Private equity investor Warburg Pincus, an active investor in biotech, is taking a multimillion-dollar loss on its seven-year-old investment in Allos Therapeutics Inc., which agreed to be acquired by Spectrum Pharmaceuticals Inc. for $206 million.
Warburg, with 24.4% of Allos shares, stands to bring in $47.55 million from the sale to Henderson, Nev.-based Spectrum, which is paying $1.82 a share. Under the terms of the transaction, announced April 6, shareholders could gain $12.5 million more, of which Warburg could take slightly more than $3 million, if Allos achieves a $.11 a share milestone payment by securing European goals for its lymphoma medication Folotyn.
If Allos, a Westminster, Colo.-based biotech company, is able to sell Folotyn in three European markets by 2013, Warburg's loss will be $21.1 million. If Folotyn fails, Warburg's loss would be more than $24 million, or about 33% of its $71.7 million total outlay. It paid an average of $2.68 a share.
Warburg first invested about $52 million in Allos, or through a private investment in a public company in March 2005, participating in a turnaround effort. In 2006, Warburg installed the chief executive, Paul Berns, who ran Bone Care International before it sold to Genzyme Corp. for $600 million. With Berns at the helm, the company garnered approval from the Food and Drug Administration for Folotyn, which focuses specifically on refractory peripheral T-cell lymphoma. Folotyn grew from $3 million in sales its first year to more than $50 million in 2011.
Warburg invested an additional $19.7 million through the company's secondary offering in 2008.
But the firm's investments went wayward.
The company's business strategy may have been a major factor. While Folotyn proved to be a relatively successful drug, Allos wasn't following a business plan that would allow for the company to be markedly successful, said Michael Becker, a partner at boutique cancer consulting firm MD Becker Partners.
Allos' business model appeared to replicate that of a larger company, such as Amgen Inc., which has drugs with high volume sales that target large patient populations. However, Allos' Folotyn was a niche drug -- technically designated an orphan drug by the FDA. That means it targets a patient population of fewer than 200,000, which likely limited sales, Becker said.
The result has been a net loss, though the loss narrowed in the past year. Allos had a $30.5 million operating loss in 2011, down from $77.4 million in 2010.
Having a few drugs with solid sales numbers of $50 million to $100 million is a great business plan for a company that follows that plan, Becker said.
"There are plenty of companies that would kill to have a $100 million drug," Becker said. Allos is one of those companies "built to be the next Amgen when they had a drug that was very niche at best."
How much of a role Warburg played in crafting the business plan is unclear. Warburg has maintained two seats on the board for most of the years it held a stake.
Had Allos and Amag Pharmaceuticals Inc. merged as planned in 2011, Warburg may have exited Allos with a higher valued return, though it would have been a stock deal. Amag proposed to swap 0.1282 shares of its stock for every Allos share. If Warburg traded its 26.1 million Allos shares for 3.35 million Amag shares, its Amag stake at the time would have been worth about $55 million. However, the deal fell apart in October.
Warburg declined to comment for this story.
-- David Carey contributed to this story.