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Arrowhead Buys Roche RNA Drug Assets, Doubles Burn Rate with Addition of Madison Site

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By Doug Macron

Arrowhead Research this week announced that it has acquired the RNA therapeutics assets of Roche, including its 40-person operations in Madison, Wisc., in a deal that included no cash upfront but a nearly 10 percent equity stake in Arrowhead and million-dollar late-stage milestones.

The addition of Roche's RNA drug operations will roughly double Arrowhead's cash burn rate, an important issue for a company that has struggled in recent years to find financing. However, Arrowhead President and CEO Christopher Anzalone said that the company believes the new assets will be sufficient to entice industry partners and their technology-licensing dollars, providing Arrowhead with the capital necessary to fund its expanded operations.

Roche has been looking for a home for the assets since last November, when it announced that it was shutting down all of its in-house RNA activities as part of a company-wide restructuring (GSN 11/18/2010). At the time, a Roche spokesperson told Gene Silencing News that the big pharma was "evaluating creative ways to preserve some of [its RNAi] sites in a non-Roche environment."

She added that Roche was also planning to continue exploring “the potential of RNAi and other RNA-based technologies as a therapeutic modality,” but noted that “this will be done via external collaborations."

With the Arrowhead deal, it appears that Roche has managed to do both.

Under the terms of the arrangement, Arrowhead has acquired virtually all of Roche's RNA drugs-related assets and intellectual property, including Roche Madison, a research and development site that was acquired as part of Roche's $125 million buy-out of Mirus Bio in 2008 (GSN 7/24/2008). This includes all of Roche Madison's employees and equipment.

Arrowhead has also acquired the dynamic polyconjugate delivery technology that was under development at Mirus and largely drove Roche's interest in that company. It also picked up a proprietary liposomal delivery system that Roche had developed in house, and a license to a specific version of Tekmira Pharmaceuticals' lipid nanoparticles, formerly known as stable nucleic acid lipid particles.

Arrowhead has further gained Roche's licenses to Alnylam Pharmaceuticals' siRNA-related IP, acquired in 2007 through a deal that cost $331 million in cash and equity investments (GSN 7/12/2007); its license from the City of Hope to Dicer-substrate siRNA molecules; and its license from Marina Biotech to meroduplex siRNAs.

A Roche spokesperson told Gene Silencing News that the company has separately shut down its German RNAi operations, which were acquired through the Alnylam deal. The site was not included in the Arrowhead arrangement because it "did not fit within the ... deal structure."

In exchange, Roche has received “just under 10 percent” of Arrowhead in the form of restricted common shares, Anzalone said during a conference call held to discuss the transaction. Based on the stock's trading price of $0.50 just after the deal was announced and the company's roughly 71.8 million shares outstanding, the equity stake has a value of about $3.6 million.

Roche has also been given “limited rights of first negotiation on certain future product candidates,” which are structured so that they will not “materially impede” Arrowhead's ability to find other partners for the drugs, but still give Roche “a chance to negotiate for them,” he noted.

Arrowhead competed with “multiple interested parties for these assets,” Anzalone said. In part, the company was successful in its bid because it was willing to give Roche “the ability to negotiate for future drugs and drug candidates as we enter the clinic. … This enables Roche to stay in the [RNAi] game.”

Additionally, Roche stands to be paid royalties of 3 percent on the sale of drugs commercialized using its technology, but the arrangement includes “stacking provisions” that reduce this royalty rate in the event that Arrowhead is required to pay “other royalties” on the products.

Roche will also receive undisclosed milestones from Arrowhead, which range from $2.5 million to $6 million, each, according to an Arrowhead filing with the US Securities and Exchange Commission.

During the conference call, Anzalone stressed that the deal included no upfront cash payments to Roche, and noted that the milestones won't impact Arrowhead's bottom line any time soon because “none of them are near term; they don't kick in until after drug approval.”

What will affect Arrowhead's financial standing are the costs associated with maintaining the Madison site, which Anzalone said are in the range of $7 million to $8 million a year, or about $583,000 to $666,000 a month. Arrowhead CFO Ken Myszkowski said during the call that the company's monthly burn currently sits between $500,000 and $600,000.

Sustaining its operations has long been an issue for Arrowhead, which has cut back expenditures within its RNAi therapeutics subsidiary Calando Pharmaceuticals a number of times over the past few years. Most notably, in 2008, the company halted all of Calando's R&D activities not related to its phase I siRNA drug candidate, CALAA-01.

The next year, Arrowhead shuttered Calando's laboratory, citing financial constraints in part due to its inability to find a partner for CALAA-01.

This summer, Arrowhead reported increased third-quarter expenses and sharply increased losses, and said it had $4.3 million in the bank.

During this week's call, Anzalone said that while the acquisition of the Roche assets will “increase our burn rate, we believe that our ability to finance that burn in a non-dilutive manner will increase even more rapidly,” namely through partnerships with bigger companies interested in the technologies and expertise in RNA therapeutics that Arrowhead now has.

“It is our plan to leverage these partnerships to bring in potentially substantial non-dilutive capital that we can then use to fund operations and development of our own drug pipeline,” he said.

“We did his transaction in large part because it puts us in a situation where we can bring in a stable revenue source because of all this real estate we're bringing in in this RNAi field,” he added. “While our burn rate is going to go up, our ability to capture non-dilutive capital will go up even faster.”

Anzalone declined to provide guidance on when a partnership is expected to be signed or on the timing of any drug-development efforts until integration of the Roche assets has been completed.

He did note, however, that the dynamic polyconjugate technology is ready to be partnered now.

“We have not seen any small RNA-delivery system with better efficiency or high therapeutic index in non-human primates than DPCs,” he said. “My sense is that within the various generations [of the technology] that have been developed … we have something right now that is clinic-ready.”

He said that he couldn't comment on how long talks with interested parties would take, but said that “I think the technology is certainly ready for negotiations.”

Until such deals are formalized, Arrowhead will be using $10 million it recently acquired through private placements, and can draw down on, at its discretion, a $15 million facility from Lincoln Park Capital (see related story, this issue), Anzalone said.

“We run in a very capital-efficient way, especially relative to other biotechnology companies,” he said. “With the financings we just completed and the Lincoln Park facility, we feel comfortable that we have the capital we need for the time being.”


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