There was a flurry of San Diego life sciences news over the past week, but we’ve got it all sorted for you here.

—Politicians sometimes complain about voter apathy, but consider the plight of San Diego’s La Jolla Pharmaceutical. The biotech, which failed to develop a drug for lupus, has been unable to muster enough shareholder votes to put itself out of business—or to approve a proposed merger with Adamis Pharmaceuticals (OTCBB: ADMP). In a statement this week, La Jolla Pharmaceutical says only 12 percent of its shareholders returned their proxy cards last week—falling far short of the quorum needed to constitute a valid vote.

—San Diego’s Adventrx Pharmaceuticals (NYSE Amex: ANX) says the FDA wants more data from stability testing of its new formulation of vinorelbine, a chemotherapy drug used to treat a variety of cancers, including non-small-cell lung cancer.

—Optimer Pharmaceuticals (NASDAQ: OPTR), a San Diego biotech developing an antibiotic for a dangerous hospital infection, raised $51.5 million in a secondary stock offering.

—San Diego’s Novalar was in the news twice in the past week. The San Diego-based biotech struck a deal that gives Sanofi-Aventis exclusive rights to market Novalar’s vasodilator drug phentolamine mesylate (OraVerse) in Germany.

—Novalar was also ordered by the FDA to stop using a misleading patient brochure in its marketing of the drug phentolamine mesylate. Novalar CEO Donna Janson says the … Next Page »

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The demise of San Diego’s Verari Systems and its resurrection as Verari Technologies happened so fast you might not have realized what happened unless you were paying close attention over the holidays.

The longtime local company, which specializes in making high-performance servers, server racks, and energy-efficient data storage centers, laid off 223 employees and ceased operations just two weeks before Christmas. It was hard to make out what was happening at the time, chiefly because Verari denied media reports that it had shut down—saying instead that its doors were open and it was merely “restructuring” its business.

But a few weeks later, a notice on Verari’s website said the high-performance computer company was in fact soliciting buyers in a public auction. All Verari assets were later sold through a liquidation known as an “assignment for the benefit of creditors.” Such liquidations, sometimes known as “friendly foreclosures,” are not that unusual—especially these days, according to Bruce Bennett, a Los Angeles bankruptcy lawyer. Bennett told me that in these scenarios, a senior secured creditor, usually a bank that provided a business loan, forces the issue, but ultimately with the company’s cooperation. “It’s just an inherently simpler and less expensive way of liquidating the assets instead of going through bankruptcy,” Bennett says. In most cases, no new company emerges from such liquidations.

But Bennett says it’s not that unusual for a key figure from a distressed company to step back in and acquire all the assets—which is what happened at Verari. Dave Driggers, who founded the San Diego company in 1991 and was working as Verari’s chief technology officer, led an investment group that bought all of the old Verari’s assets. Driggers also stepped in as CEO to reboot the San Diego computer company, which is now known as Verari Technologies. Less than 40 percent of the old Verari’s 223 employees are expected to get their jobs back.

Dave Driggers

Verari reopened for business last week, capping a lightning-fast salvage that took less than six weeks to carry out. But it tortures common sense to describe what happened as a restructuring.

In a recent interview, Driggers told me that all of Verari’s previous investors were wiped out—after raising $59 million in three rounds—and that they were not part of the group that bought Verari’s assets. “You never heard me announce a restructuring,” Driggers said. “I chose not to say anything during the process—from the day we shut down until after the acquisition.”

During our conversation, Driggers explained why he’s optimistic about the future of Verari Technologies—which he says is moving forward with the same technology and a better business model. He also explained why the old Verari failed.

With a mixture of exasperation and pride, Driggers said that Verari “had incurred a huge amount of debt” while its technology and products were … Next Page »

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San Diego’s Verari Systems, which ceased business in mid-December and laid off more than 200 employees, says it is restarting its blade computer business after an investment group acquired Verari’s assets at auction. An investment group led by the company’s original founder, David Driggers, purchased Verari’s inventory, equipment and technologies, and will support past Verari customers. The restructured company, renamed as Verari Technologies, will resume operations this week with less than a third of its previous workforce.

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When San Diego tech firm Verari Systems abruptly laid off nearly all of its employees last month, senior vice president Dan Gatti maintained that the doors remained open, a few executives were staying on, and the company was restructuring its business. In a Dec. 14 statement posted on Verari’s website, the company said it had initiated a process to protect “our customer investment and benefit our creditors as we restructure the business…There are several options that are being considered to provide solutions to our customers.”

Several former employees denounced the company’s line in e-mails to me and in comments posted beneath our story, saying all 200 employees were terminated Dec. 11 and Verari, which specializes in data storage hardware and green data storage centers, has no business left to restructure.

It now appears that Verari has indeed ceased operations. An advertisement on its website is soliciting offers for an asset sale, saying, “All assets will be sold by CMA (Credit Management Association) as assignee for the benefit of creditors.” Such language reflects a well-established tool that is an alternative to bankruptcy for insolvent companies that cannot continue to operate. A rough translation is that Verari pledged its blade-based computers and other equipment to secure a bank loan—and the banker is selling the assets to recoup the debt. The deadline for submitting bids was 5 p.m. yesterday.

The CMA representative handling Verari’s asset sale did not return my call. The Burbank, CA-based company explains on its website that secured creditors view the process known as a “general assignment for the benefit of creditors” as useful “because the secured creditor is relieved of the legal costs and risks associated with the foreclosure and sale of its collateral.”

It seems likely that Verari’s insistence on characterizing its shutdown as a restructuring was intended to assuage customers that have installed Verari’s data storage equipment and who might reasonably expect some level of continued technical support. Those customers include Akamai, Microsoft, Qualcomm, Petrobas, Harris, and Lockheed-Martin.

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[Corrected 12/29/09, 3:40 pm. See below.] When it comes to commercializing a bio-engineered human skin substitute that could be used to treat diabetic ulcers and other tissue damage, Kathy McGee has the benefit of a long view.

McGee tells me she arrived in San Diego from Ireland in 1992 to work for Advanced Tissue Sciences (ATS). The pioneering biomedical startup raised hundreds of millions of dollars and spent 15 years developing its human tissue products before filing for Chapter 7 bankruptcy liquidation in late 2002. ATS then passed the baton to Smith & Nephew, the London-based medical products giant that had been its partner in a joint venture to manufacture its product line. In a 2003 deal approved by the bankruptcy court, ATS sold the global rights to its Dermagraft tissue substitute and related technologies and manufacturing facilities in La Jolla to the British company. Smith & Nephew tried without success to commercialize the technology itself—and ultimately sold the same rights and facilities in 2006 to Advanced BioHealing, a regenerative medical technology company that has a headquarters in Westport, CT and a manufacturing facility in San Diego.

Kathy McGee

“I was here for the startup and the shutdown and the restart,” quips McGee, who is now a vice president with Advanced BioHealing and general manager of the company’s San Diego operation. She joined ATS five years after it was founded, and worked in various capacities during the company’s early stage of development. She stayed on as Smith & Nephew’s director of manufacturing. And a few years later, as a member of Smith & Nephew’s shutdown team, McGee says, “I signed my layoff letter from Smith & Nephew in the morning, and signed my employment letter from Advanced BioHealing in the same afternoon.”

Now Advanced Biohealing could someday serve as the definitive case study in how the third time is the charm when it comes to building a complex medical products company. “The two companies that were based here before us were unsuccessful in making a business with this product,” McGee says.

Advanced BioHealing re-launched the business in 2007, focusing solely on the sale of 2-inch by 3-inch Dermagraft patches, which are derived from … Next Page »

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San Diego’s Metabasis Therapeutics (NASDAQ: MBRX), which warned in May that it might have to cease operations, says it has hired a financial advisory firm to help the company evaluate its strategic options. Metabasis said earlier this week that Mark Erion, the company’s CEO, chief scientific officer, and director, has resigned to join Merck & Co. as a vice president overseeing work on diabetes and obesity. Erion was among a handful of executives remaining at Metabasis, which named chairman David Hale as executive chairman.

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Sequoia Communications CEO Dave Shepard was out of town last week when the demise of the San Diego fabless semiconductor design company came to light. I was told he was furious over the shutdown, as Sequoia had finished its product, a chip for use in cellphones and wireless devices, had secured customers, and was roughly a year from breaking even. The explanation was that the eight-year-old startup had been unable to raise the additional venture capital.

But if he was upset, the semiconductor CEO had processed the news, so to speak, by the time I finally reached him yesterday. Instead of talking from Sequoia’s ground zero, Shepard spoke from a considerably higher altitude, saying, in effect, that the problems that swamped the San Diego startup chipmaker extend well beyond the company itself.

“The issue is bigger than Sequoia Communications,” Shepard says. “I think the venture-backed model for semiconductor startups is broken. The complexity of these chips has just gotten so high, it just takes so much money to fund a startup nowadays, that to the VCs, it’s just not worth it.”

In a nutshell, Shepard says semiconductor startups are getting squeezed by sharply higher costs and dramatically lower valuations. A new chip technology that would have required two to three years and $15 million to $30 million in startup funding to get to proof of concept a few years ago now requires five to eight years and something closer to $80 million. For that kind of startup capital, Shepard says VCs want to see semiconductor buyouts of $400 million to $500 million. But deal values have plunged. At a meeting organized earlier this month by CommNexus, San Diego’s non-profit wireless industry association, one presenter said the median value of 97 semiconductor M&A transactions in 2000 was $484.1 million. In 2003, there were only 47 deals and the median deal size was just $144.5 million. The trend has worsened with the economic downturn, and Shepard says valuations for semiconductor startups are now in the range of $75 million to $100 million.

Shepard says he was unable to sell Sequoia, even though the company had contracted with several customers in China and had a finished product—a sophisticated multi-mode transceiver designed to accommodate the burgeoning market for various 3G mobile phones. In addition to transmitting and receiving standard cell signals, Shepard says Sequoia’s transceivers perform multiple functions, such as translating analog RF signals into the digital code used by mobile devices.

After raising close to $75 million from VCs and other investors, Shepard estimates Sequoia was about a year away from breaking even. The company, which had about 30 employees, needed to raise an additional $10 million. Sequoia’s investors instead decided to cease operations in mid-July. (By last week, auctioneers were preparing to sell the company’s remaining assets and Shepard was taking a break in Lake Tahoe.)

“The VCs just got tired,” Shepard says. “Half of our VCs were out of money, and the other half had been in the company for a long time. So they were looking at a low return on their investment.”

He adds, “It’s not really anybody’s fault. I’m not mad at the VCs.”

He maintains that what happened to the San Diego startup “is not a Sequoia-specific problem.” The changing economics of semiconductor innovation have ramifications for the entire industry, he says, because the big chipmaking companies like Qualcomm, Intel, and AMD have traditionally counted on smaller startups as a key source of their innovation.

Worldwide, Goldman Sachs data shows semiconductor M&A transactions declining from 137 deals with a total value of $33.7 billion in 1999 to 86 deals with a total value of $2.2 billion so far in 2009. Semiconductor IPOs have been practically non-existent this year, with Goldman Sachs showing 10 deals worldwide with a total value of $43 million. The CommNexus meeting, which Shepard helped organize, was billed as “Endangered Species Alert: Fabless Semiconductor Startups Threatened With Extinction!”

Shepard says he not sure how the broader problem is going to get solved. It’s possible that China could move into the semiconductor R&D vacuum, although that could raise broader issues for U.S. economic policy. “The semiconductor industry is a sensitive area that touches everything,” he says.

Meanwhile, an online auction of Sequoia’s office furniture and electronic testing equipment is set to begin today.

The company’s most-valued assets, the design database for the chip and its intellectual property, including Sequoia’s portfolio of 20 issued U.S. patents and 15 patent applications, will be sold through a separate process. Proceeds will go to the investors. “I have no idea what the value is, but it will be under $10 million,” Shepard says. “It will be vastly less than what they put in.”

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San Diego’s Sequoia Communications, a venture-backed semiconductor company founded in 2001, has shut down—ending the startup’s effort to develop an innovative microchip for cellular phones. The company’s demise was reported yesterday by the website SoCalTech.com, which noted that Sequoia has raised more than $50 million from BlueRun Ventures, Cadence Design Systems, Gabriel Venture Partners, Huntington Ventures, Motorola, Nokia Venture Partners, Tallwood Venture Capital, and Third Point Ventures.

Rory Moore, CEO of CommNexus, the San Diego non-profit wireless industry group, confirmed the closure in a terse e-mail to me, saying simply that Sequoia’s VCs “pulled the plug.” Additional details were not available late yesterday, including the number of employees who lost their jobs. (The chipmaker had about 50 employees two years ago.) Sequoia’s former CEO, Dave Shepard, could not be reached for comment.

In a 2007 Q&A with the San Diego Union-Tribune, Shepard said the wireless chip under development at Sequoia was intended for the high-end phone market. “Our chip actually makes those high-end phones have much better battery life, much better cost, and much smaller form factor, so they get into a smaller phone size,” Shepard said at the time. He also described the wireless chip as “multi-mode,” saying, “It works in GSM, Edge and wideband CDMA, which are all the different phone modes.”

The Woodland Hills, CA, auction firm Cowan Alexander has scheduled an auction of Sequoia’s test and measurement equipment, computers, printers, flat-panel monitors, lab benches, and other equipment at the company’s headquarters. The auction, which begins at 11 a.m. PT Tuesday, is being webcast.

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It might be the dog days of summer, but San Diego’s life sciences companies kept up a busy flow of cool news over the past week. Get your update here.

—Isis Pharmaceuticals, the Carlsbad, CA, biotech that specializes in so-called antisense technology, is getting ready to test a new treatment later this year for patients with an aggressive form of amyotrophic lateral sclerosis (ALS), or Lou Gehrig’s disease. Isis (NASDAQ: ISIS) is planning the first clinical trial of a treatment known as ISIS-SODRIX, a drug designed to shut down the genetic RNA machinery that enables the production of disease-causing proteins. Luke reported the treatment also could pioneer a new way of delivering antisense drugs for a variety of neurological disorders.

—San Diego’s TorreyPines Therapeutics (NASDAQ: TPTX) has agreed to a reverse merger with Novato, CA-based Raptor Pharmaceuticals. To pull off the deal, however, TorreyPines must get its shareholders to vote to approve the deal. That sounds easy enough, but TorreyPines was unable to muster enough shareholder votes in July to approve a resolution to dissolve the company.

—A Boston-area researcher said a new drug developed by San Diego’s BrainCells Inc. could someday prove effective in treating depression. The drug known as BCI-952, which combines buspirone and melatonin, was not expected to work. But it’s getting a second look after Dr. Maurizio Fava, of Massachusetts General Hospital, presented promising results in a clinical trial of 142 patients diagnosed with major depression.

—San Diego’s La Jolla Pharmaceuticals (NASDAQ: LJPC) plans to seek shareholder approval for a liquidation plan. As Denise reported, the company disclosed in a recent SEC filing that it has discharged substantially all of its obligations to creditors and is working to satisfy those that remain. The biotech also said it has settled a lawsuit with former partner BioMarin Pharmaceuticals (NASDAQ: BMRN) of Novato, CA.

—San Diego’s Inovio Biomedical (AMEX: INO) has raised $30 million from the direct sale of 11.1 million shares and 2.8 million warrants to institutional investors. Inovio is focused on the development of vaccines to prevent or treat cancers and chronic infectious diseases. The company’s delivery solutions are based on electroporation, which uses brief, controlled electrical pulses to create temporary pores in cell membranes, which makes it easier for cells to take in a useful biopharmaceutical.

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TorreyPines Therapeutics (NASDAQ: TPTX) has found a new solution to its cash woes: a merger with Novato, CA-based Raptor Pharmaceuticals. To pull off the deal, however, TorreyPines must overcome an old problem: getting its shareholders to vote.

Few biotechs come to an end as embarrassingly as San Diego’s TorreyPines Therapeutics. When its board of directors called for liquidation earlier this year, shareholders displayed their apathy by failing to vote in sufficient numbers for the resolution to pass by the required margin.

So the board gave shareholders more time to turn in their proxies – until July 16. But TorreyPines still couldn’t muster enough votes, so it extended the voting until July 30. It looked like TorreyPines couldn’t even succeed at failing.

Now things could change. Last week, just before the polls “closed” for the third time, the company’s board endorsed a new proposal. TorreyPines announced plans to merge with Raptor Pharmaceuticals (OTC BB: [[ticker:RPTP.OB]]) of Novato, CA., a three-year-old company working on drugs for rare diseases or those with few treatment options. The merged company will be called Raptor and will be headed by Raptor’s current management team. Raptor shareholders will own 95 percent of the merged company. To learn more about the deal, I left messages for executives and PR representatives of both companies yesterday, but no one got back to me.

TorreyPines brings little to the table. It already has sold off much of its pipeline and is down to three employees. But it has something Raptor lacks—a NASDAQ listing. The companies say that when the deal closes, they will initiate a reverse stock split to keep the merged company in compliance with a NASDAQ requirement that shares list for at least $1. That will take some doing. Raptor’s shares have been trading over-the-counter in the 40-cent range. TorreyPines shares have been hovering around 13 cents.

The merged company faces a tough road. In its filing for the quarter ending May 31, Raptor said it anticipated receiving enough cash from deals already in motion to fund operations through the first quarter of 2010. But first, the two companies must persuade TorreyPines shareholders to weigh in on merger deal. Given recent history, that’s far from a sure thing.

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San Diego’s La Jolla Pharmaceuticals (NASDAQ:LJPC) plans to ask shareholders to approve a liquidation plan at a not-yet-scheduled special shareholders meeting, according to a recent SEC filing. The company says it has discharged substantially all of its obligations to creditors and is working to satisfy those that remain. Separately last week, the company disclosed that it settled a lawsuit with former partner BioMarin Pharmaceuticals (NASDAQ:BMRN) of Novato, CA. BioMarin had marketing rights to La Jolla’s only experimental drug, but abetimus sodium (Riquent) failed in a late-stage trial.

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What if a company called a special shareholder meeting and nobody voted? Executives at San Diego’s TorreyPines Therapeutics pondered the question today after failing to muster enough votes for a proposal to liquidate and dissolve the company. In a statement, TorreyPines said 62 percent of the biotech’s stockholders failed to vote on the issue, which the board unanimously approved in May. The measure to dissolve the company requires a majority of outstanding voting shares for approval. In a bid to collect enough votes, TorreyPines adjourned its meeting until July 16th at the company’s corporate offices.

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San Diego’s Advanced Tissue Sciences tried for 14 years to develop living-tissue patches for healing burns, wounds and chronic sores. But the business went into bankruptcy liquidation in late 2002, a victim of regulatory delays and more than $300 million in debt.

Since then, former CEO Gail Naughton says she’s been invited to speak many times about the hurdles that Advanced Tissue Sciences was unable to overcome and what she would have done differently. “After talking about what I would do differently a number of times,” Naughton says, “I decided to go out and actually do it.”

The result is Histogen, a San Diego-based life sciences company that Naughton founded last year. Naughton says the technology underlying Advanced Tissue Sciences has been reborn—with significant advances—and that Histogen intends to avoid the business pitfalls that crippled the predecessor company.

“Many of us worked for Gail at Advanced Tissue Sciences,” says Robert Kellar, Histogen’s vice president of research and development. “So we joke around by saying ‘We’re putting the band together again.’ ”

After raising more than $5.3 million from private investors in May, Naughton says Histogen plans to raise another $1.4 million from investors by the end of the year. The startup also has secured a $1.4 million loan.

A key difference at the new company is the creation of a subsidiary, Histogen Aesthetics, which is adapting the in-house expertise in fibroblasts, the cells that form connective tissue, to develop skin and hair care products. By focusing at the outset on the cosmetics, dermatology, and plastic surgery industries, Naughton says Histogen can generate immediate revenue to support the long-term development of living tissue skin grafts and other medical products that require a protracted regulatory approval process.

The company’s first cosmetics product is called ReGenica, a liquid made from fibroblast-secreted proteins, growth factors, and other products. It is intended for use in anti-aging skin treatments and to promote healing after cosmetic laser skin resurfacing.

Last week, Histogen said it also plans to evaluate whether ReGenica injected into the scalp will stimulate hair regrowth in a clinical trial of 24 patients. “Our hypothesis is that it helps to stimulate resident stem cells to become hair follicles,” Kellar says.

Naughton says Histogen already has used its expertise in culturing and growing fibroblast cells to develop products derived from human tissue cells that can be used as a growth medium by stem cell researchers. With such products already generating sales, she says Histogen can generate cash to offset at least some losses it expects to endure while it spends years working toward getting approval to sell its therapeutics products.

It was that prolonged march through the desert that eventually killed Advanced Tissue Sciences, which endured a three-year FDA delay amid mounting debts in getting the company’s Dermagraft skin patch for diabetic ulcers to market. Even after getting regulatory approval, Naughton said the reimbursement rate that insurers set for the treatment covered only a fraction of the company’s actual cost to make the patch. Today reimbursement rates are more favorable, Naughton says.

Histogen intends to use its same proprietary human “extra-cellular matrix” to develop a variety of other medical products—coatings for orthopedic implants and stents, patches for repairing torn shoulder ligaments and other tissue, and even “retentive” enemas for treating sores in the large intestine and Crohn’s Disease.

“So basically we’ve learned and we’ve brought the best and brightest people back at Histogen,” Naughton says. “The team that did it before is back together again, with decades of experience.”

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