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Based in Lexington, MA, Concert Pharmaceuticals (CNCE) scheduled a $65 million IPO on the Nasdaq with a market capitalization of $211 million at a price range midpoint of $13 for Thursday, February 13, 2014.

The full IPO calendar is available at IPOpremium.

ASPX did very well last week, although ASPX is in a Phase 3 registration clinical trial.

SEC Documents

Manager, Joint managers: UBS Investment Bank, Wells Fargo Securities

Co-Managers: JMP Securities, Roth Capital

Summary

CNCE is a clinical stage biopharmaceutical company applying its extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs.

CNCE has paying collaborations with Celgene (NASDAQ:CELG) $65 billion market cap; Avanir (NASDAQ:AVNR), $546 million market cap; and Jazz Pharmaceuticals (NASDAQ:JAZZ) $8.3 billion market cap. An earlier collaboration with GlaxoSmithKline (NYSE:GSK), $130 billion market cap, was terminated. GSK owns 11.8% of CNCE pre-IPO.

Auspex Pharmaceuticals (NASDAQ:ASPX) is in the same area. ASPX priced at the high end of the range, $12, with an increased size and traded Wednesday, February 5. ASPX closed Friday, February 7 at $17.65. ASPX is in a Phase 3 registration clinical trial.

CNCE is only in Phase 1 and Phase 2 clinical trials.

Valuation

Glossary

Valuation Ratios

Mrkt

Price /

Price /

Price /

Price /

% offered

annualizing Sept 9 mos

Cap (MM)

Sls

Erngs*

BkVlue

TanBV

in IPO

Concert Pharmaceuticals (NASDAQ:CNCE)

$194

6.9

-4166

3.1

3.3

31%

*almost breakeven

Auspex Pharmaceuticals

ASPX $11 mid-range pre-IPO

$231

n/a

-21.7

2.9

4.7

35%

ASPX 2/5 close at $17.65

$371

n/a

-34.7

4.7

7.5

22%

Conclusion

Buy, close to breakeven, sales up, Price/Book 3.2, shareholders including Celgene indicate buying interest of up to $14 million (19%).

To put the conclusions and observations in context, the following is reorganized, edited and summarized from the full S-1 referenced above:

Business

CNCE is a clinical stage biopharmaceutical company applying its extensive knowledge of deuterium chemistry to discover and develop novel small molecule drugs.

CNCE's approach starts with approved drugs, advanced clinical candidates or previously studied compounds that it believes can be improved with deuterium substitution, a process CNCE refers to as deuteration, to provide better pharmacokinetic or metabolic properties and thereby enhance clinical safety, tolerability or efficacy.

CNCE believes this approach may enable drug discovery and clinical development that is more efficient and less expensive than conventional small molecule drug research and development.

CNCE is utilizing its DCE Platform to discover and develop product candidates for a variety of indications. CTP-354 and AVP-786 are advancing in clinical trials and CNCE has multiple preclinical candidates, two of which CNCE expects to move into clinical trials in 2014.

CNCE's priority programs include:

CTP-354 for spasticity associated with multiple sclerosis and spinal cord injury, which is in Phase 1 clinical trials;

CTP-499 for type 2 diabetic kidney disease, which is in a Phase 2 clinical trial;

AVP-786 for neurologic and psychiatric disorders, which has completed a Phase 1 clinical trial under its collaboration with Avanir;

CTP-730 for inflammatory diseases, which is in preclinical development under CNCE's collaboration with Celgene; and

JZP-386 for narcolepsy, which is in preclinical development under CNCE's collaboration with Jazz Pharmaceuticals.

Through September 30, 2013, CNCE had received an aggregate of $105.4 million in upfront and milestone payments, equity investments and research and development funding from current and former collaborations.

Collaboration

Celgene
In April 2013, CNCE entered into a master development and license agreement with Celgene, which is primarily focused on the research, development and commercialization of specified deuterated compounds targeting cancer or inflammation.

The collaboration is initially focused on one program, but has the potential to encompass up to four programs. For the initial program, CNCE granted Celgene an exclusive worldwide license to develop, manufacture and commercialize deuterated analogs of a selected non-deuterated compound and several close chemical derivatives thereof.

CNCE further granted Celgene licenses with respect to two additional programs and an option with respect to a third additional program.

CNCE and Celgene have agreed on the non-deuterated compound for each of the two additional license programs. For the option program, Celgene may select the non-deuterated compound at a later time, which, unless otherwise agreed by CNCE, will be limited to a compound for which Celgene possesses exclusive rights.

With respect to the two additional license programs, CNCE granted Celgene an upfront exclusive worldwide license to develop, manufacture and commercialize deuterated products that contain deuterated analogs of the agreed upon non-deuterated compounds.

Celgene is restricted from utilizing their research, development and commercialization rights under each of the upfront licenses, unless, within seven years after the effective date of the agreement, Celgene pays CNCE a license exercise fee.

If Celgene does not elect to pay the license exercise fee during the seven-year period, the license will expire.

With respect to the option program, once a compound is selected, Celgene may exercise its option by paying CNCE an option exercise fee within seven years of the effective date of the agreement, and upon Celgene's exercise of the option CNCE will grant to Celgene an exclusive worldwide license to develop, manufacture and commercialize deuterated products that contain deuterated analogs of the selected non-deuterated compound.

Under the Celgene agreement, CNCE received a non-refundable upfront payment of $35.0 million in April 2013. During the nine months ended September 30, 2013, CNCE recognized $17.0 million of revenue upon the delivery of a license for the initial program and $0.4 million of revenue related to research and development services performed on the initial program.

In addition, CNCE is eligible to earn up to $23.0 million in development milestone payments, including $8.0 million related to the completion of a Phase 1 clinical trial, up to $247.5 million in regulatory milestone payments and up to $50.0 million in sales-based milestone payments related to products within the initial program.

If Celgene exercises its rights with respect to either of the two additional license programs, CNCE will receive a license exercise fee for the applicable program of $30.0 million and will also be eligible to earn up to $23.0 million in development milestone payments and up to $247.5 million in regulatory milestone payments for that program.

Additionally, with respect to one of the additional license programs CNCE is eligible to receive up to $100.0 million in sales-based milestone payments based on net sales of products, and with respect to the other additional license program we are eligible to receive up to $50.0 million in sales-based milestone payments based on net sales of products.

If Celgene exercises its option with respect to the option program in respect of a compound to be identified at a later time, CNCE will receive an option exercise fee of $10.0 million and will be eligible to earn up to $23.0 million in development milestone payments and up to $247.5 million in regulatory milestone payments.

In addition, with respect to each program, Celgene is required to pay CNCE royalties on net sales of each licensed product at defined percentages ranging from the mid-single digits to low double digits below 20%, on worldwide net product sales of licensed products.

The royalty rate is reduced on a country-by-country basis during any period within the royalty term when there is no patent claim or regulatory exclusivity covering the licensed product in the particular country.

Under the Celgene agreement, CNCE is responsible for conducting and funding research and development activities for the initial program at CNCE's own expense pursuant to agreed upon development plans.

These activities consist of the completion of single and multiple ascending dose Phase 1 clinical trials and any mutually agreed upon additional Phase 1 clinical trials. If Celgene exercises its rights with respect to any additional program and pays us the applicable exercise fee, CNCE is responsible for conducting research and development activities at CNCE's own expense pursuant to agreed upon development plans until the completion of the first Phase 1 clinical trial, which will be defined in each development plan on a program-by-program basis.

In addition, if Celgene exercises its rights with respect to the option program and pays CNCE the applicable exercise fee, CNCE is responsible for seeking to generate a deuterated compound for clinical development in the selected option program at our own expense.

Avanir
In February 2012, CNCE entered into a development and license agreement with Avanir under which CNCE granted Avanir an exclusive worldwide license to develop, manufacture and commercialize deuterated dextromethorphan containing products. Avanir is initially focused on developing AVP-786, which is a combination of a deuterated dextromethorphan analog and an ultra-low dose of quinidine, for the treatment of neurologic and psychiatric disorders.

Under the Avanir agreement, CNCE received a non-refundable upfront payment of $2.0 million in February 2012 and a milestone payment of $2.0 million in April 2013.

CNCE is also eligible to receive, with respect to licensed products comprising a combination of deuterated dextromethorphan and quinidine, up to $4.0 million in development milestone payments, including $2.0 million related to initiation of dosing in a Phase 2 or Phase 3 clinical trial for AVP-786, up to $37.0 million in regulatory and commercial launch milestone payments and up to $125.0 million in sales-based milestone payments based on net product sales of licensed products.

In addition, CNCE is eligible for higher development milestones, up to an additional $43.0 million, for licensed products that do not require quinidine. Avanir is currently developing deuterated dextromethorphan only in combination with quinidine.

Avanir also is required to pay us royalties at defined percentages ranging from the mid-single digits to low double digits below 20% on worldwide net product sales of licensed products. The royalty rate is reduced, on a country-by-country basis, during any period within the royalty term when there is no patent claim covering the licensed product in the particular country.

Avanir is responsible for funding 100% of CNCE's research and development costs incurred under the development plan or for activities conducted at Avanir's request, subject to limitations specified in the agreement. However, Avanir is currently conducting all research and development activities without CNCE's services.

Jazz Pharmaceuticals

In February 2013, CNCE entered into a development and license agreement with Jazz Pharmaceuticals to research, develop and commercialize products containing deuterated sodium oxybate, or D-SXB. CNCE is initially focusing on one analog, designated as JZP-386. Under the terms of the agreement, CNCE granted Jazz Pharmaceuticals an exclusive, worldwide, royalty-bearing license under intellectual property controlled by CNCE to develop, manufacture and commercialize D-SXB products including JZP-386.

Under the Jazz Pharmaceuticals agreement, CNCE received a non-refundable upfront payment of $4.0 million in February 2013. CNCE is also eligible to receive up to $8.0 million in development milestone payments, up to $35.0 million in regulatory milestone payments and up to $70.0 million in sales milestone payments based on net product sales of licensed products.

In addition, Jazz Pharmaceuticals is required to pay CNCE royalties at defined percentages ranging from the mid-single digits to low double digits below 20%, on a country-by-country and licensed product-by-licensed product basis, on worldwide net product sales of licensed products. The royalty rate is lowered, on a country-by-country basis, under certain circumstances as specified in the agreement.

CNCE is currently conducting certain development activities for a Phase 1 clinical trial with respect to JZP-386 pursuant to an agreed upon development plan, and CNCE will be responsible for supplying a deuterated intermediate for making clinical trial material for a Phase 1 clinical trial.

Thereafter, obligations to conduct further development activities are subject to mutual agreement and CNCE has agreed with Jazz Pharmaceuticals that Jazz Pharmaceuticals will assume all manufacturing responsibilities for Phase 2 development.

Pursuant to the agreement, CNCE's costs for activities under the development plan, including pass-through costs and the costs of employees' time at a rate per full-time equivalent year of CNCE's employees' time, which are mutually agreed to, are reimbursed by Jazz Pharmaceuticals. This reimbursement is subject to limitations in the agreement, including adherence within a particular percentage to the development budget.

GlaxoSmithKline

In May 2009, CNCE entered into a research and development collaboration and license agreement with GSK a wholly owned subsidiary of GlaxoSmithKline plc, to research, develop and commercialize multiple products containing deuterated compounds, including CTP-499 and, ultimately, CTP-298, which was developed pursuant to the agreement.

CNCE's agreement with GSK, as subsequently amended, expired in 2012.

The rights to the products developed under the agreement have reverted to CNCE and it is free to pursue them without further obligation to GSK other than to repay GSK an amount of up to $2.75 million, if CNCE commercializes CTP-499 or if, prior to a specified date in 2018, CNCE re-licenses or transfers the rights to its CTP-499 program prior to a specified date in 2018.

Intellectual property

As of December 31, 2013, CNCE held 100 issued patents worldwide, including 50 issued patents in the United States. CNCE's patents and patent applications, if they issue as patents, for its lead programs expire between 2028 and 2034.

CTP-354

CNCE holds U.S. patents covering the composition of matter of CTP-354 and related compounds. These patents expire in 2029. CNCE also has a pending U.S. patent application claiming compositions and methods covering CTP-354. CNCE has corresponding issued patents in Europe and Japan that expire in 2029. CNCE has retained all of the CTP-354 patent rights.

CTP-499

CNCE holds a U.S. patent that covers the composition of matter of CTP-499 and related compounds. This patent expires in 2029. CNCE also has pending U.S. patent applications that cover CTP-499 and related compounds. CNCE has two patent applications for CTP-499 in Europe and two issued patents in Japan that cover the composition of matter of CTP-499. Patents that issue from the European patent applications would expire in 2029 and 2030. The issued Japanese patents expire in 2029 and 2030. CNCE have retained all of the CTP-499 patent rights.

Competition

There are a number of large pharmaceutical and biotechnology companies that currently market and sell products or are pursuing the development of product candidates for the treatment of spasticity, kidney disease, neurologic disorders, cancer and inflammation, the key indications for CNCE's priority programs.

Several large pharmaceutical and biotechnology companies have also begun to cover deuterated analogs of their product candidates in patent applications and may choose to develop these deuterated compounds.

In addition, CNCE knows of one small biotechnology company, Auspex Pharmaceuticals, Inc., and possibly two others, DeutRx LLC and Berolina innovative Research and Development Services Pharma GmbH, that are developing product candidates based on deuterium substitution.

Potential competitors also include academic institutions, government agencies and other public and private research organizations.

5% stockholders pre-IPO

Entities affiliated with Three Arch Partners 12.8%

Entities affiliated with TVM Capital 12.4%

Entities affiliated with GlaxoSmithKline 11.8%

Brookside Capital Partners Fund, L.P. 10.2%

Skyline Venture Partners Qualified Purchaser Fund IV, L.P. 9.4%

Entities affiliated with Fidelity Investments 6.6%

Entities affiliated with Greylock Partners 6.3%

Flagship Ventures Fund 2004, L.P. 5.9%

Roger D. Tung, Ph.D. 6.8%

Use of proceeds

CNCE expects to net $57.4 million from its IPO. Proceeds are allocated as follows:

$20 million to fund development of CTP-354;

$15 million to advance its other current clinical-stage product candidates and partnered programs;

$7 million to advance its current pipeline of non-partnered preclinical product candidates and to research and develop additional preclinical product candidates; and

the remainder for working capital and other general corporate purposes.

Disclaimer: This CNCE IPO report is based on a reading and analysis of CNCE's S-1 filing, which can be found here, and a separate, independent analysis by IPOdesktop.com. There are no unattributed direct quotes in this article.

Source: IPO Preview: Concert Pharmaceuticals