Aye for an Eye

Well isn’t this just what the VC ordered?

Bausch & Lomb’s move to acquire privately held eyeonics Inc. certainly will be welcome news to medical device VCs wondering who the next acquirer will be. Last year wasn’t a good one for VCs who counted on mid-tier device companies to make up for the lazy pace of traditional acquirers.

Instead of emptying VC portfolios, these folks bought each other. Hologic merged with Cytyc. EV3 bought Fox Hollow. St. Francis bought Kyphon before being acquired by Medtronic. “If I come out of a meeting and find out that someone bought Arthrocare I’m going to shoot myself,” one VC told IN VIVO Blog at the JPMorgan conference.

A bit of hyberbole, perhaps.

Nevertheless, with public investors being somewhat squeamish VCs need smaller companies like Arthrocare to step up their acquisition pace. Now Bausch & Lomb, fresh from its acquisition by Warburg Pincus, may be prepared to help out, at least in picking up a few of the more mature or promising eye companies out there.

This is a fairly new strategy for B&L. In the past, Bausch & Lomb has shown a stronger interest in acquiring pharmaceutical companies with the acquisition of a controlling interest in Shandong Chia Tai Freda Pharmaceutical Group, the leading ophthalmic pharmaceutical company in China, as being one of the biggest. So the move toward devices is encouraging.

Bausch & Lomb does have a considerable surgical business. It offers a line of intraocular lenses (IOLs) and phacoemulsification equipment (used to remove a patient’s natural lens) as well as disposable surgical packs. Sales of cataract and vitreoretinal surgery products accounted for 17% of the company’s $2.292 billion 2006 revenues. It’s the third largest manufacturer of these products behind Alcon and AMO, according to the company’s 2007 annual report.

But sales of these products rose only 1 percent, according to the report. A pittance compared to what eyeonics is doing.

Eyeonics developed and sells its crystalens IOL, the only FDA approved accommodating IOL used to treat cataracts. The crystalens IOL replaces the eye’s natural lens and has been implanted in more than 95,000 eyes worldwide, according to the company.

In a statement, Ronald L. Zarrella, chairman and CEO of Bausch & Lomb, says the acquisition "immediately places Bausch & Lomb into the rapidly expanding premium IOL market." The release reports that market is growing more than 20% annually. "In 2007, eyeonics generated revenues of approximately $34 million, an increase of 100 percent over the prior year revenues of approximately $17 million. Its crystalens IOL is estimated to represent approximately 30 percent of the presbyopic IOL market in the United States," according to the release.

The acquisition automatically adds 10% to the surgical group's revenues. Still, the company has run into some challenges. Check out our MedTech Insight report here. For an early profile of the company click here.

The good news is another potential buyer is in the market. The less-than-good news is eyeonics is no spring chicken. Founded in 1998, the commercial stage company last summer filed to raise $86 million in an IPO. Yet it opted to be acquired. Venture investors include Versant Ventures, Brentwood Associates, Pequot Private Equity, ABS Ventures, and Entrepreneurs Fund.

Versant's Bill Link first invested in the company when he was still with Brentwood. (Link later would leave Brentwood to form Versant.) Together, the two groups owned 33% of the company.

So did eyeonics sell because its IPO chances were iffy? Or did Bausch & Lomb make them an offer literally too good to refuse? (So-called twin-tracking certainly happens in both the device and biopharmaceutical side of the industry.) Until we find out the terms, IN VIVO Blog is leaning toward the latter.

In any case, it's good to have another buyer out there.

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Genentech Gets Tough: Who is the Target?

How do you crack down on compounding labs without adversely affecting your key customers? That is the tricky question Genentech is grappling with as it tries to shut off the primary source of supply for bevacizumab (Avastin), for ophthalmologic use against neovascular macular degeneration.

An October 11 letter from Genentech to “retinal community” members makes the compounding pharmacies the clear target. “As of November 30, 2007, Genentech will no longer allow compounding pharmacies to purchase this product directly from wholesale distributors,” the company declared.

In response to questions about potential limitations on supply to hospital pharmacies, the company emphasizes that is not taking any action to limit that source of supply. A Genentech spokesperson says there will be no allocations to hospital pharmacies to try to restrict spillage from the use of VEGF in oncology to the ophthalmic markets.

If ophthalmologists want to get Avastin from hospital pharmacies, that route will remain open, a company spokesperson explains.

That makes the October 11 announcement appear to be a surgical strike by Genentech against one class of trade – a class that the company argues has raised quality control issues. Genentech points out that it has the Food & Drug Administration on its side in questioning use of compounded Avastin: a December 4, 2006 warning letter from the agency to the New England Compounding Center; and FDA inspection observations at Genentech which note continued off-label ocular use of Avastin.

But is Genentech really restricting this fight to compounders? By cutting off the supply of the inexpensive ($17 - $50 per shot) Avastin, the company will be moving more of the ophthalmologists to the $1,950 per moth (ranibizumab) Lucentis.

Genentech is shifting a large inventory risk to its customers: the wholesalers and ophthalmologists. The firm says it is not changing payment terms from its current 85-day dating for the product. It could have extended the payment terms to soften the blow of forcing more doctors to the higher-priced version of anti-VEGF treatment. The higher priced product also puts the eye doctors in the uncomfortable position of trying to collect average co-pays in the $400 per month range.

The tough approach to its customers is exacerbated by the context of the extended argument that the company has been having with segments of the ophthalmologic community over the potential for Avastin and the effort from the specialty community to support a comparative trial of Avastin and Lucentis. Genentech has helped to make that trial difficult for the eye doctors and the government to undertake. In the fight, the company has created bad feelings among a number of opinion leaders in the small customer class of ophthalmologists.

The move against compounders also shifts liability risks as well as carrying costs. One close observer of the field says Genentech is making this move to isolate the company from liability and make ophthalmologists fully liable for any adverse events that could arise from using Avastin in the eye.

The observer notes that there is an ongoing study of Medicare macular degeneration claims at Duke (the AWARE study under Scott Cousins) to try to pick up the frequency of untoward events from excessive anti-VEGF from injection in the eye. The study uses date from the Chronic Condition Warehouse database, managed by a Medicare contractor, the Iowa Foundation for Medical Care (IFMC), a Medicare contractor. Genentech claims that Lucentis has been designed as an antibody fragment to bind more specifically in the eye and avoid appearing systematically.

If Genentech can shift Avastin ophthalmic sales to Lucentis, the investment community will be impressed, but the cost might be forcing more financial and liability risk on its customer base.

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Forsight Scores Big

With the Red Sox and Indians facing off in the American League Championship Series, IN VIVO Blog would like nothing more than to toss in an old baseball metaphor to describe how well investors in Forsight Labs second company did with their investment, but even the ever popular grand salami falls a bit short.

So with the shameless favorite sports team plug firmly inserted, we can go on to tell you that Forsight Newco II, founded just 10 months ago, raised approximately $5 million from investors to cover costs of product development and some early clinical testing of the company’s drug-eluting ocular punctual plug, a technology that can deliver drugs through the eyes’ own tears. For a video showing the product go here.

Now, just 10 months after the company’s inception, QLT stepped forward to pay $42 million upfront for the company. But the potential returns don't stop there. QLT also agreed to pay $5 million payment upon the initiation of phase III clinical trial for the first product; $20 million for the first commercialization of a product; $20 million for the commercialization of a second product; and $15 million on first commercialization of each subsequent product.

For those keeping score at home, that’s $67 million if QLT succeeds in getting one of these products on the market; $87 million if it gets two; $102 million for three and so on. To be sure, all of these potential payments are years off. QLT will need a few years to run the plugs through clinical study and isn't likely to get a product to market until 2011 or 2012.

QLT management is being criticized for overpaying, but Bob Butchofsky, president and chief executive officer of QLT, says the company’s punctual plug, which is inserted in one of the two ducts that drains tears from the eye, will put QLT in position to challenge the $6 billion eye drop market.

Unlike standard punctual plugs, which only slow the drainage of tears from the eye as a means of treating dry eye, QLT’s new plug contains a drug core. As the tear film flows against the plug, the drug is released delivering a steady stream of drug. The Newco identified glaucoma as a first application for the device, but the plug could be used to deliver any drugs currently delivered as eye drops. “I believe this is a start of a major change on how we treat ocular disease,” Butchofsky told analysts in a conference call this morning.

Others aren’t as impressed. QLT shares hit a 52-week low today after the deal was announced. An item on the Globe and Mail web site reported:

National Bank Financial analyst Prakash Gowd calls the deal pricey, citing “very limited data supporting the theoretical benefits of [ForSight’s] punctal plug technology. Moreover, he figures the technology is likely to be a “very competitive area and patents have not yet been clarified.”

QLT must be high on the technology as it made the only real bid for the company. Forsight CEO K. Angela Macfarlane says while Forsight had talks with other companies about its various programs, Newco II wasn’t being shopped around. (Curious about Forsight's first product? Go here.)

Robin Bellas, general partner at Morgenthaler Ventures, one of the investors, called the acquisition, "quite a surprise. We always expected to raise another round. It was unusual that QLT came to us and expressed strong interest in the program. We had no plans to sell it.”

For more about Forsight Labs go here.

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Seeing Double: Ophthotech's $36mm Series A

IN VIVO Blog has several different varieties of deja vu.

SV Life Sciences, HBM BioVentures, and Novo AS have just funded an ophthlamology start-up with a $36 million Series A that will pay for the acquisition of two interesting drug candidates. Didn't that happen last year? It sure did, in May 2006. The company was Lux BioSciences.

OK, how about this: David Guyer, MD, and Samir Patel, MD, have teamed up as founders of an ophthalmology specialist based on in-licensed aptamer drugs and hope to make headway in the tricky macular degeneration space. SV (then Schroder Ventures Life Sciences) was an early investor. No, no, no, that was way back in 2000. Eyetech, right? Absolutely.

Well, talk about getting the band back together: On Monday, BioCentury broke the news that SV and co. were launching Ophthotech with a $36 million Series A, which Patel will helm as CEO and co-founder Guyer (who is a venture partner at SV and also on the board at Lux) will chair. Everything old is new again. Next you'll be telling us the Spice Girls are getting back together. What? Nooooo!

The cash will pay for the in-licensing of two aptamer projects, each of which should be in the clinic by the end of the year, SV managing partner Lutz Giebel, PhD, told IN VIVO Blog.

The first asset comes from OSI Pharmaceuticals' troubled and for-sale ophthalmology group, which just happens to be Eyetech (!), Guyer/Patel's former outfit they somehow had convinced OSI to pay the better part of $900 million for back in 2005--to the market's, and now OSI's, chagrin. That deal brings in an old Eyetech anti-platelet derived growth factor (PDGF) aptamer program with the lead compound E10030, which Giebel calls "an IND in a box," for a familiarly undisclosed mix of up-front cash, milestones, and royalties.

The second deal brings in more aptamers, this time from Archemix. (Funnily enough, Archemix got its start by licensing in the therapeutic rights to Gilead Sciences' aptamer technology back in 2001, which Gilead had acquired along with NeXstar in 1999. The only therapeutic aptamer rights Archemix didn't get turned out to be Eyetech's Macugen.)

Ophthotech and Archemix are also not releasing terms of their deal, which gives Ophthotech worldwide rights to all ophthalmic uses of Archemix's aptamers targeting the C5 component of the complement cascade, a hallmark of many inflammatory diseases.

Beyond all the coincidences, what seems a little strange to us is that these products didn't wind up in Lux BioSciences, and that basically the same investor base felt the need to reinvent the wheel by starting up another company. At this point, Guyer, HBM's Axel Bolte, and Novo's Thomas Dyrberg all sit on Lux's board of directors as well as Ophthotech's.

True, Lux is for the moment focused on uveitis and corneal transplantation and is further along the value chain than these preclinical assets--LX211, the company's lead uveitis treatment in pivotal clinical trials, just received fast-track designation from the FDA. But Lux has told us before that it intends to get into back-of-the-eye diseases like AMD in the future, particularly as it contends that AMD is at least partially an inflammatory disease, which is in Lux's sweet spot.

Perhaps the firms' management and investors weren't so keen on diluting Lux's focus; a successful LX211 pivotal trial could provoke a quick takeout by Big Pharma, and keeping managment's eyes on the prize could have been a factor. "Lux had looked at the C5 aptamer from Archemix, and stage-wise, it just didn't fit," Giebel tells us.

He should know: he led SV's investment in Ophthotech but has not taken a seat on the board, since he remains on Lux's board (besides Guyer, SV's representative on the Ophthotech board is Henry Simon, PhD, partner at SV and former chairman of [you guessed it!] Eyetech). Giebel downplays the multiple potential conflicts of interest between the two companies, saying that while there's always potential for that sort of problem, there are many ways of managing it.

We reached Lux CEO Uli Grau, PhD, to get his take. "It is a bit of an unusual situation," he agreed. "And we share large parts of our boards and even though the two companies are positioned somewhat differently, there might be times where we'll have a tough time carving out exactly what is whose territory."

Nevertheless, he says, "I'm a little relaxed because we have a tremendous relationship with our board, the members are honest and trustworthy, and there's no indication that there is a problem."

Lux's take on the Archemix project? "You have to ask yourself," says Grau, "complementing a late stage pipeline with an interesting but early-stage approach, is that giving us value recognition by the time we are looking at a strategic exit?"

Lux can also take comfort in the presence of Prospect Venture Partners--the one investor in Lux that hasn't also invested in Ophthotech. The smiling guy on the right here is David Schnell, MD, managing director at PVP and on the board at Lux. IN VIVO Blog thinks of him as the enforcer. If Lux identifies new opportunities it doesn't want the competition to know about (and however nice everyone involved seems to want to play, the companies are competitors), Prospect provides that additional muscle.

Oddly enough, only a few years ago, it would have been a sure thing to keep all these assets under one corporate roof, because the VCs would have been hoping for an IPO exit, and investors like to see multiple clinical projects at IPO hopefuls. Now that M&A is the preferred exit, the assets are siloed. For now.

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