New Mountain, VC Firms Team Up For Drug Play

Targets: Ikaria Inc.; INO Therapeutics

Purchase Price: $670 million

Sponsors: New Mountain Capital; ARCH Venture Partners; Venrock Associates; 5AM Ventures; Alexandria Equities; Altitude Life Science Ventures; Black Point Group

Seller: INO Therapeutics: The Linde Group

Financial Advisors: Ikaria: Goldman Sachs; Linde: Morgan Stanley

Legal Counsel: Ikaria: Heller Ehrman LLP; Linde: Freshfields Bruckhaus Deringer; New Mountain: Fried, Frank, Harris, Shriver & Jacobson LLP; VC Buyers: O’Melveny & Myers LLP

A buyout professional, a biotech executive, and six venture capitalists walk into an auction…

No, this isn’t the beginning of a bad private equity joke. It’s just part the main cast of characters in a multifaceted transaction being led by New York buyout shop New Mountain Capital. In a deal valued at about $670 million, New Mountain, together with a group of venture capital and strategic investors, plans to acquire two critical-care pharmaceutical companies—Ikaria Inc. and INO Therapeutics—and merge them into a single entity called Ikaria Holdings.

Ikaria Inc. is a Seattle-based biotech company focused on developing critical-care products. Founded by venture firms ARCH Venture Partners and Venrock Associates in 2005, the company conducts research on therapeutic gases that induce metabolic depression (slowing down the speed at which the body uses energy). The goal is to develop products that could be used to treat conditions resulting from stroke, cardiac arrest or trauma. The company is “quite a few years away from commercialization” of its products and does not have a revenue stream, according to New Mountain Capital Managing Director Alok Singh.

INO Therapeutics, meantime, is a specialty pharmaceutical business. INO’s main product is a gas called nitric oxide, which it markets under the brand name INOmax. Nitric oxide is used to regulate blood pressure and fight infection. Unlike Ikaria Inc., INO is already a fast-growing, profitable business that generates about $160 million in revenues per year. The owner has been German industrial gas and engineering company The Linde Group.

The transaction—expected to close by April—includes a $300 million equity component, of which $200 million is coming from New Mountain Capital in return for a more than 50 percent stake in Ikaria Holdings. The Linde Group will maintain a 17 percent stake in the combined company, while ARCH Venture Partners and Venrock Associates will each hold 10 percent stakes. The remainder of the company will be held by venture firms 5AM Ventures, Alexandria Equities, Altitude Life Science Ventures and Black Point Group, as well as by the Fred Hutchinson Cancer Research Center and the Washington Research Foundation. Senior cash flow-based financing was provided by Credit Suisse.

“You have enough profitability and cash flow coming out of [INO] to not only pay for the substantial research programs which are at INO, but also at Ikaria—so in one fell swoop we have essentially taken care of the future research commitments that we have,” New Mountain’s Singh said.

Most of the research being done at Ikaria will center on metabolic control through a gas called hydrogen sulfide. “When a person’s metabolic rate is slowed to the point of hibernation, their brains call for less blood,” Singh said. That’s an important outcome to achieve in cases such as severe head trauma or a hemorrhage. In these cases, Singh said, the brain is unable to receive the amount of blood it wants, so it keeps sending out signals for more and more blood to come its way. “The brain is trying to save itself but could really end up damaging itself,” Singh said. Hydrogen sulfide promises to relax the brain’s call for more blood, allowing it to operate on a reduced supply.

“It is pretty amazing,” Singh said. “This thing has got very substantial implications from the standpoint of how treatment might be done over the long run.”

Singh negotiated the transaction over a period of 11 months. “This is the longest, most complex investment, quite frankly, that I’ve ever been associated with,” Singh said.

The deal is also one of the latest to illustrate what could be a growing trend of buyout firms hooking up with venture capitalists. Earlier this year, Francisco Partners, a tech-focused LBO shop, teamed up with VC firm Sequoia Capital to provide a $40 million Series A round of financing to Barracuda Networks Inc., a provider of anti-spam software. And toward the end of last year, buyout firm Lightyear Capital teamed up with Insight Venture Partners to acquire Circle Software Inc., a developer of software for real estate development and investment professionals.

Ikaria Holdings company will be led by New Mountain Senior Advisor David Shaw, who is the chairman of Ikaria Inc. It was Shaw who brought the investment opportunity to New Mountain, Singh said. New Mountain is investing out of its second fund, New Mountain Capital Partners II LP, which raised $1.55 billion and closed in December 2004.—A.N.