BOSTON (Reuters) – Small biotechnology companies with cash but failed or floundering products are in hot demand as partners for companies that are unable to raise money in the capital markets.
One of them is Nuvelo Inc, whose blood clot-dissolving drug alfimeprase failed earlier this year. It said on Thursday it will be acquired by privately held ARCA biopharma Inc., which makes treatments for cardiovascular diseases.
The deal gives ARCA access to Nuvelo’s money — it had $76 million in cash and short-term investments at the end of June — and it gives Nuvelo’s stockholders the chance to fight another day.
Companies such as Nuvelo, Replidyne Inc, Vaxgen Inc Cell Genesys Inc and Vanda Pharmaceuticals Inc are among a handful of once high-flying biotechs whose leading products have failed, but which retain significant cash on their balance sheets.
Some of these, including Replidyne and VaxGen, are openly touting that cash as an asset to attract partners. Others are likely entertaining proposals behind the scenes; and interest is running high.
“Given the state of the market, good companies that would otherwise have done an IPO are viewing this as a viable financing strategy,” said Michael Brinkman, managing director of healthcare investment banking at Piper Jaffray & Co. “Every late-stage private company is looking at it; all the bankers are looking at it; and all the CEOs of cash shells are cognizant of it.”
The Nuvelo agreement follows a recent deal between Novacea Inc, whose lead cancer drug Asentar failed a late-stage clinical trial, and privately held Transcept Pharmaceuticals Inc, which has an experimental sleep drug in late stage development. The deal gives Transcept some $90 million in cash and, incidentally, a public listing.
“The single biggest advantage for us was the ability to generate capital that would otherwise not have been accessible,” said Glenn Oclassen, the chief executive of Transcept. “The market is very rugged for companies seeking IPO capital and we were no exception to the rule.”
So-called cash shells have always existed, but have rarely been a financing option of choice.
“Now every one of them has a dance card that is full,” said Dan Janney, managing director at Alta Partners, a venture capital company focused on life sciences.
Replidyne, which saw the failure of its experimental antibiotic, had about $64 million at the end of July; and Vaxgen, whose shares once topped $36 on hopes for its HIV vaccine, had $46.5 million in cash and investment securities at the end of July, or $38.5 million net of outstanding convertible debt.
These companies could make attractive acquisition targets, and unless they plan to give their money back to shareholders, they should all consider the cash shell route, said Brinkman.
“They should be considering this option because it is almost always going to be the fastest way to deliver shareholder value,” he said.
For ARCA, the deal gives it a way to continue to bring forward its lead product, Gencaro, a heart-failure treatment that is currently under review by the U.S. Food and Drug Administration.
The company said the cash position of the combined company is expected to fund its operations at least through the expected regulatory approval of Gencaro in mid-2009.
Still, merging with a cash shell has its disadvantages for the acquiring company: Oclassen is swamped trying to meet all the new regulatory and disclosure requirements that come with being a public company.
“This wasn’t a gradual process,” he said. “One day we were private and the next day we weren’t. We’re all running around like gerbils.”
By Toni Clarke
(Editing by Dave Zimmerman)