Genaera bets its new lead program can pay off with a big partnership deal

A year ago, Genaera was forced to start a gut-wrenching reorganization.

Faced with hard data that its drug candidate for wet, age-related macular degeneration worked no better than existing drugs--and had little prospect of competing against Genentech--CEO Jack Armstrong decided to halt work on it. Soon after, 13 workers--about a third of the small biotech’s staff--were pink slipped in a first round of layoffs. Then in July two mid-stage studies--Lomucin for cystic fibrosis and squalamine to treat prostate cancer--were also shuttered. More workers were let go, cutting the company’s payroll to the low 20s, less than half what it had been.

For the board of the publicly-traded company, the next step seemed obvious. With its stock in the discount basement for biotech losers, Banc of America was brought in to advise the biotech on its options, including a probable sale.

But the company survivors didn’t just stop working to wait for a buyout announcement. Inside the Plymouth Meeting, PA-based company, Armstrong, who was formally named CEO at the beginning of 2006, shifted the company’s sights to a preclinical therapy for type 2 diabetes and obesity--trodusquemine--that is now the company’s only internal clinical project.

“We did that, not silently, but close to non-publicly,” says Armstrong about the stealth research work underway at that time. “We didn’t want to say very much until we understood the mechanism of the drug.”

Trodusquemine is designed to suppress appetite and normalize blood sugar by inhibiting the protein tyrosine phosphatase 1B, or PTP-1B. In animal studies, researchers found sustained weight loss and signs that it overcame the natural metabolic readjustment that can blunt weight loss. Not unexpectedly, the data indicated that it could also be effective against comorbidities often found in obesity cases--including abnormal glucose metabolism and high cholesterol levels.

PTP-1B, says Armstrong, has “been a target of Big Pharma for a decade or more. That generated some interest. The stock doubled and the attractiveness of M&A diminished, and in April the bank and management recommended we go ahead. By that point we were down to 22 or 23 people. Since then we’ve added a couple of people with selective talents.”

Genaera’s other big development bet is largely out of its hands. MedImmune licensed Genaera’s anti-IL9 antibody and now has it in a mid-stage study for asthma. If it works, MEDI-528 will counter the reduced airways, mucous production and inflammation associated with asthma. And there’s a lot at stake: Genaera has up to $54 million in future milestone payments and royalties on the table for any approved product.

“The next milestone is the start of Phase III,” says Armstrong. “After that there’s a submission of a BLA. And the combination of those is $4 million. That won’t finance this company, and it won’t happen probably until 2009. They’ll have a go, no go decision for a pivotal trial at the end of this year.”

The asthma program, though, is in other researchers’ hands. At Genaera, everyone’s focus is on trodusquemine.

“We did the first Phase I study starting last May,” says Armstrong, “and completed it in October. That was a single ascending dose study, with no toxicity. This was done in healthy but obese normals, no high blood sugar or anything. In the next Phase I study the population is type 2 diabetic, not well controlled on metformin, that’s also obese.” And Genaera plans to launch a multiple ascending dose study in April or May.

Adds Armstrong: “What we’re looking for is proof of concept of what we’ve been seeing pre-clinically.”

Armed with that kind of data on a major market drug prospect, Armstrong feels that Genaera would be in a good position to push its ongoing talks with Big Pharma to a lucrative partnership.

“This company has been through so many dilutions,” notes Armstrong, “it’s best for the drug and the company to partner it.”

Exactly how a partnership could be structured is still sketchy, of course. Armstrong suggests that a partner with deep pockets could put up a significant amount of cash for research, splitting research responsibilities.

“We need help with clinical cost and formulation work,” says the CEO. “We’re working on subcutaneous. It’s possible it can be done orally, but that’s likely after approval. We need the resources of a bigger company; this outstrips our ability to finance it.”

Armstrong is not thinking small. A deal could be worth “tens of millions of dollars upfront and potentially have milestones of $200 to $300 million back-ended with a significant royalty stream. We’ve been willing to wait this far. We’re willing to wait it out and do the best that we can. I think going through Phase II alone is unlikely. All we can do is partner at the end of Phase I.”

In the meantime, Genaera is working on other molecules that could be used to follow up on trodusquemine -- preclinical programs that would likely be wrapped up in any collaboration the company would sign.

Genaera ended ‘06 with a little more than $33 million in cash on hand. By the end of last September, the company bank account had burned down to $23 million. That’s enough to keep going until Genaera can lay out its proof-of-concept case.

“As the data continues to come out, people are going to be very pleased, both mechanistically and clinically,” says Armstrong. “I can’t convince any Big Pharma company based on hype. They want to see the proof of concept. Big Pharma is willing to pay a lot more and see what they want to see.”