Investors See Double Over Chin Drug

After nearly a decade in the laboratory and accumulated losses of $172 million, Kythera Biopharmaceuticals Inc. finally has a shot at making some money – and providing a role model for other local biotech startups. The Food and Drug Administration on July 10 accepted the Westlake Village company’s paperwork seeking approval to market its flagship drug ATX-101. It’s an injectable chemical that breaks down fat cells, and the company will market it as the first non-surgical treatment for a double chin. Although Kythera has never sold a product, investors love it. The company went public in late 2012 and raised $72.5 million, followed by a secondary offering last year for $125 million. The company had a market capitalization of $784 million and a closing share price of $34.62 on July 23. Ahmed Enany, president of the Southern California Biomedical Council, a Los Angeles trade group, said Kythera is a perfect example of a high-risk, high-reward biotech that inspires investors to gamble. “They have a product likely to turn into a blockbuster,” Enany said. “There’s nothing like it on the market yet, so there’s no competition. And there is demand. That’s what investors are buying into when you look at the company’s valuation.” Chief Executive Keith Leonard called the FDA’s acceptance of the drug application a milestone, but now developments will accelerate. “When you hit the send button, it’s a real sense of accomplishment, but also anticipation, because now for the first time we are on a clock,” he said. “We can see a potential approval date, so there’s anticipation about the next phase of commercialization.” Kythera submitted the FDA application after two Phase III trials last year showed about 80 percent of patients were satisfied with the treatment. The FDA has given the company a target date of May 13, 2015 for a decision. ATX-101’s active ingredient is a synthetic version of deoxycholic acid, a naturally occurring chemical in the body that breaks down dietary fat. When injected, it dissolves the walls of fat cells but leaves other cells unaffected. After destruction of the fat cells, the body clears the debris and forms new collagen, the structural molecule that gives skin its firmness, thus providing a youthful look. Leonard said that so far it has worked on every type of fat cell the lab has tried. Kythera decided to market it initially for chin fat because it promised the highest value, meaning consumers would get the biggest aesthetic benefits for the least amount of drug, which would make it easier to market. “If I could take the same amount of fat off the love handles of a guy, would he pay the same amount of money?” Leonard asked. “With the advent of video chats, selfies and other technologies, people are obsessed with their chins now.” Doctors’ approval Assuming the FDA approves it, the drug still needs acceptance by doctors. Kythera believes it will be an easy sell because it will add a revenue stream for doctors without any expense for additional equipment. Doctors are already familiar with injection therapy from Botox, a drug made by Allergan Inc. of Irvine, which uses a neurotoxin to paralyze facial skin muscles and temporarily make some wrinkles disappear. Also, patients pay directly for cosmetic treatments, meaning insurance companies or Medicare can’t complicate acceptance in the market. “It’s an area that doesn’t require reimbursement,” Enany noted. As for price, Leonard said plastic surgery or liposuction for the chin costs $3,500 to $5,000, and Kythera is targeting that same price range – but promising less pain and fewer side effects. The treatment consists of up to six injections about six weeks apart. Side effects are redness and swelling at injection sites. Studies show that after four years, 87 percent of patients are still satisfied with their chins. To market the drug, Kythera is rapidly expanding its payroll. At the end of last year, it had 64 employees; Leonard estimates it currently has 90 and by this time next year he projects 200. That why it left its long-time location along the 101 freeway in Calabasas this week for larger space in Westlake Village, though many of the new employees will be based elsewhere. Between 60 and 80 will be salespeople reaching out to the roughly 5,000 dermatologists and plastic surgeons in the country. Leonard has no plans to partner with a larger company for sales or distribution because it’s such a well-defined market. Ken Cacciatore, an analyst who follows Kythera for brokerage Cowen & Co. in New York, estimates ATX-101 will launch in the second half of 2015 and will reach $500 million in sales within six years. That would translate to a $60 to $70 share price for Kythera, or nearly 60 percent higher than the current price. If a large pharmaceutical company such as Allergan or Valeant Pharmaceuticals International, in Irvine, decided to buy Kythera – which Cacciatore sees as likely – it could add another $20. “Our enthusiasm for the commercial success remains exceedingly high,” he wrote in a note to investors on May 9. “We continue to believe the commercial opportunity is significant and still underappreciated by the Street.” Local example Kythera was formed in 2004 by Leonard and a small group of venture capitalists and scientists. Lab work started in 2005 to find uses for ATX-101, a licensed compound discovered by UCLA researchers. Leonard came from Amgen Inc. in Thousand Oaks, where from 2001 to 2004 he was general manager of Amgen Europe. Leonard currently owns about 5.3 percent of the company’s stock, according to Kythera’s proxy statement. Venture capitalists Robert Nelson and David Schnell individually own more after making early investments in the company. Fidelity Management & Research Co., the company’s largest shareholder, has 9.9 percent, while four other venture and institutional investors own more than 5 percent. Even with venture capital backing, the company has been frugal. Kythera maintains no manufacturing facilities or lab space. And the company’s research is conducted at the Los Angeles Biomedical Research Institute at Harbor UCLA Medical Center in Torrance. Leonard said the company plans to continue to use third-party manufacturers for the commercialization of ATX-101 or any other drug in the future. It also has no plans to move out of the Conejo Valley, something that various financiers urged Leonard to do over the years. “I view the world inverse from those people,” he said. “They think, ‘I have the money so come to me.’ I think, ‘We have the talent, so the money should find us.’ And it will.” Brent Reinke is partner at Westlake Village law firm Musick, Peeler & Garrett LLP who specializes in biotech clients and startup funding. He said that without doubt venture capitalists often demand that new local biotech companies relocate to either the Bay Area or San Diego before they will provide money. However, Kythera had a well-respected management team, so it was able to attract capital without leaving the Conejo Valley – an example that other local startups can follow. “It’s key that you surround yourself with people who have experience with the venture capital or private equity community. It doesn’t have to be management – it could be the board of directors or member of an advisory board,” said Reinke. Enany agreed that other startups can take lessons from Kythera’s success in attracting capital. “You need the right management to attract resources, and you have to position your company where there are not comparable products,” he said. Leonard added that the company’s product, a chemical that dissolves fat, was instantly understandable to financiers. And as Kythera progressed through its research phase, every round of investors could show a paper profit because the company’s valuation at the next round kept rising. “Every financing round we’ve had has been an up round,” he said. “That’s not easy to pull off.”