Sucampo Pharmaceuticals Inc. is buying Japanese firm R-Tech Ueno Ltd. through an all-cash tender offer valued at ¥33 billion (US$278 million), a deal CEO Peter Greenleaf said marks both the culmination of the company's transformation over the past year and the trajectory of its future growth via business development efforts.

The deal, set to close in the fourth quarter pending a successful tender offer, is expected to boost the company's revenue, give the Bethesda, Md.-based firm supply chain control over flagship product Amitiza (lubiprostone) – the constipation drug currently is manufactured by R-Tech Ueno – and diversify its pipeline into other areas, including the hot, emerging immuno-oncology space.

"We previously stated that a key goal is to execute on a business development strategy and transactions that were ... immediately accretive and diversify our pipeline," Greenleaf told investors on an early Wednesday conference call. The latest move is "our first major step toward these objectives."

But Sucampo had been working quietly since Greenleaf took the helm early last year to lay the groundwork for building out a global, development and commercial biopharma firm. Much of that focused on bolstering the Amitiza business, expanding its commercial partnership with Takeda Pharmaceutical Co. Ltd. beyond the U.S., inking a Chinese partnership with Harbin Gloria Pharmaceuticals Co. Ltd. and working to broaden Amitiza's use by filing for approval in Canada and picking up a positive recommendation for the drug by the UK's National Institute for Health and Care Excellence.

Amitiza, approved for chronic idiopathic constipation, opioid-induced constipation and irritable bowel syndrome with constipation, so far, has continued to see sales grow, despite competition from Ironwood Pharmaceuticals Inc.'s Linzess (linaclotide) and, most recently, the addition of Movantik (naloxegol, Nektar Therapeutics Inc. and Astrazeneca plc). Management had predicted that the new entrants would help grow the constipation market for all players, and sales so far – Takeda reported U.S. sales increased 15 percent year over year to $88.2 million for the second quarter – have borne that out. (See BioWorld Today, Sept. 17, 2014.)

Sucampo is forecasting Amitiza to continue growing, with mid- and long-term revenue growth in the high single digits to mid teens, estimates that appear more likely following last year's resolution of a generic challenge to Amitiza, which preserves patent protection until 2021.

"Much of what we did in 2014 might be viewed as sort of small moves," Greenleaf told BioWorld Today, adding that the firm also changed out "probably 80 percent" of the management team, specifically bringing in experts in both small molecules and biologics and rounding out those scientific additions with experienced clinical, regulatory and commercialization leaders.

"So the early, smaller moves might not be seen as transformational truly, but they were the building blocks," he added.

The R-Tech Ueno agreement, however, is expected to have a "substantial positive impact on future financial results," Greenleaf told investors. Sucampo anticipates almost doubling its net income in 2016 vs. 2015, reaching $55 million to $60 million and is guiding for a 2016 earnings per share of $1.20 to $1.30.

In addition to saving on manufacturing payments to R-Tech Ueno, Sucampo also will pick up manufacturing revenue R-Tech Ueno earns from Amitiza partners Takeda, Gloria and Mylan NV, which sells the drug in Japan. For the three months ending June 30, R-Tech Ueno reported ¥1.5 billion in revenue from Amitiza.

The Japanese firm also receives revenue from Rescula (unoprostone isopropyl), approved for the management of open-angle glaucoma and ocular hypertension. That drug, however, has gone generic, so sales are relatively limited, with R-Tech Ueno reporting about ¥182 million for the three months ending June 30.

Upon closing of the deal, Sucampo expects annual cost savings of $5 million, starting in 2016.

PRIORITIZING THE PIPELINE

Sucampo's offer for R-Tech Ueno consists of about $54 million in cash and 2.5 million Sucampo shares, representing roughly 5.5 percent of shares outstanding. Specific terms call for Sucampo's Japanese subsidiary to offer ¥1,900 per share in cash for 56 of the outstanding shares in the tender offer. Taking into account the market volatility of the past week, that price marks a 16 percent premium to the Japanese firm's three-month volume-weighted average price.

Shares of R-Tech Ueno (TOKYO:4573) closed Wednesday at ¥1,278, up ¥108 or 9.23 percent.

Sucampo expects to acquire 56 percent of the outstanding shares via the tender offer. The remaining 44 percent will be acquired for ¥1,400 per share from R-Tech Ueno's founders and a related entity, the company said.

R-Tech Ueno was founded in Tokyo in 1989 by Ryuji Ueno and Sachiko Kuno, who went on in 1996 to establish a U.S. firm that later became Sucampo. The now-husband-and-wife team is largely focused on philanthropy, though the couple retains a significant stake in Sucampo.

Plans for integrating R-Tech Ueno into Sucampo are still in the works, Greenleaf said. For one, the company will move from having 13 to 15 employees in Japan to more than 90 employees.

There's also the expanded pipeline to consider. Sucampo already has made an early commitment for two R-Tech Ueno programs aimed at vascular adhesion protein 1, or VAP1, a target with potential in multiple indications, including orphan diseases, autoimmune and inflammatory disorders and cancer. The most advanced, RTU-1096, could have applications in nonalcoholic steatohepatitis, chronic obstructive pulmonary disorder and even immuno-oncology, and plans are under way to move into a phase I multiple ascending-dose study.

An earlier-stage intravenous VAP1 inhibitor, which has indicated potential in acute cerebral infarction, is ready to move into investigational new drug application-enabling studies.

Beyond those programs, Sucampo will need to prioritize. The combined company will boast a total of 10 assets. "While we have begun to examine the potential during the due diligence process, our goal will be to take a much closer look during the three months" it will likely take to close the transaction, Greenleaf said.

"We'll accelerate the high priority programs and invest only where we believe we can have the greatest impact," he added. For those not deemed strategic fits, "we'll look for additional value by monetizing" through partnerships or out-licensing.

POSITIONING FOR GROWTH

Sucampo plans to finance the R-Tech Ueno deal through a $250 million term loan, leaving the firm with plenty of cash on its balance sheet – $127.7 million as of June 30 – in addition to the cost savings and additional revenue. If all goes as planned, the company will have the capacity for further deals in the near future.

"We also recognize we need to continue to do pipeline work, to bring in more external assets," Greenleaf said. "We'll digest this [transaction] and figure out what our next investment play" will be.

Also to be determined along the way will be the company's commercial strategy. In response to an analyst's question on the call, Greenleaf said Sucampo likely would take on commercial responsibilities in areas where it made sense to do so in terms of cost-to-return ratio. With the right customer base and in the right geography, the company could make "those types of investments to build a commercial organization."

"We don't see ourselves as just an R&D partnership house here," he added.

But Sucampo has no plans to build the kind of infrastructure, either globally or in the U.S., needed to reach the larger markets. "Obviously, that would be areas such as primary care and potentially even some cardiovascular areas where you need to touch a large, large number of physicians."

But where there's "a solid return on investment, we'll take a swing at that on our own in the right geography." Either way, "we'll be asset-selective," he said.

Shares of Sucampo (NASDAQ:SCMP) closed Wednesday at $24.55, up 61 cents.

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