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As Shares, Revenues Continue to Dive Nuvelo Struggles to Sell Its PGx Assets

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Shares in Nuvelo have fallen more than 15 percent over the past four days as many investors expressed doubt the nascent drug maker can sustain plummeting revenues and widening net losses long enough to bring a single compound to market. Additionally, questions linger about the pharmacogenomics assets the company appears not to have sold yet.

Nuvelo, which was created when Hyseq acquired Variagenics in January 2003, has been plagued by sharply falling revenues, most recently in the first quarter, as it continues to develop its three drug candidates.

Total revenue for the three months ended March 31 sank by more than half, to $642,000 from $1.3 million in the year-ago period. During this time, R&D spending grew to $16.3 million from $10.8 million, and losses widened to $17.7 million, or $.65 per share, from $13.6 million, or $.82 per share, year over year.

The company had similar luck in the previous two quarters: Revenue for the third quarter 2003 fell to $262,000 from $11 million during the same period a year ago, and receipts during the fourth quarter 2003 fell to $350,000 from $3.5 million year over year.

Last Friday, following Nuvelo’s lackluster first-quarter earnings report, investors said they’d had enough. That day, shares in the Sunnyvale, Calif., company fell by more than 10 percent on the Nasdaq exchange to close at $9.87, and continued their slide into Monday, where they fell an additional 5 percent to close at $9.30 — nearly half their 52-week high of $16.50.

The punishment continued into Wedneday, where shares were down 3 percent at $9.18 in late-afternoon trading.

Though some analysts have attributed the stock slide to impatience among investors over the company’s centerpiece compound, alfimeprase, the big question in pharmacogenomics circles is the status of the Variagenics assets Nuvelo has had on the block since January 2003. It’s been 16 months since Hyseq acquired Variagenics to create Nuvelo, and it appears that most of these assets — including those that have a track record of attracting biopharma collaborations in the past — remain for sale.

According to documents posted on Nuvelo’s website, the company managed so far to shed Variagenics’ chemical cleavage patent estate, which Sequenom bought last September [see 9/3/03 Pharmacogenomics Reporter]. Since then, the company has been promising investors and collaborators that the remaining assets will soon be divested.

Nuvelo still owns Variagenics’ molecular diagnostics business, its SNP database, and the NuCleave genotyping platform. Additionally, Nuvelo owns 90 percent of Callida Genomics, a microarray business it shares with Affymetrix. Nuvelo signed on Affy, which owns 10 percent of the business, after Applied Bisystems dropped out in October 2001.

On its website, Nuvelo suggests the company hasn’t sold any of these remaining “non-core assets. In the third quarter of 2003, Ted Love, Nuvelo’s president and CEO, said the company “continued to make substantial progress in executing our strategy to monetize non-core assets.” He added: “We are in several discussions surrounding our non-core assets.”

Three months later, Nuvelo announced the patent-estate deal with Sequenom, and Love reported that the company “continue[s] to monetize assets outside of our therapeutic focus.”

In its first-quarter 2004 earnings report, Nuvelo did not mention its Variagenics assets, but said in a statement that the company “continued to streamline operations since completing” the acquisition.

“I just think that, in general, that kind of technology is just not going for much these days,” David Wood, who covers Nuvelo for Rodman & Renshaw in New York, told Pharmacogenomics Reporter this week. “It would be hard for me to see who exactly would buy those assets.”

Wood said he doesn’t believe Variagenics’ assets are eating into Nuvelo’s bottom line. “They’re not using them for anything, so I don’t think there’s really any cost.

“Even if they were to divest these assets, I don’t think what they would get for them would be terribly large, quite frankly.”

Nuvelo officials were unavailable for comment.

Cash Strapped

Soon after it acquired Variagenics in January 2003, Nuvelo, which was called Hyseq at the time, put on the block all of the pharmacogenomics assets that belonged to Variagenics. It also promised to sell the Callida Genomics microarray business owned with Affymetrix.

Originally, Love assured Variagenics’ investors, customers, and employees that though certain “non-core assets” would be sold following the acquisition, the firm’s SNP database and other assets would remain to contribute to the new firm’s drug-discovery efforts.

“Variagenics’ knowledge of SNPs and what those SNPs can do ... means we might be able to integrate it” for clinical trials, Love said at the time.

Variagenics’ technologies, especially the NuCleave platform, could have been used to solidify relationships with drug or diagnostic makers, and Love had every reason to be optimistic about the assets. In fact, two weeks before the $56 million all-stock transaction, Variagenics licensed to Celera Diagnostics the patent rights to a human gene, methylenetetrahydrofolate reductase, that is linked to certain neurological and cardiovascular diseases.

“The breadth of discussions for Hyseq and Variagenics, in terms of partners, has increased,” Love said at the time. “We think that as a new company we will be able to do broader and deeper deals.”

So much for those plans. In the end, Nuvelo decided to put on the block Variagenics’ molecular diagnostics business, its SNP database, and the NuCleave platform, Nuvelo CFO Pete Garcia said eight months after the acquisition. “The idea is to have the company focus on a technology or on a business that we think will derive the most value, and we think that that is developing therapeutic products,” Garcia said at the time. “We don’t have the bandwidth” for the other disciplines.

“Given the company’s limited resources, we had to identify that we have to either spin out or sell other assets that weren’t core to that,” he added.

Asked to define these assets, he specifically mentioned Hyseq’s moribund HyChip platform. This product, which Nuvelo said can sequence genes without relying on specific reference genes or sequences, was being co-developed with Applied Biosystems in 1997 as part of a five-year partnership. However, ABI released Nuvelo from the collaboration in October 2001 and became a non-exclusive partner so that Hyseq could settle a patent-infringement suit with Affymetrix, Garcia said. ABI had the option to develop the HyChip for commercial use, though he doubted the company would do so.

“We are taking a look at what to do in [the HyChip] area,” Garcia said in August.

One option is to sell to Affy a small Callida Genomics subsidiary called N-Mer, which was responsible for developing the HyChip platform with ABI. Terms of the Callida joint venture, struck as part of the firms’ 2001 legal settlement, gave Affy the right to buy out N-Mer and give up Callida Genomics.

“I think what we’re trying to do is to derive some value to where we can have this asset be worth something to Affymetrix, or to another party,” said Garcia. He said at the time that Affy has not indicated it wants to buy N-Mer, but declined to say if Nuvelo approached Affy with the offer. Garcia also conceded that not buying N-Mer and the HyChip might make sense for Affy because the platform is for gene sequencing research rather than expression.

Officials from ABI and Affymetrix did not return telephone calls and e-mail requests seeking comment.

Variagenics’ molecular diagnostics program is also languishing at Nuvelo. “Though we think it has value, it didn’t have the same kind of value as our program in the therapeutic area,” Garcia said in August. This program has enabled Variagenics to license its SNPs and haplotypes to diagnostic companies. Variagenics’ last molecular diagnostics deal, with the Korean firm GeneMatrix, aimed at developing products to predict drug response in certain cancers.

Also on the block is Variagenics’ pharmacogenomics program, which comprises gene-expression profiling, pathway analysis, molecular modeling, haplotype analysis, and heterozygosity technologies. This program helped Variagenics pen R&D collaborations with biopharmas Amgen, Boeringher Ingelheim, and Isis Pharmaceuticals.

It’s the Pipeline, Stupid

Top on the company’s priority list is its drug pipeline, which now comprises a trio of candidates in various stages of development: alfimeprase, a drug for acute peripheral arterial occlusion being co-developed with Amgen; rNAPc2, a candidate for the treatment of acute coronary syndrome it acquired from Dendreon; and a thrombin inhibitor for coronary artery bypass graft surgery and percutaneous coronary intervention that Nuvelo is co-developing with Archemix.

And in March, Nuvelo pocketed nearly $75 million in a stock offering after selling 5.8 million shares. The company had $94 million in cash, cash equivalents, and short-term investments as of March 31.

Analysts like Rodman & Renshaw’s Cook remain bullish. “I think the alfimeprase drug works, and I think we’re going to see data that it does and that it’s safe. And the other two products in their pipeline are intriguing.

“As far as a small biotech goes, I think they have everything they need to really move the ball down the field,” he said.

—KL

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