Financings of the Fortnight Looks for Its Shadow

We are always on the lookout for leading indicators, no matter how faint the signal. If you tend an herb garden on your back porch, you might prefer the "green shoots" metaphor. Ever hopeful that the second law of thermodynamics isn't really the guiding principle ruling our lives, we humans also imbue natural events and public rituals with significance. Earthquakes as divine punishment! The groundhog's shadow! That said, we should say right off the bat that Genmark Diagnostics is no Punxsutawney Phil.

Yes, Virginia, there was an IPO last week, and its name was Genmark. But it wasn't the sort that necessarily means a damn thing. An obscure UK diagnostics firm formerly known as Osmetech that creates a US subsidiary, reverse-merges into it to reach US shareholders -- and only pulls in $28 million after shooting for as much as $45 million, for that matter -- is only that. An N of one.

Yet it came at a time when we were already thinking about diagnostics, and funding, and the funding of diagnostics. The low-profile offering, tucked just in front of the long holiday weekend, was also sandwiched between two conferences that opened different windows on the application of genetic information. At a consumer genetics show in Boston this week, funding strategies weren't explicitly on the menu, but as our correspondents noted, it's becoming ever more clear that cost breakthroughs in sequencing will lead to identification of medically significant genetic variations in patients. The question then becomes, what do you do with them?

That was the topic last week at the C21 venture conference in California's Napa Valley, where the diagnostics panel drew an eager crowd looking for ways to put money into -- buzzword alert! -- low-cost innovation. (That is, really cool stuff that doesn't cost a lot to make.)

And as our colleague Mark Ratner noted in his recent IN VIVO feature, despite the early days of most genetic research, a trio of well-known VCs -- Kleiner Perkins Caulfield & Byers, Mohr Davidow Ventures, and TPG -- have spread their diagnostic bets further, particularly into cardiology, after hitting the jackpot with breast-cancer test maker Genomic Health. Genmark isn't in their portfolios, but as we've seen on the drug side, any IPO activity after the long dry spell of 2008-2009 is worth scrutiny, not just as an indicator for current portfolio companies but for investors looking to jump in. One of the keys to diagnostics is getting pharma's attention in a variety of ways, such as using tests as a marketing tool when a drug rep is out detailing. We'll let Ratner explain:

The raison d'etre of new molecular tests is to significantly add to the information available to physicians to enable or change critical clinical decision-making. Especially at a time when the pace of new drug introductions is slowing and the opportunities to meet face-to-face with physicians therefore diminishing, as molecular diagnostics moves into new and broad markets like cardiology and metabolic disease, pharma could use this opportunity to its advantage in many settings.

In the case of a specific cardio test called Corus CAD, Ratner writes, "There's sufficient novelty and interest in genetics and genomics associated with coronary disease that [drug reps] could start a dialog with a physician about Corus CAD and at some point change to their drug-oriented message."

Diagnostic brethren such as LabCorp, Roche and Qiagen make splashy acquisitions; pure-play pharmas probably won't, though some are keeping their options open. Other deals will come from industrial giants such as General Electric and Procter & Gamble. But with massive hoards of cash to spend, any sign of pharma opening its coffers for diagnostics deals could mark a big change in the way VCs invest, which despite a few high-profile deals hasn't been that stunning. According to the Elsevier Strategic Transactions database, investment in diagnostics, over $1 billion annually for most of the past decade, is trending lower this year with $273 million through May.

Then again, life-science investing is down across the board this year. Have no fear, there's always plenty of material to bring you...



Tetraphase Pharmaceuticals: The antibiotic developer pulled in a $45 million Series C round to push its lead candidate into Phase II trials later this year, marking another step toward filling what public-health officials say is a ever-growing need: next-generation treatments to fight drug-resistant Gram-negative bacteria, as noted by our colleagues at START-UP. Tetraphase starts with a tetracycline backbone and then modifies the molecule at multiple positions to create an extremely large library. These molecules then can be screened for both their anti-infective properties and their potential to cause off-target toxicities. The lead compound, the intravenous TP-434, will likely focus initially on intra-abdominal infections. The Series C cash will also help push two more compounds -- TP-2758, for complicated urinary tract infections and TP-834, for the treatment of community acquired bacterial pneumonia -into Phase I. Excel Venture Management, a new investor for the biotech, led the round joined by existing backers: CMEA Capital, Fidelity Biosciences, Flagship Ventures, Mediphase Venture Partners and Skyline Ventures. Steve Gullans, managing director of Excel Venture Management, will join Tetraphase's board of directors. -- Carlene Olsen

NormOxys: The developer of small-molecule oxygen-enhancing drugs to treat a variety of diseases announced on May 24 a $17.5 million Series B financing. In addition to existing backer Index Ventures, Care Capital participated in the most recent financing round, with partner Argeris "Jerry" Karabelas joining the start-up's board of directors. It brings the firm's total funding to $30 million. With its novel platform technology and top-notch scientific pedigree, NormOxys has raised a sizeable but not extraordinary amount of additional cash from A-list backers and avoided too much dilution. It can now also aim for a more lucrative big pharma partnership -- whether it's a licensing deal or acquisition -- once the lead molecule, and thus the company's platform, have been derisked. The lead molecule is OXY111a, which the firm calls an "oxyren," for its oxygen-releasing capabilities. It changes the offloading capacity of hemoglobin so that more oxygen can be delivered to tissues where needed. If all goes to plan, it shouldn't result in excess oxygen delivery to normal tissue, which can cause damage because of free radical production. Equally important, say officials, is that the molecule triggering the actual physiological changes is oxygen itself, not the oxyren. Thus, potential off-target side-effects that have scuppered artificial blood substitutes such as Biopure's Hemopure, Northfield Laboratories' PolyHeme, and Baxter Healthcare's HemAssist, should be less problematic. OXY111a is entering Phase I trials with a later goal of testing it against chronic heart failure and an undisclosed cancer indication. -- Ellen Foster Licking

Exelixis: The San Francisco Bay Area public biotech is no stranger to all kinds of financing deals, and now it's turned again to debt to help expand the late-stage development of lead candidate XL184. Exelixis said June 3 it has secured loans worth $160 million from two lenders at an aggregate cost of capital under 10%. Part of the cash will pay back a loan from GlaxoSmithKline, a remnant of the firms' broad, six-year license-and-option deal signed in 2002. It will also fund XL184, which should enter Phase III trials for second-line glioblastoma by the end of 2010, with more Phase III trials possibly coming in 2011. XL184 was rejected by GSK before the six-year deal expired in late 2008, but Exelixis pivoted into a lucrative deal with Bristol-Myers Squibb, which pays 65% of XL184 development costs. It is currently in Phase III for medullary thyroid cancer and earlier-stage trials for glioblastoma. Exelixis is tapping Silicon Valley Bank for $80 million with a seven-year term loan at 1% interest. It's also borrowing $80 million from Deerfield Management, a five-year term with a maximum principal of $124 million. Interest is $6 million a year. Exelixis opened a line of credit with Deerfield in 2008 that, at the time, officials said they hoped never to draw down from. But with a 40% cut in staff in March the firm is shifting resources to late-stage development, which is still expensive even with big-pharma partners footing much of the bill. -- A.L.

Constellation Pharmaceuticals: Epigenetics pioneer Constellation added a corporate venture backer, GlaxoSmithKline's venture arm SR One, in a $22 million Series B financing announced June 2. In addition to SR One, previous investors Third Rock Ventures, The Column Group, Venrock Associates, and Altitude Life Science Ventures, which led the company’s $32 million Series A in 2008, all participated in the round. SR One’s cash should help Constellation keep pace with its main competitor, Epizyme, which obtained backing from Amgen Ventures and Astellas Venture Management in its own $40 million Series B last fall. Neither company has reached the clinic. Both are focused primarily on cancer, but Constellation of Cambridge, Mass. hopes to move eventually into diabetes, autoimmune, inflammatory and neurological diseases. Epigenetics focuses on chemical modification to chromatin, the proteins that package DNA, to create therapeutics that influence gene expression. Two classes of such drugs already are on the market: Celgene’s Vidaza and Eisai’s Dacogen, both DNA-methylation molecules approved for myelodysplastic syndromes, and Merck’s Vorinostat, a histone deacetylase (HDAC) inhibitor for T-cell cutaneous lymphoma. At least two other HDAC inhibitors are in late-stage development for oncology indications. -- Joseph Haas

Extra thanks to Mark Ratner for help with this week's post. Photo courtesy of flickr user avmaier.

Financings of the Fortnight's Symphonic Overtones

Not to hijack FOTF for what is clearly DOTW territory, but how about that Alexza deal with Biovail, eh?

Alexza licensed its novel loxapine formulation, which is being developed for schizophrenia and bipolar patients with acute agitation and is delivered via its Staccato single-dose inhaler, to serial CNS in-licensor Biovail yesterday for $40 million up-front and--you know what? You'll have to wait for DOTW to get the rest of our take on the deal (or read up on it in Thursday's Pink Sheet Daily). [You could also come to our annual Pharmaceutical Strategic Outlook confab (Feb. 24th and 25th in NYC) and get the skinny straight from Alexza's CEO Tom King.]

But this being a financing post, what interests us most for now is how Alexza was able to get its drug candidate through the clinic in the first place. (It awaits an FDA decision later this year). The answer: project financing.


But here's the rub. Even though Alexza's drug has been quite successful in the clinic--and now on the deal front--the biotech's arrangement with Symphony didn't have its financier singing the sweetest of tunes.

In 2006 Alexza got $50 million from Symphony to push forward two projects, effectively forming a newco to fund their development (Symphony Allegro). Symphony also got 2 million warrants to buy Alexza shares at $9.91 apiece. AZ-004 and AZ-002 (the latter drug, a Staccato formulation of alprazolam, posted "inconclusive" results in a Phase IIa study in patients with panic attacks) could be repurchased by Alexza following proof-of-concept for a set price--nearly twice what Symphony paid. Alexza whisked 004 through the clinic pretty quickly, but for Symphony's model to work, Alexza's share price needed to rise enough for the biotech to access non-dilutive funding to take the programs back from Symphony (see the deal specs here).

And that didn't happen. Alexza's shares were waaaaay under water, despite the clinical success of 004. For the biotech to buyback its programs from Symphony Allegro, the terms of the deal needed to be renegotiated. In June 2009, the companies did just that: Alexza bought back 004, 002 and 104 (a low dose version of 004 for migraine, added to the deal in 2007) for about $18 million in a stock transaction that gave Symphony about a 23% stake in the biotech.

Symphony still hasn't earned back its $50 million, even on paper. Its 23% stake is valued somewhere around $33 million (its warrant coverage--under the renegotiation that's 5mm warrants to buy shares at $2.26 for five years--has bobbed above and below the surface since the terms were amended). Even the Biovail deal didn't seem to move investors, who pushed shares of Alexza lower on the news, to close at $2.62 on the day.

For more on Symphony's model--and the hard times it faces as investors are increasingly unmoved by positive clinical news--see this January 2009 IN VIVO feature and this June 2009 story from "The Pink Sheet".)

Symphony had seen the model work before (its deal with Isis, for example) but without help from the public markets, it was dead in the water. AZ-004 may get the nod from FDA later this year and turn into a success for all concerned, and a relief for Symphony. Allegro was much more of a project than it bargained for.


Ironwood Pharmaceuticals: Is it one of the financings of the fortnight? For sure. Have we already given you our take on this deal? Yes (blog), yes (Pink Sheet Daily) and yes (Pink Sheet). Are we going to do it again? Not so much. Eh, not yet, anyway.--CM

Alnara Pharmaceuticals: This Cambridge, Mass.-based biotech really brought home the bacon for liprotamase, its Phase III recombinant, non-porcine pancreatic enzyme replacement therapy, by raising $35 million in a Series B round that closed Jan. 28. (Click here for our Strategic Transactions deal record.) Liprotamase, being developed as an oral, non-systemic tablet for exocrine pancreatic insufficiency in cystic fibrosis patients, successfully completed its Phase III development program last fall. Currently available PERTs are made by harvesting pancreatic enzymes from pigs. MPM Capital, which led the Series B round, sees great potential in the product and will place its managing director, Ashley Dombkowski, on the company’s board. MPM was joined in the round by returning investors Third Rock Ventures, Frazier Healthcare and Bessemer Venture Partners. Noting that Alnara remains on track to file an NDA for liprotamase this quarter, Dombkowski hailed the medicine's “positive long-term safety and nutritionally relevant data” and said the filing will place Alnara “on the cusp of significant value creation opportunities.” In addition to the imminent filing, Alnara also is developing a second formulation of liprotamase for the pediatric CF population. --Joseph Haas

Syndax Pharmaceuticals: When START-UP profiled Syndax Pharmaceuticals in the 2007 A-List group, the young biotech had essentially just started operations with an HDAC inhibitor program in-licensed from Bayer Schering AG, and a platform built on theory that epigenetic changes to the tumor phenotype would restore targets that sensitize tumors to treatment and reduce resistance to targeted combination therapy. A few years later, investor interest in this cancer player has not waned--on February 3, Syndax filed a Form D revealing it’s raised an additional $9 million on top of the $40 million Series A from 2007. (MPM Capital, Domain Associates, and Pappas Ventures are among the company’s previous backers.) And Syndax could still draw down another $7 million in this tranche, bringing the Series A total potentially to $56 million. Syndax is still awaiting Phase II data on entinostat (SNDX275)--its lead candidate from the Bayer deal targeting the HDAC isoforms 1, 2, and 3--in combination with a number of drugs including erlotinib and azacitidine. Trial results are expected at the end of 2010. For venture backer MPM, this is the second big investment in epigenetics; the VC has also heavily backed Epizyme, which in October '09 announced its $40 million Series B.--Amanda Micklus

Merus BV: Corporate venture continues to be a relatively reliable source of funding for early-stage biotechs. (For our takes on corporate venture, see here and here). One of the most active corp VCshas struck again: the Novartis Option Fund (part of the Novartis Venture Funds) was a lead investor on Merus BV’s €21.7 million ($30.7 million) Series B financing, announced on January 29. Pfizer, Bay City Capital, Life Science Partners, and Series A backer Aglaia Oncology Fund also participated. Merus, a seven-year-old Dutch biotech, has two platforms (both derived from the MeMo transgenic mouse): one produces full-length bispecific antibodies; the other, called Oligoclonics, generates combinations of three to five monoclonal antibodies sourced from one clonal cell line (the PER.C6 line, exclusively licensed from Crucell NV in 2004). Merus believes this Oligoclonic mixture of multiple antibodies, which have the same immunoglobulin light chain variable so that all binding sites are functional, will be more efficacious than a single monoclonal antibody. The Series B is the first disclosed amount of venture financing for the company (it raised an undisclosed sum in its January 2006 Series A). With the current round, Merus expect to have enough cash to move its candidates for oncology, inflammation, and infectious disease into Phase I. Meanwhile, as is its M.O., NOF has secured an exclusive option to the cancer program in exchange for an up-front payment and milestones, all of which could total $200 million, plus sales royalties.--AM

flickr image by Lady T 220 used under a creative commons license

DotW: It's A Mad Mad Mad Mad World

These days it seems like we could all use a dose of Stanley Kramer's 1963 classic movie about a madcap chase through the California desert in search of treasure. (What else is there?) Thankfully we have the NCAA tourney--that professional event masquerading as amateur ball--to distract us from the doom, gloom, and outrage swirling in the air.

Who's not feeling the love? Mad Money's Cramer, who is still reeling from the smackdown Jon Stewart gave him last week. Anyone associated with AIG, which has earned a new acronym in the eyes of many Americans: Arrogance, Ignorance, and Greed. Also, Connecticut Senator Christopher Dodd, given the responsibility he bears for the bail-out legislation that led to outsized AIG bonuses in the first place.

Our level-headed legislators are trying to tamp down the furor related to AIG bonuses by taxing the hell out of them. (The move ought to make VCs feel better; by comparsion the new 39% tax rate on carried interest is quite modest.)

There's no shortage of madness in our own industry. The war of words between BVF and Avigen, continues to escalate. (Remember when Carl Icahn was the only activist shareholder to whom we paid attention?) On Friday, BVF sent a letter to Avigen shareholders promising to pay $1.20-a-share for the company, but only if BVF earns seats on the company's board. BVF, of course, owns a significant share in Avigen. Outraged by the way the biotech has been managed, they are hoping to oust leadership to broker a sale to MediciNova.

Of course, the BVF/Avigen saga is small potatoes compared to the umbrage directed at Harvard professor Dr. Joseph Biederman, whose involvement in a conflict-of-interest scandal related to the use of antipsychotics became headline news once again. So much for the purity of the ivory tower.

Will Pfizer investors rise up in anger at the news the big drugmaker is on the prowl for a generics biz? What about Astellas' investors? Unwilling to be drawn into a bidding war for CV Therapeutics after Gilead trumped its offer, Astellas called off its hostile bid for the company this week. But with billions in cash in its war chest and top-seller FloMax due to go off patent in October, the number 2 Japanese pharma needs to do a deal and odds are investor clamoring to that effect will rise in the coming months.

Are you outraged about the incessant debate about Michelle Obama's right to bare arms? Stop the madness. It's time for...

Merck Serono/Fast Forward: Merck Serono this week showed its willingness to accelerate early stage research in MS by providing up to $19 million in a partnership with Fast Forward, a subsidiary of the National Multiple Sclerosis Society. The agreement—which has a two-year term, but may extend for an additional three—is focused on identifying the most promising drug discovery research in this field, whether in biotech or academia, and providing the funds to take those projects through development. The money might all be coming from Merck Serono, but it’s Fast Forward—set up 18 months ago to provide a bridge, both informational and financial, between academia and the private sector—that will take the lead in selecting awardees for the funds (albeit with participation from the drug firm). Priority areas for development, however, will be determined by a joint committee with representatives from both sides. And yes, there are strings attached: Merck Serono, with (of course) a strong interest in building out its MS franchise beyond Rebif, gets first right of refusal to pursue development of projects that it supports. Fast Forward is keen to point out that these rights don’t extend to the many other projects it’s funding independently of this agreement, however. And if Merck Serono isn’t interested in pursuing a program, Fast Forward is free to find another partner. For Merck Serono, this smells a bit like disease-focused corporate VC—albeit with a significant partner making portfolio decisions. And although many other disease-focused charities besides the National MS Society are supporting and financing research in academia and, increasingly, in the private sector too, few have signed up large drug firms. Not that this means other pharma aren’t interested in supporting early-stage research, of course: GlaxoSmithKline has a drug performance unit (DPU) dedicated to academic collaborations.—Melanie Senior

Merck/MMV: Merck Serono wasn’t the only pharma to announce a tie-up with a not-for-profit this week. Merck & Co. Inc. also made headlines, announcing a deal with the Medicines for Malaria Venture (MMV) around a novel, orally available, IND-ready antimalarial. Under the terms of the agreement Merck, whose researchers discovered the candidate, has granted MMV an exclusive royalty-free license to pursue development of the malaria drug in countries where the disease is endemic. In return, Merck retains the option to become MMV’s development partner upon completion of the first Phase II study of the candidate. But if it exercises that option, Merck has also promised that it will price the drug such that it is “not ultimately profiting from its use in developing countries,” according to the press release announcing the news. Merck scientists have already shown in preclinical studies that the IND-ready drug is effective against P. falciparum, the organism that causes acute malaria, including multi-drug resistant strains. MMV will take-over further testing, launching first in human safety trials later this year. The deal is a good one for Merck on a number of levels. It bolsters the pharma’s public image, showing its intent to play a role in developing treatments for diseases that have long been neglected, a move echoed by GlaxoSmithKline and Novartis. It also offloads some development costs near-term, while retaining a clawback to the product should it ultimately work as advertised. More importantly, from the biz dev perspective, it may give Merck access to a priority review voucher in the future. The PRV program, first proposed by a group of Duke economics professors as a potential approach to incentivize R&D for global public health priorities, was included in the FDA Amendments Act with only minor refinement in 2007. Merck, like Pfizer and Sanofi-Aventis, has signaled its interest in the program, by offering comments on FDA’s draft guidance for the incentive program.—Ellen Foster Licking

Centocor/U. Michigan: Even as debate rages in the public sector about the academia’s ties to industry, Big Pharmas’ efforts to get closer to thought leaders at universities is likely to muddy the discussion. In addition to GlaxoSmithKline and AstraZeneca, Johnson & Johnson has been at the forefront of embracing a new model of innovation that improves information flow between the tree-lined walks of academic institutions and the halls of pharma. In January, J&J’s Belgium affiliate Janssen Pharmaceutica NV teamed up with Vanderbilt University's Program in Drug Discovery to discover and license metabotropic glutamate receptors for the potential development of a new class of schizophrenia drugs. That collaboration, which promises to move J&J’s schizophrenia therapy in a new direction, fits in with the pharmaceutical company's new mantra of "open innovation," a term Paul Stoffels, MD, J&J's chairman of global R&D, Pharmaceuticals, first used in media interviews at the beginning of the year. On March 19, J&J announced another deal, this time between Centocor and the University of Michigan, designed to further its ability to access innovation on the cheap. In an interesting twist, the Centocor/U. Michigan tie-up doesn’t relate to the product pipeline as much as the war for talent. The new program pairs minority post-doctoral fellows recruited by the University of Michigan with Centocor researchers to work jointly on interesting research. Under the program, research proposals will be developed by U Mich and Centocor scientists and then submitted for review by a combined steering committee that will select certain grants and follow their progress. One important mission of the program will be fostering strong relationships with African Americans, Hispanic, and Native American scientists who are working in the strategic areas of focus for Centocor. “This strategic link will help us build strong relationships with these talented individuals thus creating a robust pipeline of potential hires,” said Miguel Barbosa, PhD, VP of Discovery Research at Centocor. It’s the latest attempt to do well financially by doing good, but it’s unquestionably a smart PR move on Centocor’s part. It requires very little financial input, breathes new life into the organization, and may yield interesting products down the road.—Ellen Foster Licking

Inverness/Acon Labs: Point-of-care diagnostics specialist Inverness has scooped up the remaining portion of ACON Labs’ lateral flow immunoassay test kit business for the consumer, point-of-care, and laboratory markets, including tests in infectious disease, cardiology, drugs of abuse, and women’s health. The price of the deal? A mere $200 million. ACON will retain its other worldwide in vitro diagnostics businesses including diabetes testing, clinical chemistry and other immunoassay products. Inverness expects to complete the transaction in a series of cash payments through October 2011, but holds the option to use stock for up to 34% of the purchase price. Three years ago, following a patent dispute in which Inverness alleged ACON infringed several of its immunoassay patents including IP around consumer pregnancy and ovulation tests, it acquired ACON’s rapid diagnostics businesses covering the US, Canada, most of Europe, and parts of the Pacific Rim for $175 million. At the time, Inverness agreed to buy the remainder of ACON’s ROW territories including China, India, Russia, Latin and South America, the Middle East, Africa, and Eastern Europe. That “second territory” business – the subject of this deal -- accounted for $45 million in revenues last year. The deal returns Inverness to its “bread and butter: broadening geographic reach and leveraging sales and manufacturing infrastructure,” according to Leerink Swann analyst Bruce Cranna. Inverness has been on a more expansionist buying spree in the past several years, acquiring Biosite and Cholestech in 2007 (see our coverage in IN VIVO here),then shelling out over a billion dollars to buy Matria Healthcare and establish a health management division alongside its diagnostics business.--Mark Ratner

GTC-Biotherapeutics/LEO Pharma: Our, uh, “goat” this week is a deal that has for months apparently been in slow transition, but last Friday took a nasty turn (OK, yes, so it’s a No Deal of Last Week). LEO Pharma has since 2005 held rights to develop and market GTC-Biotherapeutics’ recombinant human antithrombin Atryn in Europe, Canada and the Middle East, but it just doesn’t want those rights anymore. So last year the two companies said that LEO wanted to transition Atryn to a different marketing partner, and GTC has been seeking to do so (Atryn, which is made in the milk of transgenic goats, was approved in Europe in 2006, and was also recently approved in the US as well, where it will be sold by Ovation). Now comes word that “GTC considers LEO to be in breach of its obligations under the contract and is terminating the contract pursuant to its terms and seeking damages under International Chamber of Commerce arbitration procedures.” Terminating the LEO deal should allow GTC to speed discussions with new potential partners, broaden the drug’s label in existing markets and get it approved in other markets, like Canada. One potential partner: LFB Biotechnologies, the French plasma-drugs specialist that loaned GTC $15 million last December and with whom GTC has an existing deal in recombinant proteins and mAbs development. Meanwhile GTC, despite its recent regulatory success in the US—which the company believes is a significant validation of its transgenic technology—has other troubles. This week the biotech received a warning letter from Nasdaq related to the minimum market-value threshold.—Chris Morrison

Image courtesy of flickr user oceanaris through a creative commons license.

DotW: Pink Is The New Black

It's official. Pink is the new black. Any doubt, look at the week's most depressing news item: the U.S. government's announcement that 651,000 jobs disappeared in February.

These days everyone knows someone touched by the rapidly deteriorating economy. We are all frugalistas (frugalistos?) now.

The blogosphere has errupted with sites outlining helpful hints for the newly unemployed, designed to help curb spending and add meaning when someone's work identity is in flux. One of our favorites: 100 Creative, Painless (and Even Therapeutic) Ways to Downsize Your Life After a Layoff.

Pharma types could learn a lot from the site, which includes the following suggestions: hold a garage sale; consider a smaller house; use less or reuse. In our lexicon that could be reworded to mean monetize unwanted assets (aka outlicense), accept that your company may need to downsize instead of growing larger (the anti-Pfizer strategy made manifest by BMS), jettison R&D (Sanofi and Valeant are the first to admit they might need less internal research), and utilize a stable of technologies to find new uses for old drugs (an homage to the reprofilers!).

Our own personal favorites from the top 100 suggestions:

58. Discover community theater. Pfi-eth, Roche/Genentech, preemption, the hunt for an FDA commish, and the fall-out from Obama's healthcare budget all seem to apply if you are looking for a biopharma-centric spin to performance art.

45. Collect coins, as in make a game of finding coins on dressers, the floor, or the street, collect them, and deposit them in the bank (Roche are you listening? It's one way to find the extra $4 billion you need for your $93-a-share bid for Genentech).

43. Surfing the internet. As long as it includes a visit to IVB and Deals of the Week, of course.


Pfizer/Aurobindo: A year after signing a smaller arrangement with the Indian generics firm, Pfizer signed up again with Aurobindo to sell up to 60 generics, primarily in the U.S. but also in Europe. (We’re not exactly sure what this means for Aurobindo, incidentally — since it also has a growing U.S. presence.) The whole thing is an expansion of Pfizer’s “mature products” strategy — an idea initially articulated as a way of squeezing more profits out of existing drugs largely by selling brands into emerging markets. Such a strategy wouldn’t change the pharma business model fundamentally: Pfizer would still use detail reps to sell brands and the brands, although lots cheaper than they’d be as patented U.S. drugs, would still net some premium. The idea isn’t unique to Pfizer: Sanofi-Aventis acquired Zentiva to sell generics in Eastern Europe, while GlaxoSmithKline teamed up with South African generics company Aspen to sell generics in emerging markets. But Pfizer now is moving wholesale into the U.S. generics business. With the Aurobindo deal, it’ll have approximately 120 generic drugs to sell (injectable and oral) in the U.S. – better than one-third of Teva’s list. Why the relative shift in geographic emphasis? Pfizer’s seen the power of generics to interrupt its own U.S. business (Lipitor U.S. sales fell 12% last year, largely because generic simvastatin has been eating its lunch; even its apparently fast-growing Lyrica has been hobbled by the managed-care driven popularity of its generic predecessor, gabapentin, despite its worse label for pain). And the apparent re-emphasis also may reflect rising pessimism about the health of emerging markets, where the economies have been hurt a lot more than in the U.S by the global crisis. Meanwhile, there’s no question about the health of the U.S. generics market. The problem is that Pfizer now is going directly into competition with companies like Teva, Watson and Mylan, and without an obvious strategic or tactical advantage compared to companies that have been built for the high speeds and narrow margins of the generics world. The generics strategy hasn’t worked wonderfully elsewhere, investors point out — Novartis never has made Sandoz into a top generics performer, despite its size. We see it as further evidence that Pfizer is trying to recreate itself as a truly industrial company, a value stock, with modest if predictable top line growth boosted into less modest bottom line growth by strict limits on the expense line. (You can read more about our thesis in the February issue of IN VIVO.)--Roger Longman.

Pfizer/Bausch & Lomb: But Pfizer's diversification strategy isn't limited to generics. On the same day it announced its deal with Aurobindo, it also announced a U.S. co-promotion tie-up in ophthalmology drugs with privately-held Bausch & Lomb. In an environment in which pharma companies are looking to cut costs and retool selling strategies, the co-promotion offers the opportunity for the two organizations to consolidate their commercial structure without sacrificing breadth and reach. The partnership will market Pfizer’s Xalatan, which tallied total sales of $1.75 billion last year, including $536 million in the U.S., with B&L’s Alrex, Lotemax and Zylet. Pfizer also gets a piece of B&L’s bacterial conjunctivitis candidate Optura, which sailed through an FDA Dermatologic and Ophthalmic Drugs Advisory Committee meeting in December. FDA action on the NDA is expected this quarter--Jessica Merrill.

Vertex/ViroChem: As Vertex anticipates bringing its protease inhibitor for hepatitis C, telaprevir, to market, it expanded its HCV pipeline March 3 with the purchase of privately-held Canadian biotech ViroChem. In the process, the Cambridge, Mass., biotech gained a pair of Phase I polymerase inhibitors. But they didn't come cheap: Vertex reportedly had to beat several competitors for the acquisition, eventually paying $100 up-front and issuing 9.9 million new common shares of its stock, pushing thetotal deal value to nearly $340 million. “It was a really competitive process and there were many large pharma companies that were looking at this with us,” Vertex Chief Commercial Office Kurt Graves told "The Pink Sheet" DAILY. The relationship the two companies built, combined with telaprevir’s lead in the HCV protease inhibitor race, gave Vertex a big advantage, he added. Graves cited several strategic underpinnings for the deal, including the ability of the ViroChem drugs' to enhance the lifecycle of telaprevir-based regimens, establishing the foundation for a franchise of specifically targeted antiviral therapy combinations in HCV that can displace the current standard of care ribavirin and peg-interferon. Of the two ViroChem compounds, Vertex seems most interested in VCH-222, which in a five-patient, three-day trial showed the most substantial viral-load reduction seen so far with an investigational polymerase inhibitor for HCV. Telaprevir and ‘222 are complementary in safety, Vertex says, because they are metabolized differently, and the biotech hopes to begin combination therapy study of the two compounds later this year--Joseph Haas.

Sanofi-Aventis/AEterna-Zentaris: Sanofi-Aventis is hoping to add to its bag of tricks in the U.S. market with a co-development and commercialization deal announced today with AEterna Zentaris. Sanofi gains rights to AEZ’s injectable cetrorelix pamoate, a leutenizing releasing hormone antagonist in Phase III development for benign prostatic hyperplasia. AEZ will receive $30 million up-front and stands to gain up to $135 million in regulatory and commercial milestone payments, plus an escalating double-digit royalty on net U.S. sales; it also will complete the current Phase III program — three Phase III trials involving more than 1,600 patients with symptomatic BPH in Canada, the U.S. and Europe — and handle the NDA submission. Sanofi is responsible for post-marketing studies and AEZ will have access to any data from Phase IIIb and IV clinical trials for use elsewhere, while hanging onto “certain” U.S. co-promotion rights as well. For AEZ, the move provides some additional cash to get cetrorelix across the finish line in BPH. (Cetrorelix acetate is already marketed as Cetrotide by Merck Serono ex-Japan [Shionogi in Japan] to prevent premature ovulation in women undergoing in-vitro fertilization.) The Canadian biotech had sold off non-core assets in 2008 to raise cash to fund the compound’s pivotal BPH program and an earlier-stage oncology candidate, and nearly was down to its last few Loonies when it inked a deal last fall with Cowen Healthcare Royalty Partners bringing in $52.5 million in exchange for AEZ’s royalty income from fertility sales. AEZ shares spiked more than 50 percent on the deal news, but the firm’s market cap remains anemic at about $57 million--Chris Morrison.

Pharmexa/Affitech: Eager not to miss out on the high-value antibody shopping that big pharma have indulged in over the last few years, Norwegian private group Affitech is reverse-merging into Denmark’s listed Pharmexa. The idea is to create a fully-integrated antibody group quickly, combining Affitech’s phage-display-based antibody discovery technology and expertise (similar to that used by CAT, acquired for about $1 billion in 2006 by AstraZeneca) with Pharmexa’s immunology and product-development skills, hitherto focused on vaccines . The new company, to be called Affitech and headquartered at Pharmexa, will be listed on the Nasdaq OMX Copenhagen exchange and owned 70 percent by Affitech shareholders, 30 percent by Pharmexa. Standalone Affitech didn’t have the development capability likely to attract Big Pharma partnerships or acquisitions—they want technology and product candidates. That helps explain why certain antibody companies, including Dyax and Sweden’s BioInvent, haven’t been snapped up: they started product development relatively late. So Affitech needed a quick way to fix the situation—since its shareholders, some of which have been around since 1999, were starting to get itchy for an exit. “Organic growth would have taken too long,” says Affitech’s CEO Martin Welschof, who will become Chief Technology Officer of the new group. He claims the company already is discussing potential partnerships, but not a trade sale — at least, not quite yet--Melanie Senior.

Novartis/Proteon: Anyone following IVB's twitter feed know that corporate venture financings have been prominent news lately. This week came news that the MPM BIO IV NVS Strategic fund, Novartis' corporate venture gambit with MPM Capital, invested in the $38 million Series B financing of Proteon. Similar to other recent MPM/Novartis deals, the financing gives Novartis the option either to buy the Waltham, Mass.-based biotech or acquire a global license to said start-up's lead compound, PRT-201, at the conclusion of the recombinant human elastase's Phase II program. The drug currently is in Phase I/II studies in end-stage renal disease patients undergoing surgery for arteriovenous fistula creation. While specific details of Novartis' option were not disclosed, Proteon said acquisition and regulatory milestones could exceed $550 million. These kinds of option arrangements were tricky to negotiate just a few years ago. When VCs were flush with cash, many thought twice about signing off on a deal that capped the ultimate upside of a portfolio company. With Novartis taking an option on a significant program, what other pharmas would think seriously about acquiring said biotech at a premium? And what if they pharma didn't actually exercise the option? These kinds of agreements didn't protect the start-up in the event of such negative news. But in an environment where cash is king--and cash now is even more important--corporate venture groups looking to broker option-style deals ala Novartis might be gaining more leverage. Certainly this is the second deal in recent months for the MPM/Novartis group. In January, they invested in Peptimmune, with Novartis optioning worldwide development and commercialization rights to PI2301, a Phase Ib multiple sclerosis candidate.

(Image by flickr user my hobo soul used with permission through a creative commons license.)

Proteostasis Proves Platform Companies Still In Vogue

It pays to be fashionable. Anyone doubting that platform-based, big think biotech start-ups have gone by the wayside should think again. On Monday Proteostasis Therapeutics stepped out of stealth mode, announcing it had secured a cool $45 million in financing from a synidcate of backers that includes HealthCare Ventures, Fidelity Biosciences, New Enterprise Associates, Novartis Option Fund, and Genzyme Ventures.

The Cambridge Mass.-based company's Series A was one of the largest to date in 2008, eclipsed only by the $105 million raised earlier this summer by RaQualia Pharma, which spun out of Pfizer’s Nayoga research site with backing from the UK’s Coller Capital and Japan’s NIF SMBC Ventures.

But unlike RaQualia, which comes with three marketed products, six development programs, and a 70-strong team of researchers, Proteostasis is an early-stage platform company that is at least three to five years away from clinical candidates. The recent funding shows that at least some venture firms aren’t shying away from discovery-based companies, as long as there’s a potential platform that can be monetized.

Other companies announcing eyebrow-raising amounts of money this year include Constellation and Agios. In April, Constellation, a company focused on developing drugs based on an emerging field called epigenetics, pulled in $32 million in financing from Third Rock Ventures, The Column Group, and Venrock Associates. Meanwhile, Third Rock joined returning seed investors Flagship Ventures and Arch Venture Partners in July to fund Agios, which is focused on cancer metabolism and therapeutics targeting a poorly understood cellular process called autophagy.

Like Constellation and Agios, Proteostasis Therapeutics is of a type: A-list investors, top management, and hot science. Mention the company's scientific founders by name and VCs interested in staking high science start-ups morph into Pavlov's dogs. The three co-founders are Jeffery Kelly of Scripps Research Institute, Andrew Dillin of the Salk Institute, and Richard Morimoto of Northwestern University. Taking the helm as CEO is David Pendergast, who served as COO and CEO at Transkaryotic Therapies before its 2005 acquisition by Shire for nearly $1.6 billion.

Proteostasis hopes to develop first-in-class therapies for neurodegenerative diseases and certain genetic conditions by targeting the biological pathways that regulate the correct folding or placement of proteins within a cell. “It’s a fundamentally different way of looking at disease,” says investor Christopher Mirabelli, managing director of HealthCare Ventures.

To work correctly, proteins must undergo a poorly understood act of molecular origami that depends both on the primary amino acid sequence and the cellular milieu where the folding occurs. Once folded, the proteins must be sent to the right place in the cell – a process called trafficking – to do their job.

But mistakes happen in this complicated multistep process, and that’s when disease strikes. Misfolded proteins can overload the cell’s quality-control mechanisms, aggregating into toxic intermediates such as the debilitative amyloid beta plaques that are the hallmark of Alzheimer’s disease. When certain proteins – especially enzymes – misfold, they are no longer in the proper conformation to do their jobs. So-called molecular chaperones of the kind Proteostasis is interested in developing would cross the intracellular membrane and coax the misfolded molecules into their correct, biologically active conformations.

The company has spent the past 18 months in stealth mode, validating its hypotheses and generating small molecules that work in animal models and cell lines with a $1 million in seed money from HealthCare Ventures. Folks can get an early look at what might be the scientific rationale for the company. In the September 5 issue of Cell, Kelly's lab will publish a paper that shows that certain well known small molecule drugs can disturb the biological pathways involved in proteostasis.

If the company's business model sounds familiar, that's because it isn't entirely without precedent. VCs have been investing heavily in this space for the past several years in companies such as Amicus Therapeutics, which went public in 2007 and recently signed a licensing deal with Shire worth up to $200 million. Meanwhile, FoldRx, a company using molecular chaperones to treat diseases such as cystic fibrosis, Parkinson's Disease, and the rare neurodegenerative disorder familial TTR amyloidosis, also boasts Jeffery Kelly as a founder, and HealthCare Venures as a backer.

Mirabelli isn't worried, however, that FoldRx and Proteostasis will be competing either for partnerships or with potential therapeutics. "It's such a big space. There's room for a number of investment opportunities," claims Mirabelli.

In an interview, Mirabelli emphasized that the two start-ups are taking complementary approaches to the developing therapeutics based on protein homeostasis. While FoldRx has focused on salvaging individual misfolded proteins that play a role in disease, Proteostasis is taking a more global approach, attempting to use systems biology to track down regulators that involved in various diseases.

Though the company hasn't specifically outlined its therapeutic areas of interest, based on conversations with co-founder Kelly, Pendergast and Mirabelli, it seems that Proteostasis will also initially focus on different diseases than FoldRx, with a special eye on Huntington's Disease and the lysosomal storage diseases.

This focus on lysosomal storage diseases could make Proteostasis a direct competitor of Amicus-- if the technology bears fruit. And it's likely one of the reasons Genzyme Ventures got involved in the deal. Genzyme, after all, pioneered enzyme replacement therapy, developing Cerezyme for Gaucher Disease and Fabryzyme for Fabry disease. In 2007 alone, the two products generated over $1.5 billion in sales. Despite the fantastic success of these large molecule products, they don't work for all patients afflicted with the disease. Moreover, Shire's rich deal with Amicus suggests that Genzyme is attempting to hedge its bets by investing in a potential challenger.

The fact that Novartis Option Fund is also a backer suggests the potential breadth of Proteostasis's technology. As we described last year, Novartis Option Fund was designed to do two things: invest in early stage companies, but at the same time take an option on a promising therapeutic program, creating a cheaper "in" for the parent pharmaceutical company. Any potential licensing deal comes with a pre-negotiated price tag and can only be triggered by discreet events, such as lead optimization, pre-IND, and first-patient dosing. So that it's impossible for Novartis to exercise virtual control of a potention portfolio company, Novartis Option only invests in companies that have at least three programs.

The current market turmoil and difficulty exiting via the public markets mean Proteostasis's backers will likely carry the company for a long time. (It's worth keeping in mind that Amicus's backers poured at least $150 million into that company before it finally went public in 2007 after several attempts.) That's likely one of the reasons for the large Series A.

But Mirabelli insists that big science of this kind deserves big money. It was important he says, to have the company's executives focused on validating the theory and generating ideas. "We didn't want them to spend a lot of time on fund raising," he says.

(Photo courtesy of Flickr user malingerer via a creative commons license.)

Venture Round: An IPO To Do List

KPMG LLC released a survey this week declaring that a venture capitalist don't expect to see a "consistent flow" of IPOs until 2010.

Odd, dire predictions like that coming from an industry populated by eternal optimists. (We later learned the survey of 297 included venture capitalists, corporate buyers, bankers and entrepreneurs.)

Ah well, as we've discussed in the past, times are tough. However, our own private survey of a few investment bankers paints a slightly brighter picture for life sciences IPOs. But it's only slightly brighter.
However, as we noted in our upcoming IN VIVO magazine, predicting when the IPO window will open is not unlike trying to predict when the winter's snow will melt. Yes, it'll happen eventually, when the weather gets warmer, and if you project out far enough into the spring calendar you've got a greater chance of being correct.

But so many macro-economic factors must be taken into account when crystal balling the IPO market. Fortunately for us, investment bank Jefferies & Co. Inc. presented us with a clear road map of what must happen for medical device and biopharmaceutical IPOs to return.

(Jefferies also provided us with some fascinating data tracking IPO success with stage of company. The results will surprise. Check out the magazine.)

Bottom line, our gurus are hoping to see things coming around sometime next year. But so many balls still hang high in the air.

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Not surprising but certainly worth noting: SR One Ltd., one of the more if not the most venerable of corporate venturing programs, has seen its last days as an independent entity. It's merging into the new GSK Ventures, according to this morning's VentureWire Lifescience.

We suggested this would happen when we broke the news on GSK Ventures back in May. True, SR One had staying power. The unit has existed since 1985 when Peter Sears started to invest on behalf of SmithKline Beckman.

But the group's West Conshohocken office must have been equipped with a revolving door to handle all the changes in management since Sears' retirement a decade ago. The units managers have swung in and out of the place leaving for opportunities in the venture world or back at Daddy corporate.

GSK Ventures new manager Russell Grieg, a direct report to Andrew Witty, the new GSK CEO, will work from the group's office in Pennsylvannia, according to the report. SR One's web says the group has moved to East, we presume, to Conshohocken.

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Is the out of control locomotive starting beginning to slow? VentureWire reported this week that first half investments in healthcare companies dropped 30% compared to the same period last year. Overall venture capital dropped only 12.4%

The $1.97 billion Q2 total is off 22.1% from the $2.53 billion invested in the corresponding period in 2007, a year in which VCs funneled a record $10.17 billion into the sector. So far this year, firms have invested a total of $3.8 billion in health care, down from the $5.5 billion they had funneled into the sector by the end of June 2007.

[In the biopharma sectors VCs] invested $1.07 billion last quarter, down 15% from the $1.26 billion sunk into the sector in Q2 of 2007. This year's first-half biopharma total of $1.88 billion is down 41% from the $3.1 billion in the first half of 2007, and is the lowest since 2005, when firms had invested $1.73 billion into biopharmaceutical concerns through two quarters.

Medical-device funding is also down. Investors put $797.6 million into devices companies in the second quarter, down from $1.05 billion in second quarter of 2007. Device investing stands at $1.6 billion for first two quarters, down from $2.07 billion last year.

We generally agree with the VCs quoted in the artice. This seems like a healthy correction and a wise one given the current economic state. But we'll provide deeper analysis of our own fund-raising data in the September Start-Up.

***

VentureWire Lifescience also confirmed what we reported a few weeks ago. Foundation Medical Partners is raising a fund. VWLS puts the target at $150 million which sounds about right to us....VWLS also says that OrbiMed Advisors has hit the $150 million for its Pan-Asian health care fund, Caduceus Asia Partners LP. OrbiMed added to its Asia-based team with the hiring of Sunny Sharma, a private equity partner in Mumbai. Sharma joins managing directors Nancy Chang and Jonathan Wang. Sharma previously had been managing director of Easton Capital.

***

Remember the VC Comic? They brought a little bit of laughter to an otherwise dreary day of venture capital reporters who covered the stone-cold life sciences industry rather than the red hot Internet investments. Of course, we got the the most important laugh--the last one--a few years later. (Thanks to HEC Paris Private Equity and Venture Capital Club blog.)

Dalton Joins Pfizer

The make over of the corporate VC world continues.

IN VIVO Blog has recently learned that Pfizer Inc. brought aboard Barbara Dalton, formerly of SR One and EuclidSR, to lead its Pfizer Strategic Investment Group. In hiring Dalton, Pfizer is sticking with the decision to be represented by professionals with experience on the front lines of venture capital investing rather than shuffling people out from the corporate side of the business.

Dalton joins Debra Yu, formerly of Delphi Ventures and Bay City Capital, who helped start the group three years ago. She replaces Ilya Oshman. She’ll report directly to Ed Harrigan, senior vice president of worldwide licensing and business development. “We are certainly pleased to have Barbara join us – she brings a great deal of experience, is very well-respected in the field, and will surely put her stamp on Pfizer’s venture investment group,” Harrigan told IN VIVO Blog in an email.

Pfizer is taking a unique approach with this venture effort. First, as we stated earlier, it’s bringing in outside people with venture investing experience and, more important, connections. To be sure, any VC or chief executive will return a phone call from Pfizer. But the program clearly benefits from having familiar faces represent in the field at conferences and other venture gathering places.

Second, from the very first day the venture group steered clear of Pfizer’s internal research and development wheelhouse—pharmaceuticals—as well as some external efforts (remember the Pfincubator and our other posts?). Instead, the group sought to invest in companies that might influence how pharmaceuticals are used, marketed or paid for.

The group has built a significant portfolio in diagnostics and, no doubt as part of this effort, the corporate side of the house has stood up and taken notice, becoming an aggressive and progressive player in diagnostics. “She brings the needed talent and personality to the job that is important as our venture activity evolves to its new place in the organization," Yu told us in an email.

Prior to moving over to EuclidSR in 2003, Dalton had been president of SR One, one of the grand daddies of corporate venture programs in the pharmaceutical world, for two years. Founded by Peter Sears in 1985, SR One first invested on behalf of Smithkline Beckman. It has survived all these years as its corporate sponsor went through mergers.

Dalton became president in 2001 when Brenda Gavin, who took over for Sears in 1999, moved on to co-found Quaker BioVentures in 2001.

Dalton left SR One in 2003 with two other principals to become full-time investors at EuclidSR, a New York venture capital firm. This group grew out of a partnership between Euclid Partners, a venture capital firm, and SR One. The firm that sought to invest in companies that benefited from the “convergence” of health care and information technology.

EuclidSR raised at least one fund in 2000, the first year of the partnership. Dalton and other SR One principals invested on behalf of both GSK and EuclidSR until their departure in 2003. It’s unclear what Dalton’s departure means for EuclidSR. She couldn’t be reached for comment.

The Downsizing Opportunity: Pipeline on the Cheap?

The IN VIVO Blog was in Michigan last week, attending a profiting-from-downsizing symposium.

Would Pfizer—we wondered at the Michigan Growth Capital Symposium--use its pull-out from the state (and the near-term freedom of some 2350 full-time Michigan-based Pfizer employees) as a way of pursuing an alternative research strategy—an experiment in externalization?

The venture world is all over Pfizer right now, looking for preclinical and clinical programs. And they’d particularly love ones that come wrapped with some of their key scientific supporters. Theoretically, we reasoned, the Michigan shut down could allow Pfizer to at least keep some of these researchers tied to the mother ship by letting them – on the VCs’ dime – take ownership of programs Pfizer will be shelving. Meanwhile, Pfizer would get equity and some kind of option on the programs, should they prove interesting to its marketers. If uninteresting to them, the program still might prove commercially worthwhile, giving Pfizer a nice equity upside.

But from the discussions in Michigan, and subsequent chats with VCs, it’s increasingly clear that Pfizer—despite an ongoing program to study how it should go about out-licensing or spinning off internal assets—isn’t moving fast enough. Its best Michigan-based researchers will soon be working for other companies, including Pfizer competitors. And when they're gone so will be the best conduits to, and conductors of, Pfizer's unwanted research programs.

Not that Pfizer is uninterested in venture opportunities that provide it relatively low-cost access to interesting programs. But if our Pfincubator post is to be believed, Pfizer would prefer to win cheap access to programs it didn’t create. That seems to be the intention behind its San Diego venture idea, in which Pfizer swaps infrastructure and capital for a start-up’s equity and options on its research output.

Success of that program seems just a bit more likely than an experiment at Novartis. Its pharma division’s option fund aims to co-invest with other venture funds but get, along with its equity, an option on its investee’s product. Since most VCs we know aren’t in the habit of giving co-investors in a round a better deal than they get (in this case, Novartis would get equity at the VC price plus the option), we don’t think this arrangement will get much traction. We’re likewise skeptical that VCs backing the start-ups Pfizer hopes to woo to its San Diego facilities will be particularly happy about ceding product rights for cheap space and some cash. We’ll be happy to be proven wrong.

Indeed, neither the Pfizer nor the Novartis venture adventure leverages its parent’s real differentiable assets—de-prioritized research programs. And it is only with that kind of unique asset (money and space are commodities) that a drug company can create the opportunity to get both equity appreciation and pipeline help. Novartis in particular should understand the value here: its only major recent primary care launch, Tekturna, came about because a small, privately held company, Speedel, created a product out of a de-prioritized Novartis program—on which Novartis had kept an option.

Pfizer and Novartis aren’t alone in their unwillingness to let start-ups take over assets on their shelves. Most companies won’t. Pulling together all the relevant information is expensive, invasive, and potentially competitive. It actually took the shutdown of all of its early-stage research efforts for Procter & Gamble Pharmaceuticals to try to monetize some of its unrealized value. It’s getting equity in a new Cincinnati-based spin-out, Akebia Therapeutics, which is developing two ex-P&G programs: an angiogenesis promoter (initial target: peripheral artery disease) and a Fibrogen-like EPO inducer. P&G also out-licensed two other programs—one for heart failure and one for atrial fibrillation, but these went to established companies, one large, one small.

But that doesn’t mean pharma shouldn’t do it – at least as an experiment in an alternative research strategy. Roche is the leader here—in deals, for example, with new companies, like Synosia and Amira, based around Roche IP. Lilly has certainly done plenty of out-licensing to already existing companies, like Vicuron and Cubist, but its recent deal with Versant Ventures to exploit its Chorus development division is a big step in the start-up direction.

The real question is whether more pharmas will begin to take advantage of the enormous opportunity to experiment with virtualized R&D – at very little cost to themselves. With the retirement of Pfizer's R&D chief and its most senior opponent of out-licensing, John LaMattina, it's likely that Pfizer will reassess the strategy it's so far pursued. In that reassessment, they'll soon realize that if they don’t provide some of the key research assets, they can’t hope to get low-cost options on what the start-ups do with them.