Pharming: Back from the Brink of Bankruptcy

Two years ago it looked as if all was lost at Pharming: escalating costs for its Pompe's disease program and indebtedness to its JV partner Genzyme forced it into legal moratorium in August 2001. Today, Pharming's back in the game; indeed, its new management, slimmed down operations and heightened focus on cost control mirrors the many other European biotechs trying to adapt to the harsh winter. But Pharming could have avoided near death by not turning its development partner into its biggest creditor. Still, the firm's turnaround—even this far—shows a reassuring willingness among Europe's investors to assume risk and give companies another chance.

Pharming Group NV was spun out of GenPharm International Inc. (now part of Medarex Inc. [See Deal]) in 1995 to develop transgenic animals whose milk would yield therapeutic proteins [See Deal]. The idea was that transgenic production methods would offer advantages over harvesting proteins from human serum, such as a more dependable supply, lower costs and a reduced risk of the transfer of human viral diseases to patients.

Pharming's prime focus was alpha glucosidase, made from rabbit milk. Unlike the firm's other proteins, this could not be produced by any other means and deficiency of the enzyme causes Pompe's disease, a fatal hereditary lysosomal storage disorder with no effective therapy.

Like most of biotech, transgenic technologies were hot at the time. PPL Therapeutics PLC 's cloning of the first mammal, Dolly the sheep, had captured both the public and investors' imaginations. After a series of private financing rounds, Pharming went public in 1998, netting $61.5 million (€56 million) from listing on Nasdaq Europe [See Deal] and obtained a dual listing on Euronext in 1999. Infected by the widespread optimism of the day, Pharming's ambition was to become a fully integrated biopharmaceutical company, developing, manufacturing and marketing its own products.

Things didn't work out that way. In the first half of 2001, escalating costs associated with the alpha-glucosidase program forced the company into legal moratorium. It has since come back to life, but looking very different, with less lofty objectives, and without alpha-glucosidase.

Pharming's Fall From Grace

Pharming's alpha-glucosidase therapy Pompase had advanced into a small Phase II study by 1998, when it formed a product development joint venture with Genzyme General, a subsidiary of Genzyme Corp. [See Deal]. Analysts welcomed the deal, seeing it as an endorsement of Pharming's technology. Moreover, Genzyme appeared the ideal partner for Pompase from both a therapeutic and development standpoint, given its focus and experience at developing enzyme replacement therapies for lysosomal storage disorders (Genzyme's biggest drug imiglucerase (Cerezyme), launched in 1996, targets another lysosomal disorder, Gaucher's disease). Pharming also benefited from an upfront equity investment of $14 million; what's more the JV appeared to be entirely 50/50, with both parties sharing equal costs, profits and, importantly, influence on the product's development.

But Pompase ran into trouble when it became evident the therapeutically effective dose was far greater than expected. Nonetheless, since the enzyme replacement therapy was benefiting patients, the partners decided to continue the program despite the greater costs. Yet they recognized, according to a Genzyme spokesperson, that relying on the rabbit platform for later stage development and eventual commercialization of the enzyme would be impractical and too expensive. Indeed, one analyst estimates that in trials, the annual cost of treating one patient with rabbit-derived Pompase was €1 million. Thus, in April 2000, the JV licensed rights to technology for the production of Pompase in Chinese Hamster Ovary (CHO) cells from US company Synpac Pharmaceuticals, a division of ACS Dobfar SPA [See Deal].

Which is when Pharming began to overstretch itself. Since the Dutch group couldn't finance its share of the $19.5 million license fee, Genzyme loaned it the cash in exchange for a $10 million convertible note, with the Pompase IP as security. At the time, the loan seemed like a reasonable deal, allowing Pharming to meet its ongoing obligations to the JV, which in 2001 advanced CHO-derived Pompase into Phase II/III studies.

But turning the development partner for its lead product into its biggest creditor turned out to be a mistake. With hindsight, the company should have been more willing to take the dilution of a new equity financing—even at a down round—which would still have been possible in early 2001. Even more obvious with hindsight, the company should have raised equity during the boom.

Yet Pharming had chosen its path and its problems advanced from there. With two production platforms to support, since it had to continue producing Pompase from rabbit milk until the CHO production was scaled up and approved, Pompase costs surged. Pharming's cash burn increased by over 90% from €7 million in the first quarter of 2001 to €13.3 million the following quarter.

Pharming clearly needed additional funding to finance its increased cash burn, recalls CBO Rein Strijker, but "by then it was mid 2001 and the market climate had already begun to decline, which made it very difficult for us to raise additional equity," particularly given its already precarious financial situation, and the heavy dependence on Genzyme. The only other option was to take on more debt. That was a dangerous move for any company without regular, reliable income; all the more so in souring markets.

But Pharming thought the treasure was in sight: it was anticipating being able to launch Pompase by 2003 and thereafter collect its share of the €300 million estimated peak sales. Without many other options, the company set out to borrow €30 million and on July 31 2001 announced it had reached agreement on €15 million of that.

A week later, on August 7th 2001, Pharming's house of cards came crashing down. The risk of placing oneself too heavily at the mercy of a partner became painfully apparent when Genzyme announced the acquisition of Novazyme Pharmaceuticals Inc., another lysosomal storage disorder company with its own Phase I Pompe's drug, manufactured in CHO cells [See Deal]. Genzyme appeared to be deserting Pharming, although it was unclear whether the JV had rights over follow on products from either party's product portfolio—including the Novazyme program.

Three days later however the debate became irrelevant. Pharming's €15 million loan fell through. Fearing that its creditors—particularly Genzyme—would call in their debts, and thus faced with the loss of its key Pompase-related IP, Pharming filed for protection from its creditors.

Turning Pharming Around

During a period of legal moratorium granted by the Dutch courts, Pharming's existing management and supervisory board all resigned or were dismissed and a trustee took over. He, along with company advisors (now new management) decided that there was enough residual value in Pharming to attempt to revive the company—but not without significant restructuring.

The true price of Pharming's overdependence on Genzyme became apparent: after 3 months' negotiation, Pharming announced it would transfer all rights, data and IP relating to the Pompase program to the US biotech. Furthermore, Genzyme would also acquire Pharming's manufacturing facility in Belgium and take on the 100 staff for €22 million, comprising the €10 million owed to Genzyme, €6 million of other debt relating to the facility and an agreement to manufacture €6 million worth of Pharming's now lead product the C1 inhibitor.

Genzyme got a good deal: in addition to freedom to pursue whatever approach it wants to Pompe's (it has since ceased development of Pompase and is now focused on in-house generated therapy Myozyme, currently in Phase III), it also got a state of the art facility at a knock-down price, boosting its own manufacturing capabilities. (Genzyme had been about to build its own plant in the US, according to the company, but buying the Pharming facility was a lot quicker, and allowed the group to establish manufacturing operations in Europe.)

With the Genzyme situation resolved—at great expense—focus shifted to doing what the company should have done when its financial difficulties first began: restructure. Just as many other European biotech companies have been forced to during the extended downturn, Pharming sold or shut down a collection of non-core assets, focused its R&D activities on its most advanced products, reduced headcount and scrapped its expensive dual listing, retaining only its Euronext listing (see Exhibit 1).

According to analysts, Pharming's divestment program generated approximately €7.5 million. More importantly, the company had enough left, post-Pompase, to attract a new, more commercially minded management team—many with extensive experience of restructuring companies—in February 2002, headed up by CEO Francis Pinto, MD.

Pinto—an industry veteran with over 30 years experience, including stints on the boards of Pfizer Inc. , Bristol-Myers Squibb Co. and GlaxoSmithKline PLC —was attracted to what he saw as strong commercial and clinical potential in Pharming's products and technologies. He was also up for the challenge of turning Pharming around, given his significant experience reorganising and restructuring companies. As such, Pinto agreed to provide the group with a convertible loan, and, unusually given the prevailing climate, took his management fee in shares, not cash. Existing and new investors, including some additional management and board members, refinanced the company, providing Pharming with €13.6 million, comprising €8.4 million convertible debt and €5.2 million equity. Pharming was able to repay its creditors and exited legal moratorium in October 2002.

The New Pharming….

The safe haven of legal moratorium has given Pharming another bite of the cherry. But its second chance comes at a time when even those biotechs with a reasonable track record are struggling; as such Pharming will likely have no slack at all with investors.

So far, however, Pharming is fast applying the hard lessons it has learned: focus on just a few promising programs, don't try to do everything alone, control costs tightly, and don't expect investors to keep footing the bills. Shedding its early, heady ambition to become a fully-integrated pharmaceutical firm, Pharming will henceforth focus on research, early-stage development (to Phase II) and manufacture of its protein therapeutics, leaving the expensive late stage development and marketing to licensing partners.

Reflecting a new focus on revenue generation, Pharming also plans to license out its proprietary technology platform, something it had previously guarded in house. So far, the signs are that others do recognize the potential value in Pharming's alternative approach to protein manufacture, particularly given the ongoing capacity shortage: rEVO Biologics Inc. paid €1.5 million for rights to the technology in June 2002.

Pharming has retained four products in its pipeline (see Exhibit 1) but its success hinges on its lead program, C1 inhibitor replacement therapy in Phase II trials for hereditary angioedema (HAE). The product has orphan drug status in the US and Europe, and is expected to reach the market in 2005.

HAE is characterized by acute, localized swelling or bruising of soft tissue and can be life threatening when it occurs in the upper gastrointestinal or respiratory tracts. The disease affects between 10,000 and 50,000 patients in the Western world. Current treatment options include replacement therapy with enzyme purified from blood plasma for acute attacks, and preventative therapy with male hormones. There are problems however with both approaches. Male hormone therapy is associated with a range of undesirable side effects, particularly in women and children. There is insufficient supply of C1 inhibitor from plasma to meet demand, production costs are high and there's a risk of transfer of blood-borne disease.

Pharming reckons its method of production should overcome these problems. So far, trial results have been encouraging and reassuringly, the company claims the drug won't require the same large doses as Pompase. Phase II/III trials are due to begin before the end of 2003.

The true test of this program's—and Pharming's—credibility will come when and if the group manages to secure one or more partners for late-stage development and/or distribution and marketing of the C1 inhibitor, something it hopes to do by H1 2004.

…Attracts New Investors

Against heavy odds, Pharming has raised €5.5 million in additional funds since it exited legal moratorium, from both existing and new investors, including €4 million, and a possible further €2 million should it exercise its warrants, from European Bioscience Investors Ltd., a recently launched proprietary fund investing in European biomedical companies.

According to one investor, one of the most compelling reasons for investing in Pharming is its strong and experienced management team. Indeed, Pinto's track record at the company to date is encouraging. As the investor points out, "he's got the company out of receivership, appointed a new supervisory board, reduced losses from €55 million a year to only €1 million in 2002, turned a negative equity position positive, reduced debt from €24 million to less than €5 million in 2002, restructured the company and found time to take the lead product into Phase II trials. That's a phenomenal achievement in such a short period of time."

Yet while new investors can benefit from buying in to Pharming at a very low valuation relative to its pre-legal moratorium price, those who bought in before the company's troubles—and are still around—have seen the shareprice fall from highs of over €30 to lows of around €0.20. They'll need some more reassuring yet. The best way Pharming can do that, say analysts, is through achieving its goals of advancing the C1 inhibitor into Phase II/III trials and securing a development and/or marketing partner. All eyes are on Pinto: "With his network of contacts, if anyone can license C1, he can," says one investor. The company has less than a year to do so: with cash burn for the year estimated to be around €6 million, Strijker indicates that Pharming only has sufficient funds to see it through to the first half of 2004. (Given current market conditions, raising public money is not an option, certainly not for now; indeed the board of PPL, which was also developing proteins from transgenic animals' milk, recently recommended that the company be sold because of lack of support for its restructuring plan.)

The group may have a little leeway, however, thanks to its encouraging turnaround so far: the debt and warrants issued to investors as sweeteners during the company's refinancing while in legal moratorium expire at the end of 2003. Since they're priced at only €0.80 and the shares are currently trading at almost double that, they're likely to be taken up; indeed, some already have been, according to the company, although it hasn't disclosed the total amount raised.

The Pharming story isn't the only illustration of the importance of strong management; struggling UK biotech CellFactors PLC was rescued from a funding crisis during the course of 2003 by a new, commercially experienced CEO prepared to rationalize heavily and take on some personal risk. (See "CellFactors: Bringing the Commercial to Biotech," In Vivo Europe Rx, July/August 2003 (Also see "CellFactors: Bringing the Commercial to Biotech" - In Vivo, 1 Jul, 2003.).) But Pharming's particularly close brush with bankruptcy and its loss of a key program shows the price of poor risk-management, irresponsible cost-control and a naïve approach to partnering.

That Pharming has a chance of resurrection is good news; it also points to a reassuring trend among some investors to take on risk, and remain open-minded about a technology's potential. With the bulk of its hopes pinned on just one development program, Pharming is by no means out of the woods. But nor are most of Europe's biotechs; at least Pharming is back in the race.

--by Hazel Dawson

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