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	Client Success Stories Team-Building and Passion Drive Later-Stage Financing at Amicus Therapeutics Entrepreneurs are “big picture” people, often endowed with expertise in a specific field and the ability to envision an enterprise that would fill unmet needs or bring new benefits to an emerging or underserved segment of the marketplace. It is their passion and motivation that drives a start-up business through its initial stage, and in the most successful cases those qualities get infused throughout the organization. However, as the company’s financing needs change in later stages, passion and motivation must be supplemented with practical skill sets. “As a company moves through different stages of development, often a need arises to reposition the management team and build some strength in areas needed to take the initial concept to commercialization,” explains Joe Warusz, vice president, finance, at Amicus Therapeutics, a Cranbury, N.J.-based biopharmaceutical company which recently closed a $55 million Series C financing. Amicus Therapeutics is a clinical-stage biopharmaceutical company developing small-molecule, orally active drugs for the treatment of human genetic diseases. Its approach is considered paradigm-shifting because it uses pharmacological chaperones to selectively bind and “rescue” the defective proteins behind conditions such as Fabry disease (a lipid storage disorder caused by a faulty or missing enzyme; it usually begins in adolescence and can lead to increased risk of heart attack or stroke) and Gaucher disease (pronounced “Go-shay,” an inherited genetic condition that causes fatty deposits to build up in certain organs and bones and affecting less than 10,000 people worldwide). The company believes its unique technology represents the next-generation approach to the management of human genetic diseases and offers the potential to dramatically improve treatment options for patients. With Series C, Investors Look for a Quality Return In the case of high-tech ventures such as Amicus, company founders tend to be researchers and scientists. As these companies progress through the development lifecycle, they need to bring in complementary skill sets. Investors—especially later-stage investors—in these companies generally are very savvy business partners, and financing candidates must be able to demonstrate program strengths, ability to meet timelines and other capabilities in a convincing manner in order to raise additional capital. "When you look to raise $55 million in a Series C, you start to set a clearer picture of an exit strategy for investors, such as an IPO. Ultimately, the goal is to take the company public at some point. Everything we are doing today–with our business and our science–is helping to position us for an IPO over the next 12 to 18 months." “Our investors know the biopharmaceutical space,” Warusz says. “In raising Series C capital, we had to demonstrate critical development within our various programs, where they stood in terms of clinical trials and what the expected endpoints were. It is incumbent on us to be able to demonstrate those things in terms that resonate with the previous experience our investors have in this field.” Amicus recently initiated Phase II clinical studies of its lead compound Amigal^TM, which is being developed as an entirely new approach for the treatment of Fabry disease. Amigal^TM has been granted orphan drug status by the Food and Drug Administration for the treatment of Fabry disease, in effect barring competition from any other drug with the same active ingredient unless it is proven clinically superior for that disease. The company is completing preclinical development of AT2101, an experimental oral therapy for the treatment of Gaucher disease, and plans to initiate clinical studies in the first half of 2006. Positioning Amicus for an IPO In Series C financing, investors are looking for evidence of a company’s ability to take the next big step toward commercialization, a process which calls for supplementation of scientific expertise with solid business skills. “When you look to raise $55 million in a Series C, you start to set a clearer picture of an exit strategy for investors, such as an IPO,” Warusz explains. “Ultimately, the goal is to take the company public at some point. Everything we are doing today—with our business and with our science—is helping to position us for an IPO over the next 12 to 18 months.” Over the past year, Amicus has made management moves to help it meet that challenge. John Crowley, named chairman and CEO in January 2005, and Matthew Patterson, its chief business officer, both have extensive experience on the business side of the biotech and pharmaceutical industries. Warusz, who joined the company in August 2005, has 25 years of experience in financial and operations management in pharmaceuticals, medical devices, biotechnology and public accounting, most recently as vice president and treasurer of a publicly-traded genomics research and testing firm. Balancing Passion and Business Strategy Given the fact that all of Amicus’ current investors opted to participate in the Series C round of financing, which was led by new investor Quaker BioVentures, it seems clear that the company’s strategy reflects what its savvy business partners were hoping to see. But Warusz stresses that as important as the company’s strategic moves on the management and business side may be, there is no diminishment to the important role passion plays at Amicus. “To be successful in this environment, you need an organization that is highly motivated, energized and committed to the programs. You really have to have a passion for what the company is looking to do,” he says. “Quite frankly, what we are looking to do is a pretty significant shift in the treatment of many human genetic diseases, looking to go from enzyme replacement therapy to drug delivery. One of the big things contributing to our success in the Series C was having in place a management team with a proven track record, which enabled us to present the company as business-led, but science-driven. The passion and commitment are still there, and that’s evident on an organization-wide basis.” For more information, please contact Joe Gitto at jgitto@gellerco.com. Capital Trends SPACs and Reverse Mergers Offer Alternatives to Traditional IPOs Raising capital is a critical challenge for many growth companies. With the market for smaller initial public offerings relatively quiet in recent years, some companies are turning to alternatives such as Specified Purpose Acquisition Corporations (SPACs) and reverse mergers. A SPAC is actually a form of an IPO, explains Charles Weinstein, CPA, managing partner with Eisner LLP in New York City. The primary difference is that a SPAC has no operating business at the time of the offering. SPACs are “acquisition vehicles” formed by dedicated management teams, usually consisting of some combination of individuals with relevant industry experience, successful entrepreneurs, managers and/or investment bankers. The team works with an underwriter to raise money in an IPO that will be used to acquire an existing business in its target sector. Acquisition of an Operating Company Whether a SPAC or a conventional IPO is preferable depends on the nature and objectives of the parties involved, points out Joseph Tiano, Jr., a partner with Thelen Reid & Priest LLP in Washington, D.C. A viable operating company seeking additional working capital and wishing to retain control of its operations would likely favor an IPO. A SPAC is generally formed for the specific purpose of acquiring an operating company, with control passing to the principals and stockholders of the SPAC. SPACs are "acquisition vehicles" formed by dedicated management teams, usually consisting of some combination of individuals with relevant industry experience, successful entrepreneurs, managers and/or investment bankers. The team works with an underwriter to raise money in an IPO that will be used to acquire an existing business in its target sector. Typically, 85–95% of the proceeds raised in a SPAC IPO are held in trust. The SPAC must generally sign a letter of intent to form a business combination within 12 or 18 months of the IPO, or it will be forced to liquidate and distribute the trust holdings to the public stockholders. The acquisition target must have a fair market value equal to at least 80% of the SPAC’s assets at the time of the acquisition. If a letter of intent has been signed within the specified time period, the SPAC can close the transaction within six months of the end of such period. Regulators Show Increased Interest in SPACs However, the increasing popularity of SPACs is also bringing closer scrutiny by the SEC, warns Steven Skolnick, a partner with Lowenstein Sandler PC in Roseland, N.J. “SPACs offer a simplified alternative to a traditional IPO for raising cash and can be useful for an entity that does not currently have an operating business and is looking for an acquisition candidate” he says. “Prior to the summer of 2005, it was an easier transaction to complete. But once the number of deals started increasing, the SEC started looking at them more closely, and the regulatory climate has grown more stringent.” In particular, the SEC has begun looking closely at the fair value of unit purchase options going to underwriters in SPAC deals. The agency is also asking more pointed questions about capitalization levels of SPAC entities and how that figure was determined. A potential pitfall associated with SPACs is a requirement for shareholder approval of an acquisition, a process that may be cumbersome and time-consuming for the seller, notes Weinstein. Skolnick points out that the increased use of SPACs could make it more difficult for entities to find appropriate acquisition targets because of increased competition. New Rules May Help Climate for Reverse Mergers In essence, a reverse merger is a transaction in which a private company becomes public through a combination with an existing public company, with the private company ending up in control of the combined entity. “ More often than not, the public entity in a reverse merger is a ‘shell’ company, with no operating business and insignificant assets,” Weinstein explains. Among the potential advantages of a reverse merger, notes Weinstein, are: Ability to complete the transaction without engaging an underwriter, thus reducing overall costs. Avoiding the rigors of the IPO process, including a long road show. Less vulnerable than an IPO to the vicissitudes of public markets and risk of being unsuccessful. Ability to complete the transaction in a shorter time if the private company has audited financial statements and other required information available at the time of transaction, preparations that can be easily completed with a CPA firm. In the past, there has been a potential stigma attached to companies taken public through a reverse merger because there was very little information about the operating company available immediately after the transaction, Weinstein points out. However, he believes that elements of a new SEC final rule related to filings by shell companies (17 CFR Parts 230, 239, 240 and 249) that became effective on August 22 and November 7, 2005, may help to “legitimize” the marketplace for reverse merger transactions. The new rules require more timely and extensive disclosure for the operating business in a reverse merger, such as the filing of Form 8-K within four days rather than the previously required 71 calendar days after the date that the initial report on Form 8-K must have been filed. For more information, please contact Mike Bernstein at mbernstein@gellerco.com. Financial Reporting Navigating a Changing Landscape as Audit Portion Becomes More Complex The audit portion of financial reporting has become more critical and more “cerebral” in nature over the past few years. At the center of these changes is the Sarbanes-Oxley Act of 2002. Other factors include the increasing complexity of documents such as FIN 46R (disclosure rules related to a “variable interest entity”) and FAS 43 (accrual of liability for employees’ rights to receive compensation for future absences). Reporting companies must factor these changes into their audit preparation processes or risk facing potentially negative consequences. The Expanding Role of Audit Teams “The audit portion of financial reporting has become more critical in that the information auditors look at is being examined in much greater depth than it was just a couple of years ago,” says Mark Davis, a managing partner of Deloitte & Touche LLP’s technology and venture-backed practice in the Northeast region. “We as a firm have always supplemented our audit teams with people who have other specialized expertise in areas such as tax compliance and ongoing evaluation of goodwill and intangibles,” Davis says. “ The audit team has morphed from a group of audit specialists to one which includes a broader spectrum of knowledge, skills and expertise. We are getting the right answers in areas such as merger and acquisition activity, FIN 46R and FAS 43 by relying on experts with specific skills in those areas.” "A need has arisen for audit firms to work in a different way with clients. There is stricter separation between the accounting and auditing functions, and there is the possibility that legitimate differences of opinion over some accounting issues could lead to problems." This new environment for the audit function raises financial reporting challenges for companies, says Michael Bernstein, managing director of Geller & Company’s Emerging Business Group in New York City. “A need has arisen for audit firms to work in a different way with clients. There is stricter separation between the accounting and auditing functions, and there is the possibility that legitimate differences of opinion over some accounting issues could lead to problems,” he says. Roadblocks to Reaching Similar Positions Most companies want to do the right thing when it comes to financial reporting, and the auditor does too, Bernstein says. “But the way the rules are structured and enforced makes it difficult and awkward for the two parties to have the kind of collaborative, productive conversations that in many cases might make it easier to reach a right conclusion.” In some cases, companies are hesitant to take a position on certain issues, especially in areas such as business combinations and valuation. “If they take the wrong position, it can be seen as a material weakness, ” Bernstein explains. “But they have to take a position, because if the auditors are asked to work with something other than a final product, that can be interpreted as them having crossed over the line.” Walking the Line between Balanced Responsibilities That “line” is the pivot point in the “appropriate balance between the responsibilities of management to design, oversee and obtain reasonable assurance about internal controls over financial reporting and the auditor’s responsibilities to test and report independently on those controls in connection with the annual financial statement audit,” according to an April 2005 report from Deloitte in response to a request by the Securities and Exchange Commission (SEC) for comments on its experiences with implementation of the auditing and reporting requirements of Section 404 of Sarbanes-Oxley. Among the fundamental principles affirmed in Auditing Standard No. 2 and emphasized or strengthened in Section 404 of Sarbanes-Oxley and related SEC rules is that external auditors must perform sufficient testing themselves to obtain the principal evidence to achieve their own reasonable assurance regarding the accuracy of items included in an audited company’s financial statement. “The most important thing clients can do to adjust to the new environment is to gain access to more specialized expertise, either by adding it in-house or by turning to an outside expert firm, such as Geller,” says Davis. Prior research and preparation can help ensure that the positions a company takes on material issues, such as business combinations and valuation, will turn out to match the conclusions reached by the auditor, thus avoiding the potential downsides of higher fees, a lengthened audit process and delays in releasing information to the public. For more information, please contact Antonette Favuzza at afavuzza@gellerco.com.