AQX-1125 is an activator of the enzyme SHIP1, a modulator of the PI3 kinase pathway and, the company says, particularly important in preventing abnormal inflammation at mucosal surfaces. The founders of the Vancouver, BC, firm discovered SHIP1 while at the University of British Columbia and created a mouse model whose immune system lacks SHIP1. The asset that became AQX-1125 came from Aquinox’s 2009 deal for one of Swedish firm Biolipox AB’s compound libraries.

Lead underwriters Jefferies and Cowen, along with Canaccord Genuity, hold an option to buy up to 555,000 additional shares.

Human Longevity

Pioneering biologist Craig Venter’s newest project will aim to compile a vast amount of genomic data to treat disorders associated with aging, with an eye on adding decades to the human lifespan (Also see "Venter Targets Life Extension With New Genomic Research Company" - Pink Sheet, 4 Mar, 2014.). The former genome-mapping CEO of Celera Corp. and founder of the J. Craig Venter Institute unveiled the project March 4, revealing an initial funding round of $70 million.

Human Longevity Inc. didn’t name the full list of investors, but it includes lead backer KT Lim, a Malaysian billionaire whose holdings include a long list of casinos and resorts. Another investor, Illumina Inc., supplied HLI with two systems that can sequence a genome for $1,000, and normally list for $10 million apiece. The remainder of the roster includes an assortment of high-net-worth individuals, Venter said.

HLI says it initially will create 40,000 genomic sequences annually, and may soon obtain 100,000. At first, most will come from consenting patients in University of California San Diego research programs. HLI plans to unite genomic, microbiome and metabolome data to create profiles of healthy and unhealthy patients from all ages, including infants and supercentenarians. It also will investigate the associations between depleted stem cells and aging-related diseases, and will first address cancer before moving on to neurological, cardiovascular and liver disorders.