Even with a brightening finance landscape for public biotechs, two veteran firms that have been struggling in recent months--VaxGen and La Jolla Pharmaceuticals--are in their final days as independent entities.

On Oct. 15, VaxGen of Brisbane, Calif., said it plans to merge with Oxigene, which is exchanging up to 22 million shares for the once high-profile vaccine developer and receiving $33 million in cash. In Southern California, the 20-year-old La Jolla Pharmaceuticals said on Oct. 14 its shareholders will vote on a liquidation plan at the end of the month.

There are 93 public companies with less than 12 months of cash, according to Rodman & Renshaw's Oct. 12 Biotechnology Balance Sheet. But the cash crunch is easing as follow-on financings have begun to flow recently. As of mid-July, 56 companies were trading below their cash positions.

That number fell to 25 as of Oct. 9, according to Rodman & Renshaw. The reduction is in part due to takeouts and liquidations, but "I attribute it mostly to the improving market and financing conditions," said Rodman biotech analyst Simos Simeonidis in an interview with "The Pink Sheet" DAILY.

Goodbye La Jolla and VaxGen

Soon, however, La Jolla and VaxGen will simply disappear. As recently as January, La Jolla's only product, a Phase 3 lupus nephritis treatment called Riquent (abetimus sodium), was promising enough to snare a $15 million upfront from BioMarin Pharmaceutical with more than $200 million in potential milestone payments. But one month later, an advisory board said the drug failed an interim efficacy analysis, and it told the new partners not to continue the trial, dubbed ASPEN (Also see "Riquent Trial Fails; Is This La Jolla’s Last Gasp?" - Pink Sheet, 12 February, 2009.).

BioMarin knew it was a risky bet. Riquent had two earlier clinical failures, including a Phase 3 blow-up that prompted the company to work with the FDA to design the ASPEN trial, the largest ever for a lupus drug. Half of BioMarin's upfront payment bought 3.4 million preferred shares of La Jolla that were convertible to common shares at a 3-to-1 ratio. In effect, BioMarin bought La Jolla common stock at 73 cents a share.

BioMarin converted its shares from preferred to common in March, when it terminated the partnership and began selling them off at more than $2 a share. As of June 19, the firm still held 4.5 million shares. If its liquidation plan is approved by shareholders, La Jolla estimates it will distribute between 2.8 and 4.5 cents per share to its owners, with 66 million shares outstanding. As of Aug. 31, La Jolla had $4.4 million in cash. The board of directors has already voted for liquidation.

According to investment bank Merriman Curhan Ford's Oct. 5 "Biotech Balance Sheet" report, La Jolla had the second-highest amount of insider shares sold in the previous six months, with 9.2 million. The sales represented 14 percent of all outstanding shares.

According to its regulatory filings, La Jolla fielded merger proposals in February and March and found one worth pursuing. In the midst of negotiations, however, BioMarin filed suit to force La Jolla to speed up the registration of the 10 million shares of common stock BioMarin had bought in the January licensing deal. According to La Jolla's filings, the lawsuit "negatively impacted" the merger talks, and in June the firm decided to go the liquidation route.

It's also the end of the line for VaxGen. Once a high-profile Genentech spinout, the vaccine developer tried its hand at HIV and anthrax. It fell apart when the federal government canceled an $877 million contract for anthrax vaccine in late 2006. Limping ever since, VaxGen tried to reverse merge into Raven Biotechnologies in late 2007, but shareholders voted against it.

Oxigene will initially issue 15.6 million shares worth $22 million based on Wednesday's closing price for all VaxGen shares. It gains VaxGen's $33 million in cash, and will place 8.5 million more shares in escrow, payable based on VaxGen's lease situation and potential royalties and milestones VaxGen stands to earn from Emergent BioSolutions, which bought VaxGen's anthrax program last year.

A similar fate for peer biotechs?

Even in good times, biotechs fail and disappear, and VaxGen and La Jolla, both gutted, would likely have gone under no matter what the economy was doing.

What's surprising is that a lot of their peers won't necessarily follow. The great biotech shakeout that many predicted as the recession deepened hasn't happened. According to merchant bank Burrill & Co., the number of biotechs publicly traded on major U.S. markets has fallen in 2009 from 356 to 328. That's an 8 percent drop, hardly calamitous.

In a preview of third-quarter earnings, Cowen & Co. analysts noted small-cap biotechs are benefiting from investors who are willing to try risk again. "For the third straight quarter, unprofitable biotech stocks substantially outperformed profitable biotech stocks," they wrote. "We ascribe this trend toward greater willingness on the part of specialists to consider higher beta stocks, including those of $300 million to $500 million market cap biotechs."

-Alex Lash (a.lash@elsevier.com)

Two Veteran Biotechs Give Up the Ghost Just as Public Markets Start to Rebound

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