In the ever-evolving landscape of the pharmaceutical industry, the financing model known as "NewCo" has emerged as a standout trend in 2024. This term refers to the strategy where established pharmaceutical companies divest promising drug pipelines, forming new entities in collaboration with capital investorsThis approach enables companies to exchange valuable equity and cash, albeit amid a backdrop of constrained funding and economic uncertaintyWhile NewCo may provide an avenue to navigate the harsh realities of a capital winter, it is essential to consider its implications for investors.

Investing in a NewCo formation often entails the significant dilution of equity from the original firm, primarily because it necessitates parting with promising assets to establish the new entityAs such, many industry observers view this approach as a last resort for pharmaceutical firms faced with financial pressures, raising questions about the long-term sustainability of such transactions.

While the NewCo phenomenon garners attention in domestic markets, a noteworthy shift in capital mobilization is taking place elsewhere, notably in the United StatesHere, Biotech companies are pioneering an innovative financing model centered around ‘patent rights’ instead of the traditional equity-based fundingAn examination of a recent case within this realm sheds light on potential avenues for companies in other regions to explore.

On November 4, 2023, Syndax Pharmaceuticals, a U.S.-based biotech firm, announced a groundbreaking financing agreement with a royalty company that will support the commercial potential of their promising drug NiktimvoUnder the agreement, Syndax stands to receive $350 million in upfront cash, while the royalty company secures a 13.8% share of the U.S. sales revenue generated by Niktimvo until cumulative payments reach $822.5 million.

Niktimvo is a CSF-1R monoclonal antibody that received FDA approval on August 14, 2023, for treating chronic graft-versus-host disease (cGVHD) in patients weighing at least 40 kilograms after failure with at least two other systemic treatments

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This is significant, particularly given that Niktimvo represents the first targeted antibody against CSF-1R, which is crucial in cGVHD pathophysiologyThe drug is anticipated to enter the commercial market in the early months of 2025.

It's also essential to note that Syndax had previously engaged in a global business development agreement with Incyte Corporation in September 2021. Under this deal, Syndax licensed substantial commercial rights regarding Niktimvo to Incyte while retaining a 50% stake in the U.S. marketThis arrangement included provisions for Incyte to cover 55% of U.SR&D expenses and all expenses related to international research, alongside various milestone payments totaling $1.17 billion.

What sets apart the 'patent rights' financing model from the NewCo method is the absence of equity dilutionInvestors are apt to back late-stage clinical products, which offer a more predictable return on investmentThe royalty company, in particular, excels in transacting patent rights and boasts a portfolio that includes well-known drugs like Humira and IbrutinibThis unique business approach allowed the company to conduct a successful IPO on the U.S. stock market in 2020.

The allure of investing in Niktimvo for the royalty company fundamentally lies in its potential linked with the CSF-1R targetChronic graft-versus-host disease, stemming from allogeneic transplantations, poses a severe challenge—exacerbated by the hyper-reactive immune responses induced by donor T-cellsThis complication remains a leading cause of morbidity and mortality among long-term survivors of hematopoietic stem cell transplants.

Currently, the therapeutic landscape for cGVHD treatment includes corticosteroids, cyclosporine, BTK inhibitors, and JAK inhibitors, but the availability of targeted therapies is considerably lowerThe approval of Rezurock, a ROCK2 inhibitor from Sanofi in July 2021, marked a milestone; it became the first ever-targeted therapy for cGVHD, albeit as a later-line treatment.

Niktimvo, a monoclonal antibody representing a new biological approach, fills a significant gap in the existing therapeutic arsenal

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While classified as a later-line option, it has promising potential for earlier-stage combinations, with ongoing mid-stage studies evaluating its efficacy when paired with ruxolitinib.

Should Niktimvo demonstrate success in combination therapy, it could very well establish itself as a cornerstone medication for cGVHD, providing insights into why the royalty company would make such a substantial investment.

In addition to its application in cGVHD, the CSF-1R target also represents a promising avenue in treating tenosynovial giant cell tumors (TGCT), although competition in this market is considerably fierceThe only approved CSF-1R inhibitor, Pexidartinib, received market authorization from Daiichi Sankyo in August 2019 but has been accompanied by serious safety warnings from the FDA.

Further contenders from Deciphera, SynOx, and others are in pre-commercialization phases, refining the profiles of drugs targeting side effects observed in earlier formulations, which may reshape the landscape of agents targeting CSF-1R.

As the dynamics surrounding the CSF-1R target continue to unfold, the commercial potential of this area is visibly set to escalateThe market dynamics for cGVHD hint at significant growth opportunities, with CSF-1R presenting the potential to emerge as a foundational therapy in this challenging clinical space.

For pharmaceutical companies, the lesson here is clear: innovation in thinking and flexibility in financing approaches hold the key to navigating the shifting tides of the industryWhether through traditional business development, NewCo creations, or patent rights financing, the core principle is leveraging intellectual property in capital exchanges.

The essence of 'patent rights’ financing lies in its non-intrusive nature, allowing companies to engage in a limited sale that does not involve transferring drug equityFor both parties, this model can minimize risk exposure significantlyA firm like the royalty company adopts a strategic approach where they seek drugs with certain potential, ensuring a high likelihood of profitability while risking only a fraction of their investment.

From the perspective of pharmaceutical firms, this financing approach can be exceptionally beneficial

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