[Updated throughout 8/30/12 2:00 pm.] Sticking with a lean business model has paid off big for San Diego’s Elevation Pharmaceuticals, which has agreed to a buyout offer from Marlborough, MA-based Sunovion Pharmaceuticals that could eventually be worth as much as $430 million.
With the deal, Sunovion (a subsidiary of the Japanese drug maker Dainippon Sumitomo) has secured EP-101, an inhaled medication to ease the breathing of patients with respiratory disease. The drug is a reformulated and inhalable solution of a generic drug already approved by the FDA—a long-acting muscarinic antagonist (LAMA) bronchodilator. Elevation combined the drug with its eFlow Nebulizer System, a proprietary, hand-held device used to deliver an easy-to-inhale mist.
Elevation was advancing the drug-and-device together, and recently completed a mid-stage trial for treatment of chronic obstructive pulmonary disease (COPD). Elevation’s nebulizer represents a key part of the value of the deal for Sunovion (previously known as Sepracor), which can combine the device with other respiratory drugs already in its portfolio.
Elevation was founded in 2008, and has raised a total of $44 million to develop new aerosol therapies with a team of just 11 employees. The principal founder, CEO Bill Gerhart, was joined by chief medical officer Ahmet Tutuncu and San Diego serial entrepreneur Cam Garner, who served as chairman.
In a telephone interview this afternoon, Gerhart said Sunovion’s offer represents his best financial deal ever. He was previously the founder and CEO of Mpex Pharmaceuticals, acquired by Aptalis in 2011, and Medlyte Therapeutics (now Lpath Therapeutics).
Terms of the deal call for Sunovion to make an upfront payment of $100 million, which means the VCs would realize an immediate return that is at least twice their investment. If development of Elevation’s drug-and-device combo successfully continues, additional milestone payments would return almost 10 times the venture investment.
Brent Ahrens, a general partner in Canaan Partners Menlo Park, CA, office, led the Series A round of $31.6 million, which closed with a first tranche of $14.6 million in January 2010. “Think of the value the team created,” Ahrens told me by phone this afternoon. “It was pretty strongly up and to the right.” Including all expected returns, Ahrens said, “From the time we invested until today, the value creation is on the order of a half-million dollars a day. That’s pretty remarkable.”
Other investors include Novo Ventures, TPG Biotech, Care Capital, and Mesa Verde Venture Partners.
COPD, also known as emphysema and chronic bronchitis, is the third leading cause of death in the U.S., according to the Centers for Disease Control. About 12 million Americans are estimated to have COPD, and another 12 million have not been diagnosed, according to the National Institutes of Health. Elevation’s drug-and-device combo targets a segment of the market that consists of more than 1 million Americans with severe or very severe COPD, and who are typically very young or very old patients, Gerhart says.
In a joint statement, Elevation’s Gerhart says, “Nebulized medicine is an important treatment option for older and sicker patients—the fastest growing segment within COPD.” Hiroshi Nomura, Sunovion’s vice chairman, said the acquisition will strengthen and diversify the company’s portfolio of respiratory drugs.
The boards of both companies have approved the deal, which is subject to customary closing conditions.
In addition to the upfront payment, Sunovion agreed to make milestone payments of up to $90 million for EP-101. If EP-101 wins regulatory approval, additional commercial milestone payments could total as much as $210 million. Another $30 million is contingent on the successful development of other drug programs.
As Gerhart noted, “That’s helpful for other biotech companies that are trying to raise capital, for investors to know that these returns are out there.”