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Myriad Deal Provides Capital, Exit Strategy for Crescendo as it Transitions to Commercial Operations

By Tony Fong

NEW YORK (GenomeWeb News) – Five years after its founding, and less than one year after launching its first product, molecular diagnostics firm Crescendo Bioscience is shifting to full commercialization mode for its test targeting rheumatoid arthritis.

But unlike many other startups that are transitioning from the technology development phase, the South San Francisco, Calif.-based company may not have to worry about how to provide its investors a return on its investment.

Earlier this month, it signed an agreement with Myriad Genetics that would grant the Salt Lake City molecular diagnostics firm the option to purchase Crescendo in three years, providing Crescendo the all-important exit strategy. In return, Myriad is loaning Crescendo $25 million.

Crescendo announced at the same time that it had raised $31 million in a Series C equity financing round, which it will use along with the $25 million from Myriad to further commercialize its test for rheumatoid arthritis and develop additional tests. Since its founding, the company has attracted $76 million in equity funding.

In announcing the deal, Myriad CEO Peter Meldrum called Crescendo "a franchise with strong potential; one which we believe can transform the management of chronic inflammatory diseases."

According to one investment analyst, the deal could provide Myriad with a potentially important asset. If Myriad were to buy Crescendo, it would broaden Myriad's portfolio and lessen its dependence on the oncology market, said Mizuho Securities analyst Peter Lawson in a research note. At the same time, "the option sets an acquisition multiple using the current, depressed valuation levels and lowers the risk to Myriad."

For Crescendo, the deal provides capital that is non-dilutive to its equity investors, and if Myriad chooses not to acquire Crescendo after the three-year period, it would have three years afterward to repay the $25 million loan at an interest rate of 6 percent, "so we've got plenty of time to refinance that capital," Crescendo CFO Bill Salisbury told GenomeWeb Daily News in an interview last week.

The deal also gives Myriad an observer to Crescendo's board.

Myriad has no equity stake in Crescendo, and though there is no formal agreement for Myriad to help Crescendo with its commercialization strategy or other operations, "We expect to learn from them over time, and we may find attractiveness from a strategic point of view of working with them over the option period," Salisbury said.

There is no guarantee, of course, that Myriad will exercise its option to buy Crescendo and much can happen in three years. But the deal removes at least some uncertainty about the future for Crescendo if its technology achieves what the company believes it will.

"If [Myriad does] exercise the option, it provides an exit strategy for us in addition to providing some level of validation by virtue of the fact that they were willing to loan us money and procure an option to buy us," Salisbury added.

Target: RA

Founded five years ago by Michael Centola, an assistant member of the Oklahoma Medical Research Foundation, Crescendo develops molecular diagnostics directed at autoimmune diseases, specifically rheumatoid arthritis. Late last year, it launched its first commercial product, the Vectra DA test comprising 12 protein biomarkers that "survey multiple pathways or mechanisms involved in" the disease, its CEO Bill Hagstrom said.

By providing a score between 1 and 100, the test gives physicians a picture of disease activity and progression in a patient. The ultimate goal is to use that information to design a treatment regimen to put the patient in remission.

"Knowing where a patient's level of disease activity is at a given point in time and if it is shifting or moving … toward remission is a very important clinical objective and one which is very actionable from the perspective of interventional approaches, including which traditional or biologics therapies a doctor might want to access," Hagstrom told GWDN.

Studies have shown, he added, that if the level of disease activity in patients can be measured and treatment decisions are made quickly, RA in half of all patients can be put in clinical remission, "yet less than 20 percent of patients in the real world are in remission."

Traditionally, RA has been diagnosed by a physical exam and observation of external symptoms. A method called Disease Activity 28, or DAS 28, is used to measure RA disease activity. DAS 28 employs a mathematical formula that includes the number of tender and swollen joints out of a total of 28; a blood marker of inflammation; and a patient's "global assessment of global health."

The method is subjective — a patient's pain threshold, for example, can influence a DAS 28 score — however, and Hagstrom said that in real-world medicine it is not used very often. What was missing, he said, was an objective and quantifiable method of diagnosis and tracking of disease progression.

Since its launch in November 2010, Vectra DA has become available in 49 states through the company's CLIA laboratory. The exception is New York State, though the company has filed an application with its department of health.

Hagstrom declined to identify the platform on which it is running the test, saying only that it is commercially available and Crescendo has made modifications to it.

He also declined to disclose the price for Vectra DA or revenue or volume figures for the test, which he said has an addressable market in the US of about 1.5 million patients. Crescendo is in the early stages of work to get reimbursement for Vectra DA from private insurers as well as public payors.

The company, Hagstrom said, is evaluating whether to apply for clearance from the US Food and Drug Administration to market the test and to market Vectra DA outside the US.

Crescendo continues to build on the capabilities of the test for other unmet clinical needs in the RA space, though that may involve different biomarkers than are currently used in the test. Potential pipeline opportunities include use of a Vectra DA-derived test as a companion diagnostic to determine which patients may react best to specific treatments.

Also, between 30 and 50 percent of RA patients have cardiovascular disease, myocardial infarction, or strokes, and Crescendo sees a market opportunity in developing a test to determine which RA patients may be at risk of such an event, Hagstrom said.

While the company believes that other autoimmune diseases such as lupus and psoriatic arthritis also have an unmet need for new techniques for assessment, he said that Crescendo does not expect to expand Vectra DA into the non-RA autoimmune disease market because every autoimmune disease needs to be assessed independently "looking at biomarkers that might be most appropriate for that [specific] disease and noting the unique pathways and mechanisms that may be involved."

Crescendo is in the early stages of building out is pipeline, "but we are committed to a strategy by which we will be bringing multiple products to market over a period of time," Hagstrom said.

The company is also part of a clinical study called Batter-Up aimed at determining which RA patients benefit from anti-tumor necrosis factor medications such as Remicade (infliximab), Enbrel (etanercept), and Humira (adalimumab). Such medications work in only about half of all RA patients, though it's unclear why that is.

Other participants in Batter-Up include drug manufacturers and biotech firms such as Biogen, Roche Genentech, Bristol Myers-Squibb, and Sanofi-Aventis. Crescendo's role in the study is to develop a diagnostic that's predictive of which patients would be best respondents for anti-TNF therapies.

Independent of Batter-Up, the company has about six deals with pharma firms using Vectra DA to "better understand early drug candidates or to characterize patients' levels of disease activity for … clinical trials at various stages," Hagstrom.

He added that the firm has internal biology modeling capabilities into which a number of drug firms are interested in tapping.

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