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SR Pharma Closes Atugen Acquisition, Eyes Other Assets as Part of Roll-Up Strategy

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SR Pharma has closed its £6.2 million ($7.5 million) acquisition of Atugen, making the German RNAi shop a wholly owned subsidiary of UK-based SR Pharma, RNAi News has learned.

According to Thomas Christely, COO of Atugen, the deal gives his company access to the funding required to keep its research and development moving forward, but which was unavailable to Atugen when it was still a private firm in Berlin.

Atugen will continue to operate as a stand-alone entity at its current German facilities. CEO Peter Buckel, who joined Atugen early last year (see RNAi News, 4/23/2004), has stepped down from the company, while Christely and CSO Klaus Giese will stay on in their positions.

There have been no formal layoffs at Atugen in conjunction with the acquisition, Iain Ross, chairman of SR Pharma, told RNAi News this week. He noted that employment negotiations with Andre Lochter, Atugen's director of business development, are ongoing.

According to Ross, the acquisition of Atugen stemmed from the UK company's failure to prove its allergic asthma and atopic dermatitis drug, SRP 299, was effective in a phase III trial late last year. Putting additional strain on the company was the May 2004 resignation of its chairman and June 2004 departure of its CEO.


"We have other assets that we've targeted, so Atugen won't be our last acquisition. We have a number of other things targeted, which range from products [to] IP, and we are actually looking at a potential revenue-generating acquisition, as well."

SR Pharma "was involved in developing … a microbacterium, M. vaccae, which has been in the clinic for various indications," Ross told RNAi News this week. Despite the agent's promise in phase II studies, "the company had some disappointing results in phase III."

Ross said he joined SR Pharma about a year ago, and after the SRP 299 setback began exploring the possibilities of acquiring new biotechnologies that could be developed in-house. One of these potential acquisitions was New Zealand biotech firm Genesis Research and Development, which is investigating therapeutic applications of RNAi. While SR Pharma didn't end up pursing a deal with Genesis, the negotiations helped tip the company off about the potential of RNAi.

"That's when we came across Atugen, which we felt had an edge because they have a delivery technology," Ross noted. "I was actually pursing another acquisition earlier this year, but as soon as I knew that there was a possibility of making a move for Atugen, we put the other discussions on hold. [RNAi] is high-risk and high-reward, [and] we were pretty keen to get into the area."

For SR Pharma, the acquisition of Atugen represents an opportunity to reinvent itself in much the same manner as peers CytRx and Sirna Therapeutics, both of which turned to RNAi-based drugs development after they failed to successfully develop other biotechnologies.

For Atugen, however, the deal with SR Pharma marked the opening of a financing avenue that the company had until then been unable to find.

Atugen was formed in 1998 as a spin-out of Ribozyme Pharmaceuticals (now Sirna) focused on providing contract research services. In early 2004, the company announced that it had thrown its hat into the RNAi therapeutics ring (see RNAi News, 2/13/2004) and that it had secured €5 million through its third round of financing, bringing its total amount of venture capital since inception to about €30 million.

However, according to SR Pharma, Atugen posted a 2004 net loss of €2.8 million based on revenues of €3.5 million, generated mainly from contract research and target validation services, and R&D costs of €3.1 million. During 2005, Atugen's revenue stream has slowed from the previous year, while R&D operations have dropped off amid a cash crunch, SR Pharma noted.

As a result, Atugen began looking to be acquired, engaging in talks with a number of different companies including certain of its peers in the RNAi drugs sector.

"For a private … German company, it's extremely difficult to get further financing," Christely told RNAi News this week. Despite the fact that Germany has the biggest economy in Europe, it is "much more difficult compared to … Western private companies or even UK private companies because the German market is a little bit more down than the other markets."

Christely said that a number of factors have contributed to this difficulty, but that a major one was the lack of a Nasdaq-type technology stock exchange in Germany. Although the Neuer Markt was established in Germany in 1997 as an exchange for new technology stocks, it crashed and was dissolved in 2003, leaving "VCs in general a little more hesitant to invest in [German] companies that have no clinical products," he said.

"In RNAi, the [stock] market leader is Alnylam [Pharmaceuticals], which has nothing in the clinic as well," Christely added. "But it's … somehow accepted [in the US that a preclinical company] can have an IPO. In Germany, the market wouldn't make this possible so we had to look for other" options.

Christely said that while Atugen's investors have been very supportive of the company and its technologies, additional financing was simply not available from them. As such, Atugen agreed to the merger with SR Pharma, which allowed it "to become part of a public company and have all the advantages [that go with it such as] the possibility of attracting investors."

Already, it seems, this is the case. SR Pharma announced late this week that it has raised £8.3 million through a stock placement with institutional investors. The company also said that it has secured a £1.7 million equity investment from Introgen Therapeutics, a biopharmaceutical company based in Texas. The deal gives Introgen an 8.3 percent stake in the post-merger SR Pharma.

In regards to the size of the new financing, Ross said that "we feel at the moment that we're undervalued, so we don't want to take too much cash in. We don't want to over-dilute the existing shareholders."

Still, this money should be sufficient to allow Atugen to continue work on its lead oncology program, which Ross said is focused on liver and pancreatic cancer.

Giese told RNAi News this week that the company has already identified targets in these indications, and is working on several drug candidates. He declined to disclose the targets, but said that they "are endothelial-specific targets, which will lead to tumor shrinkage by blocking the blood supply to the tumor. They are also involved in preventing metastasis," he added.

"We have chosen [liver and pancreatic cancer] for a number of reasons," Giese said. "One is we will have at least second-line access to the patients. The other is that [this is a] completely unmet medical need area — there are no drugs out there right now [for these indications] on the market."

Actually, Gemzar, made by Eli Lilly, is one drug used against pancreatic cancer, while the drugs Adrucil and Efudex, made by SP Pharmaceuticals and ICN, respectively, target liver cancer.

Giese noted that with the money from the financing round, Atugen is set to prepare for clinical trials, which he expects to be ready to begin in about a year.

Money from the financing will also go to support SR Pharma's "roll-up" strategy of acquiring other "undervalued assets," Ross said. "We have other assets that we've targeted, so Atugen won't be our last acquisition. We have a number of other things targeted, which range from products [to] IP, and we are actually looking at a potential revenue-generating acquisition, as well."

The Deal

SR Pharma in late June first said that it planned to acquire Atugen. The deal, which closed following the approval of SR Pharma's shareholders at a June 30 general meeting, called for SR Pharma to acquire 96 percent of Atugen's shares, as well as certain debt, for £6.16 million ($10.7 million) in mostly newly issued SR Pharma stock. The remaining shares of Atugen were acquired for £52,000 ($90,500) in cash and stock.

Under the terms of the arrangement, Atugen shareholders will own a maximum of 49 percent of the new company, known as SR Pharma. Certain Atugen shareholders, representing about 46 percent of the stockowners of the new company, have agreed to a 12-month lock-up following the closing of the acquisition.

While he declined to provide specifics on SR Pharma's acquisition targets, Ross noted that they generally relate to the company's core focus of oncology and inflammation, and fall both within and without the RNAi sector. He noted that they most likely will be limited to biologics, rather than small molecules.

Ross also noted that SR Pharma plans to announce collaborations, possibly with other players in the RNAi field, before the end of 2005. "We don't need to have access to everything to have a successful company," he said. "We're focused very much on systemic delivery of RNAi, and we feel that there are deals to be done within the sector. There's plenty of room for everybody."

Additionally, money from the financing will allow SR Pharma to hire on UK-based Fulcrum Pharma Developments to handle Atugen's clinical development activities.

While Atugen will conduct basic research and preclinical animal testing in-house, Ross said, "in terms of clinical development, we won't be building a huge infrastructure. The Atugen operations will remain as is, and any moving of the products along the clinical pipeline will be handled by an outsourcing company," namely Fulcrum. "That will be for all our products," he added.

As for Atugen's contract research operations, Ross said that they will remain a part of the company as a key revenue driver. "There are no plans to spin anything out," he added.

— Doug Macron ([email protected])

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