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Troubled Biotechs (UK Edition): Summit, Alizyme, ReNeuron

This article was originally published in The Pink Sheet Daily

Executive Summary

More than a third of UK biotechs are short of cash, and those that haven’t already found creative means of monetizing their assets have run out of time.

No wonder the UK's biotech industry association is clamoring for government help for the sector. Over a third of UK biotechs will run out of cash by the end of the second quarter this year, according to analysts at KBC Peel Hunt.

Building biotechs in the UK (and indeed most of the rest of Europe) is challenging in the best of times - investors are more risk-averse, less generous, and less specialist than in the U.S. In the UK, awkward rules concerning pre-emption rights and granting existing shareholders the right to participate in subsequent rounds to maintain their equity share haven't helped pull in funding from overseas investors either.

The global economic meltdown has turned a challenging environment into an almost impossible one for all but the best-capitalized groups (or those able to secure funds from unusual sources, like proteomics group Proteome Sciences, which borrowed more than £6.5 million (about $9 million) from its CEO, secured against the company's intellectual property. London's Alternative Investment Market (AIM), once hailed as the Holy Grail for high-growth biotechs unable to meet the main market listing requirements, now looks more like a graveyard. It's clear that many companies listed prematurely.

Summit, for instance, bypassed venture capital entirely when it floated on AIM in 2004. Its model: partnering its drug-discovery programs early, for milestones and future royalties, and generating revenues from services in carbohydrate chemistry and zebrafish drug candidate screening.

But early-stage deals don't generate much cash; partners will pay only for de-risked assets that are at least partly-cooked. So, despite four partnerships, including most recently a deal to develop a buccal formulation of Summit's sialorrheoa candidate with Taiwan's Orient Pharma (in which Orient funds all development in exchange for Asian rights), Summit's in trouble (1 [See Deal]).

The biotech declared in a late February press release that it hadn't been able to raise additional equity and was seeking alternative funding sources. It will need at least £2.5 million (about $3.5 million) to take it into next year, according to KBC.

Possible options: divesting some or all of its services businesses, such as zebrafish experts DanioLabs, which it acquired in 2007 for £15 million in cash and stock, and carbohydrate chemistry group DextraLabs, bought the same year for £1.5 million in stock. Alternatively, Summit may seek a trade sale with a buyer seeking cheap technology that already has the later-stage assets required to raise further cash.

Alizyme has later-stage assets - but they're the wrong ones, it seems. The company has been trying to find an ex-Japan partner for lead drug cetilistat, a gastrointestinal lipase inhibitor, which has completed Phase II trials in obesity, for at least a couple of years.

Getting any drug past the regulators is tough these days, but obesity is especially tricky given high profile snafus including that of Sanofi Aventis' rimonabant (although granted, that was a centrally-acting drug, which cetilistat isn't; so safety trial requirements are not quite so onerous) (2 (Also see "Taranabant Loss No Surprise For Obesity Field, But Shock To Merck’s Pipeline" - Pink Sheet, 6 Oct, 2008.), p.22). Still, if a company's going to make that kind of investment, another gastrointestinal lipase inhibitor may not be a worthwhile prize. After all, Roche's version orlistat ( Xenical ), hardly a runaway success itself, is now sold OTC by GlaxoSmithKline PLC as Alli.

Japan partner Takeda in September 2008 began Phase III trials of the drug, possibly because orlistat didn't make it beyond Phase II in this market. That triggered a $3 million milestone payment to Alizyme.

But it wasn't enough to keep research and development going, particularly given that Alizyme's other late-stage asset, ulcerative colitis drug COLAL-PRED (which combines a generic steroid with the company's proprietary colonic drug delivery system) failed to meet a co-primary endpoint in a European Phase III trial. According to the company, "further analysis of data and discussion with partners [Norgine in Europe, South Africa, Australia and New Zealand, Prometheus Labs Inc. in the U.S., and TSD Japan Inc. in Japan] and regulatory advisors is ongoing to establish the optimum route forward for this product."

In the meantime, Alizyme has reduced its headcount to 12, and its cash-burn to "virtually zero, apart from the nominal sums paid on salaries," according to Alizyme's public-relations firm (presumably being paid also). If it doesn't do anything but pay the staff, Alizyme has cash for another 12 months. But that's not really the point. Biotech is supposed to be doing value-adding R&D, not draining its cash on salaries and overhead.

Meanwhile stem-cell focused ReNeuron seems to have had several lives already, and it's still hanging on - though just barely. The company first went public in the heady days of 2000, only to be whisked back into the private realm by lead VC Merlin Bioscience Ltd. three years later, leaving most investors out of pocket (3 (Also see "ReNeuron: Going Private" - In Vivo, 1 May, 2003.)). It floated again in 2005, raising just £9.5 million ($17 million) in a far less ambitious IPO (4 (Also see "UK Stem Cell IPOs Defy Odds" - Scrip, 1 Sep, 2005.))

But ReNeuron hasn't been such a good investment the second time around. According to its 2008 annual report, the biotech had £2.8 million of cash at the end of March 2008, and spent over £6 million that year. This year's spend will be lower, since ReNeuron has cut its headcount by 60 percent and shut down its U.S. facility. But it would still, by now, be out of time -were it not for a £2.5 million convertible loan facility secured mid-last year from two existing investors (including its original backer, Merlin). The loan notes now have been fully drawn down. In March, however, ReNeuron once again found a new life-line, announcing a £3 million (about $4.2 million) share placing - which, if successful, will trigger a conversion agreement with the loan note holders.

The placing "extends our runway for at least another year," said CEO Michael Hunt. But ReNeuron isn't on dry ground; its programs are very early-stage, and stem cell therapies are still perceived as ultra-high risk and unproven - notwithstanding the boost that many companies in the area should get from news that President Obama is lifting the U.S. ban on research using embryonic stem cells (5 (Also see "NIH’s Stem Cell Guidelines To Get Dusted Off After Obama Lifts Ban" - Pink Sheet, 9 Mar, 2009.)).

That easing is unlikely to extend to the regulators: FDA failed to approve ReNeuron's application to start a clinical trial with stroke therapy ReN001 in early 2007, although the group plans to start UK trials this quarter. ReNeuron's next financing port-of-call will be charities and grants, said Hunt.

- Melanie Senior ([email protected])

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