Quite A Set of Lung (Companies)

Are the public markets ready for TWO interventional pulmonology companies?

With Tuesday's filing for an $86.25 million IPO yesterday, Broncus Technologies Inc. became the second company with a device that could treat serious emphysema to seek support from public investors. We reported on the first way back in September when Emphasys Medical Inc. filed for a near identical amounts. (Seriously, $86.25 million vs. $86.3 million? Who is cheating off of whom here?)

Technologically and clinically, this is exciting stuff. According to Broncus’ S-1, 3.8 million adults in the United States have reported that they had been diagnosed. The company suggests—as they should—that many people go undiagnosed. The filing cites a 2005 survey by the National Center for Health Statistics that states the “prevalence of emphysema in the U.S. increased at an average annual growth rate of 2.4% from 1997 to 2005, with approximately 675,000 new diagnoses between 2003 and 2005, the most recent years for which this data is available. We estimate that emphysema is responsible for approximately $5 billion in direct healthcare costs in the United States each year, comprised primarily of hospital and physician costs and oxygen use.”

Although their approaches are quite different, Broncus and Emphasys hope to treat people with the most serious—and most expensive—cases of emphysema. Today, severely sick people have very few options. Drugs and supplemental oxygen can help. Other than that you’re looking at highly invasive transplants or lung volume reduction surgery. The two companies developed products that can be delivered through the airways so no opening of the chest is required.

Broncus’ Exhale emphysema product line includes needles and stents that are used, respectively, to create new airways and prop them open, allowing trapped oxygen to escape. The company says as the air escapes, the diaphragm regains some of its normal range of motion, enabling the patient to breathe more easily. Broncus’ procedure takes one or two hours under general anesthesia or conscious sedation.

Emphasys Bronchial Valve is a one-way valve that, once inserted in airways, allows trapped air and fluids to escape during exhalation but prevents any air from entering the airway inhalation. The device provides the benefits of lung volume reduction surgery without the risk of open surgery. With airways leading to disease portions of the lung blocked off a patient is able to breathe more effectively. The entire procedure lasts between 20 and 40 minutes, according to the company’s S-1.

At this point, Emphasys would seem to have one distinct advantage. It’s further along in clinical testing than Broncus. As we noted in September, Emphasys has submitted the results of its pivotal trial to the FDA. It hopes to have market approval next year.

Broncus, meanwhile, has a longer road to hoe. According to the S-1, the company has enrolled more than 100 subjects worldwide in our studies and clinical trials, “including approximately 40 subjects treated in our pivotal Exhale Airway Stents for Emphysema, or EASE, Trial for the treatment of severe homogeneous emphysema.” The company hopes to complete enrollment by the end of next year and file for its PMA in 2009, with an eye on having a product on the market in 2010.

That might be too long a time horizon to interest IPO buyers, but stranger things have happened.

One of those stranger things happens to have happened to Broncus’ off-spring, Asthmatx Inc. That company, a spin off from Broncus, had filed to go public in 2005 only to withdraw the offering. CEO Glen French says the company, which is developing a device to treat severe asthma, was ready to go public at the price it wanted, but instead opted to sign a $50 million financing deal with Olympus Medical Systems Corp. French says Asthmatx got the money it wanted and sold a smaller stake than it would have during the IPO.

So perhaps Broncus will be able to tap into the thin vein of IPO buyers willing to gamble on unproven—albeit ingenious—devices. There can be huge upside there. But by filing an IPO the company also could be positioning itself to draw interest from significant corporate investors or, perhaps, even a potential acquirer.

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High Noon at Myogen

Most VC meetings provide a feel-good story for the portfolio CEOs—usually a variation on the business resurrection theme. The Atlas Venture retreat, which just finished up in St. Tropez, is no exception.

But it’s rare to hear one as compelling, or as compellingly told, as the story Bill Freytag related at the Atlas meeting of the showdown between Myogen’s management and its venture board.

Freytag, then Myogen’s CEO, told the story of a board meeting in the middle of the deadly 2003 IPO drought. To get its pulmonary arterial hypertension drug ambrisentan developed, Myogen needed the kind of money only an IPO could deliver – and for which Freytag and his team had found, despite the extraordinarily dry weather, some investor interest.

But at the board meeting, the VCs said no. IPOs were impossible, several maintained. It was “slash and burn time”--cut research radically, pare back the company, and prepare to unload the business. One apparently stood up, pointed a finger at Freytag, and said: through the whole history of the company “you haven’t created any shareholder value!”

Which was in fact literally correct. For the last several rounds, the company had raised money at the same $7 a share price—though since the VCs controlled the financings, the blame could hardly be laid at Freytag’s feet.

Freytag is a mild-mannered man—you certainly wouldn’t expect him, or frankly the kind of managers you’d assume would gather around him, to play the Gary Cooper role in some business version of High Noon. But according to Freytag, “I said, ‘Time out,’ that the management needed to caucus. And we left the room.” In the hallway, Freytag says he told his managers that it was “D Day.” Did they really believe that, given the resources of an IPO, they could develop ambrisentan and its follow-on, darusentan—and build the company around it? Their unanimous answer was “yes.”

The group went back to the board room—“I was shaking in my shoes,” said Freytag, who realized that contradicting the venture board could mean his job. “We’ve heard your advice,” he recalls saying, “but we’re going to go forward with the IPO.”

In fact, Freytag probably had little real reason to be nervous: the board faced a management team united in its opposition to them and would hardly want to inherit the responsibility for running the company. And indeed the board backed down; the IPO went ahead, raising $81 million at $14 a share, and opened the window for a host of other IPO candidates. Myogen went on to sign a $100 million ex-US deal on ambrisentan with GlaxoSmithKline and finally to sell to Gilead for $2.2 billion--the ultimate happy ending for investors.

Freytag says he’d thought he’d end up in venture capital and talked to a number of VCs about joining a firm. But when Aspreva CEO Richard Glickman surprised the board by resigning this past summer, Interwest partner Arnie Aronsky asked Freytag to run the company.

It’s a very different kind of challenge for Freytag: with $325 million in cash and marketable securities at the end of the second quarter, annual cash flow of about $150 million a year, and a drug whose clinical value outside of transplant has so far been surprisingly difficult to prove while its patent-clock races toward expiration, Freytag is hardly likely to try to face down the board in favor of product development. (For an analysis of Aspreva’s original strategy in in-licensing Roche’s CellCept, click here.) There are probably better uses of Aspreva’s cash—and plenty of unloved biotech R&D programs around to soak it up.

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IPOs: Just Another Facet of the M&A Auction

It's pretty much official now: filing an S-1 is just another part of an M&A auction.

BMS' acquisition of Adnexus, like Merck's recent acquisition of NovaCardia, demonstrates that Big Pharma, when nudged a bit by the prospect of a target hitting the public markets, is prepared to pounce.

We won't get into the details of the $415 million (plus earnouts) BMS/Adnexus deal right here--plenty of other blogs have covered the deal well (see the WSJ Health Blog or Pharmalot). Plus we're going to cover the Big Pharma biologics (and next-generation biologics) land grab in depth in the next issue of IN VIVO. And on top of all that, we're going to have Bristol's CSO and president of R&D Elliott Sigal, MD, PhD, up on stage at this week's Pharmaceutical Strategic Alliances shindig, and we'll surely get into the deal then.

But lets take a peak into the near future (tomorrow's PSA talk from Roger Longman) and look at both flavors of biotech exit; acquisitions and IPOs.

In 2007, M&A continues to climb in both total value and number of deals, while IPOs seem to have reversed a downward trend both in terms of valuations and pre-money step ups.

So which companies in the IPO queue are teeing up M&A exits simultaneously? Adnexus and Bristol's previously struck $240mm deal made BMS the biotech's logical acquirer--BMS' lack of a large molecule discovery engine greased the skids a bit for sure. Who else is angling for a public exit that could provide pharma with a similarly lacking discovery platform?

Maybe Archemix, the aptamer play without any significant Big Pharma ties could fill that kind of hole. And while Ablynx has yet to file for an IPO, its recent broad strategic alliance with Boehringer Ingelheim both gives it the pharmaceutical validations prerequisite for public investors and sets BI up as a logical acquirer should the biotech go that route.

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Can't Keep Quiet About This

Perhaps lost in the headlines about Emphasys Medical Inc. filing to raise up to $86.3 million in an IPO is the important fact that this company, the leader in the race to develop the first interventional treatment for emphysema, this month submitted the results of VENT, its 321-patient pivotal trial, to the Food and Drug Administration.

It’s all there in the S-1.

VENT, which stands for Bronchial Valve for Emphysema PalliatioN Trial, was a randomized clinical trial conducted at 31 centers in U.S. Its goal was to demonstrate the clinical benefits and safety of the Emphasys Bronchial Valve.

According to Emphasys’ S-1, the treatment group got EBV treatment in one lung along with optimal medical management including pulmonary rehabilitation. The control group received only optimal medical management treatment and pulmonary rehabilitation.

The endpoints were (drawing from the S-1):

Physiologic Improvement: FEV1, a co-primary endpoint of the study, measures the volume of air forcefully exhaled by a patient over time.

Exercise Tolerance: A patient’s exercise tolerance is used as a proxy for the patient’s ability to function on a daily basis. VENT used two tests of exercise tolerance. A co-primary endpoint of the study was 6MWT, which measures the distance a patient can walk in six minutes. Cycle ergometry, one of the secondary endpoints in VENT, measures the maximum workload exerted by a patient on a stationary bicycle.

Quality of Life: VENT used a standard, pulmonary-disease-specific questionnaire called the St. George’s Respiratory Questionnaire, or SGRQ, as a secondary endpoint in the study. Patients answered questions related to frequency and severity of symptoms, activities that cause or are limited by breathlessness, the impact the disease has on social functioning and any attendant psychological disturbances resulting from the disease.

Breathlessness: VENT used a standard questionnaire called the modified Medical Research Council Dyspnea Scale, or mMRC, as a secondary endpoint. The mMRC asked patients to report on when they experience breathlessness and what causes it.

Oxygen Consumption. Many patients utilize supplemental oxygen to reduce breathlessness. In the VENT trial, patients reported how much oxygen they consumed on a daily basis.

And the results, according to the S-1, are……:

The patients treated with the EBV in the VENT study demonstrated statistically significant improvements, measured by meeting a p-value equal to or less than 0.025, in both of the co-primary efficacy endpoints, FEV1 and 6MWT, as well as in three of the four secondary endpoints.

FEV1 showed a 6.4% difference relative to the control at a p-value of 0.0047, and the 6MWT demonstrated 5.6% improvement relative to the control at a p-value of 0.0073. We demonstrated improvement in all four secondary endpoints, with the improvement in three of these endpoints, cycle ergometry, quality of life and breathlessness, meeting the hurdle for statistical significance.

As for safety, the primary safety endpoint was a major complications composite at 180 days. The composite included death, respiratory failure, pneumonia distal to the valves, massive hemotysis, prolonged pneumothoraces and empyema.

At the six-month follow-up, the treatment arm MCC rate was 5.9% compared to 1.0% for the control arm, and from six months to one year, the treatment arm MCC rate was 4.5% compared to 4.0% for the control arm.

There's plenty more in there so we encourage you to take a look.

The IN VIVO blog didn't even try to reach Emphasys executives or investors for comment. It is, after all, quiet period time. But the action of filing for an IPO without having heard from the FDA says enough about their confidence in the results. It'll be interesting to see whether final word from the FDA will be needed for this IPO to happen.

But a happy ending to both sagas will be good news for patients, interventional pulmonologists and investors in companies developing devices to treat lung disease. IN VIVO, the magazine, will be profiling another significant player in this area, Asthmatx Inc., in our next issue.

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Going, Going.....Google

Two bits of follow up on previous posts about the health care IT space.

AthenaHealth absolutely hit one out of the park with its IPO.

Shares opened at $18 and nearly doubled, hitting $35.50. This could be a big win for its VC investors including Oak Investment Partners, Venrock Associates, Draper, Fisher Jurvetson and Cardinal Partners. All together the four owned 65% of the company prior to the opening. IN VIVO Blog talked about the importance of this IPO back in June.

Meanwhile, speculation abounds that Google, in a bid to bolster its presence on the Web, is eyeing an acquisition of health care Web site leader WebMD. Last month, IN VIVO Blog admitted to being slightly underwhelmed by the early glimpses of Google's health offerings.

Apparently, we're not the only ones. Dan Penny, director and lead analyst for publishing Outsell Inc., a market research firm focused on the publishing industry, writes:

Implications: The discovery in 2005 that 12% of individuals would consult Google before seeing a doctor has sent a message to the search giant that it should be doing something with health information, but it doesn't seem to know how to add value to an area where others have stolen a march. Google Health, as it stands, is a confusing experiment that offers little more than an old-fashioned portal for health information. Google now realises that it needs to do more than aggregate, because the boom in online health information has sent users flocking to WebMD and similar sites, such as AOL Health and RevolutionHealth. A year ago, the idea of Google acquiring WebMD would have seemed rather bizarre, but since the purchase of YouTube, Google has proven its willingness to spend, and to spend on content as well as technology. Moreover, its rival, Microsoft, bought Medstory earlier this year in a clear attempt to secure some of the healthcare vertical for itself.

Oh yeah, and Google's health care push probably wasn't helped by the fact the fellow in charge of the effort is leaving.

Now back to your regularly scheduled programming....

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CardioNet's Not So Big Surprise

Riddle us this. When is news not news at all? When it’s involving CardioNet Inc.’s Friday filing for an IPO.

See, this filing was essentially a done deal when CardioNet secured $110 million from investment banks and hedge funds in the spring. In fact, that financing isn’t entirely complete until CardioNet goes public because the participants in that round won’t receive their shares in the company until after the IPO.
It sounded strange to us at the time, but here’s how CEO James Sweeney explained it in our April START-UP article:

In exchange [for the $110 million], the providers of the capital obtained mandatorily convertible preferred stock that will convert into common stock in the company on the eve of a successful IPO. They'll get a discount on the stock; anywhere between 10% and 25% depending upon the success and timing of the IPO. Sweeney says no debt was issued. Investors only got the promise of common stock upon the completion of the IPO.

Therefore, the valuation of the company for this deal won't actually be set until it goes public. "This is a very new product," Sweeney suggests. "In fact most of the people we sold it to hadn't seen it before."

So CardioNet and its investors didn’t set a valuation for the $110 million. Why? With no value for the last private round, Sweeney suggested the company could more favorable negotiate terms for the IPO. Sounds fine, if everything goes well and the company goes public at attractive terms. But if this company can’t go public, the terms of the private round will be “punitively expensive,” according to one investor.

Putting all these financing machinations aside for a moment, CardioNet’s wireless system looks to offer a real opportunity for innovation in health care. We’ll just wait and see how all this financing sorts out.

If you want to read more on this financing, please check out the article. But here’s one more interesting point. It looks as if this road show is entering its fifth or six month. Citigroup Global Markets and Sun Trust Robinson Humphrey, which served both as co-placement agents for the $110 million round, now are serving as underwriters for the IPO. Citi is also listed as an underwriter.

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The Euro-Next Biotech Bubble?

Just when Europe’s biotech sector appears to have regained some of the confidence lost after the last boom-and-bust, there are signs that history might be about to repeat itself.

At least, in the Benelux countries and on Euronext. The strong post-IPO performance of a good handful of Belgium, Dutch and French biotechs has prompted some of Europe’s investors to warn of a potential “Euronext bubble”—along the lines of that seen on Germany’s now-defunct Neuer Markt during the late 90s.

Stocks such as TiGenix, which listed in March in Belgium, or Metabolic Explorer which IPO’d in Paris in April are up more than 30%--performing a lot better than their UK counterparts on AIM. “Yet I refuse to believe they’re really worth that much more,” said William Brooks, Senior Investment Manager at Belgium-based Quest Management, at BioEquity Europe in Glasgow yesterday.

Brooks told the IN VIVO Blog that this almost-bubble is being driven by “inexperienced” Benelux banks, and a high proportion of “retail dentists and doctors”, lured by government-driven tax incentives and faced with meagre interest payments on bank savings. Companies are floating too early, and raising sub-optimal amounts—it’s the German Biotech Boom all over again.

So are sensible investors staying away this time? Apparently not. “You can’t not take part,” says one, even if it means dipping in and out in six months. Aspiring biotechs are seizing the opportunity: Amsterdam Molecular Therapeutics yesterday announced its intention to float in Holland—and it’s in gene therapy, hardly the sexiest, or safest, field to play in.

Meantime the UK market has seriously lost its flair, according to Gareth Powell, fund manager at AXA Framlington, in part because UK investors haven’t seen a real winner to get excited about. Any activity there is “is being driven by M&A activity, not by us,” chorus the buy-side investors. As for internationally-focused US investors: they still haven’t forgotten British Biotech, says MPM’s Kurt von Emster.

So with Benelux frothy, and the UK anemic, where should an aspiring young biotech list in Europe? Germany’s treading water. Like the UK, it has painful memories. Switzerland would seem a good bet—home to Europe’s biggest biotechs and plenty of healthcare-savvy investors, and with—as yet—no major disappointments. Addex happily became Switzerland’s newest public biotech earlier this week, raising CHF137 million at the upper end of its range.

If you’re not of Roche or Novartis pedigree, though, Switzerland might not prove a wise choice either. “If I were a VC-backed start-up, I wouldn’t go there, either,” warns William Blair, investment director at Scottish Widows.

Still, there’s always Australia. “We’re seeing now in Asia and Australian biotech what we saw in Europe ten years ago,” remarked MPM’s von Emster. “There’s an Australian biotech in my office almost every day; they’ve taken a huge step,” he says.

Look out, Europe.

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IPO Cabal? Not Really.

"Everybody knows," one prominent VC told us, "that biotech IPOs are controlled by six people.”

He may be stretching a point (not everybody knows it; there might be slightly fewer, or a couple more, fund managers in control; and control is a highly relative concept)—but, in broad strokes, no one in the financial world really disagrees. To get public, most biotechs need to convince at least some of these investors to buy in—and because they need to do so, these investors can keep the price low—in a very narrow band of market value.

So who are these investors? Among 'em are Kris Jenner of T. Rowe Price, Bill Slattery of Deerfield, les frères Baker from Baker Biotech, and Adam Koppel of Bain. But the point is--the list ain't long. (More on this in the May issue of Start-Up).

So if there are billions of dollars washing around in the market, why are there so few biotech IPO investors that matter?

One reason--somewhat counterintuitive--is that biotech IPOs look less like public venture capital than they used to. In the old days, and particularly in the gravity-defying genomics-enamored market of 2000, companies could go public with very early-stage assets. Trying to figure out whether they'd succeed was an almost complete crap shoot, and so due diligence was comparatively less important. Good for uncovering fraud; or managerial incompetence, perhaps. But not much help with figuring out whether a drug would work, or whether doctors would prescribe it if it did. In 2000, the average fund manager--indeed, the average individual investor--wasn't at a huge informational disadvantage to the knowledgeable investor (there were other disadvantages, of course--like whether he could get a piece of a hot IPO, which would be generally reserved for favored fund managers).

No more. Biotechs virtually can't go public without late stage assets--and those are ripe for due diligence. The usual IPO roadshow -- 20 minutes with the management per investor -- doesn't allow for any real understanding, which leaves just a few experienced investors that anyone who wants to go public must spend time with, and who have probably seen plenty of similar companies come down the pike. In this world, experience counts. And can be used to keep IPO prices down.

Some companies are trying to get around this problem by packing so-called crossover investors -- who can invest in both private and public companies -- into their mezzanine rounds, giving them time to get to know them and thereby seeding the IPO with long-oriented investors who can make their money both on the private-to-public step-up as well as on further public appreciation. But there aren't a lot of those opportunities.

In the first place, some venture investors don't want to bring in crossovers into their mezzanine rounds when their object is to sell the company, not take it public.

And high-quality companies that could go public have sometimes put themselves into positions where they can't. Take Perlegen, which just yanked its IPO filing (and shook up its management team): it had plenty of crossovers among its investor group. But it couldn't pull of the offering, most importantly because its lead drug/diagnostic didn't work. And yet it wasn't getting much traction anyway. The company had raised $256 million privately and, in a world where pre-money IPO valuations are averaging $150-200 million, no one wanted to take that kind of haircut on price.

In short, there may be an IPO cabal. But the peculiarities of biotech keep it in business.

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