Purinex Inc - Case Study in Finance and Investment

BBMF 3113 CASE STUDY IN FINANCE AND INVESTMENT

CASE STUDY 1 (20%)

Purinex, Inc.

To lead the world in discovering, developing & commercializing novel therapeutic compounds acting on the purine receptors in order to save and improve the patients’ lives.

In June 2004, Purinex, Inc, a pharmaceutical company with several clinically and commercially promising drugs in development, had reached a turning point. Sometime in the next four to twelve months, the company stood an excellent chance of securing a partnership with a major pharmaceutical company. That partnership, if secured, would enable Purinex to develop one of its leading compounds into a drug for the treatment of one of the world’s deadliest and most widespread diseases. The company had no sales or earnings, however, and there was only enough cash on has to last 11 months.

Gillard Harpaz, Purinex’s chief financial officer, believed that if a partnership deal came through, the company would be in an excellent position to carry out its mission. Moreover, securing a deal was practically a prerequisite for any eventual initial investors. But, as things stood, it was unclear whether the firm could stay afloat until such a partnership could be consummated.

Harpaz believed that the company could either attempt to secure financing now or wait until it struck a partnership deal. “But, if we wait,” Harpaz thought “the terms of the deal would get a lot worse”. Harpaz, a former officer in the Israeli Special Forces who has earned a graduate degree in business, considered how to structure this decision. What were the probabilities that collaboration with a pharmaceutical company would actually happen? How could the company stay above water until that occurred? Besides insolvency, what were the other risks to the company under these circumstances?

Purinex, Inc.

Purinex was a drug-discovery and development company based in Syrcuse, New York., that sought to commercialise therapeutic compounds based on its purine drug development platform. Purine was naturally occurring molecule that acted as selective agonists (activators) or antagonists (blockers) for specific purine receptors in the cell membrane. These molecules could initiate physiological responses or block the activation of receptors by endogenously produced signalling molecules. Purinex’s goal was to develop products that evoked a receptor-specific pharmacodynamics effect without producing undesirable outcomes that could result from interactions with other receptors.

The company had 14 employees and maintained a chemistry laboratory a few miles from its main office. Purinex’s intellectual-property portfolio consisted of more than 35 patents pending or issued in the purine field. The company planned to take its new receptor-selective drug into clinical trials to address a broad range of potential indications. In June 2004, the most promising indications for its compounds were for treatment of diabase and sepsis.

Diabetes

Diabetes was a long-term condition that affected the body’s ability to process glucose and hampered its use of other nutrients, such as protein and fat. Glucose, a common product of digestion, circulated in the blood of the body’s mechanism for moving glucose (blood sugar) stayed excessively high, leading to serious health complications over time.

High level of blood glucose affected the eyes, kidneys, and the nervous system. In addition, diabetes increased the risk of atherosclerosis, which narrows arteries, especially those carrying blood to the heart, brain, and legs. Diabetes affected more than 100-million people worldwide, and was among the most common causes of death and disability in North America and Europe. Purinex had a patent on the use of any purine antagonist for the treatment of diabetes and its related condition within the United Sates. The company had also developed a series of proprietary antagonist molecules that showed great promise in preclinical studies of diabetes. Potential annual sales of this drug were believed to be $4 billion.

Sepsis

Sepsis was a serious medical condition caused by a severe infection leading to a systemic inflammatory response. The more critical subsets of sepsis included severe sepsis (sepsis with acute organ dysfunction) and septic shock (sepsis with refractory arterial hypotension). Septicaemia was sepsis of the bloodstream (blood poisoning) and was caused by bacteraemia, which was the presence of bacteria in the bloodstream. The systemic inflammatory response syndrome led to widespread activation of inflammation and coagulation pathways. This could progress to dysfunction of the syndrome and, eventually death.

Sepsis was more common and more dangerous in the elderly, immunocompromised, and critically ill patients. It occurred in 2% of all hospitalizations, and accounted for as much 25% of intensive care unit (ICU) bed utilization. It was a major cause of death in ICUs worldwide, with mortality rates that ranged from 20% for sepsis to 40% for severe sepsis to more than 60% for septic shock. In the United States, sepsis was the leading cause of death in noncoronary ICU patients, and the tenth leading cause of death overall. One problem in the management of septic patients was the delay in administering the right treatment after the sepsis is diagnosed.

One of Purinex’s Agonists for the treatment of sepsis had been shown (in animals) to have limited side effects and to be fast acting and effective at treating sepsis, even if treatment were significantly delayed after onset of the disease. Further, it has been proved safe in humans in phase I clinical trial. Harpaz estimated that annual sales for this product could be around $500 million.

Development of Pharmaceutical Drugs

In 2005, the pharmaceutical industry remained one of the world’s most dynamic economic sectors, with more than $530 billion in global sales. Although pharmaceuticals continued to grow faster than most other segments of the economy, some analysts predicted a softening in its growth over the next five years. As part of an effort remains competitive, many large pharmaceutical firms had moved aggressively to partner with smaller forms in the biotechnology sector in order to identify the next generation of drug candidates. In recent years, the U.S. biotechnology industry had mushroomed, as sector revenues grew from $8 billion, in 1992, to nearly$40 billion, at the end of 2003.

Collectively, the biotechnology industry devoted a higher percentage of its sales to research and development (R&D) than did any other major U.S. industry. According to Standard & Poor’s, R&D spending by public biotechnology was closed to 40% of the industry’s revenues. This high percentage was largely because many biotechnology companies did not generate revenues. R&D spending by public biotechnology companies was $17 billion in 2003 and $12.5 billion in 2002. Among the reasons for the high R&D costs was that the drug development and approval process was lengthy and risky. According to a June 2001 study by the Boston Consulting Group (BCG), the total cost to develop a new human-therapeutic compound was $880 million; a 2003 report by Tufts University placed that cost at $897 million (in 2000 dollars). The BCG report estimated that drug-development failures accounted for 75% of the R&D cost.