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June 2005 issue
Coming Of Age: Pediatric Pharmaceuticals
Get Some Attention From Legislators And Venture Capitalists Sign up for a trial subscription and get the current issue! Read more about Healthcare Corporate Finance News Read the past headlines.
Companies Mentioned in this issue: June
2005 |
Coming Of Age: Pediatric Pharmaceuticals Get Some Attention From Legislators And Venture CapitalistsHow does a company that does not yet have any products for sale enter the $20 billion pediatric drug market? With $98 million, if it’s Verus Pharmaceuticals. This month the California-based specialty pharma announced its $78 million Series A round, and expects to complete the acquisition of its first product within a month. The venture financing, done in three closings, is augmented by a $20 million product-specific royalty financing arranged with Paul Royalty Fund, provider of the largest commitment of capital to the overall financing, which was led by Domain Associates and Prospect Venture Partners. Investors may have been attracted to this segment of the pharmaceutical market because it is underserved and growing rapidly, and because few other companies specialize in pediatric drugs. The pediatric segment primarily requires medications for respiratory conditions, including allergies and asthma, behavioral disorders and infections. Nine months of planning preceded the financing, during which time the three founders, Bob Keith, Peter Schineller and Cam Garner—previously executives at Dura Pharmaceuticals—examined the pharmaceutical market for the right opportunity and discussed what had and had not worked well for Dura. After whittling down the options the founders decided to focus on the pediatric market, and to utilize their business experience and skills most effectively by primarily looking at pipeline opportunities and working on later-stage projects, with an initial focus on respiratory, allergy/asthma and related diseases and conditions. Of the total pediatric drug market, the allergy/asthma-related segment represents $5 billion or so. Approximately 15% to 20% of children are diagnosed with asthma alone, representing the most prevalent treatment area in the pediatrics market. Other investors that participated in the financing, believed to be the largest sum ever raised in a Series A round in San Diego, were MPM Capital, Montreux Equity Partners, Athenian Venture Partners, Windamere Venture Partners and private investors. An aggressive acquisition and commercialization schedule is already in place at Verus, although the company is trying to keep under wraps exactly what products it will launch, beginning later this year. Currently pursuing several transactions, by mid-2006 Verus expects to have two product candidates in Phase III trials for the treatment of asthma. Strength in the areas of development and commercialization, as well as very deep pockets, are expected by the executives at Verus to propel their company into a position of strength in the market it seeks to serve. Verus intends to expand its staff from about 25 now, to about 100 people by the end of this year. The proceeds of its Series A round will be used primarily to build the organization, for the launch of Verus’ first product in the United States, for other pipeline projects and to evaluate additional potential transactions. The venture capitalists had already worked with Verus’ founders for years, so they are betting on the management team to leverage a profit with their development prowess and marketing expertise, plus they liked the pediatric model. Looking forward, Verus is open to opportunities beyond the respiratory treatment area, and would not be opposed to acquiring another company, if it made sense. The need for additional capital will be evaluated periodically. By successfully exploiting opportunities that highlight the founders’ key strengths, Verus hopes to become the partner of choice among pharmas seeking to maximize the pediatric-oriented assets in their own portfolios. At least one other company, PediaMed, Inc., has laid down tracks and is running smoothly in the business of meeting the underserved medical needs of children. But there is still plenty of space to fill. Perhaps, like the executives in charge at PediaMed and Verus Pharmaceuticals, venture investors are hoping to impact the lives of children in a positive way, with products that are tailored and tested specifically for their small bodies and particular needs. Dr. Cameron Durrant, CEO of PediaMed, was pleased to see another company joining PediaMed in the pediatric space, seeing it as further validation of PediaMed’s business model. PediaMed has been either breakeven or profitable for three of its four years in business. Although exact figures were not revealed, Dr. Durrant said that PediaMed’s revenues are currently in the double-digit millions. The company won the Best Places to Work in Kentucky competition for 2005 in the medium-sized employer category, and early this year raised $15 million of venture capital in an up round. The proceeds of that round primarily fueled later-stage research and development, some commercialization, and were also used to increase staff levels. Already partnering with big pharma, PediaMed is looking to co-promote, license and acquire compounds for pediatric development and commercialization, with a preference for lower-risk, later-stage development projects. In designing drugs to treat children, the company is challenged not only to ensure products contain proper drug dosage, but also feature palatability and easy administration and consumption—or are "kidpliant" as PediaMed calls it, a term that describes some of its existing products as well as some drug delivery projects in its pipeline. Going forward, PediaMed plans to continue to introduce new products and invest in its own growth, including expansion in the United States beyond the major metropolitan areas, where it is already active. Currently the company employs 125 people, and won the Tri-State (Ohio, Kentucky, Indiana) "Fastest Growing Company" award for 2004, on the "Fast 50" list compiled by the Cincinnati Business Courier. The market for pediatric pharmaceuticals is estimated to exceed $20 billion. Spurred on by a series of legislative acts, the market is picking up speed, representing one of, if not the fastest-growing segment of the pharmaceutical industry. Essentially the legislation requires that all drugs, except those that are indicated for conditions rarely to never found in children, be tested specifically for pediatric applications. It is believed by some that up to 50%—and by others, up to 75%—of the products that are currently being prescribed to children do not actually have an adequate pediatric label, and the legislation may serve as an incentive to pharmas to do the research and develop the pediatric label for a given drug, because by doing so, they receive a six-month extension of exclusivity on the drug. Alternatively, companies such as PediaMed, Verus and others may partner with or license from big pharmas to conduct research, develop the label for and commercialize late-stage or existing product candidates. PediaMed built its business by selling several cough and cold products that are specially formulated for children, plus it has an agreement with Schering-Plough Corporation (NYSE: SHP) to co-promote a pediatric respiratory treatment in the United States, and with Allergan (NYSE: AGN) to co-promote ZYMAR ophthalmic solution, a treatment for bacterial conjunctivitis (pink-eye). The assets of Protein Therapeutics were added to PediaMed’s pipeline as part of an acquisition in 2004. Now the company is beginning to extend its therapeutic reach to include respiratory, anti-infective, gastroenterology and CNS products. The anti-infective and allergy/respiratory markets represent a significant portion of the entire pediatric market, each accounting for up to 30% of the total. Venture investors, including Union Springs, LLC, Blue Chip Venture Company and Essex Woodlands Health Ventures, hold substantial ownership of PediaMed. PediaMed’s sister company, Xanodyne Pharmaceuticals, was also founded by Union Springs, the Kentucky-based pharmaceutical incubator, and is also funded by Blue Chip and Essex Woodlands. The founder of Union Springs, PediaMed, Xanodyne and Integrity Pharmaceuticals is Roger Griggs, the original founder of Richwood Pharmaceuticals, which merged with Shire Pharmaceuticals (NASDAQ: SHPGY). Under Griggs’ leadership, growth at Richwood was attributed primarily to the success of marketing the compound now known as Adderall for a new indication, bringing the drug up from generating less than $50,000 as a treatment for obesity, to several millions as a treatment for ADHD. Other drug companies in the pediatric space include Alliant Pharmaceuticals, Inc., InfaCare and BioMarin (NASDAQ: BMRN). Novato, California-based BioMarin was founded in 1997 and went public two years later. The biopharma is developing and commercializing products for serious diseases and medical conditions, including Orapred (prednisolone sodium phosphate oral solution), an asthma medication licensed from Medicis (NYSE: MRX) that was part of the Ascent Pediatrics portfolio. Just this month, BioMarin received FDA approval for Naglazyme (galsulfase) as a treatment for mucopolysaccharidosis VI, making it the first approved drug for the rare disorder that leads to dwarfism. The company has some revenues, with net product sales of nearly $5 million for the three months ended March 31, 2005, but is operating at a loss, with operating expenses of more than $19 million for the same period. If these companies are milking the pediatric market for money, then there is another company bringing a twist to that formula. Also this month, California-based Prolacta Bioscience raised $4 million in an early venture round, garnering the proceeds needed to establish milk banking procedures and for facility construction. Prolacta develops and provides large-scale testing and processing of human breast milk. The investors include Draper Fisher Jurvetson, Draper Associates LP and Draper Richards LP (co-leads); plus Jupiter Partners, the William K. Bowes, Jr. Foundation and others. |
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