Financings of the Fortnight Follows the Money Wherever It Goes

Your IN VIVO blog crew is a motley crew, and rarer will you find a motlier crew, at least not without umlauts. Collectively, we dig deeply into pharmaceuticals, medical devices, regulatory policy, reimbursement, and Philadelphia sporting activities. We've even been known to riff extemporaneously on the vuvuzela. Sorry about that.

Despite IVB's polyglot ponderings, Financings of the Fortnight tends to keep it tight on the pharma side. Once in a while we veer into devices or diagnostics, but generally the drug folks keep us hopping. This might change. It's no secret there's a shakeout in biopharma investing. Despite glimmers of economic recovery, first-quarter investment in drug-focused biotechs hit its lowest total, $619 million, in at least five years, according to Dow Jones Venture Source. And industry stalwarts are having trouble raising their next funds.

One axiom of reporting is "follow the money," so we'll be watching to see if some of the cash previously earmarked for drug startups goes into other life-science sectors or leaves health care completely. There's no hard evidence for this trend yet. First-quarter totals for medical services, devices and software were lower than nearly every quarterly total over 2008 and 2009. In other words, if there's a shift on, it didn't happen by the end of the March.

Even without the data, there's been plenty of intense conversation on the subject, as IVB guest blogger Steve Dickman noted last week. Dickman made a case for molecular diagnostics as the next field where VC might reap decent exits. You might point to the top-up round for Predictive Biosciences, a diagnostic firm with near-term commercial hopes which we describe below, as another sign that VCs are eager to pile into near-term exit opportunities. Then again, you might be Harold Varmus, who sounded a cautionary note about genomic exuberance in the May 27 New England Journal of Medicine. (Link tip from Merrill Goozner's GoozNews.)

Or, if you're looking for ripples that signal movement below the surface, perhaps you fancy the $60 million C round for Castlight Health, a consumer comparison-shopping tool for health care that's gotten quite a bit of ink this week. Veteran biopharma investor Bryan Roberts of Venrock was part of Castlight's syndicate, and IVB asked him if VCs are putting money into health services at the expense of biopharma or device investments.

Roberts demurred, noting "it's not really a matter of one or the other," but he did voice a common refrain: drug investing is getting harder because of regulatory and reimbursement uncertainty. (A perfect example: antibiotic developer Trius Therapeutics put its IPO on hold in March because it couldn't square away a protocol for a crucial Phase III trial. Trius announced June 16 it has reached agreement with FDA, though it didn't say when -- or if -- the IPO would get back on track.)

As Trius's travails suggest, the oft-discussed but elusive goal of capital efficiency seems even more elusive. And that could argue for service type investments. Of course, it helps if you can make money doing it--and Venrock's Roberts points to the 2007 IPO of Athenahealth, a maker of revenue-tracking software for doctors, as exhibit A in support of that thesis. Sure, anyone dreaming of IPO riches these days is likely to wake up with a cold wind blowing through the screen door. But with Uncle Sam and everyone else looking for better ways of treating sick people and keeping healthy people healthy, there could be acquirers aplenty looking for the right tools and services to make health care reform a reality.

We can't wait to look back six months from now to see if healthcare IT and molecular diagnostics have drawn more venture support. Meanwhile, the best way to keep following the money is to stick with...


Predictive Biosciences: More oncology molecular diagnostics are edging towards the market with VC backing. The latest is from Lexington, Mass.-based Predictive, which announced June 16 a $25 million C round led by new investor ProQuest Investments. All four current investors also chipped in. The cash will help Predictive complete two prospective, 1,000-patient clinical trials and bring to market its first product: a non-invasive bladder cancer assay based on its CertNDx platform, which detects protein and DNA biomarkers present in urine. Predictive is already working on distribution; in January, it bought a CLIA-certified lab, OncoDiagnostic Laboratory in Cleveland, and plans to roll out the bladder cancer test through a nationwide network of pathology and molecular diagnostics labs. Predictive last December licensed for an undisclosed amount the diagnostic rights to Fibroblast Growth Factor Receptor 3 (FGFR3) from several French health-care systems. It is combining the FGFR3 DNA biomarker with matrix metalloproteinase (MMP) protein detection in the bladder-cancer test. Flybridge Capital Partners, Highland Capital Partners, Kaiser Permanente Ventures and New Enterprise Associates are the returning investors, and Flybridge's Michael Greeley is the firm's chairman. Predictive previously raised nearly $32 million in two early rounds.-- A.L.

Castlight: Castlight’s $60 million Series C is one of the top venture financings of 2010 and the largest mid-stage C-round year to date. (Others include the respective $56 million and $45 million raises by Achaogen and Tetraphase.) The deal is noteworthy not just for its size but the diverse group of backers, which includes new and non-venture players such as the Wellcome Trust and the Cleveland Clinic, plus the company’s previous supporters Maverick Capital, Oak Investment Partners, and Venrock, as explained above. Castlight, founded in 2008 as Ventana Health Services, is a Web-based service aimed at letting employees compare out-of-pocket costs for procedures such as colonoscopies, X-rays or MRIs. While the service is for now geared toward providing intel on procedures, it looks to include information about pharmaceuticals, dental and eye coverage. The technology relies on complex algorithms to crunch claims data and calculate the costs to a consumer based on specific treatment decisions. In addition to a commercial buildout, part of the $60 million will go toward creation of assessments of that ever-elusive metric: the quality of care being delivered.--Ellen Foster Licking

Agile Therapeutics: The contraceptive maker said June 14 it has amassed $45 million to push its lead product into long-delayed Phase III trials. Dubbed AG200-15, the patch transmits both ethinyl estradiol, a form of estrogen, and levonorgestrel, a synthetic progestin, through the skin. It called the round a Series B, when in fact it was the first round after the firm quietly recapitalized late last year. Investor Growth Capital, a unit of Sweden's Investor AB, and Care Capital were co-leaders of the round, which also featured first-time backer Kaiser Permanente Ventures and previous investors Novitas Capital and ProQuest Investors. At least two early investors, TL Ventures and The Hillman Co., declined participation. The firm said nearly two years ago it was readying the patch for Phase III trials after reporting positive Phase II data, but the program was delayed. CEO Thomas Rossi declined to discuss specifically the Phase III delays. Rossi was previously with Johnson & Johnson and worked on the Ortho-Evra contraceptive patch that bears a black-box warning for blood clotting issues and has raised the ire of public-health watchdogs. Agile's chief medical officer told The Pink Sheet DAILY, the company's delivery technology allowed greater amounts of the progestin to pass through the skin than in existing patches, while its lower estrogen dose could remedy the clotting problems.-- Paul Bonanos

Genzyme: Putting in motion a plan it announced at last month’s investor day to buy back $2 billion of its stock, Genzyme will sell a pair of private debt offerings totaling $1 billion to fund the first tranche of the buyback effort. Slated to close June 17, the offering will consist of $500 million 3.625% senior notes due in 2015 and $500 million of 5.0% senior notes due in 2020. Genzyme says it will sell the debt to qualified institutional investors inside and outside the U.S. With shares down about 16 percent the past year, due in large part to manufacturing woes, Genzyme outlined the share buyback program May 6 as part of a five-part plan to increase shareholder value. CFO Michael Wyzga, asserting that the biotechs shares are undervalued, said Genzyme will purchase $1 billion of stock in the short-term, with plans for buying up another $1 billion by 2015. These purchases will be in addition to nearly $800 million in shares purchased under a 2007 buyback plan.--Joseph Haas

Otonomy: The San Diego hearing-loss startup said June 11 it raised a $10 million Series A from Avalon Ventures to continue its Phase I trial of lead compound OTO-104 for Meniere's disease, an inner ear disorder, and to fund preclinical work. That's roughly average for biopharma A rounds this year, not bad for a firm in a therapeutic field that drug makers have ceded to the device world, as our Pink Sheet colleagues noted recently. Is there pent-up medical need for pharmaceutical intervention? Note that the U.S. Department of Defense and Veteran's Administration together spend about $4 billion a year to cover hearing aids, tests, and evaluations for hearing loss and tinnitus. (There's also quite a market for aging rock stars.) Otonomy is openly pursuing partners for OTO-104 outside the U.S., but partnering deals in the hearing-loss space have been nearly nil so far. The only publicly-disclosed deal was in January. Novartis spent $5 million upfront for rights to GenVec's gene-therapy program to regrow hair cells in the inner ear. (Because of a different program, however, GenVec isn't doing so well.).-- A.L.

Photo courtesy of flickr user Andrew Turner.

Guest Post: The Next Feeding Frenzy? VCs Rush Toward Diagnostics (!?)

Steve Dickman is the CEO of CBT Advisors. He blogs about biotech, VC and personalized medicine at Boston Biotech Watch. Interested in guest blogging for In Vivo? Drop us a line here.

There was a time not long ago when no amount of persuasion could have made most venture capitalists do a diagnostics deal. The reasons abounded: markets were too limited; margins were too low; and the number of potential acquirers too small. So imagine our surprise when the most upbeat session of this year’s c21 investor conference in late May was a panel discussion focused on – you guessed it – molecular diagnostics.

If this is not a feeding frenzy, then at least it seems to be a period of high marketability for private diagnostics companies seeking acquisition exits. Session chair Bill Kreidel of Ferghana Partners described four sell side diagnostics assignments his firm is working on for which multiple bidders had appeared.

What sells? Proprietary content, improvements in speed or sensitivity/specificity, robust datasets, and large markets. Who are the buyers? Clinical labs like Labcorp, naturally, but also instrumentation companies in the imaging business like General Electric that “see diagnostics cannibalizing some of their revenue” and are trying to capture it back, said panelist Dion Madsen of Physic Ventures.

The advent of acquirers such as GE has caused venture firms to change their tune. The three venture capitalists on the panel certainly weren’t diagnostic neophytes. Madsen, Dr. Rowan Chapman of Mohr Davidow Ventures, and Dr. William Gerber of Bay City Capital have all made numerous investments in diagnostics and personalized medicine including Tethys Bioscience and CardioDX, clinical lab companies that recently reached commercial status.

And there have been some impressive diagnostic exits driving venture interest. Switzerland-based HBM Partners, for instance, announced last September that it had earned a 21.6x multiple on its investment in Brahms, a Berlin-based diagnostics company acquired by Thermo Fisher.

But the information asymmetry that led to that deal has begun to recede now that investors have woken up to the opportunity. Still, in today’s market, where the environment is driven by cost constraints rather than spending, the locus of value is shifting earlier, toward diagnosis and away from treatment. In other words, knowing in which patients a therapy will work is as important as knowing whether it will work at all.

One common approach is for a company to walk into a VC firm and say “We are the next Genomic Health”, a Nasdaq-listed company (ticker GHDX) with OncotypeDX, a commercial breast cancer test, as if that were an appropriate role model. But Genomic Health, its stock down 25% in the last quarter, is not only not a role model, it’s a bad example, Madsen said.

“We still get companies saying they will be the next Genomic Health and we say, we don’t WANT you to be that!” emphasized Madsen. Gerber, whose fund did not invest in that biotech, added “Their first study was published in ’04 and it’s six years later and they are just about to break even!”

Circumstances have drastically changed both for IPO exits and for reimbursement in the interim. At the moment, an IPO is an unlikely dream for companies that do not have tens of millions of dollars in revenue. And reimbursement is complicated by both the murky regulatory situation and the unlikely circumstances that allowed the company to get reimbursed at unprecedented levels. “Breakeven [for Genomic Health] is predicated on a $3,000 price point,” Kreidel observed, “not something most diagnostics companies can aspire to”--except, we would argue, in oncology.

Adding to the complexity is a lack of clarity on the regulatory front. At the rate the Food and Drug Administration is moving it will be 2011 before companies offering algorithm-based tests like OncotypeDX have a clear path forward. (When will the regulations arrive? “There are as many answers to that question as there are consultants in Washington,” quipped the fourth panelist, Bruce Cohen, CEO of VitaPath Genetics.)

So VC-backed companies are working on building proprietary content strong enough to stand up to any level of regulatory scrutiny. What does content mean? (See here for a blog post explaining Madsen’s views on the subject and his criteria for what makes a “doable deal” in diagnostics.) Put simply, “content” is the unique ability to make a diagnosis or link a drug to efficacy in a particular patient in a reproducible way.

Three quick examples of the content-driven, data-intensive approach:

• VitaPath Genetics, a Mohr Davidow portfolio company developing a cheek-swab test for spina bifida risk early in prior to pregnancy. It ran a 2,100-subject study to validate its test and hopes to go commercial by 2011 on a modest $15 million.


• On-Q-Ity, a Boston-area company invested in by both Physic and Mohr Davidow is another example. To develop a commercial test to inform physicians when to treat cancer aggressively or even which chemotherapeutic agents to deploy, On-Q-Ity will require an “intensive analysis of tumor samples” and a “huge bioinformatics exercise,” he said.
  


• A third company, mentioned but left unnamed by Kreidel, has apparently achieved a remarkable level of sensitivity and specificity in predicting ovarian cancer, an area of huge unmet need where a better test would help thousands of women avoid surgery – and help insurers avoid paying for it.

So the new VC recipe goes like this: Find a potential market for which reimbursement is uncertain. Define a plan based on capturing reliable data from the vagaries of human biology. Invest VC dollars to collect the data. Crunch the numbers. Then see what you’ve got.

Hmmm. The risk profile sounds almost like …drum roll, please… therapeutics investing.

But it’s actually better – fewer dollars in, earlier clinical signals. And now, more likely exits with no need for an IPO. No wonder there are more investors than ever in this space. Some of them are likely to go home winners.– Steve Dickman

image from flickr user chamer80 used under a creative commons license

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

Do We Have the Right Managers for the UK Innovation Investment Fund?

The UK government yesterday announced that Hermes Private Equity and the European Investment Fund (EIF) had been selected to manage the technology-focused UK Innovation Investment Fund (IIF).

Science & Innovation Minister Lord Drayson reckons the 15-year IIF will grow to £1 billion within 18 months, making it the largest technology-focused fund in Europe and helping close the VC funding gap between the UK and the US. Thus far, we're about a third of the way there: the chosen managers have raised an additional £175m (mostly from UK institutions) to supplement the government's cornerstone £150m, making the fund worth £325m.

It's the EIF that we're interested in, since they'll take £100 million of the UK government's money in a £200 million technology fund-of-funds, covering life sciences, digital/ICT and advanced manufacturing. Hermes is slated to manage a £125 million low-carbon and cleantech fund-of-funds (which will receive the UK's remaining £50m).

So how much will UK biopharma companies see? The EIF choice is interesting given its clear European remit: EIF is a public-private partnership whose shareholders include the European Investment Bank, the European Commission, and various European banks (including the UK's Barclays). It already manages about €3 billion. Will £100 million from the UK government really make much difference--and more critically, will it trickle through to actually be invested in the UK?

Yes, says Drayson. For one thing, he and his team have stipulated (while trying to keep political interference to a minimum) that at least £25 million of the government's contribution must go to life sciences. According to his team, "EIF have indicated that it will be more than that," and they've also indicated that nearly all the £200 million will go into UK companies.

We should hope so. After all, why should UK money simply go into a European pot (which the UK is already contributing to, indirectly)? EIF has already signed individual biotech-supporting agreements with national institutions in other countries. In November it agreed to put €26.7 million into a co-investment fund with Sweden's Karolinska Development AB. A few years back it put €10.4 million into Danish VC Nordic Biotech's venture fund.

There's presumably nothing to stop UK venture funds from securing similar deals directly, although Drayson didn't answer our question as to why those hadn't yet appeared. He did say, though, that the IIF "is complementary to work done by university funds and other organizations" in the UK. The IIF is special, he continued, because of its (predicted) size and long-term structure, ideally suited to life sciences investments. That, he infers, should be enough to avoid an overall skew towards, say, cleantech which, with the ongoing Copenhagen Summit and all, is particularly fashionable right now.

UK biotechs, then, should in theory start to see a freer flow of venture capital by early 2010. It will be longer, however, before they begin to benefit from another pillar of the government's innovation-stimulation package: a flat 10% rate of corporation tax on profits generated from UK-rooted biopharma patents, confirmed in the UK chancellor's pre-budget report also announced yesterday. That won't come into effect until 2013.

Still, "we expect to see companies re-locating their IP to the UK in order to benefit from this," Drayson told IN VIVO Blog. The reduced rate (down from 28% and which will apply to UK-domiciled patents across all sectors) is apparently "very competitive" with the US rate (although it doesn't quite match Belgium's 6.8%).

Focus or Diversify? For VCs, Why Not Both?

What to make of the new €350 million fund raised by Index Ventures? That the firm's LPs apparently like focus, except when they don't.

Index's Index Ventures V is billed as an early stage and seed fund and is the fifth such fund the venture firm has raised in the past ten years--clearly Index is on to a winning formula with its emphasis on the very early stages of company formation and development. The firm has been consistent in its fundraising--no small feat these days. Index Ventures IV was raised just over two years ago and also topped out at €350 million.

But not too long ago Index decided it wanted to invest in later-stage opportunities as well. Not wanting to diminish that early-stage focus in its existing funds, it decided to raise a separate fund for those more mature investments in early 2008: Index Ventures Growth Fund (IG).

To date, IG has invested in two biotech companies--both of them public. Last week Index announced it was an investor in the recent $24.3 million Ariad PIPE deal and in 2008 it co-led Micromet's $40 million PIPE as well.

That's a slightly different twist than what many other venture outfits are doing these days. It's no secret that VCs are attracted to the public markets given the beating publicly traded biotechs have taken in recent months. (Valuations of private companies by comparison still look sky high.) But most VCs aren't choosing to develop a separate fund for such investments, instead committing money already raised as a diversification strategy. Call it one version of venture's Plan B.

But if Index's two funds allow for focus--late-round investments and PIPEs versus seed and starter rounds--there's also plenty of room for diversification. That's because Index's funds invest across life sciences, high tech and clean tech, by no means an odd or niche strategy but one not as popular as it once was. Like other diversified funds--say, Polaris Ventures' or Interwest's--Index has been spread across multiple sectors for some time and has a loyal LP following. Today's announcement notes that Fund V was raised "almost entirely from the firm's existing base of limited partners."

Those partners likely appreciate the variations in risk, return and business models between, say, cleantech and biotech, especially in today's awful economic climate. Maybe it's best not to have too many eggs in one basket, even within a particular fund.

image by invivoblog.

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: Covidien Ventures Out

The announcement that Covidien Ltd. launched a venture fund should come as no surprise to faithful IN VIVO readers. We reported on the groups's creation back in our May issue in a cover story on the company. Despite our prodding, the company opted not to provide details on the group until this week.

But the news still warrants review as this is a significant departure for Covidien, the former Tyco Healthcare. In its previous life, the group now known as Covidien had a dismal record when it came to investing in R&D and new technologies. (See chart, right.) In the late 1990s, Tyco grew its health care business through significant acquisitions of low margin hospital supplies and other mostly low-tech endeavors.

Trouble hit in 2002 when Tyco fell under the weight of its storied investigations. At the time, the company didn’t have the resources to commit to R&D even if it wanted to.

But all that is in the past. Covidien is a full year removed from its Tyco ties, and it’s working to restore its research and development capabilities.

The press release doesn’t give much information, but VentureWire Lifescience offers a bit more. Most interesting is the team Covidien assembled to make the investments (which will be $5 million on average in early stage companies.)

Covidien has built a team of three to manage its new venture wing. Daniel T. Sheehan, a former general partner at Affinity Capital Management, is heading the new operation as vice president of corporate venture capital. He is joined by Dave Neustaedter, former director of commercial strategy and advanced technologies at Stryker Development LLC, and Joseph Graham, who worked in strategic marketing for Covidien's patient care and safety business.

Covidien deserves credit for dipping into the venture business to find its new leader. Too often, corporations try to staff their venture groups from people within the organization. (Of course, it’s usually difficult to lure folks from the venture side back to the corporate venture side.) An experienced venture capitalist should come with the contacts to find deals that might not typically be shopped to corporate investors (i.e. VCs looking for some dumb corporate money.)

The additions of Neustaedter and Graham give the new group expertise both in corporate innovation as well as the ins and outs of Covidien itself, which is a far flung organization with businesses and divisions across the globe.

Covidien's move might be deemed a bit counter-culture as the number of corporate devices investors and acquirers is dwindling. But the company has been on a frenetic shopping spree over the past two years, buying eight companies over the past two years including some big-ticket buys like Vivant Medical and Confluent Surgical.

Still the company isn't taking big chances with its purchases. Instead, it's moving into opportunities that lie within or generously abut its current borders. "When you look at the acquisitions that we've done, they are focused and purpose-driven," Jose Almeida, head of Covidien's medical device segment, told us back in the spring. "They have niche specialties and market advantages, and they are synergized to our sales channels. They augment our technology base. They bring potential double-digit growth for the 10-year period that we analyze the sale."

We expect the venture group will take the same measured approach, but perhaps Covidien will let its hair fall down just a bit further.

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.

***

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.

***

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.)

Novartis: Having & Eating Its Cake

It’s tough to be both a financial and a strategic investor. Which is why corporate VC has generally fared so poorly. If you’re out for returns, then you want to maximize the value of the company you invest in. If you’re out for product rights, you don’t.

For the last 10 of its 11 years, Novartis has been running a VC operation, originally as a way to fund the ideas of Novartis executives and scientists who’d been restructured out of jobs but later as a more or less pure returns-focused venture operation.

But now Novartis, like many companies before it, wants to have its VC cake (newco’s products) and eat it too (newco’s returns). Thus the interesting Novartis Option Fund experiment (confusingly, one of two option funds for Novartis as a whole—the other one is run by the pharma division and operates as a side-by-side fund with MPM Capital). Start-Up has discussed the funds briefly before, but Novartis Option now made its first investments, leading a $9 million round in RNAi delivery company Cequent Pharmaceuticals and a $14 million round in a re-start company called Adenosine Therapeutics.

The option fund works like this: along with its founding investment, Novartis Option Fund buys an option for a single program (any company Novartis Option invests in must have at least three programs--so that Novartis isn't exercising virtual control). The option comes with a pre-negotiated licensing deal and can be exercised at one of three increasingly expensive points: lead optimization, pre-IND, and first-patient dosing. Thus with Cequent, Novartis tops up a Series A led by Ampersand, Nexus and Pappas and, simultaneously, bought an option for another small amount to a inflammatory bowel disease program. With Adenosine, Novartis got an option to its A2B receptor antagonist program (Bristol has rights to its Phase III A2A agonist).

Clearly, the other VCs wouldn’t let the program go for nothing, but Novartis’ VC boss, Reinhard Ambros, argues that it's in Novartis' best interest to sign a market-priced deal as well. If it’s too cheap, he says, the start-up won’t work on the program—since Novartis has only one seat on the board, it can’t force things. And a cheap deal “hurts our investment returns,” says Ambros, which determine his annual bonus. If it’s too expensive, Novartis’ research group won’t exercise the option – and so has wasted its option price.

Meanwhile, Novartis Pharma’s option fund, the MPM Pharma Strategic Fund, is looking for later-stage programs—and according to the Novartis executive who oversees it for the company, Corinne Savill, will soon close its first deal. We'd earlier reported that the fund was looking to pick up product options without paying anything more than its equity. Not true, says Savill: they'll be paying option fees. You can't get something for nothing.


Too true.

Adimab gets backed by Polaris and SVLS

IN VIVO Blog has learned that Tillman Gerngross, professor at Dartmouth and the founder of GlycoFi (and part of the brains behind that company's yeasty glycoengineering platform), and Dane Wittrup of MIT (who has pioneered the use of yeast for displaying libraries of antibodies and ab fragments) have started up a new antibody play with lead backing from SV Life Sciences and Polaris Venture Partners, called Adimab.


Gerngross tells us that the concept behind Adimab stems from the financial and organizational hassles that Big Pharma must endure to bring the necessary continuum of antibody-related know-how in house. The process, from soup to nuts, requires a host of technologies often licensed from disparate sources. "They need to have deals to get display technology, affinity maturation technology, protein expression technology, you need to line up a long series of technologies, and wind up with a royalty stacking issue and a very complicated set of relationships," he says.

Adimab--which stands for Antibody Discovery Maturation Biomanufacturing--is developing a platform that's deliberately engineered to minimize and potentially eliminate third party royalties, offering a one-stop-service-shop to a select few Big Pharma partners.

Gerngross declines to get into specifics of IP, and though he admits that it's complicated, he remains convinced that Adimab has found a way to engineer a technically superior and economically favorable approach to antibody discovery. Sticking to one system, yeast, should allow Adimab to move more quickly from discovery through antibody selection, he says.

"We're not pretending to be the only ones in this space," Gerngross says. "But we're building a business that will service pharma better than anyone else and on that could very quickly trigger an acquisition."

Adimab's as-yet announced Series A will bring in roughly $6.2 million to get the ball rolling. Its backers--which happen to be those same VCs that got behind GlycoFi from that company's outset--are aiming for another GlycoFi-like return: VCs invested a total of about $35 million since 2000 in that company, which Merck bought last year for $400 million.

We'll have more on the newco in the next START-UP.

Mitchell Goes To Washington

Tip of the cap to today's PE Week Wire (can't link to an email but go to PE Hub) for this one. Familiar face Kate Mitchell, managing director at Scale Venture Partners (formerly BA Venture Partners),will be representing the PE industry Wednesday at a congressional hearing on the proposed carried interest legislation.

While she primarily invests in software and business services companies she's also walked within life sciences circles from time to time, including investments in Acusphere and Songbird.

The very personable Mitchell serves on the board of directors of the National Venture Capital Association. Also testifying before the Senate Finance Committee will be representatives from Treasury, the SEC, the Congressional Budget Office and Mark Gergen, a University of Texas Law School professor, who, according to PE Week Wire, will argue in favor of taxing carried interest at 35% rather than 15%

Higher Tax, Fewer Deals?

The IN VIVO Blog has been somewhat mum on the carried interest debate. Frankly, this topic is being covered to death elsewhere (The link goes to PE Hub but there's no shortage of discussion.)

This topic is important, no doubt, crucial even, but Mom always told us if you don’t have something fresh and interesting to blog about than it’s better not to blog at all. (Well, she would have said that.)

So we’ve been asking around a bit, trying to get a sense from our VC community on the potential impact of these changes. To be honest, the change put forth by the Democrats didn’t really sound the alarm bells in our virtual hallways. But the same apparently isn’t true in the actual hallways of VC firms investing in life sciences. IN VIVO Blog expected VCs to answer queries with a “Congress will be Congress” attitude similar to the one put out when discussing changes at the FDA or CMS.

But there’s some genuine concern here. No question, much of that concern most likely has to do with a diminished paycheck. But there’s some fear surrounding the impact these changes could have on the availability of capital.

An email from one West Coast VC:

I really believe that these proposed new taxes will make it so that some new companies will not get funded. These taxes essentially raise the cost of capital and if the returns are not there to the GPs then they will not get funded eliminating many high risk or sometimes questionable deals. One has to remember that often deals look promising and then don’t make it while the opposite is true as well but maybe not to a greater extent. If the cost of capital is high then those marginal/high risk deals won’t get done.

It is the same concept as lower interest rates and lower borrowing hurdles allowed the housing market to boom. If the cost of capital rises then it eliminates those who are at the margin. The same is true in our business. Those on the margin lose—fewer jobs and lower growth.

The suggestion that this could eliminate “many high risk or sometimes questionable deals” rings true and does sound an alarm. After all, doesn’t that describe most biopharma deals and a good deal of device companies as well.

Could this change in taxation have a particularly detrimental impact on the life sciences industry, pushing VCs even further away from funding true start-ups? Even worse, would this aggravate the diversion of dollars away from smaller, venture capital firms looking to do these deals. Or perhaps, as A VC Blog suggests, the best VCs will just invest their own money, forget the institutional dollars.

A VC Blog also had what I thought to be a very thoughtful position later on.
Mom did teach us not to covet other people's stuff, so the "Tax the Rich" crowd won't get a sympathetic ear here. Still, the suggestion that the GP's carry on "other people's money" goes beyond that simplistic idea. The idea that this income should be taxed as salary isn't that far out (or far left) as some would like it to appear.

We’ll update with interesting points of view as we continue to talk to folks. But don't feel like you need to wait for a phone call. Consider this an open invitation to opine on what impact the suggested changes will have on the life sciences industry.

Venture Debt in Europe: Opportunity Missed?

European biotechs may bemoan their funding disadvantages relative to US counterparts—the lack of specialist investors, fragmented public markets, poor liquidity and meagre or non-existent PIPEs—but some of the trouble is of their own making.

They’re simply not seizing the alternative funding options available to them—such as venture debt, for instance. At least, that was the message from a panel of—you guessed--venture debt providers, speaking at the UK’s BioIndustry Association's BioFinance Europe 2007 meeting last week.

Venture debt has been going strong in the US for at least 20 years; it offers VC-backed companies the opportunity to leverage their equity capital by borrowing quickly, non-dilutively, without affecting valuation, and usually without relinquishing any board seats or voting rights. Last year the US life sciences sector borrowed about $1 billion of this kind of money, according to executives at venture debt providers ETV Capital and GE Financial Services. In Europe, the equivalent figure was less than $50 million.

So what’s going on? That's what the debt providers wanted to find out.

Emotions and ignorance were the top two answers from the panel discussion. The emotional barrier is that these debt providers need to secure their loan—naturally enough—and typically do that against a company’s IP. At a minimum, borrowers may have to sign a “negative pledge” promising not to use their IP to raise debt elsewhere during the course of the loan. But since IP is what the CEO-founders have often spent several decades creating, they’re not, in general, keen to mortgage it, the panellists suggested.

Lack of confidence is another way of putting it: European biotech management and VCs see venture debt as too risky, was the suggestion, because they don’t think they will be able to create sufficient value to pay back the loan—and thus fear that their assets will be seized.

And indeed, venture debt isn’t a lifeline for struggling companies. It’s intended for firms that expect to create value in the near to mid-term and need tiding over—for “high return” situations, as one debt-provider explained in his presentation. If the borrower isn’t in a (relatively) strong position, the deal gets too risky for the lenders. “Companies must have VC support and more than 12 months’ cash” to qualify for venture debt, noted the panellists.

They’ll need enough cash to pay back the loan, too—plus up to 14% interest, and the legal fees associated with the loan. As in any business sector, creditors take priority over the shareholders if things go pear-shaped, which is why management does need to be pretty sure the next round is an up-round, or that the exit they’re after comes at a nice premium. The debt providers require that confidence, too: none will lend without taking share warrants so that they can participate in the hoped-for value creation and meet their return criteria.

Still, for any company not on its knees, venture debt offers “an option to use someone else’s money to create equity value,” the debt providers argued, at least if you think you can create more value than the cost of the loan, and do so before you need to pay it back.

But on to the other reason venture debt hasn't caught on in Europe: management and VCs in Europe just don’t get debt, according to Peter Keen, a partner at VC firm Esprit Capital Partners, chairing the panel. “When you start talking about debt, their eyes glaze over,” he says. Apparently your average European biotech board meeting doesn’t often include a discussion of cost-of-capital, either—and if it does, “that goes right over their heads,” Keen continues.

Here’s the thing: equity is more expensive than debt in many situations. Equity investors expect a 20-30% return (or they used to). Even expensive debt may not cost half that—provided, of course, you can pay it back. So sometimes it’s cheaper, and therefore makes sense, to use debt rather than equity to fund capital expenditure and working capital.

A few European firms have cottoned on. Arrow Therapeutics took a £4 million venture loan to help tide it over while considering its exit options—it was in the end acquired by AstraZeneca for $150 million, so had no trouble with repayments. UK firms Vectura (now public) and Domantis (now part of GlaxoSmithKline) have also used venture debt in the past, according to the panelists, both in order to buy time during financing negotiations.

But these are exceptions. So far, the rest of the UK and European biotech sector either doesn’t like debt, doesn’t get debt, or doesn't feel confident enough in future value creation to take it on.

This may soon change. Public investors, the conference heard, are exiting biotech, not entering. The few specialist funds that exist in the UK and Europe by and large haven't made great returns on that portion of their holdings. US and foreign investors are blocked by pre-emption rights, granting existing shareholders the right to maintain their ownership share in any capital increase. PIPEs are frowned upon (and not easy to do, also because of pre-emption rights).

So soon enough UK and European biotechs may have no choice but to look more pro-actively at alternative financing sources, including venture debt. Especially as M&A continues to offer the prospect of future value-creation.

Meanwhile the inexorable rise of private equity, across all sectors, may help change attitudes too. If anyone knows how to do debt, private equity does. And they’re all getting rich, so eventually perhaps the love-debt message will trickle down to biotech.

While You Were at ADA

Here are a few of the stories that IN VIVO Blog picked up on over the weekend ...

• Not technically a weekend event, but late on Friday Congress introduced legislation that would change the tax treatment of carried interest from a capital gain to regular income, effectively jacking up the tax rate on VCs, hedge funds and private equity shops from 15% to 35%. Spirited discussion continues over at PE Hub, but comments encouraged here too. Will this truly hurt the pace of innovation in the US, as has been and will be argued? Or are undertaxed investors only looking out for #1? Both?


• The American Diabetes Association's annual meeting kicked off in Chicago. Among the companies presenting data was Merck. Reuters reports on some new Januvia data that suggests the drug added to standard therapies (study 1: metformin, study 2: metformin plus sulfonylureas) improves blood sugar better than those therapies alone. The incidence of hypoglycaemia, however, was up in the Januvia groups in each study when compared to the control.


• In other ADA news, Lilly and Amylin presented solid data from a long-term study of Byetta, including progressive weight loss over a three and a half year period. Novo Nordisk's liraglutide is no slouch either. See this June IN VIVO story for the low down on Novo's diabetes prowess.

Should Some of these Butterflies Get Eaten?

Last week, Oxford Bioscience Partners gathered its portfolio CEOs as well as some interested industry friends to its annual meeting in Cape Cod, this time to talk about “Adapting to Change.”

And change, the program argued, was necessary to success. The best managers adapt to changing circumstances. Caterpillars become butterflies (that was the picture on the program’s cover).

But unlike the relatively predictable lifecycle of that extraordinary insect, biotechs often go through many transformations, all of them expensive, and very few of them ever yielding the economic equivalent of the butterfly’s winged beauty. (See, for example, an interesting New York Times story on – to mix a metaphor – biotech’s zombies.) Instead, many companies continue to transform themselves into the next thing, somehow attracting hopeful new investors along the way to keep them alive.

To get the discussion started, Oxford had invited a group of executives who had taken their companies (Xoma, Enzo, Oscient, GPC and Alantos) through major business transformations. Most of the companies are impressively old—impressively because only one, the 30-year old Enzo Biochem, supports itself on its own cash flow. And Enzo has been at best a moderate success (a 9% compounded increase in its stock price since 1992 – our systems don’t allow us to go back to 1980, when the company went public at a market valuation of $10 million).

Take the changes sketched by Oscient Pharmaceuticals CEO Steve Rauscher and GPC Biotech CEO Bernd Seizinger.

Both companies dumped their original technology strategies, moving into in-licensing shortly after the genomics balloon deflated. Oscient has gone into primary-care marketing; GPC into oncology drug development, having in-licensed, in satraplatin, what has turned into one of the hottest anti-cancer candidates in biotech (and a relatively old compound, to boot). Seizinger was too politic to point out that in 1998 he had been abruptly fired as the CSO of Oscient, then called Genome Therapeutics. Nor did he point out the fact that Oscient, the company that kicked him out, was now trading at a market cap of just $60 million, despite having two marketed products and $32 million in cash. Meanwhile Seizinger’s GPC had a valuation of about $970 million.

You can argue that Oscient’s transformation into a primary care company was hardly the kind of transformation likely to yield a butterfly. Nonetheless, it follows a traditional storyline: it abandoned technology for products; it dumped its management. Panelist and Alantos CEO Keith Dionne dumped his company’s technology six weeks after he’d joined the company. He kept his German scientists; laid off many of the Americans. Enzo is bringing in new management right now to run its operating businesses (although the parent is still run by its founders). And while it has certainly made money on its inventions, it hasn’t made a lot – it only recently won patent priority in court cases over competing protein array and amplification technologies, both of which it developed in the early 1980s. That’s a long time to wait for a return.

But granted the ability and willingness to transform, the real question is why do it in the first place. That was the pertinent point Mark Carthy, an Oxford partner, asked the panel: given the longevity of some of these companies, the dismal returns from their original strategies, and their subsequent twists and turns, how does the investor make money?

“Timing,” was the general, unhelpful, response.

Meanwhile, Keith Dionne only had to show up to give his answer: he’d sold his company to Amgen for $300 million – rather than sticking around and probably having to change strategy again (it was founded as German Therascope AG in 1999, around a Nobel prizewinner’s combinatorial chemistry platform).

With Xoma trading at well below its 1989 price, let alone its nutty genomic-boom pricing, shouldn’t that company have been assigned to other managers – and more pertinently, other owners? Same for Oscient: the transformation led by Rauscher from discovery into primary care marketing is only one of several huge strategic changes since the company’s founding in 1961 as Collaborative Research. And nowhere has it found traction. But it’s always found investors.

Meanwhile, Xoma has raised more than $700 million of investor capital since it was founded in 1980, and will have soon gone through its fourth CEO. But for Pat Scannon, founder and EVP of Xoma, hope springs eternal: the up-tick in his stock price this year, from $2.16 to $3.40 may, he said, portend great things to come. Just like all the other upticks in his share price over the previous 26 years.