KaloBios's stumbles provide a lesson to enthusiastic IPO investors

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The ongoing misfortunes of KaloBios will do little to help the queue of private drug developers still hoping to climb through the IPO window. Its short public life already contains textbook examples of the risks that early-stage companies face: clinical unpredictability, the swift withdrawal of market support that cuts off further funding and the vagaries of bigger partners.

The antibody researcher floated in 2013 at $8 a share with two promising clinical-stage projects and a top-shelf partner, but this week announced its second major disappointment in the form of an exit by Sanofi Pasteur. After the failure of its lead asthma project in January it is not surprising that investors have also chosen to head for the door. Shares dropped 13% this morning to $1.68, giving the company a market value similar to its cash balance.

Non-starter

The company’s Nasdaq debut in January 2013 added $70m to its coffers; KaloBios has an antibody engineering technology that has yielded three clinical stage candidates to date.

Its previous lead project, KB003 for severe asthma, was effectively scrapped 12 months after the company floated (KaloBios takes its medicine and cuts losses in asthma, January 30, 2014).

And now Sanofi has walked away from KB001-A, an antibody against Pseudomonas aeruginosa, a bacterium that causes particularly troublesome pneumonia infections for intensive care patients or those with cystic fibrosis.

Sanofi had been working on the antibody in pneumonia for over four years without progressing beyond epidemiology studies and a trial in healthy volunteers. KaloBios claimed that it had pursued the transfer of rights, and the company was no doubt motivated to get its project back from an uninterested partner. But the reasons for Sanofi’s lack of interest will be an ongoing concern for investors.

The French vaccines giant had developed certain manufacturing know-how, however, and KaloBios will take all this work and data back in return for a 10% sales royalty, capped at a cumulative $40m, and up to $40m in payments out of any future licensing agreements.

On a call yesterday KaloBios’s chief executive, David Pritchard, said the company would pursue a new partner now that it had full global rights to the antibody. KaloBios hopes to be able to retain US commercialisation rights in cystic fibrosis, but remains open to options.

Wins needed

Given that the company is in a weak negotiating position, it will need to keep an open mind. KB001-A is far from proven in either indication – clinically or commercially – and much work remains. KaloBios is slightly further ahead in cystic fibrosis; it recently completed recruitment into a 180-patient study that should yield results in 2015.

Sanofi won fast-track designation in the prevention of ventilator-acquired pneumonia, which could tempt potential partners to take a closer look at the project.

But all investors can do now is sit back and wait to see what the industry makes of KB001-A; it is hard to imagine firm commitments emerging before more data are available, and the economic value to KaloBios is already diminished by the payments due to its former partner.

The company does have a third shot on goal: KB004, anti-EphA3 MAb with potential in treating haematological malignancies and solid tumours. A phase I/II trial is enrolling patients with myelodysplastic syndrome and acute myeloid leukaemia.

A win with either asset is now desperately needed. The company ended March with $65m in the bank, and with a market cap of $54m today it will be virtually impossible to raise further funds via equity for now.

Executives can talk up the regained value and new partnering opportunity, but this is not the story that shareholders were sold on flotation. As investors continue to pull companies through the IPO window, KaloBios shows how quickly fortunes can change.

To contact the writer of this story email Amy Brown in London at AmyB@epvantage.com or follow @AmyEPVantage on Twitter

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