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12:00 AM
 | 
Jul 14, 2008
 |  BioCentury  |  Finance

Ebb & Flow

Following in the footsteps of PDL (NASDAQ:PDLI) and Enzon (NYSE:ENZ), Angiotech (TSX:ANP; NASDAQ:ANPI) last week said it will spin out everything except royalties derived from paclitaxel-eluting stents into a separate private company called Angiotech Pharmaceutical Interventions (API). One goal is to separate the operating business from declining royalties on the Taxus line of paclitaxel-eluting coronary stents.

API will have several marketed products, plus clinical-stage device and drug candidates focused on acute and surgical applications. The clinical stage candidates are mostly variations of paclitaxel-eluting stents; it also has MultiStem, a stem cell therapy to treat acute myocardial infarction that started Phase I trials in December 2007 (see BioCentury, Dec. 24).

Concurrent with the deal, Ares Management and New Leaf Venture Partners agreed to purchase $200-$300 million in new notes that can convert into a 32-48% stake in API, with Angiotech shareholders holding the remainder.

The Taxus deal with Boston Scientific(NYSE:BSX) is the most lucrative of Angiotech’s paclitaxel-eluting stent royalty deals, but Taxus sales have been nicked by safety and efficacy concerns about drug-eluting stents that have emerged in the last few years. Overall, Angiotech’s paclitaxel-eluting stent royalties declined by 14.5% between 1Q07 and 1Q08, holding its total revenue almost flat across those periods.

“The decline in Taxus-derived royalty revenue diminished our original strategy and planned quarterly debt reduction,” which was put in place in the spring of 2006, Angiotech President and CEO William Hunter said on a conference call.

He also noted the new financing structure - selling a minority interest in the spinout - enabled Angiotech to raise capital in excess of its market cap, which was $251 million before the deal was announced on Monday.

Proceeds from the convert will be used to retire some of Angiotech’s outstanding debt. At June 30, the company had $575 million in debt, including its outstanding senior floating rate notes due 2013 and 7.75% senior subordinated notes due 2014.

The amount of the convert deal is at the discretion of Angiotech management. If $200 million in convertible notes are issued, the company expects net proceeds of $165 million. The same day Angiotech announced the deal, it issued a tender offer in that amount. The remaining debt will be serviced by cash flow from paclitaxel royalties (see B25).

Last year, Angiotech had about $50 million in cash interest expense. This deal would reduce that to $24-$33 million annually, said CFO K. Thomas Bailey.

The new notes will have an initial conversion price of $20 per share. The notes bear 7.75% interest, payable semiannually in kind with additional convertible notes. The notes are convertible after Sept. 30, 2009, or upon the occurrence of a transaction such as an IPO or the sale of API.

Sum of the parts

Angiotech will capitalize API with $75 million in cash, and the newco will be debt-free.

In FY07, Angiotech had $288 million in revenue. If the spinout had already occurred, $111 million from the paclitaxel-eluting stent royalties would have remained with Angiotech, while the remaining $177 million in product and royalty revenue would have transferred to API.

In 1Q08, Angiotech had $27.2 million in royalty revenue from paclitaxel-eluting stents and $49.5 million in other product and royalty revenue.

According to Bailey, “virtually all” Angiotech’s operating expenses will be transferred to API. Operating expenses were $194.8 million for FY07 and $55 million for 1Q08.

Based on FY07 revenues and expenses, API would have had an operating loss of roughly $18 million, while for 1Q08 the operating loss would be about $5.5 million. That suggests that API will have about three to four years of runway.

The deal has been approved by Angiotech’s board but it still is subject to the approval of shareholders, who sent the stock down $0.43 (15%) to $2.52 on the week.

API’s board will include three members appointed by Angiotech’s board, three members from Ares and New Leaf, and a new, independent director selected by Angiotech.

The transaction is expected to close late this quarter or early next. Goldman Sachs advised Angiotech.

Microfinance

Threshold was another company that was able to raise more than its market cap last week. The oncology play raised $18.3 million in a private placement to VCs, five of which were existing investors. Threshold’s market cap was $11.6 million on Thursday, the day prior to the financing announcement.

Sutter Hill Ventures and Three Arch Partners were among the pre-IPO investors in the deal; the other early shareholders weren’t disclosed. New investors included HealthCare Ventures and Alta Partners.

Not surprisingly, the deal was heavily dilutive. Threshold will issue 53.8...

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