Turnaround CEO Shores Up Strategy for Unigene Based on Big Pharma Partnerships

11/15/11Follow @arleneweintraub

When Ashleigh Palmer joined Boonton, NJ-based biotech company Unigene Laboratories as CEO in mid-2010, he faced a turnaround challenge that others might have considered way too daunting. The 30-year-old company was struggling to make money from a disjointed set of assets, which included a promising but, in Palmer’s view, under-marketed technology that could be used to turn injectable peptides—or protein-based drugs—into easy-to-swallow pills. Unigene was in debt and in need of a rescue. Furthermore, says Palmer, it had been managed by the two scientist-founders, who were brothers. “There’s the first warning sign,” Palmer says. “Family and business often don’t go well together.”

Wall Street has yet to be convinced that Palmer has what it takes to turn around Unigene’s fortunes. Unigene (NASDAQ: UGNE), which went public in 1985, was delisted in 1999 and pretty much left for dead by investors. On November 9, Unigene announced a net loss of $7.2 million for the third quarter ended September 30, on $3.4 million in sales. The company’s revenues included royalties from a nasal spray it developed to treat the degenerative bone disease osteoporosis—a product that that Unigene licensed to Maple Grove, MN-based Upsher-Smith Laboratories but that hasn’t been selling well due to competition.

The stock, as usual, barely budged—edging down 2 percent to $1 after the earnings announcement.

Palmer has been doing his best to get investors to focus on the good news. In conjunction with its earnings announcement, Unigene announced positive Phase 2 trial results on an osteoporosis drug it is developing with European drug giant GlaxoSmithKline (NYSE: GSK). The drug is an oral form of parathyroid hormone (PTH), the protein that’s the basis of Eli Lilly’s blockbuster osteoporosis injection teriparatide (Forteo). In the trial, Unigene’s drug produced a statistically significant increase in bone mineral density in the lumbar spine—a measure used to predict fracture risk. It was the result the companies were hoping to see.

Wall Street’s reaction? Crickets.

Then, yesterday, the company announced that an osteoporosis drug it was manufacturing as part of a partnership with Novartis (NYSE: NVS), Danish drug developer Nordic Biosciences, and Cedar Knolls, NJ-based Emisphere performed poorly in a late-stage clinical trial. Unigene has already received $13.7 million out of $18.7 million in potential payments from Novartis under a 2004 licensing agreement, and Palmer said in a statement that the setback would make little difference to the company’s turnaround effort. Still, it was enough to knock Unigene’s stock down by a dime.

As far as Palmer is concerned, the company’s relationship with GSK is the key element of his turnaround plan. GSK first partnered with Unigene in 2002 with the intention of developing a synthetic, oral form of PTH. But the first generation product didn’t work, and GSK lost confidence in Unigene, Palmer says. So shortly after he joined the company, Palmer and his team went to GSK and presented new data onthe next-generation of oral PTH that the company’s scientists had developed. Last December, GSK renewed and amended the agreement, vowing $4 million upfront to Unigene and $4 million upon completion of Phase 2 patient enrollment. Unigene could earn $142 million in milestone payments should the product make it to market and is also entitled to tiered royalties in the low double-digits.

Unigene will report details of the Phase 2 study to GSK by the end of this year, at which point GSK will have 75 days to decide whether to move forward into a pivotal, Phase 3 program. “If GSK’s decision is positive, it will be a game-changing event,” Palmer says, “with milestone payments that will have a significant impact on our debt.”

GSK isn’t the only company willing to give Unigene a shot. On Oct. 6, Unigene announced that Nordic Bioscience had established a joint-development program with Unigene to develop analogs of calcitonin—a hormone the two companies will investigate for the treatment of Type 2 diabetes, osteoarthritis, and osteoporosis. (The program is independent from the Novartis osteoporosis program involving Nordic.) Such deals, Palmer says, lessen Unigene’s vulnerability to disappointments. “Our philosophy is to create options and to diversify the company,” he says. “We have many shots on goal.”

Palmer also set up a separate unit to market Unigene’s core technology, called Peptelligence, to other pharmaceutical companies that want to convert injected products into oral drugs. The previous management team, Palmer says,”squandered the potential to apply the technology to other company’s products. Now we can go to them and say, ‘We can make oral formulations of your drugs and expand your market.’ We’re like the Intel Inside for peptides.”

In May, Unigene announced that it had formed an agreement with Shelton, CT-based Cara Therapeutics to deploy Peptelligence in the development of a pain drug. Palmer says there are an additional six feasibility studies ongoing with other companies that have not yet been announced.

Unigene has about $5.2 million in cash—enough to take it into the second half of next year. When the company was facing bankruptcy in 2009, it entered into a financing agreement with Chicago-based Victory Park Capital, which had lent the company $20 million the year before. Victory Park added $13 million and transformed the debt into a convertible note, says the company’s managing partner Richard Levy. That may be why traditional life sciences investors are steering clear of the stock, he says. “The structure of the convertible note is not as clean as what life sciences investors need to see,” he concedes. “We understand that and we’re working on it.”

Victory Park interviewed about 25 potential turnaround CEOs before choosing Palmer, whose previous experience includes heading up business development at Ohmeda, a drug company that was bought for $1.2 billion in 1998 by a consortium that included Baxter and Becton Dickinson. Says Levy, “He had the stomach to do what needed to be done, like killing projects that didn’t make sense.”

Levy says he’s been surprised by how quickly Palmer has moved beyond the bare necessities of divesting non-core assets and hiring new management. “He’s created very valuable Big Pharma partnerships,” Levy says. “It’s miraculous.” Levy says Victory Park has already doubled its money on Unigene, even though they’re “not yet liquid” on the investment. “We know these assets are worth more than the Street thinks they are,” he says.

Unigene is still facing some daunting obstacles, though. Both the GSK and Nordic partnerships are only guaranteed through Phase 2. Palmer is well aware that completing the Phase 3 trials necessary for FDA approval in diseases such as osteoporosis and diabetes—where patients take drugs chronically for years on end—won’t be easy. Proving safety and efficacy will require long trials with thousands of patients, he admits. If, say, GSK pulls out before Phase 3, the prospect of having to pay millions to finance the program will fall on Unigene’s shoulders. Palmer says he’s not worried. “If GSK decides not to move forward, the rights come back to Unigene. I’m confident this is a very attractive asset for partnering” with another company, he says.

After Unigene’s earnings announcement Wednesday, Palmer spent an hour on the phone with Wall Street analysts explaining the GSK news and answering questions about the progress of the turnaround. He emerged cheerful in spite of the grilling. “When you do this enough times you get to know the alligators that can jump up and bite you,” he says. “It’s humbling. But we’re privileged to have so many assets. We come to work and have a blast every day.”

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