The curious solution to Curis’s pipeline conundrum

Biotechs lucky enough to see one of their products come to market often face a tricky question: what to do now? One such company, Curis, yesterday provided investors with its answer: mortgage the cash-generating asset and buy something new.

With just two pipeline projects to its name, Curis has effectively given up royalties on its Roche-marketed basal cell carcinoma drug, Erivedge, in return for Roche’s early-stage oncology project GDC-0917. Although the deal’s financial metrics are somewhat alarming, investors are upbeat, and Curis’s depressed stock closed up 4% yesterday.

Central to the deal is a $30m loan – taken at 12.3% – that has been routed through a new legal entity and secured against Erivedge. This will fund a $9.5m up-front payment to Roche to gain access to GDC-0917, as well as paying for further clinical work.

Curis insists that 12.3% is low relative to other royalty transactions, which carry effective interest rates in the mid to upper teens. However, Peregrine Pharmaceuticals recently managed to get a $30m loan at around 8%, albeit secured against all of its assets.

IAP antagonist

GDC-0917 is a small-molecule IAP antagonist. IAP – the initials stand for inhibitor of apoptosis – comprises a family of proteins that Curis says are instrumental in cancer cells becoming resistant to drugs.

The trigger for the deal seems to have come from both companies. Curis said it had been looking into this pharmacological mechanism with a view to making an acquisition, and had even identified a suitable company to buy, but the deal did not come through. EvaluatePharma reveals several companies working in this field.

Meanwhile, Roche has recently been pruning its pipeline (Roche R&D cull highlights pressure on pipelines to perform, June 27, 2012). Curis said Roche had approached it six months ago looking to do a deal, although some might wonder why the Swiss pharma giant would want to give away anything other than a dud.

Curis points to a recently completed phase I study of GDC-0917 carried out by Roche that yielded “highly promising” tolerability data and apparent signs of antitumour activity. Full results will be presented at a cancer conference in mid-2013.

The biotech firm said it would consider doing single-agent studies as well as combining GDC-0917 with standard-of-care chemotherapy in several tumour types, although a decision on phase II was still a year away.

Giving up royalties

The early data aside, it might come as a surprise that Curis is giving up royalties on the recently approved Erivedge (One big step forward one small step back for hedgehog inhibitors, January 31, 2012).

It is odd also that, since Roche is on the other end of both assets, a straight exchange of the Erivedge royalty for GDC-0917 was not done without recourse to third-party debt. But apparently there was “complexity in terms of control over Curis that [Roche] wasn’t comfortable with”, Curis said, and there might be legal or tax implications.

The Erivedge royalty Curis receives from Roche will effectively go towards servicing the $30m loan, after paying a 5% earnout to Erivedge’s academic originator. This is similar to royalty-financing transactions in which entities like Paul Capital or DRI Capital specialise.

Curis expects to pay off the interest and principal within four years, based on Erivedge generating in-market revenue of $80m next year, $160m in 2014 and $245m in 2015. This is well in line with EvaluatePharma’s consensus forecasts, which see sales of $353m in 2015 and $543m in 2018.

The biotech company ended its third quarter with $42m in cash, and expects the loan to boost year-end funds to $56-57m, which will fund it to 2015 in the absence of any milestones related to Erivedge. Milestones, some of which are possible next year, are the icing on the cake, lying outside the loan deal and accruing directly to Curis.

While this mitigates some of the deal’s harsher aspects, investors might now have to bank on the company getting lucky a second time.

To contact the writer of this story email Jacob Plieth in London at [email protected]