Nature Biotechnology 24, 477 (2006)

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Are small biotechs still underselling themselves?
John Ransom

Lone Tree, Colorado

As AtheroGenics prepares to wrap up phase 3 trial sites for its lead atherosclerosis compound, small molecule AGI-1067, the future could suddenly become very bright for this tiny research company based in Alpharetta, Georgia. www.path.utah.edu As AtheroGenics prepares to wrap up phase 3 trial sites for its lead atherosclerosis compound, small molecule AGI-1067, the future could suddenly become very bright for this tiny research company based in Alpharetta, Georgia. If the outcome of the trial is successful, the $50-million licensing bet that AstraZeneca made on AtheroGenics in December 2005 could prove to be a cheap gamble. Indeed critics of the deal point out that with estimated peak sales estimates in the $2–3 billion range for AGI-1067, AtheroGenics, which would get an estimated $1 billion out of the deal, may have undersold itself. Small biotech companies, like AtheroGenics, when dealing with big pharma, may still need to learn the expensive lesson that success is not just measured by bringing a product to market but by maximizing shareholder value.

AGI-1067 is a novel small molecule designed to treat inflammation of the heart by \"turning off inflammation at the site of atherosclerotic plaques on a systemic level,\" according to analysts. In AGI-1067 AstraZeneca may have found a perfect complement to its current cardiovascular product offerings. \"Will there be a better partner than AstraZeneca if you have a successful drug?\" asks Seamus Fernandez, a biotech analyst with SG Cowen & Company in Boston, Massachusetts, in framing the debate over the deal. In addition to the $50 million upfront payment, ArtheroGenics is eligible to receive up to $300 million in additional regulatory milestones and $650 million in commercial milestone payment.

Fernandez points out that AstraZeneca's emphasis on cardiovascular disease with current drugs such as Crestor (rosuvastatin) will allow it to leverage its existing distribution to the benefit of AGI-1067—there are 4.5 million Crestor patients alone according to the company—to create several different pill combinations with the compound. AtheroGenics' CFO Mark Colonnesse agrees. \"We think that if [AGI-1067] hits its therapeutic potential that will make it a very substantial product in cardiovascular therapy.\" On that score everyone agrees.

Where there is disagreement is whether this deal maximizes the value of AtheroGenics' investment in AGI-1067. With a $2–3 billion range of peak sales estimates, analysts say, the company's valuation might have topped the $8-billion mark, which is 2 to 3 times sales if current phase 3 trials are successful, which makes an estimated $750 million royalty check under the agreement look paltry in comparison.

It's not the first time that a small biotech company's deal with a big pharmaceutical has come under attack for allegedly not maximizing shareholder value. When troubled biopharmaceutical ImClone hired Lazards in January to explore the possibility of selling the company, analysts pointed to the company's research deal with Bristol-Myers as a prime stumbling block to getting a deal done, as that agreement limits the value ImClone can realize from the agreement (see Nat. Biotechnol.  24, 233–234, 2006). Similarly, shareholders of Freemont, California-based Abgenix filed suit against the company shortly after Amgen agreed to buy it in December, charging that previous agreements with Amgen unfairly constricted the price Abgenix may have realized in the open market (see Nat. Biotechnol.  24, 119, 2006).

The preoccupation with the concerns surrounding the phase 2b trials may have contributed to AtheroGenics' desire to get a deal with a big pharmaceutical done on the best terms they could, as quickly as they could.  

  

The main question occupying the management of AtheroGenics right now, as is often the case for a small biotech with no commercial drugs, isn't the problems of success or shareholder value, but whether its compound, AGI-1067, can fulfil its therapeutic potential.

The company is hoping that the ongoing phase 3 trials of AGI-1067 will put to rest any lingering doubts over the compound. The compound's phase 2b trial data provided mixed results after interim data showed stronger results than the final data. The preoccupation with the concerns surrounding the phase 2b trials may have contributed to AtheroGenics' desire to get a deal with a big pharmaceutical done on the best terms they could, as quickly as they could. Indeed, some analysts point to the relatively small up-front payment made to AtheroGenics and the back-end loading of the deal as signs of trouble to come.

That may explain why some critics of AtheroGenics are downright hostile to the company. \"The shareholders who did not act by either selling or short selling as result of the AstraZeneca deal will lose substantially,\" says analyst Jonathan Aschoff of investment firm Brean Murray Carret & Co.'s New York office. Aschoff recently reiterated a $2.00 price target on the AtheroGenics stock. Currently the company's stock is trading at around $16.00. Other analysts have a more nuanced view. Lucy Lu, vice president of investment bank First Albany in New York City, although maintaining a neutral rating on the company, said in a research note dated February 28, 2006, that \"given that [AtheroGenics] is a single product story, there is substantial downside if [the phase 3 trial] fails.\"

And even supporters have a hard time disagreeing that the risks are substantial, although recognizing the substantial benefits for both parties. One benefit for AstraZeneca is that it doesn't have to earmark the financial resources that a committed research partner would. Pantginis says: \"AtheroGenics' ...potential milestone payments [from AstraZeneca] depend on the timely and successful completion of clinical trials.\" Fernandez agrees, noting in a research report that the terms of the agreement allow AstraZeneca to walk away after the phase 3 results are announced if the results prove inconclusive; the inference being that AstraZeneca has purchased cheaply what would be very costly to buy if the phase 3 trial ends up being successful.

Indeed, some analysts point to the relatively small up-front payment made to AtheroGenics and the back-end loading of the deal as signs of trouble to come . In addition, AstraZeneca has agreed to pay the same royalties on \"all products that include AG1067,\" he noted, while emphasizing that \"that was one of the things that was important to us [in the agreement].\"

What is clear is that although the company is guaranteed substantial revenues under the agreement from the successful commercialization of AGI-1067, success in the phase 3 trials will come with or without AtraZeneca's involvement. Although getting a deal with a big pharma company is a positive move for a biotech company, the timing and structure of the deal should create a good long-term deal for both sides