Partnering or Acquisition? Two Companies Share Their Stories

BioWorld Today Contributing Writer

WASHINGTON – Most biotech start-ups, even the most successful, will at some point hit a cash flow wall, where they need a large infusion of funding to get a product to the regulatory finish line. Recent economic trends have largely taken the initial public offering (IPO) option off the table, so for most companies the choice comes down to partnering or acquisition. At BIO 2011, Calistoga Pharmaceuticals Inc. CEO Carol Gallagher and Athersys Inc. CEO Gil Van Bokkelen discussed how they arrived at the decision to partner or sell.

Additional experts joining the conversation were Hoffman La-Roche Global Director of Strategic Partnering Robert Silverman, New Enterprise Associates Principal Ali Bebahani, and Pappas Ventures' Scott Weiner.

Seattle-based Calistoga closed one of the largest biotech M&A deals of 2011 with Gilead Sciences Inc. in February for $375 million in up-front cash and $225 million in potential milestones. Calistoga's lead compound CAL-101 (now GS 1101), a compound targeting phosphoinositide-3 kinase (PI3K), was in Phase II trials as a single agent on non-Hodgkin lymphoma and in combination with rituximab in chronic lymphocytic leukemia. The acquisition helped to round out Gilead's early midstage oncology and inflammatory disease pipeline. The company had acquired two other companies previously in the areas of cancer and rheumatology.

Gallagher said the successful exit event for Callistoga began as a partnering quest. "The challenge for us in the early days was to think strategically about the capital we needed. . . . We felt confident we could develop the drug ourselves," she said.

CA-101 was the only drug with that specific mechanism in clinical trials at the time. It gave the company a three-to-four year lead on its competition. The challenge was running parallel development. The company wanted to pursue registration trials in more than one indication, a capital-intensive proposition. It began looking for North American partnerships, and talking to investors and to pharma.

As it turned out, a number of companies were interested in the lucrative North American licensing rights to CA-101. Gallagher responded that those rights were a large part of Calistoga's value, and that they couldn't sell them.

A number of companies countered with acquisition offers, leading to the Gilead's $600 million purchase.

"Companies are bought not sold," said Gallagher, who advises biotech leaders to use the principle of Best Alternative to a Negotiated Agreement (BATNA). Because Calistoga had a BATNA, and had already done the work of creating a valuation on the company before entering partnering negotiations, it was able to easily shift gears to M&A negotiations, and make a good deal for its stakeholders.

Athersys took the other fork in the road, shaking hands with Pfizer Inc. in 2009 for a $111 million licensing deal for development of its adult stem cell platform for inflammatory bowel disease. (See BioWorld Today, Dec. 22, 2009.)

Like Calistoga, Cleveland's Athersys needed to pursue multiple indications for its Phase I product, MultiStem. It already had a partnering relationship with Angiotech Pharmaceuticals Inc. for cardiovascular disease.

Bokkelen said that the company was aware from an early stage that it could not predict what disease indications would be most successful for MultiStem. It attacked the problem by developing relationships with dozens of investigators at 30 institutions in the U.S. and Europe.

That helped it determine where the product has relevance, without "going deep" in one disease area.

Once it had built that foundation of data, it was able to take a segmented approach to partnering. Bokkelen stressed the importance of looking at the big picture.

Each deal has been structured to provide Athersys and its stakeholders a meaningful share of the downstream proceeds. Under the terms of its 2009 deal with Pfizer, Athersys received $6 million up front, plus $105 million in potential milestones in the area of inflammatory bowel disease. It also received research funding and support through the initial phase of the collaboration.

Pfizer took responsibility for regulatory and commercial development, paying Athersys tiered royalties on worldwide sales of MultiStem IBD products. "We spent a lot of time focused on what is a working relationship," Bokkelen said. "It was not just a handoff – throw it over the fence and say let us know when our next milestone payment is due. That's not the best way to protect value for stakeholder."

Even a carefully planned segmented partnering strategy like Athersys's can turn into an acquisition, given the right circumstances. Robert Silverman gave two examples of companies that had partnered programs that were acquired by other companies.

When Roche acquired Marcadia Biotech Inc. in January, it already had a program partnered with Merck dating to 2008. That did not turn out to be an impediment to Roche's acquisition. "That turned into an M&A despite the fact that the company had a more advanced program it had already partnered," he said. (See BioWorld Today, Jan. 3, 2011.)

Daiichi Sankyo Co. Ltd. had no doubts about snatching up longtime Roche development partner Plexxikon Inc. in March for $805 million up front and $130 million in milestones for PLX4032. (See BioWorld Today, March 2, 2011.)

Coming from an investor's perspective, Bebahani advised that biotech companies developing late-stage financing strategies should evaluate the expectations of potential partners, and try to "get crystallization" of those elements. "The last thing you want is to give up on your molecule. . . . Not everyone gets an M&A deal," Bebahani said. "As long as [the deal] lets you live to fight another day, I think it's worth doing."

Published: June 29, 2011