Celtic Pharma: Attracting Big Pharma with experience and raising US$ 750M




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Video title: Celtic Pharma: Attracting Big Pharma with experience and raising US$ 750M
Released on: September 29, 2009. © PharmaVentures Ltd
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In this interview, filmed at PharmaTelevision’s Oxford Studios, Dr Fintan Walton speaks with Stephen Parker, Partner at Celtic Pharma, a source of private equity and venture capital created in 2004.

They discuss:

• the drug assets acquired from companies including Xenova, IDEA and Inspire
• Celtic Pharma’s Funds, their investors and their aims to raise US$750 M
• attracting Big Pharma, based on the knowledge and hands on advice given by Celtic Pharma’s experienced management team
• how the treatment of management teams is a priority for Celtic Pharma
• exit strategies
• funding in the UK Biotech sector and the economic climate
The drug assets acquired from companies including Xenova, IDEA and Inspire.
Fintan Walton:
Hello and welcome to PharmaVentures business review here in Oxford, England. On this show I have Stephen Parker who is Partner at Celtic Pharma. Welome to the show.
Stephen Parker:
Thank you.
Fintan Walton:
Stephen Parker, Celtic Pharma is a source of private equity and venture capital for the pharmaceutical and biotech industry, tell us little bit about the foundation of Celtic Pharma and what it's and describe its two funds.
Stephen Parker:
Yes indeed. Celtic Pharma was first created in 2004. We had our first close on about Christmas eve 2004 in the first fund and we went on to raise $250 million in equity which we then leveraged with a further 150 of mix in the debt, so we had a fire power of $400 million altogether. Now the first fund was aimed at acquiring late stage drug assets which for one reason or other usually has to be said as biotech companies running out of cash where unable to make the last hurdles and therefore be an interest to big pharma companies who even at that stage were increasingly short of new pharma products for their pipelines. We managed to acquire a total of 10 compounds including three which came from the acquisition of Xenova [PharmaDeals ID = 20830] in the UK, another 5 which were related to an investment we made inIDEA [PharmaDeals ID = 23522] a private, privately held company in Germany and a couple of single drug deals one to acquire XERECEPT from Neurobiological Technologies [PharmaDeals ID = 21631] in California. And the last one to acquire a Recombinant-Factor-IX from Inspiration [PharmaDeals ID = 29392] in the States.
Celtic Pharma's Funds, their investors and their aims to raise US$750 M
Fintan Walton:
So first of all where were the source of funds and where was the source of debt finance?
Stephen Parker:
Funds were contributed for everything from major pension funds both in the States and in Europe through to high networth individuals and charities no sorry no charities, funds that controlled by high network individuals really. So that was the equity side, the debt was raised for us by Morgan Stanley and in the end we had about 4 major debt providers who invested in that from both sides of the Atlantic.
Fintan Walton:
Right. Now the concept of acquiring assets rather than just simply investing into various biotech companies or maturing pharmaceutical companies and that time was quite a different angle?
Stephen Parker:
Yes it was.
Fintan Walton:
And so how did you manage that?
Stephen Parker:
Well there are two things really the first thing is how to pursuade people that we should or we could do a better job of managing these assets than way themselves. The second was putting in place a team that actually would do the development work that was necessary. As I said before most of the acquisitions we've made were frankly in distress situations so they've been a very good example of that. And so we were able to strike attractive deals which provided the potential for example for these many of shareholders to share in any upside that was going to come out of those drugs by the structure that we put in place. But also then to take them into a team which and was joining us from usually from big pharma companies with huge amounts of experience actually doing the hard yards of drug development within the big pharma company and of course the critical thing is that at the end of the day you've got to serve up products that a big pharma team is going to recognize as being something that could have come out of their shop.
Fintan Walton:
Sure.
Stephen Parker:
Otherwise you have the much invented here problems.
Fintan Walton:
And therefore you set up Celtic Pharma development surfaces?
Stephen Parker:
That's right.
Fintan Walton:
That's the group which manages the assets
Stephen Parker:
That's exactly right.
Fintan Walton:
Of the fund?
Stephen Parker:
Yes.
Fintan Walton:
And what actually happens then in terms of return do you get your return from the ultimate licensing or sale of the assets themselves?
Stephen Parker:
We when we acquire the drugs we actually do acquire but we don't license them in so that includes IP being assigned to us as opposed to if we license and in the same way when we sell on we've prefer to sell the entire assets local stock and barrell so that a big pharma company knows that they have something clean and these all there's as opposed to having a tail of royalties or whatever have been paid.
Fintan Walton:
Right. So that actually then pre-selects the type of assets you can actually acquire in some ways?
Stephen Parker:
Yes it does.
Fintan Walton:
Any type assets?
Stephen Parker:
Well it is the fact that it's a fund and therefore has a seven-year life is going to influence at some degree because a late stage development program which is going to take five-years in itself is probably outside the bounds of the funds can reasonably handled.
Fintan Walton:
Right.
Stephen Parker:
But having said that we have always believed for actually the first fund was founded that the IPO market is historical event for biotech and therefore the exit will come from sale to big pharma.
Fintan Walton:
Yeah. And how is that fund going?
Stephen Parker:
It's going very well, we are continuing to develop most of those assets, sadly we had to kill transmit from one of these novel ones but the other assets are all either actually being developed at the moment or are currently being auctioned to big pharma companies.
Fintan Walton:
Right. And the original investors in Xenova [PharmaDeals ID = 25344] by the time you acquired Xenova they're going to get a return on the sale of those assets?
Stephen Parker:
They were offered to the choice of either cash or a loan note and the loan note was secured on the drugs. And that in itself was " that was paid out at a later stage and so there is a " there is a debt instrument but that is the one that was invested in by the transatlantic investors the Xenova shareholders who elected to take the note were paid out with 15% interest rate that came which was about return compared with what they had from the equity.
Attracting Big Pharma, based on the knowledge and hands on advice given by Celtic Pharma's experienced management team.
Fintan Walton:
Right. Okay, so then now you've got a second fund which you disclosed last year, you want to tell us little bit about that and the mind set behind that?
Stephen Parker:
Yes, yes. The second fund obviously whenever you raise a fund you try and learn from things that went very well and things with more of a challenge. And one thing that become very clear to us was that big pharma whilst of the time of the first funds intellectually companies knew they had a problem coming, but it's still seemed a very long way away, now of course we see them having fully recognized that there is a major issue and they are adopting various strategies to try and deal with it, but I think that we will see that for the most part cost cutting doesn't do it for you. If you are going to lose 80 to 90% of your sales within nine months you simply can't cut cost fast enough, so the only remedy is to get more products in the salesman's bag. And so we are starting to see having started the position of the first fund where the big pharma companies really where prepared to take on any biotech risk, they did deals but they were massively backend loaded. Now we are starting to see them doing deals in earlier stage and in fact they are sometimes are finding the early stage, but none the less the feedback that we have from big pharma is that the ideal time for them to buy a drug is with the Phase III ready package, because of course in biotech terms a Phase III trial is fundamentally just a large scale Phase II trial they don't have to use resources to do anything creative about it. Big pharma that's where they " big pharm put the spin on the board for the marketers and so that's where they wanted to plan the trials. And so we decided that's where as in the first fund we had set out as though that we were going to buy that point and take it through the Phase III and deliver to big pharma a de-risked asset.
Fintan Walton:
Sure.
Stephen Parker:
Now we've recognized that it's not sensible to be complete with your customer and so we are investing broadly speaking at the IND point where we are going to expand and we will exit with the Phase III ready package, so we've moved a long way forward. And in order to deal with that efficiently goes quite clearly if you think about the point of the (indiscernable) that you're playing, we need to make sure we have a larger number of assets as same we had in the first fund. We've adopted a strategy in which we are investing in companies as opposed to just snatching and bringing the products out of companies, we are investing in companies working with company management, but we have within our team of course those people who are based in the UK in Celtic Pharma development services who bring with them all these years of fantastic experience in big pharma so just its invidious to single out one but I will Bob Milsted joined us three-years ago having taken early retirement from AstraZeneca working as Global Number 2 in Regulatory Affairs. And he personally shepherded the AstraZeneca oncology portfolio through the States, through Japan, through Europe. And basically what that guy doesn't know about dealing with the regulator doesn't need to be known.
How the treatment of management teams is a priority for Celtic Pharma.
Fintan Walton:
So it's through Celtic Pharma development services that you have a closer control on the management activity of the company?
Stephen Parker:
Yes type of fact where we've, we are not having a development services company because it is the company the investee company that's going to develop the drugs. The - our experts are sort of within our manager and providing a very active hands on advice to the companies and so that broadly speaking whenever anything happens which is either a fork in the road or a problem then these guys know that we have a team who are literally there to help invest the case.
Fintan Walton:
It is the big challenge of course is making it Phase III ready?
Stephen Parker:
Exactly.
Fintan Walton:
Because a big question is what is phase III ready?
Stephen Parker:
Yes. And the fact that we actually have a team of people who have gone through and taken drugs through the process within big pharma means that they know the things that big pharma actually looks for as being the essentials and then nice to have's and the one of that you don't like so we can make sure there are investee companies are focusing only essentials and leave the others to worry about it another day.
Fintan Walton:
Sure. So tell us a little bit about the - you've done I think two investments with this funds so far"
Stephen Parker:
That's right.
Fintan Walton:
And first of all you've done a first closing which brought in".
Stephen Parker:
Those are $100 million. This fund " we are not planning to raise leverage with this fund so we are hoping to try and get just close to $750 million we can for the full fund.
Fintan Walton:
Sure.
Stephen Parker:
So clearly in that context the 100 is only the first step but none the less.
Fintan Walton:
And the source of that money so far is from Europe, US?
Stephen Parker:
And well first of all we have various investors who have re-invested who were in the first fund have come with us into the second which obviously is great. But they are principally pension funds, high networth individuals and in this case we've managed to attract some interest from sovereign wealth funds so we have a major sovereign wealth fund investors already.
Exit strategies.
Fintan Walton:
Sure. Okay, so let's go back to these the first two investments you have made so tell us about that first?
Stephen Parker:
Well the first one was a diagnostics business or dialog devices which is a spin out from Loughborough University. This of course marks the first thing that is different in this fund from the first fund in that this time although we are principally focused on drugs, we will also invest in attractive devices or diagnostics opportunities where we believe that that product will make a dramatic difference to the practice of medicine, so it's not just a sort of "oh that's an useful information" it is something that will actively affect.
Fintan Walton:
And you are the sole investor in this?
Stephen Parker:
Well there are already some small VC's invested, but we've taken control of this company. And we have between depending on the value we achieve in the exit we will have between 50 and 60% of that exit of that business.
Fintan Walton:
Right. So how does that work then if you've got a leveraging point on the exit as a leverage work?
Stephen Parker:
Well it's almost rather than the having a sort of ghastly liquidation preference it is almost as referred to it as a liquidation deference in that we agree a target exit value beforehand which in itself will provide an attractive exit for us and given that these companies are usually very underfunded and very undervalued represent a very attractive exits to the incumbent VC's and when we hit or assuming we hit and pass that then we go on the side of the scale up to the end value and that seems to be as"
Fintan Walton:
So the end values the higher, the higher the value the higher percentage you get as an end point?
Stephen Parker:
Yes. And that is that seems to be model that we've now tested three or four times including those opportunities that we are looking at but haven't yet completed the due diligence with and that's seems to be a model that is acceptable to investors.
Fintan Walton:
Right. The second investment you've just announced recently two weeks ago.
Stephen Parker:
Yes, this was Novacta which is our first pharmaceuticals investment in the fund. Novacta is a very attractive business which has a novel family of antibiotics targeted against the hospital acquired infections so the first " first compound is again C-difficile should be in the clinic next year and that's being followed with a program for Gram-positive bacteria and targeting MRSA. And then a broad spectrum program which is following after that, so there are three recognizable drug assets within the company.
Fintan Walton:
Right. And you've taken a majority stake in that company as well?
Stephen Parker:
That's right.
Fintan Walton:
And you are the sole investors? In this particular round of investment?
Stephen Parker:
Not quite in that some of the incumbent investors wanted to make a small contribution to the round.
Fintan Walton:
Right.
Stephen Parker:
But we I think it's fair to say we are overwhelmingly the largest investor.
Fintan Walton:
Right. And do you have a similar exit system in place?
Stephen Parker:
Yes.
Fintan Walton:
So you've changed the way the funds second funds operates to the first fund is that a clue to say that the first fund is not as a good fund as the second one?
Stephen Parker:
No, no it doesn't at all. It's primarily a function of a point in which we are investing, if we " if you think about it in $400 million to give you 10 late stage assets we are hoping to have something approaching double that size of fire power and if we are dealing with early stage assets then we would be somewhere around this of 5 to 6 dozen[ph] in the portfolio. And I assure you to think of the size of team that you'll need to manage the development work in fact kind of portfolio, so it's purely a question of making sure that the very bright young eager, high energy management team that we see all around us in biotech companies are given sage advice by people who've been there and spent their lives achieving success within big pharma companies so that we harness that energy and point it to the right direction, it's not just a question of trying to get more and more and more compounds and the management takes it, it is sort of work smart ethos.
Fintan Walton:
Right. And do you expect you've already hinted that the pharmaceutical industry itself or the pharmaceutical companies themselves are changing they are going for early assets, would that mean that you are equally or likely to take and accept an exit at an earlier stage then you would have done normally or you going to persist to take the drugs through to Phase III?
Stephen Parker:
No, no, no we work to Phase III this model
Fintan Walton:
all through up to until to Phase III ready?
Stephen Parker:
The key to it is not so much the label, the key to it is the point of which both we and any potential purchaser has confidence that we've seen a proof of efficacy. And if you just take two extreme examples, Antibiotics is an area where quite often you can feel confident at an early stages it's not quite true to say that it works by traditional works in man but it's not very far short quite often. The other extreme sadly an awful lot of cancer drugs have shown promise in Phase IIA and then failed in the later stage of Phase IIB and Phase III, so the point of which we will feel confident with an oncology drug is probably significantly later on point of which you and the buyer would feel confident with an antibiotic.
Fintan Walton:
Yeah.
Stephen Parker:
So really is a question of " there is no (indiscernable) about this it's a question of when the market recognizes that there is an asset there. And if you think about it and now investing where we are you can think, the way I think about it is we invest in chemicals and we sell drugs with obviously the value steps [ph] that implies at the point of which you recognize you've got a drug and the buyer recognizes buying a drug will vary.
Fintan Walton:
So it sounds very clear that you are investing either directly in assets with two funds either in assets which are drugs themselves are you're buying companies with good portfolios going forward with good assets in them, are you likely to use the second fund for acquiring companies that are in services side of the business, companies that are in specialty pharma? Do you have any other limitations on the types of companies you would invest, because it sounds like already you are not particularly interested in investing in a anti-cancer or oncology based company?
Stephen Parker:
Well I would certainly wouldn't say that, I certainly wouldn't say that, but you must know what's the portfolio if you are going to have the things that are going to take you longer you want a few things that you will see an early exit and its all question of portfolio management. In terms of the areas that we will invest in outside of the " the hot and fast drug area we are investing in development stage companies, so broadly speaking the traditional certain small molecule specialty company well would probably be outside there, because it fundamentally they run on different model. They are very efficient most of the them they run a good model but it's not our model. But in terms of I mentioned we've invested in diagnostics we will certainly - we'll look at devices, we will potentially look at sort of combination areas say for example ophthalmology I think is an area with quite a lot of interesting and that tends to be as well as the various drugs that have been plus that you'll often find you get sort of drug related devices in that specific area and that could be of something of interest to us.
Funding in the UK Biotech sector and the economic climate.
Fintan Walton:
We had have a conversation about equity, money and biotech about talking about the current financial position we're in at the moment, we are in the middle of 2009 what's your view on this, what's you view on funding in the biotech sector generally and maybe specifically here in the UK?
Stephen Parker:
Well I've been in and around this sector since the mid 80's. And I've seen droughts before most notably in the middle late 90's where a lot of companies did fail, but I don't think I've ever seen such sustained drought with so few options for getting out of that drought that as I am seeing now. And in the UK context I must say I am delighted to see that (indiscernable) and the office of life sciences are trying to do take active steps in order to try and attract funding back into the UK and certainly at the moment we've seen a lot of very, very attractive UK opportunities which we think deserves support and by virtue all we can ourselves support all of them but I can certainly echo the view that says that everything is here that need to be done. One thing that I think is pretty just worth saying Fintan Walton is that one of the reasons that why we are in the state we are in is the way that management teams have been treated historically, where these are the people who are going to create the value and yet investors in the companies under traditional models have seen them as being absolutely the lowest priority and it's really no great surprise that when you don't support and encourage and incentify the management team that they don't deliver for you. And that's something that we are very actively trying to provide as part of our model going forward. So hopefully with various new sources of funding, government support and management teams who find themselves truly incentified hopefully and you can actually turn it on.
Fintan Walton:
And also a pharmaceutical industry that's changing as well that's more responsive to looking for opportunities?
Stephen Parker:
Pharma industry is unquestionable more responsive that at the moment of course we are seeing a lot of different almost proposed solutions, many of the companies have very active corporate investment vehicles themselves. I think it would be interesting to see how successfully they are as a source of compound to the pharma company. It's very difficult to make sure that the company is relevant to our truly alternative basis which is probably what it needs to succeed, whilst at the same time you are own R&D people will truly be all over them to try and sort of make sure they are first in the queue with the ideas. So I think well that is a challenge, but it's good to see that they are recognizing what they need to invest as well.
Fintan Walton:
Stephen Parker, thank you very much indeed for coming on the show.
Stephen Parker:
My pleasure. Thank you
Stephen Parker:
Thank you.
Stephen Parker
Partner
Stephen Parkerhas twenty years of working with and within the biotechnology and pharmaceutical industries. He has experience within the biotechnology sector as Chief Financial Officer of Oxford GlycoSciences ("OGS")(2000-2002) and through several interim CEO projects. At Oxford GlycoSciences he played a leading role in the raising of "170m in the largest UK follow-on equity fund raising for a biotechnology company and led the creation of a joint-venture, >Confirmant Limited, with Marconi PLC to exploit database applications of the proteomics platform.
Celtic Pharma
Celtic Pharma seeks to acquire direct ownership or controlling stakes in novel, differentiated and commercially attractive pharmaceutical products in the late stages of clinical and regulatory development. Celtic Pharma is committed to funding and actively managing these products through the last two to four years of clinical development and worldwide regulatory approval, including establishing manufacturing arrangements and other preparations for market launch. Celtic Pharma is pursuing a rigorous "virtual pharma" model of outsourcing for all activities except strategic decision making, regulatory interactions, contract negotiations and project supervision.