Today’s VC Is Tomorrow’s M&A
News about health care financing activity can provide us with insight on mergers and acquisitions in the making. Companies in search of capital to develop their technologies and ideas into marketable products have a variety of sources to choose from, including venture capital, private equity, private placements and the public markets. All of them are funded by investors who are naturally seeking a return on their investment down the road. In the past, investors’ exit strategies have included the sale of a company to another investor, an initial public offering or an outright sale to a strategic buyer. The ravages of the Credit Crunch have largely hobbled private equity and slammed the door shut on the IPO market so that during the past few quarters, the M&A market has been the primary means for sellers to realize their investments.

Public Markets
After a long dry spell, the public markets are showing signs of reviving, with two IPOs and two secondary offerings. Cumberland Pharmaceuticals (NASDAQ: CPIX) opened the IPO door on August 10 and raised $85.0 million. CPIX is a specialty pharma focused on branded prescription products for the acute care and gastroenterology markets; its lead product candidate, a form of ibuprofen for pain and fever, is in phase 3 clinical trials. The opening share price of $17.00 was below the projected range of $19.00 to $21.00 per share. After paying offering-related expenses, CPIX expects to have $75.0 million, which will be used for potential acquisitions, the addition of sales reps and the launch of Caldoloran, an intravenous form of ibuprofen. The company will focus on acquiring late-stage drug candidates that might be languishing at larger companies but which could still prove profitable in other hands. The deal was underwritten by UBS Investment Bank, Jefferies & Co., Wells Fargo Securities and Morgan Joseph.

Emdeon (NYSE: EM) raised $365.7 million in its initial public offering on August 11 selling 23.7 million shares at $15.50 per share. The company sold 10% more shares than first expected, and at the top of the predicted range of $13.50 to $15.50 per share. EM is an e-Health company that provides revenue and payment cycle management solutions which connect payers, providers and patients. EM plans to use its share of the proceeds, about $157.0 million, to pay early investors, repay debt and fund acquisitions. About half of the shares sold were held by current shareholders, which include two private equity firms General Atlantic Partners and Hellman & Friedman, which bought EM in 2006. The offering was led by Morgan Stanley, Goldman, Sachs, UBS Investment Bank and Barclays Capital.

So how have they fared since their IPOs? CPIX’s stock price has wavered a bit, dropping to $16.62 on August 20 before rising back to $16.86, while EM’s price has risen as high as $18.00 to settle back around about $17.10. This difference in aftermarket behavior likely reflects the fact that with most of its drugs in development, CPIX has a nominal annualized revenue of $36.0 million while EM is fully up and running, generating annualized revenue of $875.0 million and EBITDA of $208.0 million.

Two biotechs, Human Genome Sciences (NASDAQ: HGSI) and Micromet (NASDAQ: MITI), cleared the path for these IPOs with secondary offerings in late July and early August. On July 28, HGSI announced the pricing of its underwritten public offering of 23,215,000 new shares at $14.00 per share. When the dust settles and customary expenses are deducted, the company expects net proceeds of $356.7 million, to be used to advance the drug candidates in its pipeline. Goldman, Sachs and Citigroup Global Markets acted as joint book-running managers. In what may be not wholly unrelated news, the rumor mill speculates that HGSI may be the acquisition target of one of the big pharma companies.

MITI is a biopharma involved in developing proprietary antibodies for treating cancer, inflammation and autoimmune diseases. Including an overallotment, a total of 16.1 million shares were sold at $5.00 pershare for gross proceeds of $80.5 million, of which MITI received $75.0 million. The net proceeds, together with MITI’s existing cash, cash equivalents and short-term investments, are intended to fund operations for at least two years. The offering price of $5.00 represents an 11% discount to the stock’s price of $5.59 when the initial 14.0 million shares were sold and a 25% discount to the stock’s price of $6.26 when the underwriter’s overallotment was subsequently sold. Pipar Jaffray & Co. acted as the sole book running manager with RBC Capital Markets and Merriman Curhan Ford as co-managers.

Venture Capital
Adamas Pharmaceuticals closed a $40.0 million Series D round led by aeris CAPITAL AG and DAG Ventures. They were joined by existing investors MDCV-Mohr Davidow Ventures and Northgate Capital. Founded in 2004 and based in Emeryville, California, Adamas is tackling Parkinson’s disease and dementia as well as infectious diseases such as influenza by creating fixed-dose regimens in controlled-release combinations that overcome the limitations of monotherapy and conventional formulations. Buoyed perhaps by concerns about the upcoming flu season, proceeds from this financing will fund clinical studies of Adamas’ triple combination antiviral drug (TCAD) therapy for influenza.

Enobia Pharma raised $50.0 million in a Series C financing from its current investors, including OrbiMed Advisors LLC, CTI Life Sciences Fund of Montreal, Fonds de Solidarite FTQ, Desjardins Venture Capital and Lothian Partners. Based in Montreal, Enobia is a biotech focused on developing therapeutics to treat bone disorders. Proceeds from the financing are primarily to fund the development of ENB-0040, an enzyme replacement therapy to treat hypophosphatasia, a potentially deadly genetic bone disorder that strikes infants. This most recent round provides Enobia with enough capital to fund its activities through the first half of 2011.

Constellation Pharmaceuticals raised $17.2 million in financing, pursuant to the third tranche of its $32.0 million Series A financing from Third Rock Ventures, The Column Group, Venrock and Altitude Life Science Ventures. Based in Cambridge, Massachusetts, Constellation is a biopharma developing therapeutics in the domain of epigenetics, a field that focuses on selective regulators of gene function and expression. Although the initial focus is on oncology, subsequent therapeutic areas to be investigated include autoimmune, inflammatory and neurological diseases. Proceeds are intended to enhance the company’s R&D capabilities and to accelerate the development of its preclinical pipeline.

Liquidia Technologies closed on a $7.0 million Series C round of venture financing, led by Canaan Partners and Pappas Ventures, who were joined by existing investors Wakefield Group and New Enterprise Associates. Based in Durham, North Carolina, Liquidia partners with pharma companies, licensing its proprietary technology to mold nanoparticles into various shapes and sizes that affect the delivery of therapeutic entities. Liquidia has raised a total of $31.5 million since its founding in 2004; proceeds from this most recent round will go towards the in-house identification of a vaccine candidate using the company’s technology.

Pacific Biosciences continued to fill its coffers, recently raising an additional $68.0 million in financing. New and previous investors provided the financing, including strategic investments from Monsanto (NYSE: MON) and the Wellcome Trust, as well as Sutter Hill Ventures, which joins the ranks of the company’s institutional investors. Based in Menlo Park, California, Pacific Biosciences is pioneering the development of a transformative DNA sequencing technology, the single molecule real time (SMRTTM) sequencing system. The company has raised a total of $188.0 million since last summer.

Although the recent economic environment has not been altogether hospitable to venture capitalists (even less so to private equity groups), a number of VC arms of big pharma companies have taken the opportunity to beef up their presence in the health care VC space. In June, for example, Aileron Therapeutics raised $40.0 million in a Series D financing.

Investors included the VC arms of four pharma companies: GlaxoSmithKline’s (NYSE: GSK) SR One Ltd., Novartis’ (NYSE: NVS) Novartis Venture Fund, Eli Lilly & Co.’s (NYSE: LLY) Lilly Ventures and Roche Holding’s (VX: ROG) Roche Venture Fund. Aileron is developing a novel class of therapeutics called stapled peptides for use in oncology and metabolic diseases, among others. In funding these rounds of investment, big pharma companies are attempting to “outsource” some of their R&D efforts or to identify promising biotech acquisition targets earlier than in the past. And if they can eliminate paying the middle man, that’s all to the good, too.

Private Placements
Novelos Therapeutics has entered into a private placement agreement with existing investor Purdue Pharma L.P. to secure proceeds of $9.0 million. Based in Newton, Massachusetts, Novelos is a biopharma engaged in commercializing oxidized glutathione-based compounds for treating cancer and hepatitis. Under terms of the deal, Novelos is selling to Purdue 13,636,364 shares of its common stock as well as warrants (expiring on December 31, 2015) to purchase an aggregate of 4,772,728 shares of common stock at an exercise price of $0.66 per share, for gross proceeds of $9.0 million. Initially, Novelos sold 5,303,030 shares of Novelos’ common stock and warrants to purchase 1,856,062 shares of its common stock for gross proceeds of $3.5 million. Subsequent closings for the remaining $5.5 million will be subject to the availability of additional authorized shares.

As part of the deal, Novelos also agreed to negotiate with Purdue for U.S. rights to license, develop and commercialize NOV-002, a drug candidate in phase 3 development for lung cancer and phase 2 development for certain kinds of breast and ovarian cancers. Earlier this year, Novelos entered into a partnership with Mundi­pharma, an independent company associated with Purdue, to develop and commercialize NOV-002 in Europe and Asia (excluding China). Under terms of the Mundipharma collaboration agreement, Novelos may receive up to $25.0 million of launch milestones and $60.0 million of
fixed sales-based payments.

The majority of such investments will be made in various technology sectors, such as biotech, pharma and e-health. Although the door on the IPO market has cracked open again, most investors seeking an exit for their investments will not be able to access the public markets in the near term, but will look to the M&A market as a way to realize a return on their investment.