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The specific nature of this drug renders it great potential of therapeutic
and commercial success. The lack of compound-related toxicity, along with a targeted cell-
specific modality will result in a safer and more effective means. In addition, complexity of
biologics will make it hard to replicate, thereby reducing generic competition.

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There are three different kinds of issues the management team needs to deal with:
Technology Issue, Regulatory Issues and Business Issues.

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  In terms of technology issues, the management team
needs to evaluate each potential disease state for the speed with which clinical
investigators could confirm Vascugel's efficacy in that space, and their ability to capture
patients for the trial. Regulatory Issue also remains one of the greatest challenges Pervasis
faces in order to get Vascugel out to the market as fast as possible. Despite its founders
opinion we agree with the view of Steve that Pervasis should consider introducing it
initially for one specific purpose instead of for three different disease stages for following
reasons: (1) the cost of running even one critical trial is significantly high and Pervasis
certainly does not have resources to meet the demand for capital; (2) once the safety is
proved, Pervasis can always get it approved for other diseases. All it has to do it prove
efficacy for those diseases. This will be much cheaper and faster method.
Based on following analysis, we believe that Pervasis should consider filing IND for
ESRD patients where it will have much more chances of reimbursement for cost.

   Despite its cutting edge science, reimbursement for the drug could prove
difficult. The cost of vascugel at introduction will range from $16,000 to $20,000. There are
several low cost generic drugs that can be offered and are already on the reimbursement
list. In addition drugs, especially generics, targeted toward the same therapeutic area may
be less effective or more toxic, their relatively low cost and reimbursement status make
them a viable option for patients who cannot bear the burden of high cost and for the
physicians prescribing the treatment. However looking at the data, we believe that if
Vascugel is introduced for ESRD patients, its chances of getting on reimbursement list are
very high. Figure 1 shows the growth of ESRD patients and increasing burden on Medicare.
On forecasting the series we can see that in next 5 years the cost of reimbursement will for
ESRD patients will be almost 25B. Per patient cost of ESRD medicare bill is almost $33000.
Therefore, introduction of drug in this area has a very high potential for being approved for
reimbursement.

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     Establishing a foothold in this new market fuelled
by cutting edge and evolving technology will require research collaborations, contract
Pervasis Therapeutics, Inc. Case Analysis
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manufacturing organizations (CMOs), contract research organizations (CROs) and even
geographical expansion. Pervasis must resort to the outsourcing option in manufacturing,
distribution, and research. Establishing branches in less expensive regions will bring down
production costs and make room for price reduction as well. However, it has to ensure that
facilities, research, and standards must be at par with those available in North America to
ensure that the only change is in the geographic distance, and not in quality. Besides, efforts
must be made to engender favorable public opinion on this technology. The possible public
impediment could be the mode of administration. Patients prefer convenient forms of
administration; this could be a restraining factor in the choice of vascugel as a treatment
option as it has to be administered by intravenous procedure which may not be preferable
to patients.

3  


 
   Although Pervasis has some money available through
venture capitalist but it is not enough. To make itself successful Pervasis needs to develop
strategic alliance with other pharmaceutical companies. Since it has such a breakthrough
technology, reverse merger could be a great opportunity for Pervasis. It can join forces with
big pharma with lot of liquidity but few products in pipeline.
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3



 
 
 Financing decisions are going to largely be based on the
projected burn rate and duration of time before Pervasis can expect to bring in revenue.
Currently, Pervasis is spending a total of a quarter million per month on operations, which
equates to only four months left of cash reserves.
There is tremendous pressure against bringing in more financing however, as additional
equity will dilute the current investor stake, and Pervasis does not have any revenue to
justify issuing debt. With a total of $2.75M of grants and seed money from MIT, Polaris, and
Flagship, series B funding of $12M would reduce the previous equity ownersǯ investment to
1/5th of their previous stake at best (based on initial investment amounts), and 1/20th of
previous stake at worst (based on current evaluation = cash Ȃ accounts payable)  .
Dilution values will largely be dependent on the series B investorǯs valuation of the
company. Unfortunately, with only four months of cash reserves, Pervasis is in a weak
position to negotiate terms. We would assume series B investors will require preferred
stock, as the company has already set this precedent with the first round investors. The
founders will not be happy.
Examining the projected spend (exhibits 10 and 11 from the case) over the next
three years, we can observe that series B funding will take the company just past Q1 of
2007  , but no further. To avoid the impending exhaustion of their coffers, the board
would need to raise $25M just to push past the FDAǯs twelve-month report (Q3 2008),
which also assumes there are no delays along the way. In addition, revenue from sales
would need to quickly take the place of cash reserves, which is unlikely with the current

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Pervasis Therapeutics, Inc. Case Analysis
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plan given that there is no budget for marketing efforts. The total amount needed will
realistically be much higher than $25M.
Timing is a real issue here: should money be raised now, or later? Either way, the
board and series A investors will suffer dilution. If money is raised later however, the
initial investors AND the series B investors will suffer dilution. The first option may be an
easier sell to potential series B VC.
Stepping back and approaching the situation from a high level, management will
favor faster and cheaper development strategies to minimize the amount of funding
required in Series B. The key to survival while avoiding dilution is to bring a product to
market quickly, in hopes that initial cash flow generated from an approved product will
fund additional, more complicated clinical trials that may have higher overall IRR but a
longer time-frame. In addition, targeting the low-hanging fruit will pave the way for future
studies, since the tox and efficacy models will already be established with the FDA.

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