Alizyme: Can Low Risk Last Forever?
Executive Summary
Alizyme's GBP16.1 million, barely discounted placing and open offer illustrates its investors' faith in its low-risk business model and maturing pipeline. It also provides leverage for negotiating the out-licensing deals those investors now expect.
Alizyme's £16.1 million, barely discounted placing and open offer illustrates its investors' faith in its low-risk business model and maturing pipeline. It also provides leverage for negotiating the out-licensing deals those investors now expect.
"One of the most unusual things about Cambridge-based Alizyme PLC is the business model on which it was founded," suggests Richard Palmer, PhD, who has fronted the company since joining it as COO in September 1996 from Glaxo Wellcome (now part of GlaxoSmithKline PLC ) and became CEO in March 1997. In 1995, when Alizyme started up, "the company didn't have any of its own intellectual property, they had no platform or anything from which to generate multiple products, and none of Alizyme's founders had ever worked in the industry," he says.
VCs wouldn't touch the company seven years ago. Alizyme instead had to go directly to the UK's Alternative Investment Market (AIM) in 1996, despite its early stage and relative inexperience. Today, however, many VCs find comfort in the risk-limiting strategy that has got Alizyme to where it is. The company avoids discovery risk, preferring to in-license products in preclinical or early clinical development. It minimizes burn rates by retaining only 14 full-time employees and outsourcing most company activities.
From its founding until early this year, Alizyme's shoestring budget and skeleton crew have produced four mid-to-late-stage clinical programs (see Exhibit 1) at a cost of just £37 million ($58 million). Importantly, the steady progress of Alizyme's projects has cultivated a loyal investor base, through which it raised a further £16.1 million in late January 2003, placing the firm in a strong position to out-license its first product.
The placing and open offer was Alizyme's fifth public financing in seven years; roughly 40% of the new shares were scooped up by existing investors. Because the firm has issued relatively few shares in its seven year history, the dilution concerns that prevented many UK biotechs, such as Antisoma PLC , from raising more money during the 1999/2000 biotech boom, weighed less on investors' minds. (See "UK Biotech Learns the Hard Way," START UP, March 2002 (Also see "UK Biotech Learns the Hard Way" - Scrip, 1 Mar, 2002.).) In addition, upcoming commercial milestones—analysts expect Alizyme to out-license one or two products from its portfolio in the next twelve months—no doubt convinced investors to once again reach for their wallets. "If anybody was going to be able to raise money these days it was Alizyme," sums up Evolution Beeson Gregory analyst Julie Simmonds, PhD.
Escaping the Vicious Fund-Raising Circle
Such generosity is rare these days but many investors are expecting a prompt return. The new cash provides Alizyme more leverage for negotiating a deal for Colal-Pred, its formulation of the steroid prednisolone for the treatment of ulcerative colitis (UC), which is about to enter Phase III trials in Europe.
Other firms in similar financial situations have been less fortunate. Despite recent clinical and partnering successes, KS Biomedix Holdings PLC 's dwindling cash reserve—analysts estimate the company only has operating cash until the end of 2003—may be impairing its ability to strike a sufficiently lucrative US partnership for its Phase III brain cancer therapy TransMID, for example. As was true with Alizyme before its January offer, KSB's weak cash position is also holding back the firm's share price, closing the vicious fund-raising circle. "If you've got cash on your balance sheet, you can definitely negotiate a better deal," says Seymour Pierce analyst Brett Pollard, PhD. "But without a commercial deal already set up, it's going to be hard for some companies to raise cash—it's one of these chicken-and-egg dilemmas."
In Alizyme's case, however, investors were likely swayed by near-term pipeline potential. "Essentially all the recent investment is going into projects that can produce value in the short-term, because Alizyme doesn't have a lot going on in terms of undefined, early stage research products that would eat up that investment," notes Simmonds. "Alizyme has reached the commercial point where it becomes a very attractive stock for people to invest in and the downside is fairly limited."
Banking on the Pipeline
Colal-Pred is Alizyme's most advanced clinical project and reflects the group's low-risk approach to building a pipeline. The drug is a coated formulation of the generic anti-inflammatory steroid prednisolone, which is already used to treat UC patients during disease flare-ups, which typically occur every few months.
By coating the steroid with a form of starch that is only digested by bacterial enzymes found in the colon, Alizyme's Colal delivery system protects the rest of the gastrointestinal tract while allowing for targeted delivery of the drug. (Alizyme licensed exclusive worldwide rights to the Colal system from BTG PLC in July 1998; the technology was developed by the London University School of Pharmacy, the UK's MRC Dunn Clinical Nutrition Centre, and the Institute of Food Research.)
Colal-Pred is unlikely to become a blockbuster: analysts suggest the most logical partner for the drug may be a specialty pharmaceutical firm or an established biotech firm with a similar therapeutic focus. Yet neither is the market for UC therapy miniscule: Shire PLC , which recently in-licensed from Italy's Nogra Pharma Ltd. mesalazine (SPD480), a rectally administered foam to treat UC, estimates the US market at $500 million [See Deal]. What's more, the success of a Colal-based therapy, however lucrative as an individual project, will endorse Alizyme's delivery technology and pave the way for its use with other therapeutics.
Some luck has also driven Alizyme's pipeline success, Palmer acknowledges. Renzapride, the company's irritable bowel syndrome (IBS) treatment and potentially most lucrative product, was discovered at Beecham Research Laboratories; a development agreement with SmithKline Beecham brought Alizyme on board in July 1998 [See Deal]. Alizyme wound up with full ownership of renzapride when the merger that would create GSK forced the Big Pharma to divest the project [See Deal].
Results of a 500-patient Phase IIb trial in constipation-predominant IBS (c-IBS) are expected in May and a second, 160-patient study in mixed symptom IBS is due to report in October. Analysts note that Alizyme's chances of landing a lucrative licensing deal with a Big Pharma for a piece of the emerging blockbuster IBS market are good, given the level of interest in the area, despite a sketchy history. GSK's alosetron (Lotronex) is back on the market for limited treatment of diarrhea-predominant IBS (thanks to the efforts of patient-advocacy groups) after being pulled in November 2000 due to concerns about adverse events (see "Safety First … and Last," IN VIVO, April 2002 (Also see "Safety First...and Last" - In Vivo, 1 Apr, 2002.)), and Novartis AG 's tegaserod (Zelnorm/Zelmac) for c-IBS is expected to pull in more than $1.5 billion in peak sales, landing on the market unexpectedly in July 2002 after a series of delays had threatened to push a launch back to 2004. (See "Novartis and the Innovator's Dilemma," IN VIVO, June 2001 (Also see "Novartis and the Innovator's Dilemma" - In Vivo, 1 Jun, 2001.).)
While renzapride is far from the only competition to Novartis' burgeoning market dominance—Forest Laboratories Inc. , Merck KGAA , and Solvay SA , among others have competing drugs in mid-to-late-stage clinical trials—Palmer is optimistic about the compound's chances, citing the drug's potential in at least two of the main IBS patient populations (mixed and c-IBS) as well as some differentiating features in terms of renzapride's primary pharmacology.
The rest of Alizyme's clinical pipeline is less commercially mature—and hence riskier. "I always say this business is about risk, and this is our riskiest project," says Palmer of Alizyme's ATL-104, a novel plant protein treatment for mucositis nearing Phase IIa proof of concept trials. In 1996 the company licensed the IP to it and other plant lectin protein-based therapeutics from Rowett Research Institute. ATL-104 stimulates epithelial cell division to treat the condition, which is common in cancer patients receiving chemo- or radio-therapies. "Our compound looks nice in laboratory models and Amgen Inc. has recently put out data suggesting that stimulating epithelial cell division is a good thing for mucositis, but we've still got a fair amount of clinical risk—although it produces the same cellular effect, will it work in humans? We'll find out next year."
Alizyme investors won't have to wait that long for results from a Phase IIb study of the lipase inhibitor ATL-962, which are also expected in October alongside renzapride data. But the obesity treatment market, which despite dwindling sales is still dominated by another lipase inhibitor, Roche 's orlistat (Xenical), is far from a sure thing. Only an improved side effect profile versus Xenical—which owes its failure to reach blockbuster status to some uncomfortable gastrointestinal consequences—will make ATL-962 an attractive licensing candidate, say analysts. Even so, with more than a dozen anti-obesity compounds in late-stage clinical development—such as Regeneron Pharmaceuticals Inc. 's second-generation ciliary neurotrophic factor Axokine and Pfizer Inc. and Phytopharm PLC 's appetite suppressant P57 [See Deal], pharmaceutical firms may be wary of in-licensing a me-too drug, potentially dampening Alizyme's chances for a blockbuster deal. (See "The Battle For the Bulging," START-UP, December 2001 (Also see "The Battle For the Bulging" - Scrip, 1 Dec, 2001.).)
Balancing Act
Alizyme's four clinical candidates will be as vulnerable to development, regulatory and commercial disappointment as any other biopharmaceutical firm's, although the company has yet to suffer a high profile clinical setback. But Palmer notes that in 1996, Alizyme started out with ten compounds or ideas. "The trick, I suppose, is to weed things out before they raise too many expectations, and before you spend too much money on them," he says.
The other trick is to stick to your guns. Alizyme has remained true to its outsourcing model—shunning discovery research, relying on in-licensing to stock its pipeline—from day one, even in the heady biotech boom days when low-risk wasn't fashionable. Other firms with similar mindsets have wandered off the path, in part stirred by a desire for more control over earlier stage work, but mostly out of necessity. As in-licensing candidates become rarer and more expensive in an environment of declining R&D productivity, there are only so many ways to stock a product pipeline.
"Antisoma was very much a virtual company when they first started, now they do slightly more of their own research than they've done previously," notes Simmonds. "Most virtual companies eventually tend to wander off into doing different things."
Alizyme isn't likely to be distracted—yet. Palmer is confident that for now, there are plenty more in-licensing candidates available. "There are a lot of small companies and academics with a lot of good science going on, not all of which is going to get funded by any means. So why spend several million pounds of shareholders money to buy a company with people and early stage projects with a long way to go, when we can spend a million pounds to buy something in—at least if you pay for something up front, you know what you have."
A lot will likely depend on the risk appetite of Alizyme's investors. Alizyme could license out a handful of products, then simply sit back and take a royalty stream. "There's no particular reason why they'd have to keep going—the investors would see a return because they haven't raised and spent that much money to get where they are," opines one analyst. Indeed, in current conditions, investors are no longer keen to finance discovery research to mine for blockbuster potential.
But the combination of out-licensing success at Alizyme and a general thaw in the industry climate could fundamentally alter Alizyme's outlook. And over the years, if there's been a criticism of the company, say analysts, it's that Alizyme has no real control over the source of its future clinical pipeline.
Alizyme is unlikely to ever employ the shots-on-goal strategy of some of its peers; any move toward early stage research remains years away, according to Palmer. "It's not necessary for us to spend money on a discovery arm now, although it might be in the future," he argues. Indeed, as its current clinical projects advance towards the marketplace, find partners, and become less risky, Alizyme could afford to build or buy a discovery engine as a way to balance its portfolio risk. It may even have to, in order to keep investors interested.
Alizyme's long-term prospects will become a lot clearer once key late-stage clinical data comes through later this year. "By the end of this year, we'll see what we are—we may be a company with three products in or going into Phase III—that would be a tremendous achievement," says Palmer. "But we might also have just one product, or all points in between. It's a very big year for us."
In the meantime, in an environment that appears to be waking up to the need for consolidation, Alizyme's relatively late-stage pipeline has likely attracted interest from cash-rich firms eager to bulk up anemic development programs. With a market cap of just £42 million, Alizyme may look cheap, but any offer to buy the company would likely have to take into consideration the value of the out-licensing deals investors are expecting. And with its £16 million financing behind it, the firm can afford to hold out.
--by Christopher Morrison