Allozyne Looks to Rustle Up Interest on Wall Street With Backdoor IPO

7/13/11Follow @xconomy

Any company that aspires to get a listing on the stock market had better be ready for marathon hours with investors, accountants, and lawyers. But there’s a special thicket of challenges to work through when you’re introducing yourself to the NASDAQ the way Seattle-based Allozyne is.

The privately-held biotech company is taking the backdoor route to an IPO by acquiring the shell of a public company—San Francisco-based Poniard Pharmaceuticals (NASDAQ: PARD). So besides running their regular business, a few new tasks have piled up in front of Allozyne CEO Meenu Chhabra and finance chief John Bencich. They need to rustle up another 2.2 million votes from Poniard’s existing shareholder base to authorize the deal and, assuming that happens, they need to introduce themselves and their newly merged company in a hurry to Wall Street.

Poniard’s shareholders, who have lost most of their money on a drug that failed in a trial for small-cell lung cancer, could be excused for feeling too jaded to turn in their votes. And Allozyne is an unknown quantity to most Wall Street investors—it has an unfamiliar protein engineering technology platform, and a lead drug candidate for multiple sclerosis that’s still in the first of three clinical trial stages normally required for FDA approval of a new drug. That basically means it needs to gather a lot more proof that it works before investors, in today’s market, will get excited.

For the always-enthusiastic Chhabra, it just means she’s got a lot of work to do.

“I’ve been doing a lot of cardio,” Chhabra joked, referring to how she’s been shuttling between meetings with investors on the East Coast.

For now, there are some key terms investors need to settle on to seal the deal. Allozyne is asking Poniard shareholders to trade in 15 to 25 of their existing shares to get just one back, in what’s known as a reverse stock split that companies often do to prop up their stock prices above $1. If those terms are accepted, Poniard shareholders will get about 35 percent ownership of Allozyne.

If Poniard shareholders go for the new structure, then Allozyne will have to go about the hard work of redefining the company. Allozyne has raised $43 million since it was founded in 2005, and has gone through long stretches in stealth mode, keeping competitors in the dark. To go public via this route, Allozyne will have to disclose much more about its strategy and risks through a new regulatory filing called an S-4. The document will be similar to an S-1 investor prospectus for a traditional IPO, Bencich says.

Meenu Chhabra

For now, Allozyne’s executives are out doing what they can to prime the pump of interest. “The response is encouraging. It’s a fresh story no one has heard of before,” Chhabra says.

Allozyne considered a conventional IPO, but decided against it. Some biotechs have done well in recent stock market debuts, such as Parsippany, NJ-based Pacira Pharmaceuticals (NASDAQ: PCRX), but several have tried, found little investor appetite, and withdrew IPO paperwork. San Diego-based Ambit Biosciences, and Durham, NC-based Aldagen are a couple recent examples. “If you look at what’s happening in traditional IPOs, there are painful processes,” Chhabra says.

Chhabra is trying to build a base of interest with Poniard shareholders, and then to bolster that interest by setting up a couple of catalytic events. If Allozyne can complete the deal as planned in the late part of the third quarter or early fourth quarter, Chhabra says she has a couple important steps in mind for the early days of the new public company. One, she plans to release more data from the second part of a Phase I clinical trial of Allozyne’s long-lasting multiple sclerosis drug, AZ01, which I reported on first in January at the JP Morgan Healthcare Conference. And two, Chhabra says she plans to raise more capital from public investors to support a pivotal clinical trial strategy for AZ01. While that will dilute the value of existing shares—never a popular thing—it will provide Allozyne the fuel it needs to execute on its plan, she says.

Bill Greene, a partner with MPM Capital in San Francisco, one of Allozyne’s founding investors, said the company should be able to appeal to investors on the prospects not just for AZ01, a long-lasting version of the blockbuster interferon beta for multiple sclerosis, but also for the technology platform that has potential to churn out more drug candidates.

“We believe interferon will remain a mainstay of MS therapy for the foreseeable future. It could be a really valuable property,” Greene says. Of course, “the company has to demonstrate that’s what it’s got.”

Investors are naturally asking a lot about how Allozyne stacks up in the competitive landscape of multiple sclerosis therapy. Many are aware that Weston, MA-based Biogen Idec (NASDAQ: BIIB), like Allozyne, is seeking to develop a long-lasting version of interferon beta. Longer-lasting drugs are thought to be desirable because they could enable patients to take fewer shots, and to keep a steady amount of drug in their systems without peaks and valleys around injection time that can complicate treatment of a chronic disease like MS.

Biogen, the world’s largest MS drugmaker, is further along in clinical development with its long-acting interferon, in the third and final phase of clinical trials. Allozyne could be a fast follower, partly because Biogen’s patient recruitment has been slowed down by the trial design, which randomly assigns patients to get the new drug or a placebo. Allozyne expects to run a different kind of trial, Chhabra says, in which it will randomly assign patients to its new drug, or an active comparator—Biogen’s standard interferon beta (Avonex). That means patients in the Allozyne trial won’t have to run the risk of getting a placebo, and therefore should be motivated to enroll.

The risk for Allozyne, though, is that its drug will have a higher hurdle to clear.

“We think we can show superiority in efficacy to Avonex,” Chhabra says.

There are also a couple oral pills on the market now for MS that any newcomer will have to contend with—Novartis’ fingolimod (Gilenya), and Acorda Therapeutics’ dalfampridine (Ampyra)—as well an emerging contender from Biogen known as BG-12. The Novartis drug has shown some promising effectiveness, but also some safety issues that have kept it from being used in newly-diagnosed patients. Allozyne is expecting that interferons will hold onto the catbird position as first-line therapy, a segment of the market where billions of dollars are being made.

And for the investors who want to see more than that, Allozyne is making sure to position itself as more than a single-product company. Through its protein engineering technology, which was originally licensed from Caltech, Allozyne says it can produce multiple kinds of protein drugs for different autoimmune diseases or cancers. I wrote about one of those drugs, an antibody designed to hit two biological targets instead of one, last November.

“Allozyne is one of those companies which is rare where you have a platform technology that’s building viable product candidates,” Chhabra says.

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  • nanostring

    A few points of note that the article does not mention:

    1. Based on today’s price of PARD, the merger values Allozyne @ ~$20 M ($11M*65/35).
    http://finance.yahoo.com/q?s=PARD&ql=1
    That is: they took valuable technology from Caltech + $43M in investor money and ended up with $20M in value. You do the math.

    2. Even that $20M may be too rich, considering that PARD got immediately hit by two lawsuits for agreeing to the terms of the merger.
    http://yhoo.it/qbHfKv
    http://yhoo.it/mOWjQe

    3. As of now PARD shareholders have twice rejected the reverse stock-split, which is a prerequisite to the merger:
    http://biz.yahoo.com/e/110725/pard8-k.html (second graph)

    Other than that, everything is great for Allozyne and its shareholders, including the public employees of Oregon and Washington…