With the dissolution of Symphony Allegro and the return of the joint venture's three clinical programs to Alexza, Symphony Capital should have its exit from the $50 million investment it made in the biotech and its Staccato aerosol inhalation technology in 2006.

The reality is that the two companies' fortunes are still very much entwined, with the New York-based investment firm now holding a 23 percent ownership in Alexza, a seat on the board, and warrants to buy 5 million additional shares at what is intended to be a bargain price of $2.26 per share.

Symphony Capital's business model is aimed at helping biotechs fund their most promising projects, rather than financing the biotechs themselves (¹ Also see "Symphony's Project Financing Model Adapts" - In Vivo, 1 January, 2009.). From the investor point of view, the goal is to create a relatively short-term exit - perhaps three years - based on the clinical progress of specific projects, rather than tying Symphony's returns entirely to the value of the company. But the Alexza restructuring shows how Symphony has had to adapt its investment model, which now looks far more like a traditional biotech investment.

So far, Symphony has deals with seven companies. In addition to Alexza, Symphony Capital has ² ongoing joint ventures with three other biotechs: Dynavax (Symphony Dynamo); Lexicon (Symphony Icon); and Oxigene (Symphony Vida). It also fully owns the assets from its Symphony Evolution JV with Exelixis.

In its 2006 deal with Alexza, Symphony essentially bought three compounds for $50 million (³ [See Deal]), providing Alexza an option to repurchase the products following proof-of-concept. Symphony also received five-year warrants for 2 million Alexza shares at $9.91 apiece.

The Mountain View, Calif.-based biotech used the Symphony money to continue clinical development of the programs: AZ-004 (loxapine) for acute agitation associated with schizophrenia and bipolar disorder, AZ-002 (alprazolam) for acute panic attacks and AZ-104 (loxapine) for acute migraine headaches. Each program sought to provide an inhalation version of an already generic drug in a new therapeutic indication for that drug.

2010 NDA Planned For Lead Program

With positive data from two recently completed Phase III trials, Alexza plans to file an NDA for '004 in the first quarter of 2010. The biotech began dosing in a 360-patient, at-home Phase IIb trial for '104 in January and expects top-line data in the third quarter.

Meanwhile, '002 failed a Phase IIa trial last June, missing both primary endpoints in a study testing the drug in pharmacologically induced panic attacks (⁴ Also see "Alexza’s Acute-Panic Drug Fails In Phase IIa" - Pink Sheet, 9 June, 2008.). Although the Staccato version of alprazolam demonstrated no statistically significant difference versus placebo in the incidence or duration of attacks, Alexza still hopes to study the compound in other indications, such as refractory seizures, CEO Thomas King said in an interview.

As in Symphony's other deals, Alexza received a limited option - four years in Alexza's case - to buy back full rights to all of the compounds at the equivalent of a 27 percent annualized return to Symphony (roughly $97 million by 2009).

Symphony Capital's primary objective is to identify promising projects at companies needing funds to cover the period from preclinical development or Phase I through proof of concept. At the end of a successful Phase II trial, Symphony believed, the company's stock price would rise, enabling it to raise money to buy back the Symphony projects. Alternatively, the asset could attract a corporate co-development partner, whose licensing fees would finance the repurchase.

Previous Venture A Textbook Case For Model

"We saw that work almost textbook-like in our Symphony GenIsis collaboration with Isis," Symphony Capital Managing Director Harri Taranto explained in an interview.

In 2007, Johnson & Johnson paid $45 million upfront to partner two of the Symphony GenIsis compounds. Isis then used its upfront fee from J&J, the remaining cash in the joint venture, and $6 million of its own funds to buy back the compounds and provide Symphony a profitable exit (with warrants for 4.25 million shares in Isis).

But if Symphony GenIsis shows the Symphony Capital model working as originally conceived, its Exelixis transaction, Symphony Evolution, demonstrates the investment firm's downside risk. Exelixis decided not to exercise its buyout option to the compounds Symphony funded after GlaxoSmithKline dropped out of a co-development partnership with the biotech, leaving Symphony with the assets (⁵ Also see "Exelixis, GSK Deal Comes To A ‘Natural, Positive End’" - Pink Sheet, 27 June, 2008.).

To date, the Symphony Allegro joint venture seems to represent a middle ground between those two extremes. But it also clearly shows just how the collapse of the biotech financing market has affected Symphony's model - which theoretically offered some independence from market gyrations through partnerships, which also could fund a biotech's repurchase of its Symphony assets and thus provide Symphony's returns.

But partnership financing is affected by the markets. Unless their assets are extremely popular, companies appearing to lack the financial wherewithal to survive long term are likely to be forced into deals at fairly low prices. Potential partners simply can wait until a biotech is so desperate for cash that it's willing to sell its program at below-market rates. Or partners simply can wait until the option expires and, with a firm like Alexza out of the picture, deal directly with Symphony, which would be a highly motivated seller.

Thus, the economic crisis of 2008-09 and the valuation crash suffered by many biotechs altered the fate of Symphony Allegro. Despite a successful Phase III program for '004 (⁶ Also see "Alexza Moves Lead Candidate AZ-004 Into Phase III For Agitation In Schizophrenia" - Pink Sheet, 25 February, 2008.), Alexza's share price remained stuck around the $2 level.

With the expiration date for Alexza's option set to expire by the end of the year, the biotech cutting staff and narrowing its clinical focus just to stay in business in early 2009, and no deal in sight for any of the Symphony Allegro products, Taranto and his partners realized Alexza would not be able to produce the $97.5 million it owed for the Symphony Allegro compounds.

Since Alexza shares were trading in the $2 range, it couldn't even exercise an option to pay back 40 percent of Symphony's investment in stock. The stock portion of the payout was limited to 10 percent of Alexza's market cap. In May, Alexza reported it had $23.1 million in cash and equivalents on hand, down from $37.6 million at the end of 2008 despite its retrenchment efforts (⁷ Also see "Troubled Biotechs: Alexza, Synvista, Alseres, Bionovo" - Pink Sheet, 5 February, 2009.).

On June 15, Symphony and Alexza announced an "amended and restated purchase option agreement."

Symphony received 10 million shares of Alexza stock, which was trading at $1.72 at the time of the deal, five-year warrants for 5 million additional shares priced at $2.26 - a 25 percent premium over the stock's preceding 30-day average - and a percentage of any partnering income Alexza generated from the three programs. Meanwhile, Alexza got to keep the roughly $17.6 million in cash and equivalents the joint venture had on hand.

"Symphony will take a majority of its return based on whatever the stock does," King said. Taranto called the restructured deal a "hybrid" in which the two firms' fates are tied together longer than originally planned.

Stock Performance Necessitated Revised Deal

"In the old days," noted Taranto, the good clinical news on '004 would have had a dramatic impact on the stock," helped by the plethora of equity analysts covering biotech stocks. But with fewer banks and therefore fewer analysts, along with huge skepticism about biotech stocks, the '004 results did nothing. "It was just not realistic for anyone to expect Alexza to be able to execute the purchase option," said Taranto.

But, with Symphony still feeling bullish about '004 and the Staccato platform, the firm decided to structure a deal that might make investors more optimistic about Alexza's stock, hopefully enabling the biotech to find a corporate partnership that would benefit both Alexza and Symphony.

The restructured deal gives Symphony 25 percent of the first $100 million realized under any such partnership, although Symphony's take will be arranged in tranches - a small share of the upfront because of Alexza's need for cash, then a significant portion of milestones, and a significant but lesser portion of royalties on sales from any of the three programs.

Should one or more partnerships around the programs produce more than $100 million, Symphony then would get a share of those revenues corresponding to its ownership interest in the company, which will be 23 percent at the closing of the amended deal. Symphony also gets a seat on the Alexza board for as long as it retains at least a 10 percent stake in the biotech.

Charles Duncan of JMP Securities wrote in a June 17 note that he believes the deal places '004 in a much better deal-making position. "We view this transaction as a positive for Alexza as it provides clarity on the ownership of these compounds and allows the company to secure commercial partnerships ... while still retaining attractive economics," he wrote.

As Duncan also suggests, Alexza believes one reason it couldn't find the corporate partnership it needed was the Symphony deal itself: Symphony's ownership of the assets created uncertainty among the buyers, King believes.

Agitation Drug Partner Likely A Spec Pharma

King said he is negotiating with "more than two and fewer than 10" companies to partner the '004 program. Although both big pharma and specialty pharma firms have expressed interest, he added, Alexza for a variety of reasons would prefer to collaborate with a spec pharma.

"The ideal partner for us is someone who views AZ-004 as a brand-new, novel acute agitation drug. The market opportunity for that is spectacular if you view it that way," King asserted.

Citing his prior history as CEO of Anesta, which was bought out by Cephalon in 2000 (⁸ [See Deal]) on the strength of its Oral Transmucosal System technology, King said specialty pharmas "are better, I think, at creating new markets as opposed to capturing share of already existing markets."

From the Anesta acquisition, Cephalon brought breakthrough cancer pain drug Actiq to market, generating sales of $176.5 million in 2008 for a product analysts once projected to top out at $20 million annually, King noted.

"Johnson & Johnson and Purdue and some of the other big pain companies just couldn't see the value of this because they were biased by the viewpoint [of holding large pain product portfolios]," he said. "Cephalon, at that time, had no pain products and was unencumbered by those biases."

King doesn't believe he is limiting his and Symphony's potential gain by focusing on a spec pharma partner. "There's no data to support that big pharma pays more," he said.

Big pharma has shown much more interest in option deals of late, King added, "so you often get deals with $10 million upfront and a lot of biobucks." Such transactions may be structured and announced as potential $1 billion deals, but "who knows how many of those dollars will actually come in," he said.

Alexza used a thorough analysis to determine its preference for a spec pharma partner, ideally one with experience and contacts in the psychiatric space, King said.

"It wasn't that we just redlined big pharma companies," he explained. "Once we understood the top 1,600 institutions we needed to call on and the top 600 that would be the focus of our launch, we asked 'okay, who calls on those types of physicians?' It's more of the specialty pharma type companies."

More Adjustments To Symphony Model Likely

While Taranto does not plan on reworking any of Symphony Capital's other joint ventures the way it has the Alexza deal, its full ownership of the Exelixis JV and related compounds indicates that it may not be smooth sailing for the other ongoing companies.

"As soon as I get my crystal ball working, I'll have a clear answer," Taranto said when asked if Symphony's original model is workable for future deals.

Of the current JVs, he said Symphony always will be open to "creative, realistic ways" to produce strong returns for itself and its investors.

"Not just our model but everybody's model is going to have to be adjusted," Taranto added.

"As we look at the drivers of value, which we continue to believe is the clinical advancement of drugs ... for our model to work, we need the financial markets to see and recognize that value, and for that to translate into companies having better access to capital markets," he continued.

Once the Alexza deal closes, the next big milestone for Symphony Capital will be the outcome of its JV with Dynavax (⁹ [See Deal]). The lead program in that deal, which was trimmed from three compounds to two, is a Phase I toll-like receptor 9 agonist for hepatitis C. With Dynavax's purchase option expiring in mid-2010, further positive development of the HCV candidate seems imperative.

Dynavax, however, has been successful in attracting other corporate co-development partners for several preclinical programs, including Novartis for its flu vaccine, AstraZeneca for its asthma candidate and GSK for an autoimmunity/inflammation program.

The option for the Lexicon deal, centered on three clinical programs, one each for cognitive disorders, irritable bowel syndrome and gastrointestinal disorders, runs through June 2011. Symphony provided $45 million upfront to Symphony Icon, getting 7.7 million shares in Lexicon, which can buy back its programs in 2011 for $90 million (¹⁰ [See Deal]).

The Oxigene deal, inked last fall, runs through October 2012. Symphony funded the JV with $15 million upfront and will contribute another $10 million within the next two years to develop two ophthalmic programs (¹¹ [See Deal]).

As for the Elelixis assets, which include two oncologics (XL647 and XL999) as well as one for diabetic nephropathy (XL784), an advanced kidney disease related to diabetes, Taranto said Symphony will use the cash remaining in the joint venture to continue developing the compounds. RRD International, Symphony's clinical development affiliate, will seek to advance the programs to a point where they hopefully will attract significant buyer interest, he said.

- Joseph Haas (j.haas@elsevier.com)

Revised Alexza Deal Suggests Updated Strategy For Symphony Capital

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