Los Angeles County's biggest privately held biotech firm has agreed to sell itself to Japan's second-largest pharmaceutical company in a deal that could be worth more than half a billion dollars to investors.

Santa Monica-based Agensys Inc. has signed a definitive agreement to be acquired by the U.S. subsidiary of Astellas Pharma Inc. for $387 million up front. Agensys' shareholders could receive up to $150 million more if the company meets certain milestones while developing its cancer drugs.

The deal is considered the largest in this decade for an L.A.-based private biotech. The transaction is expected to close by the end of the month, pending approvals by regulators and Agensys shareholders.

"This is a deal that is good for investors, good for our people, and hopefully this will become the basis for building another significant (area of) biotech activity in the Los Angeles area," said Chief Executive Donald Rice, who was recruited to run the fledgling biotech after a career as secretary of the Air Force and president of think tank Rand Corp.

A UCLA spinoff, Agensys has one drug candidate being developed with Merck & Co. Inc. that is in early-stage clinical trials to treat prostate cancer and other solid tumors. It also has at least 30 potential treatments for kidney, colon, and other cancers in its pipeline. Some are being developed with biotech industry giant Genentech Inc. and other partners.

The deal itself is a milestone in several respects. Unlike many outside companies that have acquired an innovative L.A. life sciences company only to move its assets elsewhere, Tokyo-based Astellas is promising to keep Agensys in Los Angeles County and grant management and scientists significant autonomy at least for now.

Key members of the management team, including Rice and Chief Scientific Officer Dr. Aya Jakobovits, have agreed to stay on. Astellas also is promising to pour additional resources into the company to help it grow far beyond its current 100 employees.

"Agensys will be the cornerstone of our biologics efforts and an integral component of building our oncology efforts within our franchise," said Chief Executive Masafumi Nogimori when the deal was announced.

Astellas was formed from the 2005 merger of Japan's fourth and fifth largest pharmaceutical companies. The company makes a wide variety of drugs, including those used in cholesterol management, organ transplant and treating respiratory diseases.

Large pharma

Agensys is valuable because it has one of the more innovative drug development platforms in the business. It is based on antibodies, proteins that the body's immune system employs to attack foreign bodies or malignant cancer cells. Since antibodies are naturally occurring, its drugs can theoretically cause fewer side effects than conventional radiation or chemotherapy.

"Given the tremendous interest in antibodies on the part of large pharma today we thought Agensys' platform would be very valuable," said Farah Champsi, an Agensys director and managing director at San Francisco-based Alta Partners, the company's second largest shareholder. (Besides Alta Partners, other shareholders include such venture capital companies as Orbimed Advisors of New York, Bear Stearns Health Innoventures of New York, JAFCO of Tokyo with a Palo Alto office, and H & Q; Healthcare of Boston.)

In 1996, the company became the first spin-off in which the university took an equity stake in lieu of some royalties. Previously the university had solely demanded royalties as financial compensation for the intellectual property developed at its labs.

The UCLA researchers who founded Agensys, originally called UroGenesys, had developed technology for finding genes closely associated with certain cancers. Those genes led to the development of its antibody treatments.

The university would not disclose the amount of its stake, citing confidentiality agreements, but University of California guidelines limit equity stakes to 10 percent of a company's shares. Today, the university has equity in 20 spin-off companies.

"It was really a landmark deal for us (in 1996)," said Kathryn Atchison, UCLA's vice provost for intellectual property and industry relations. "It was unusual that we even did it back then because there were all sorts of worries about conflicts of interest, and how it would look for a university to take equity in a company."

Agreeing to an acquisition at this time appears to have been a combination of Astellas' interest and the desire by some early investors for an exit, said industry experts familiar with the company. Taking a biotech drug to market can cost more than $1 billion.

But Agensys isn't hurting for cash. The company has raised around $119 million over the years, including a $41.3 million Series D round in July. In fact, Astellas' up-front payment is predicated on the company still having a $30 million net cash balance when the deal closes.

An initial public offering also was considered and rejected because of concerns that Wall Street would value the company less than a strategic partner like Astellas would.

"Wall Street would value us just as a company with (an early stage drug) candidate," said Dr. Arie Belldegrun, Agensys chairman and one of the UCLA researchers who founded the company. "We believed we would be valued more highly by a company that would understand, appreciate and value the difference between us and all the rest."

Agensys develops its treatments by growing cancerous human tumors in genetically modified mice that have an immune system nearly identical to humans. The antibodies produced by the tumors can then form the basis of an injectable drug that humans can tolerate.

The Agensys development platform is also distinctive because its technology allows it to better determine in the lab whether a potential drug will be successful without first spending big money on clinical trials.

Ahmed Enany, executive director of the SoCal Bio industry trade group, said he has a personal preference for local biotechs to grow as independent companies. But he said if anyone had to acquire Agensys, it was good that it was a Japanese company, since they tend to leave local teams in place.

"If they keep Aya and Don, that's a good sign that they plan to grow the company here," Enany said.

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