Yamanouchi Deal Brings MediGene Breathing Space

MediGene's recent licensing deal with Yamanouchi buys the German biotech time, but does little to strengthen its long-term finances. For this, MediGene will likely have to brave the cold waters of the German capital markets. It will be the first biotech to do so since Germany's growth market collapsed in 2001.

There are early signs of Spring in the UK biotechnology market, but Germany's sector remains somewhat wintry. The continued downturn has forced the handful of companies that are still alive into radical cost cutting and restructuring programs.

Medigene AG is no exception. Following two damaging late-stage failures over the last two years and with little prospect of raising additional public funds, MediGene has extensively restructured its business to eke out its limited cash. The company has refocused on cancer, spinning out its costly cardiovascular research and development into a new, separately funded company Larnax GMBH [See Deal], cut staff and temporarily suspended early stage clinical programs.

Yet despite all the cut-backs, MediGene still has just over one year's cash. Which means for now, it has little choice but to base its decisions primarily around short-term survival tactics rather than long-term growth strategies.

MediGene's recent deal with Astellas Pharma Inc. in part illustrates this point. The transaction, in which the Japanese company licensed European marketing rights to prostate cancer therapy Eligard, an extended release formulation of leuteinizing hormone-releasing hormone (LHRH) agonist leuprolide, provides the biotech with up to €23.5 million ($30 million) in milestones (€4 million of which was payable upfront) and royalties of about 30-40%, according to analysts' estimates [See Deal]. Yet it also forces the German biotech to abandon its original plan of marketing Eligard alone—at least in Germany. This would have allowed MediGene to recoup maximum profits from the product, which it licensed in from QLT USA Inc. in April 2001 [See Deal], and sharpen up its downstream commercialization capability in time for fruition of its earlier-stage pipeline.

Even though MediGene had little choice but to out-license Eligard, it appears to have secured a good partner. Yamanouchi may not be the biggest pharmaceutical firm in Europe, but in the urology market, it is second only to Pfizer Inc. in sales force terms with over 800 reps across Europe and the largest sales force in Germany, Europe's biggest urology market. What's more, Yamanouchi is likely to be particularly committed to Eligard, given that a core component of the company's strategy is to further expand its urology franchise in Europe. The company already markets tamsulosin (Omnic/Flomax), the leading therapy for benign prostatic hyperplasia (BPH); with Eligard and its recently approved treatment for overactive bladder, solifenacin (Vesicare), Yamanouchi will have a full complement of products to offer Europe's specialist urology-product prescribers, with which it already has strong contacts.

Still, however promising the partner, the deal doesn't extract MediGene from its financial bind. According to Samir Devani, biotechnology analyst at CODE Securities, the economic terms are in line with industry averages given the likely size of the product—estimated to reach peak sales of €50 million—but the ongoing royalty payments due to MediGene will not be enough to cover its R&D costs on an ongoing basis. Moreover, the milestones and royalties payable to Atrix, which analysts estimate at about €5 million and between 19% and 24% respectively, will cut into MediGene's income from Yamanouchi.

What's more, competition for Eligard will be stiff. The European market for LHRH agonists—estimated at about €500 million and growing at 6% each year—is dominated by Takeda Pharmaceutical Co. Ltd. 's version of leuprolide, Lupron, and AstraZeneca PLC 's goserelin (Zoladex), thus, even though Yamanouchi is a leading player in the urology segment, capturing market share will not be easy. "Sanofi-Synthélabo markets Eligard in the US and has taken about 6% of the market since launch in 2002 which gives us a fair indication of how well it's likely to do in Europe," says Devani. As such, he and other analysts estimate that the product, at €50 million in peak sales, will have less than a 10% share of the European market by 2010.

MediGene CEO Peter Heinrich, PhD, is far more optimistic, and reckons Yamanouchi could capture as much as half of the European market. The key to doing so will be through launching longer-lasting versions of the drug, since compliance is one of the most important issues among prostate cancer patients. At present, one-, three- and four-month formulations of Eligard are available in the US market and the four-month formulation is the bestseller. Atrix recently filed for approval of a six-month formulation of Eligard, which, if approved, is expected to become the favored formulation. MediGene has options to develop the four-month and the six-month formulations in Europe; should it exercise them, these products could indeed, with Yamanouchi's help, capture more than 10% of the market. But success will depend on timing: other firms, including Ardana PLC are developing longer-duration formulations of LHRH agonists, although Ardana's are still in Phase II. (See "Getting Late Stage Products Early," In Vivo Europe Rx, September 2002 (Also see "Getting Late Stage Products Early" - In Vivo, 1 Sep, 2002.).)

Testing the Waters

Whatever Eligard's ultimate commercial potential, the Yamanouchi deal highlights what MediGene has achieved despite the inclement climate. It has already become the first German biotech to get a product approved in Germany, and once Eligard is launched (expected in Q2 2004), the company will become the first German biotech to have brought a drug to market. Through in-licensing and internal R&D, MediGene has also built one of the most advanced pipelines in German biotech, including a Phase III compound, PolyphenonE, an extract from green tea leaves, for the treatment of genital warts, in-licensed from Epitome Pharmaceuticals Ltd. in 1999 [See Deal]. (See Exhibit 1.) And now, the company has proved itself capable of signing a strong, committed pharma marketing partner for Europe.

These strengths, coupled with good data from the European arm of the PolyphenonE trials expected soon, may help increase MediGene's chances of attracting investor interest and raising cash if it has to go back to public markets over the coming year, as most analysts expect.

Should it decide to attempt a follow-on fundraising, MediGene will be the first company to test the German stock market's appetite for biotechnology investments since the 2001 crash of the Neuer Markt growth exchange, which has since been shut down. Early signs of a recovery in the UK, where companies such as Ark Therapeutics Group Ltd. have announced their intention to float, aren't yet evident in Germany.

Broader political and economic uncertainty in Germany is keeping investors away from high risk stocks generally; in the biotech sector, analysts claim that even the most courageous investors will need to see product approvals and launches—proof that the biotech business model works—before putting money into the sector again.

Once Eligard is launched, MediGene will have provided some of that proof. And by 2005—when some venture capitalists expect interest to return, albeit cautiously—MediGene will likely boast a marketed first product and a second product in registration. These achievements, coupled with tight ongoing cash control and a lean company structure may be enough for MediGene to win additional funds.

MediGene's deal with Yamanouchi may represent only a short life-line in financial terms, but in providing the vehicle (and a strong one at that) for Eligard to get to market, it could still allow the company to achieve its aim of becoming the first German biotech to get a product launched. This success may, in turn, help warm up Germany's public markets, ultimately putting MediGene and other German biotechs onto more solid financial ground.

--by Hazel Dawson

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