“The whole is greater than the sum of its parts,” goes the famous quote attributed to Aristotle. But biotechnology company Elan didn’t see it that way when it split up its business units recently.
In late December, Elan (NYSE: ELN) of Dublin, Ireland spun off its early stage drug discovery unit, now named Prothena, (NASDAQ: PRTA). Elan concluded that the two separated companies would each be worth more alone than they would be together. Prothena’s research unit is based in South San Francisco, though the company is incorporated in Ireland.
Elan has been streamlining its operations over the past year, selling most of its stake in its former manufacturing business, reducing debt, and phasing out its once substantial R&D facility in South San Francisco. The “demerger’’ of the Prothena discovery science unit leaves Elan free to focus further on increasing revenues for its flagship product natalizumab (Tysabri), the multiple sclerosis drug it co-markets with partner Biogen Idec (NASDAQ: BIIB).
Elan, whose revenues on US sales of Tysabri in the third quarter of 2012 were $230.5 million, expects to become profitable through the demerger and other moves. Prothena’s early R&D costs won’t be counted among Elan’s operating expenses, and Elan will also reduce its tax burden through phased deductions for accumulated losses of about $4 billion.
So, Prothena now stands on its own—an unusual discovery-stage startup that was launched as a publicly traded company with a rich initial fund of $125 million from its former parent company. Elan, which contributed cash and IP to Prothena, retains an 18 percent interest in the newly created company, whose other shares went to Elan shareholders. Each received one share of Prothena for every 41 shares they held in Elan.
Prothena is focusing on monocolonal antibodies designed to clear the body of misfolded or abnormal proteins that have been implicated in blood disorders and in neurodegenerative illnesses including Parkinson’s disease and Alzheimer’s disease. Other antibodies in the company’s portfolio attack molecules linked to inflammatory disease, cancer, diabetes, and Alzheimer’s.
Prothena CEO Dale Schenk, the former chief scientific officer at Elan, says the promise of Prothena’s drug pipeline will be more visible to investors now that the company is “out from under the umbrella of the Tysabri effort.” Progress on those R&D projects might move the share price of Prothena, while any such advances probably wouldn’t have budged Elan’s share price when the same research was still being carried out by Elan’s wholly-owned subsidiary, Neotope, in South San Francisco. The Neotope programs were absorbed by Prothena.
Prothena’s opening price was $8.10, according to Elan’s SEC filing on Dec. 21, 2012, when the demerger was completed. Trading on the NASDAQ exchange opened at $6.75 on Dec. 27. Prothena shares closed at $6.00 on Jan. 8.
Schenk says a typical spinout wouldn’t begin with an amount like $125 million to draw on. “It allows us to make significant progress without going back and spending time on fundraising,” Schenk says.
Prothena’s staff of about 35 includes veterans of the same team that developed Tysabri at the former South San Francisco company Athena Neurosciences, which was acquired by Elan in 1996. Schenk says he was the second employee hired by Athena, which was founded in 1986.
Prothena’s drug candidates were all “home-grown” within Elan’s former research units, Schenk says. The lead candidate, NEOD001, is an antibody designed to flag damaging deposits of proteins so they can be cleared away by the body’s scavenger cells.
NEOD001 attacks the problematic amyloid proteins found in two related diseases called systemic amyloidoses. The first disease is primary amyloidosis, a blood disorder in which plasma cells produce misfolded amyloid proteins that form deposits in various organs. About 1,200 to 3,200 new cases arise in the United States each year, Prothena estimates. The company received an orphan drug designation for NEOD001 from the FDA in 2012, and expects to begin a Phase I trial early this year for treatment of primary amylodosis and a related disease, secondary amyloidosis. In this disorder, the damaging protein deposits may have been triggered by another illness, such as an infection. About 8,000 patients in the US and Europe suffer from secondary amyloidosis.
Although the Phase I trial will focus primarily on the safety of NEOD001, Schenk says Prothena may glean some early hints about efficacy by looking at subsets among the trial participants who exhibit certain biomarkers.
Next in Prothena’s pipeline is NEOD002, an antibody designed to block the effects of misfolded forms of the protein synuclein, which have been linked to neurological disorders including Parkinson’s disease.
Elan, when it first announced the demerger plan on August 13, estimated that the new R&D company to be created would have an annual burn rate of $50 – $60 million. Schenk says Prothena could operate for as much as three years from its existing funds. But he says it’s likely that Prothena can start bringing in revenues from licensing deals and partnerships.
The spinoff deal creates no right of first refusal for Elan as a preferred partner for Prothena. Schenk says the new company is most likely to seek pharmaceutical company partners where its experimental drugs show promise against large disease indications such as Parkinson’s.
“The smaller, orphan indications—I think we can do those on our own,” Schenk says.
Elan, in turn, is free to take on drug development projects that might compete with Prothena’s. While Elan has ended work on early stage drug discovery, it continues its research on ELND005, a small molecule drug candidate now in Phase II testing for bipolar disorder. The company retained that project because it could yield results quickly, unlike the earlier-stage programs transferred to Prothena, Elan’s CEO Kelly Martin said in an August 13 conference call with analysts about the demerger plan.
Industry observers speculated that Elan had decided to spin off its R&D unit after the news earlier in August of disappointing results for bapineuzumab, a drug candidate for Alzheimer’s Disease that Elan was helping to fund as part of a joint venture. Johnson & Johnson announced Aug. 6 that it was discontinuing Phase III development of bapineuzumab because the drug did not meet its did not meet the clinical goals researchers had set for it. J&J unit Janssen Alzheimer Immunotherapy, Pfizer, and Elan were part of the joint project.
Elan CEO Kelly Martin maintained during the Aug. 13 conference call that the Prothena demerger had been contemplated for more than a year, and was not triggered by the bapineuzumab news. The purpose of the restructuring was to give investors a choice to invest either in a profitable commercial company—Elan—or an R&D unit with the potential for long-term gains, he said.
Another commercial company marketing a multiple sclerosis drug is also discontinuing its R&D programs and spinning out its drug candidates to startups. Merck Serono, the largest division of German drug giant Merck and maker of the MS drug Rebif (interferon beta-1a), announced in July that it had created Prexton Therapeutics, which will carry on research on therapies for Parkinson’s disease. Prexton received seed funding of about $2.7 million from Merck Serono, which plans to spend a total of about $39.2 million to create startups based on its R&D discoveries. The Merck division’s stated aim is to buffer the impact of its restructuring on unemployment at its Geneva, Switzerland location.
Prexton, which also receives government support in Geneva, may someday become one of Prothena’s rivals in the intensely competitive field of research on neurodegenerative disorders.
Meanwhile, Prothena CEO Schenk, who has previously managed large research groups, says he’s enjoying his role as a first-time CEO at an independent startup.
“There’s a wonderful excitement, and also you can move very quickly,” he says.