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The biopharma industry has seen its fair share of clinical and financial failures. When biotechs face setbacks, their stock values plummet and they lack the funds to develop new medicines, restructure their pipelines, or do anything really, despite sometimes having cash in hand. These companies should typically be pronounced dead. But they’re not quite.
When investors flee the scene, the company’s executives have to decide what to do next. Do they sail through the storm? Do they quit and cut their losses immediately? Or do they seek a buyer who may or may not be interested in the technology the company was founded on in the first place?
What complicates this decision is that while there might have been failures in the clinic, the company remains flush with cash. Not enough cash to fund a pivot, but still many millions that are sufficient to provide a runway for the biotech. Such cashed-up failures are known as zombie biotechs, the undead companies that are increasingly popular to some venture funds.
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Zombie biotechs: iTeos Therapeutics winds down
Although this is not some new phenomenon – especially when there is growing uncertainty in the biopharma funding environment – there has been a recent shakeup with companies like Concentra Biosciences buying up these ‘zombie biotechs.’ In its latest acquisition, it purchased U.S.- and Belgium-based cancer therapeutics company iTeos Therapeutics last month. Some analysts may call iTeos a zombie biotech after it scrapped the development of its TIGIT inhibitor after it failed a phase 2 clinical trial in May.
The drug in question was belrestotug, its lead candidate in the clinic for indications such as head and neck cancer and non-small cell cancer (NSCLC). While therapeutic research has been promising for TIGIT inhibitors, they have faced challenges in the clinic over the past few years.
Belrestotug drew the interest of GSK, which then began to collaborate with iTeos to co-develop and potentially market the drug for $625 million back in 2021. But underwhelming data from the NSCLC study left the company high and dry. At the time, it said that it would spend around $24.7 million in layoff costs and $11.1 million to wind down all the operations and end contracts, according to a Securities and Exchange Commission (SEC) filing.
SEC filings also showed that the company held $156.5 million in cash and cash equivalents as of March 31. Concentra said that it would buy the struggling biotech for $10.05 per share, a slightly lower rate than the valuation of $10.26 per share when the deal was announced.
Eliminating zombie biotechs: Concentra Biosciences on a spree
Concentra’s acquisition of zombie biotechs is not some side hustle; it is what the company was created to do. Still, much is not known about the California-based entity. It was established around two years ago by Tang Capital Partners, a life science investment firm founded by healthcare investor Kevin Tang. And much is not known about Tang either, other than the fact that he is also part of the board of directors at Canadian autoimmune disease therapeutics company Aurinia Pharmaceuticals.
Concentra has bought several troubled biotechs this past year, and its appetite has only grown. One of the most notable deals with a zombie biotech was with Cargo Therapeutics, following a difficult year for the latter. Cargo’s CAR-T cell therapy firicabtagene autoleucel was canned after patients with large B-cell lymphoma (LBCL), an aggressive type of non-Hodgkin lymphoma, experienced toxic side effects in a phase 2 study.
The pipeline cuts were coupled with 50% layoffs in January, which expanded to 90% by March. Cargo was in a position where it still had some cash left, although it was trading below the value of the cash, while simultaneously not having enough to restructure their pipeline or shift their research and development (R&D) focus elsewhere, the epitome of a zombie biotech.
With these kinds of companies, investors may be in a hurry to shut down these biotechs and get their money back. So, when buyers like Concentra enter the picture, it expedites this process. In the case of Cargo, Concentra paid $217.5 million at $4.38 per share in July. It announced that shareholders would also receive non-transferable contingent value rights to receive a share of any leftover money as well as 80% of sales of the company’s assets over the next two years. This could include its last remaining clinical candidate CRG-023, which is in phase 1 trials to treat blood cancers that originate in B cells.
Similarly, Concentra has swallowed beleaguered biotechs such as Elevation Oncology, IGM Biosciences, Kronos Bio, and Allakos, all in the span of five months. And while some investors think this is the best way out, other biotechs have rejected the advances of Concentra.
Concentra Biosciences and poison pills
Pliant Therapeutics was one of them. It took a ‘poison pill’ to defend itself from Concentra Biosciences and avoid an acquisition. The poison pill defense is a strategy that a company takes to avoid being acquired by activist investors or competitors, especially when they believe that the takeover will not be in the best interest of the company, according to a report by Investopedia.
Pliant did so to protect against a potential takeover after a significant stock accumulation by Concentra Biosciences. Pliant had halted the trial of its small molecule bexotegrast owing to side effects of the drug in patients with idiopathic pulmonary fibrosis – a lung disease characterized by the progressive scarring of lung tissue, making it difficult to breathe – in February. A collapse of shares followed. While it stood its ground against Concentra at the time, it subsequently ended the trial altogether in June.
Other companies that have warded off Concentra Biosciences are Acelyrin, Atea Pharmaceuticals, Rain Oncology, LianBio, Kezar Life Sciences, and Quince Therapeutics. And while not all of them are zombie biotechs, as they’ve all gone on to place their bets on their other candidates, their clinical trial struggles are reminiscent of zombie biotechs.
Newly launched Alis Biosciences to free up capital for innovation from zombie biotechs
Eliminating zombie biotechs has also been the mission of British investment firm Alis Biosciences. It seeks to “free” more than $30 billion of “trapped capital” in life science and biotech companies – a figure based on 300 listed, development-stage companies that have experienced clinical or regulatory challenges – as it explained in a statement when it launched this April.
With a goal to accelerate the return of the money to shareholders, Alis has mapped out three scenarios. One is to return around 97% cash to investors, with the company then sold back to certain shareholders or stakeholders who wish to further develop any residual science, while Alis retains a stake in it.
The second option is an alternative to filing for bankruptcy, according to Alis. It would return around 95% of the cash to shareholders, leaving funds to shut down operations, but Alis would acquire the company’s intellectual property (IP). It deems this method to be “far quicker than any bankruptcy process.” The last scenario would be for Alis to continue R&D using around 40% of the cash that is left and giving back 60% of the money along with an equity interest in Alis back to investors.
Annalisa Jenkins, chair of Alis Biosciences said in a press release: “In this challenging financial market environment, there is a need for greater creativity to find answers to this $30 billion problem. This needs to be solved if capital is to be effectively recycled within the capital market ecosystem to finance exciting new science that has the potential to succeed and deliver investor returns.”
Jenkins claims to have the support of public and private investors, adding that the team at Alis “can not only help to return value to shareholders but also develop any viable residual science.”
While these acquirers essentially swallow these companies, some zombie biotechs make the decision to end things themselves. Like Third Harmonic Bio, which closed down in April after it abandoned its phase 2-ready KIT inhibitor, THB335. The candidate was about to enter phase 2 trials to treat the skin condition chronic spontaneous urticaria when it called off plans. It had already halved its workforce, but in April, it made the decision to return cash back to investors and sell its drug assets, liquidating the business.
While Third Harmonic Bio ripped the band-aid off fairly quickly, some zombie biotechs may linger around for too long, tying up resources and delaying innovation. So, companies like Concentra Biosciences and Alis Biosciences could, in fact, be who investors want to intervene. But how much of this intervention is actually effective and does end up fueling R&D is something we should probably keep a close eye on.
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