Less than two weeks after committing its first £40 million ($60 million) to UK-based specialty pharma firm Archimedes, Novo Growth Equity on March 15 announced its second investment—in another European specialty pharma firm. This time it's Sweden's Orexo, a listed group focused on pain and inflammation, to which Novo has committed SEK206 million (about $30 million) through a share purchase and a SEK111 million convertible bond.
So should the rest of Europe's specialty pharma firms be rubbing their hands in glee, hoping they're next? Not necessarily, says Ulrik Spork, Managing Partner at Novo Growth Equity, which was set up in early 2009. "As we build [our portfolio] we won't be as narrowly-focused as these first two investments may seem. We'll be bringing in more diversity in the investments we do," he told EuroPharmaToday.
But the focus on lower risk, commercial (or near-commercial) entities will remain, Spork continues, as will Novo's minimum $20-50 million investment size and its requirement for a significant control over the company in question.
Not Filling a Funding Gap; but Strengthening Orexo's War-Chest
That said, there are significant differences between the investments in Archimedes and Orexo anyway (even though in both companies, the leading drug is a formulation of fentanyl for breakthrough cancer pain). In the case of Archimedes, "we were filling a funding gap," recalls Spork, and the investment was pin-pointed specifically to help the company establish a presence in the U.S, a strategy itself focused specifically on cancer pain treatment PecFent (nasal fentanyl), to which it has global rights ("The Pink Sheet" DAILY, Mar. 12, 2010).
In Orexo's case, Novo's funds will provide "a stronger war-chest and more financial and strategic flexibility" to the group," says Spork. Orexo wasn't exactly flush with cash: it had SEK87.4 million (about $12 million) at the end of 2009 and is still loss-making. But revenues-reported as SEK236 million for 2009-are growing. Orexo's largest marketed product is cancer pain treatment Abstral (sublingual fentanyl), which was launched in Europe in 2009 and in registration in the U.S.
The money will allow Orexo, which currently uses distribution partners for its drugs in all territories except the Nordic countries (where it has a joint venture with UK-based ProStrakan), to "develop our own infrastructure in some areas," says CEO and Chairman Torbjorn Bjerke.
Precisely which geographies they might invest in hasn't yet been decided, Bjerke continues, and will in part depend on which new products Orexo in-licenses or develops in-house-activities which this funding will also help accelerate.
The Swedish group already has a half-dozen or so formulation technologies in-house, including a sublingual tablet technology (which support Abstral and marketed insomnia drug Edluar (zolpidem)), fast-dissolving tablets, a liposomal nasal spray technique and solid syrup technology. Several of these came via the company's 2009 acquisition of UK-based PharmaKodex, originally a joint venture between Unilever's venture arm and pulmonary delivery firm Vectura. As such, "we don't feel a big need for further new technologies," says Bjerke.
More Assets Needed
But he does acknowledge that the company needs more assets-particularly if the plan is to invest in a commercial network. Orexo's pipeline includes OX17, which combines an H2 receptor blocker with a proton-pump inhibitor, slated to enter Phase III later this year. But that's already in Novartis' hands. Several other Orexo pipeline compounds, including the Phase III-ready nasally-administered cetirizine, are also partnered (in this case with Meda). OX219, a buprenorphine and naloxone combination about to enter the clinic for opioid addiction, would potentially fit the "go-it-alone" bill, according to Bjerke. Most of the rest of Orexo's un-partnered assets are early-stage (pre-clinical or formulation stage).
That means Orexo needs to in-license-yet to maintain its low-risk profile, it needs to find late-stage assets. That's not easy-or cheap. It's why Spork and other private equity investors like Warburg Pincus increasingly prefer to invest in commercially-focused spec pharmas that have the option, usually via proprietary delivery technologies, to create their own pipeline as back-up to the in-licensing activity traditionally associated with the model.
If you are going to in-license, though, it's much easier with an additional $30 million in the coffers.
Structured for Maximum Ownership, Minimum Dilution
The structure of Novo's investment-as an equity purchase and a convertible bond-came about partly by necessity and partly by design. "We wanted a 20 percent ownership stake," says Spork, but not all of Orexo's existing shareholders wanted to sell. Plus, pre-emption laws in Europe, although they vary by country, tend to set an upper threshold of approximately 10 percent of issued share capital before pre-emption rights kick in. (Such rights grant existing investors in European companies the right to avoid dilution when new shares are issued by increasing their own stake.)
Hence Novo is purchasing 10.7% of Orexo's share capital from venture capitalists Apax Partners (which is no longer involved in health care) and SLS Invest. The rest it may acquire in future via converting its bond. The bond's conversion price is SEK 47.50, a premium of about 25 percent to Orexo's closing price on March 12. It's set up to grant Novo the right to convert the bond only once Orexo's share price exceeds the conversion price by 50% during a certain period. If the bond isn't converted into equity, it will be repayable in full on 31 March, 2015 with a fixed rate annual interest of 8 percent.
As such, Novo's committing its funds with the confidence that they will lead to a significant share price appreciation, at which point the private equity firm will be able to augment its holding. Both parts of the transaction are effectively subject to approval at a March 31 Extraordinary General Meeting.
Novo's Growth Equity Fund is part of Novo A/S, which was set up to manage the Novo Nordisk Foundation's assets and has over $10 billion under management. Despite its name, the Growth Equity fund isn't really a capped fund, it's essentially an open mandate to invest in late-stage companies. That structure also allows a long-term approach; Spork talks about a four-to-nine-year time-horizon. Nor are return expectations sky-high; they're in the modest 1-3x range, rather than the VC-style 5-10x.
Spork expects the group to invest about $200 million per year, about double what Novo already invests in early-stage companies.
- Melanie Senior (m.senior @elsevier.com)
