Rockville-based EntreMed Inc., on the brink of financial disaster, has turned to rival biotechnology company Celgene Corp. for a $27 million financing package that will buy the company time to map a recovery trail, EntreMed plans to announce today.
The agreement grants Celgene development rights for a series of EntreMed's experimental cancer treatments and stock interests worth up to 49 percent of the company. The plan, completed in the final hours before the new year and exempted from shareholder approval, spares EntreMed the deep cuts -- and possible bankruptcy -- it was to have faced as its remaining money dried up at the end of 2002.
EntreMed leapt onto the national stage four years ago as investors became convinced the company might be nearing a cure for cancer. By February 2000 its share price had soared to $98.50. Since then, the stock plunged to less than $1 and the company laid off half its employees and lost two chief financial officers. Meanwhile, test results from its leading cancer treatments -- which try to choke the blood supply to tumors -- have not impressed investors, creating a cash crunch in a hostile funding environment.
As part of the agreement, EntreMed will issue Celgene convertible preferred stock and warrants to buy EntreMed shares for about $16.8 million, said EntreMed Chief Operating Officer Neil J. Campbell. Celgene can convert the preferred stock into 16.8 million shares of EntreMed common stock at $1 a share, while the warrants permit the sale of 7 million additional shares for $1.50 each.
The sale provides EntreMed with at least 12 months' worth of cash. But survival has a high price tag in biotechnology, and the terms of the financial package underscore the scientific and financial sacrifices required for companies to raise money in the sagging sector. Celgene alone will profit if the cancer therapies it acquires from EntreMed are commercialized; the Warren, N.J.-based company can convert its stock and warrants into 49 percent ownership of EntreMed and appoint two members of its board. And under the agreement Celgene can license another, still unspecified EntreMed compound for development.
At least one biotechnology analyst cast the deal as a costly last-ditch effort to keep EntreMed alive. But EntreMed called the terms fair and said the sale would allow it to pay off debt, hold on to remaining workers and focus spending on its small-molecule development program. The company expects operating costs of $12 million this year.
"As we were running out of cash, we would hear that companies have to take distress deals to secure financing," Campbell said. "That was not the case here. We are getting significant cash and partnership opportunities."
Celgene and EntreMed are unlikely financial bedfellows -- particularly when it comes to the cancer therapies included in the agreement. After years of jockeying, Celgene sued EntreMed in November, alleging that patent rights EntreMed is seeking for a product called ENMD 0995 would violate those Celgene owns for Actimid, a similar product. Both are chemically altered versions, or analogs, of thalidomide, the once-banned hormone that is being revived as a cancer treatment. Soon after Celgene filed suit, EntreMed fired back with a countersuit.
Both companies will drop their lawsuits as part of the agreement, and EntreMed is selling rights to ENMD 0995 to Celgene. "The program that made the most sense to sell was thalidomide," said Campbell. "We were able to dismiss the litigation and resolve a long-standing patent dispute."
A spokesman for Celgene could not be reached for comment yesterday.
Even with the litigation out of the way, an analyst expressed concern yesterday that the financial package carries new risks for EntreMed investors, including share dilution because of the new convertible shares and the loss of potential royalties from the drug candidates the company sold to Celgene.
"Clearly, EntreMed did not have the upper hand in negotiations here," said Alan H. Auerbach, an analyst with Wells Fargo Securities LLC in California, who said the deal leaves the company with fewer drug candidates and no reward for its investment.
"It's a good deal for the company picking up the drugs, it's a reasonably good deal for EntreMed because they get to stay in business, but it's a bad deal for the shareholder," Auerbach said. "They lose the future upside they'd have if EntreMed were receiving a royalty off the drugs."
Campbell said the negotiated price for the thalidomide analogs takes into account potential revenue from commercialization of the compounds. But analysts said it is Celgene that stands to profit more from the experimental treatments because EntreMed has shepherded them through the risky and costly early-stage testing.
The agreement was completed under tight deadline pressure, with managers from both companies trading final e-mails and faxes until New Year's Eve, EntreMed officials said. A spokeswoman said that because of EntreMed's financial condition, the company received a waiver from NASD (formerly the National Association of Securities Dealers) that allows it to complete the sale of both the stock and product rights without shareholder approval.
NASD has threatened to delist EntreMed from the Nasdaq Stock Market because its valuation dipped below minimum trading requirements. The company has appealed the action and remains on the national market until a final decision is reached.