Pharma’s Cutting Edge Vol. 4 Number 4 - April 2006
The Future of Biotech Funding? A Hedge Fund Battles a Biotech for Control
I don’t recall ever reading about a Board member’s attempt to lead a coup d’etat against a standing Board in the development-stage biotech arena. Usually such public battles are reserved for larger companies with real profits or at least the potential for real profits in the near future. And usually the group trying to take control is a private equity fund (or individual) looking to shake up a firm via merger or dissolution, hoping for a quick return on investment–the so-called corporate raiders.
Something very different than the norm is happening in Vancouver, where AnorMED’s board is under attack from a hedge fund: Baker Brothers Advisors and Felix Baker in particular. The story makes for some interesting reading, but the real interest to industry is the possible precedent being set. Hedge funds increasingly take large positions in development-stage healthcare companies. That’s no surprise given the large influx of cash into hedge funds over the past decade. Combine cash from powerful investors with a need to out-perform traditional investment funds, and these funds are no longer merely influential investors via the strength of their holdings. They’re becoming increasingly willing to exert influence over how their investments are managed. AnorMED’s fight with the Baker brothers is merely the most glaring example of this trend.
The story of this attempted coup apparently began some time prior to last November when AnorMED engaged in financing with an underwriting syndicate co-led by Raymond James Ltd and BMO Nesbitt Burns Inc. in which the underwriters purchased 6,250,000 Common Shares from AnorMED and sold the shares to the public at a price of $4.00 per Common Share (CDN), representing an aggregate issue amount of $25,000,000. At the time of the announced bought deal, AnorMED was trading at $3.50 (USD) on the AMEX, yielding a deal discount to market of $0.10 USD.
Following the finance announcement, the Baker brothers (Felix and Julian), whose funds owned 23% of AnorMED, filed a Schedule 13D with the SEC, in which they indicated their displeasure with the decision:
“Because of what the Filing Persons believe to be a questionable decision of the Board of Directors and management with respect to its most recent bought deal financing, the Filing Persons believe that it may be necessary to evaluate certain of their options with respect to their investment in the Issuer in an attempt to ensure that future board decisions and management actions are in the best interests of all of the Issuer’s shareholders.
The Filing Persons strongly believe that the Issuer’s current stock price does not adequately reflect the potential value of the Issuer. In light of that belief, the Filing Persons may wish to speak to other shareholders to elicit and share views regarding operating and financing plans that would maximize shareholder value. The Filing Persons believe that such communications may be necessary to protect shareholders interests in light of the Board of Directors’ decision on November 21, 2005 to pursue a bought deal financing instead of a backstopped rights offering which had been proposed.
[Note that Baker Brothers were proposing to be the party responsible for backstopping a deal, which, according to
AnorMED, could have resulted in them gaining a significantly larger ownership interest in
AnorMED; this information wasn’t disclosed publicly until later. Also not disclosed in this filing was that Baker Brothers participated in the bought deal financing to increase their ownership position.]
We the Filing Persons feel strongly that the opportunity to effect a financing at the Issuer’s current valuation which would have protected all shareholders’ ability to participate (or to sell their right to participate) without discrimination would have been clearly superior from the perspective of the Company’s shareholders to the bought deal transaction which the Company just concluded. The views of the Filing Persons were communicated to the Board forcefully prior to the Board’s approval of the bought deal.
The Filing Persons intend to continue to evaluate their alternatives as circumstances develop.”
And so they did.
About one month later, the Baker brothers filed an amendment to the 13D calling for a special election that would replace AnorMED’s Board:
“Following the filing by the Reporting Persons [Baker Brothers] of their Amendment No. 1 to their statement on Schedule 13D, the Reporting Persons were contacted by David Scott, the Chairman of the Board of the Company. In their discussion with Mr. Scott, the Reporting Persons suggested that the composition of the Board of Directors be changed so that Felix Baker, who is already a director of the Company, would become Chairman and a majority of the members of the Board would consist of Dr. Baker and independent nominees suggested by him.
The Reporting Persons intend to continue to evaluate their alternatives as circumstances develop.”
Following this, AnorMED convened a special committee of its Board, sans Felix Baker (a Director), at which time it proposed to discuss Dr. Baker’s proposal but also some other important issues, as described in this letter from Felix Baker to David Scott, AnorMED’s Chairman:
“I feel the need to write to express my concern with some of the recent actions that the directors of AnorMED have taken in response to our requisition to call a special meeting of the shareholders to consider replacing the current board of AnorMED with a new board….
As representative of the largest shareholder of AnorMED, I was alarmed to hear on the February 7 conference call that the same Special Committee will ‘also be taking the opportunity to evaluate the Company’s current strategy and direction and review alternatives that may be available.’ Such actions clearly go significantly beyond the stated mandate of the Special Committee, which is to respond to the requisition.
I feel strongly that under any circumstances an overall evaluation of a company’s strategy and direction is a job for the company’s full Board of Directors…. Excluding me from these discussions, on the pretence that by questioning the judgment of the current board or as the only director who is a significant shareholder of AnorMED I am ‘conflicted,’ only proves that you and this board are uninterested in a process that values shareholder input or decision making which maximizes shareholder value.
…We see this as an attempt by the Special Committee to explore ways to change AnorMED’s strategy, possibly by selling or mortgaging the company’s assets, for the purpose of entrenching the current Board rather than dealing with shareholders’ concerns in a timely way.
…In my view, by apparently conferring extremely broad powers on the Special Committee that are totally unrelated to the requisition, and by adopting a Shareholder Rights Plan, the Board has reacted inappropriately to the fairly straightforward request of the Baker Funds to put the question of a significant realignment of AnorMED’s Board of Directors before all shareholders for a vote….
It would be an error of monumental proportions for the current Board or any committee thereof to consider or approve any significant transactions in the face of the forthcoming shareholders’ meeting. Consistent with the By-Laws of AnorMED, the Board had the ability to call the shareholders meeting to consider the one issue presented by our requisition at a much earlier date than it selected. In electing to defer the time of the shareholders meeting to the latest possible date and to divert the focus required by its mandate in order explore ‘alternatives’, the Special Committee and the Board have only reinforced the concerns which led our funds to request a significant realignment of the Board in the first place.”
So, as we can see, the Board was apparently worried that the Baker brothers were acting to acquire the company and they wanted to make sure that their poison pills were sufficiently potent and their golden parachutes packed and ready to be deployed. The shareholder rights plan was adopted on February 2nd.
On February 23rd, Felix Baker again corresponded with David Scott, Chairman.
“Dear David:
I am writing to you in response to the press release issued by AOnrMED Inc. on February 20, 2006. As AnorMED’s largest shareholder, we are deeply concerned by the misleading statements in the press release regarding the attempts to date by Baker Brothers Investments Funds to come to an agreement with the Special Committee of AnorMED on proposed and needed changes to the Company’s Board. We are concerned that the release may not have been appropriate under applicable Canadian securities laws governing proxy solicitations. By issuing this release as a corporate release on behalf of AnorMED, Inc. the Special Committee has again exceeded the boundaries of its mandate.
Our primary concern, as shareholders, is that the Board as currently constituted will fail to make decisions that will result in maximum value being realized for all shareholders of AnorMED….
Current shareholders have no reason to take comfort in the statement in the press release that ‘The willingness of the Company to replace and/or add new directors is consistent with AnorMED’s past practice.’ In fact, AnorMED’s past practice is not consistent with making significant changes to the Board. If ‘the Company’s goal has always been to recruit independent Directors, as necessary, that bring relevant business and industry experience and who will act in the best interests of all AnorMED shareholders’, as the press release states, then the current Board has failed the Company miserably in that goal.
Your press release states that ‘the Chairman of AnorMED as well as other members of the Special Committee and management have been actively meeting and talking to [Dr. Baker] in a concerted effort to come to an agreement on a group of directors that is satisfactory to all’. This is a clear exaggeration of any efforts you or the Special Committee have made.
The fact is that this discussion started with the compromise proposal the Baker Funds made to you and Mike Abrams on January 5 which would lead to the replacement of only four of the current AnorMED directors. In that proposal, only one of the five new directors we would recommend would be a representative of the Baker Funds. The other four would all be directors who are fully independent of the Baker Funds and AnorMED management. We reiterated this proposal to you on January 13, 2006. After almost two months, we have yet to receive a response to that proposal.
The press release further claims that To date Mr. Baker has been unwilling to consent to the consideration of a Board that is fully independent of himself and the shareholders he represents’. This is completely false. In no instance have you or any member of the Special Committee asked us to consider a proposal that precludes our continued representation on the Board. If you meant to suggest by this statement that Baker Brothers Investments is unwilling to consider a Board that is independent from Baker Brothers Investments, this is also clearly false. Both the initial proposal we made to you on January 5, 2006 and the slate we have proposed for election at the upcoming shareholders meeting would result in a Board that is independent from Baker Brothers Investments and the shareholders we represent. Read the rest of this entry »
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March 25, 2006 at 11:41 am
· Filed under For Investors, R&D, Clinical Research, Biostatistics
The news that Antigenics’ Oncophage failed to meet its primary endpoint won’t come as a surprise to hedge fund managers, very few of whom owned long positions in the company. Indeed, the stock has been a favorite short for some time, with an astounding short ratio (the number of shares of a security that investors have sold short divided by average daily volume of the security over a defined period) over 27 in February according to Yahoo! Finance (short ratios up to 10 aren’t unusual for development-stage biotech companies awaiting Phase 3 data).
However, based on my discussions with fund managers, I believe investor pessimism was fueled more by general skepticism about the therapeutic approach and the competence (or lack thereof) of Antigenics’ management rather than anticipated failures of clinical operations. Yet, it appears from the press release that at least one operational failure contributed to the study outcome: a conflict in numbers between investigator-reported events and events as adjudicated by an independent events committee. As this was an event-driven analysis, such a conflict proved fatal to making a definitive statistical inference. How does this happen? Having no facts other than the press release to guide me, I can only speculate on what went wrong. However, there are only a few possible operational failures that can result in this outcome. Here is the short-list of possible operational breakdowns that can lead to a “substantial” discrepancy between unadjudicated and adjudicated clinical endpoints:
- Poorly defined, ambiguous or poorly communicated (including language barriers) endpoint definitions, resulting in different endpoint interpretations (i.e. among investigators, between investigators and adjudicators, or a combination of both);
- Difference of available information to investigators and adjudicators (i.e. information asymmetry);
- Difference in clinical practices (culture), equipment, or personnel among investigators that could not be overcome by training;
- Insufficiently audited investigators (i.e. lack of oversight);
- Insufficiently trained or incompetent investigators;
- Insufficiently trained or incompetent adjudicators;
- Investigator fraud or related misconduct;
- Adjudicator fraud or related misconduct;
- Difference of clinical judgment without one of the above factors.
Generally speaking, the first five factors are more common than the last four. I’d also add that development managers must be aware that FDA can and does (usually) perform its own endpoint adjudications, particularly when there are important differences between the company’s own unadjudicated and adjudicated data. If I were advising Antigenics, I’d first find out whether the results are substantially better for Oncophage when relying on unadjudicated data only. If the results are substantially better, so much so that they could result in an approval, then it is likely wise to try an NDA (assuming the drug is approvable otherwise) and devote substantial resources to investigating and explaining why there was a discrepancy. It would be far cheaper and faster than doing another clinical trial.
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March 24, 2006 at 9:51 am
· Filed under Drug Safety, Preclinical
Another twist to the tragic story of the Tegenero CD28 agonist Phase 1 trial in which six healthy volunteers were strciken with severe adverse reactions that will leave them recovering for months. In this Times piece, Professor Angus Dagleish questions the decision to allow the trial, given prior experience with another monoclonal antibody that, like the Tegenero drug, increased T cells via co-stimulatory pathway modulation and also led to serious side effects. He also questions the decision to proceed with administration to six volunteers simultaneously. Expect to see more of the Monday-morning quaterbacking in the weeks and months ahead, as formal investigations and, probably, legal battles play out. Generally speaking, administration of an investigational drug to six volunteers simultaneously is not unusual, since the initial dosing is always begun well below the anticipated toxicity level based on preclinical data. What is quite unusual is the failure of preclinical studies to predict severe toxicity at the starting dose. Why this failure now? I can’t speculate wisely without additional information. Assuming the predictive failure was the result of a failure to identify a pharmacological effect (i.e. related to the drug’s mechanism of action), as opposed to a pharmaceutical effect (i.e. related to the pharmaceutical properties of the drug per se), it represents the inability to quantify either the degree or implications of cell-mediated immunity over-drive via co-stimulatory pathway agonism. In that case, all molecules that work through this mechansim would be expected to suffer from the same imprecision of preclinical testing, necessitating extreme caution in their application, as advised by Professor Dagleish.
From a broader lessons standpoint, this tragedy serves as a jolting reminder of the need for much better predictive science prior to human testing, a need the Critical Path Institute and FDA are addressing via their proposed predictive safety consortium initiative that facilitates sharing of information among major pharmaceutical labs.
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