Financings of the Fortnight is Mr October, But VC Funding Off in Q3

Life sciences VCs, like the defending World Series champion Philadelphia Phillies, tend to rely on the long-ball. Unlike those Fightin’ Phils (who, in case you missed it, are on their way to a second straight Fall Classic courtesy of a four-home-run burst of power), many VCs are struggling.

Not only are private biotech investors having a power outage—too few acquisitions for big multiples—but (on the whole, some VCs are clearly doing very well) they’re running low on cash necessary to replenish their line-ups with solid home-grown talent or big free agent signings.

So—without further extending the metaphor—we’re therefore seeing poor biotech venture investment numbers. Have a look at when life sciences venture groups raised their last funds—some are nearly running on empty, thanks to a combination of sub-par performance and global economic calamity.

And VCs without a lot of dough to spend don’t tend to spend a lot of dough.

And that’s exactly what Dow Jones reported earlier this week, based on figures from its VentureSource database:

[Biopharma] companies raised $810.9 million in 83 third-quarter financings, down from the $1.18 billion raised in 67 deals in the second quarter. The 3Q investment total represents a 33.6% drop from the $1.22 billion invested in 73 biopharmaceutical rounds in the corresponding quarter of last year.

Trawling our own Strategic Transactions database yields similar results. Our 'biotech' venture deals (clearly a slightly different category than DJ's 'biopharmaceutical' companies) suggest a 34.4% drop from Q3 2008 to Q3 2009. During last year's quarter there were 52 biotech venture deals that raised a total of $1092 million. This year there were again 52 deals but those deals totaled only $716 million. Funding was down from the second quarter of 2009, but not as markedly: total biotech VC funding declined 20.6% from quarter to quarter.

But, thanks to the Phillies' victory in the NLCS last night, we're in a good mood (about a third of your regular IVB contributors support the Phils, in case you hadn't spotted it) and so we don't want to leave you feeling gloomy. So how 'bout some highlights:

Corporate venture continues to have a significant impact on the financing scene and some deals done over the past two weeks provide ample anecdotal evidence of the trend (for less anecdotal and more ample evidence, check out this recent Start-Up feature).

GlycoMimetics $38 million Series C was backed by new investor Genzyme Ventures and returning corporate VC the Novartis Venture Fund (among others). And newcomer Envoy Therapeutics took in $8 million from lead backer 5AM Ventures with Roche Venture Fund and Takeda Research Investment in the mix too.

And the past few days have seen big venture rounds from the likes of Lux and Flexion--which we'll talk about below. These deals aren't grounding into 6-4-3 double plays. They are ...

Flexion Therapeutics: In June, Flexion Therapeutics closed the last of three in-licensing contracts, garnering it a total of five compounds, all more or less following an anti-inflammatory theme. With this portfolio in hand, Flexion was finally able to close its $33 million Series A (here’s a piece we did when the company was founded, back in 2007). Flexion is built around its management’s experience with Lilly’s Chorus division (see this IN VIVO article), an experimental development group built around Flexion co-founder Neil Bodick, MD’s notion of “truth-seeking behavior” in clinical development. The idea is to get a new molecule to proof-of-concept for less than $5 million and in less than two years. Flexion CEO Michael Clayman and Bodick both left Chorus, sponsored by Versant Ventures, to try the notion in a start-up. They theorized that discovery productivity had outstripped development capacity at most pharmas, whose execs would therefore be willing to out-license market-baskets of pre-proof-of-concept molecules to Flexion in return for claw-back rights on one or two that piqued their interest. Indeed, says Clayman, pharmas loved the idea, and the company did at least some due diligence on about 130 compounds, looking for those few that also fit particular development and commercial criteria suitable to a small company’s potential. In the first place, they were looking for compounds whose regulatory paths appeared relatively straightforward (e.g., locally acting vs. systemic). In the second, they wanted drugs that could look commercially attractive to larger companies – but which could also be developed and sold by a somewhat older Flexion if it hadn’t been able to sign out-licensing deals on attractive terms. According to Clayman, they found the molecules which fit its criteria. But the deals took longer than expected to sign and meanwhile the financial markets tanked. Venture funds – the diminishing number with significant money left – grew more conservative, looking for excuses not to invest. Sofinnova, which is fundraising now, was nonetheless intrigued enough by the Flexion compounds to join Versant and Versant’s frequent collaborator 5AM Ventures in the new round. As for the pharma deals themselves: watch this space.--Roger Longman

Talecris Biotherapeutics: So far October has been a busy month for Talecris Biotherapeutics, maker of therapeutic proteins extracted from plasma. Only two weeks after completing its initial public offering--the net proceeds of which cut its $1.1 billion in debt by almost half--the company now is essentially eliminating approximately $593 million in existing debt it owes in the short term (based on calculations using figures as of 6/30/09), and replacing it with a longer-term loan due in 2016. On October 16 it sold $600 million in seven-year 7.75% senior notes to institutional investors. The final proceeds, which were $50 million higher than the company intended when it announced the transaction a few days earlier, will be used to pay back first and second lien term loans that mature in December of 2013 and 2014, respectively, as well as a portion of its existing credit facility with certain banks including Wachovia and Wells Fargo. The money raised from this debt sale was actually higher than what Talecris grossed in its $550 million IPO of 29 million shares at $19, a price that the market seems to have accepted--closing prices in the days after the initial offer were in the $21 range, and stock is still trading above $19. Talecris’ IPO, which was its second attempt after market conditions prevented the company from completing its first try in 2007, isn’t expected to make waves in the IPO market for traditional venture-backed biotechs like Anthera, but is still a good sign. Talecris also reached another milestone this month--days after the debt financing was completed, the FDA approved Prolastin-C, a higher concentration of the company’s twenty-year-old product Prolastin for alpha 1-antitrypsin deficiency--Amanda Micklus

Amarin: In the second tranche of a PIPE deal initiated in May 2008 (deal# 200830272), this Irish biotech was recapitalized Oct. 13 with $70 million - $66.4 million in cash proceeds along with $3.6 million from the conversion of convertible bridge notes. The money will be used to finance Amarin’s lead program –AMR101, a prescription grade Omega 3 fatty acid for a pair of dyslipidemia indications – and comes with significant warrant coverage. The cash proceeds came from the sale of $1 units comprising a full American Depositary Share in Amarin, plus a five-year warrant for half a share, exercisable at $1.50. The bridge notes were converted at $0.90 a unit, also comprising a full share and a five-year warrant. The deal was priced in July at a 22% discount, but the actual discount was even higher as Amarin’s stock was trading in the $1.60 range on the day of the transaction. Sofinnova Ventures led the round, as it did in the May 2008 private placement that netted Amarin $27 million. Despite those proceeds, Amarin had been operating via bridge financing in recent months, most recently announcing a $2.6 million bridge loan in July to continue operations. The second tranche initially was planned as a $55 million deal with the existing investors – Sofinnova, Orbimed Advisors and Longitude Capital. However, the expanded round also brought participation by Abingworth, APG Asset Management, Great Point Partners, Tavistock Life Sciences Company and RA Capital. Abingworth’s Joe Anderson, an Amarin board member, said the proceeds should be sufficient to get the company to an NDA filing, expected no later than 2012. For our full coverage of the deal from "The Pink Sheet" DAILY, click here.--Joseph Haas

Lux Biosciences: Like most biotechs, this ophthalmology specialist and its backers might have had their sights set on getting acquired once Phase III data for lead uveitis compound oral voclosporin (a.k.a. LX211 and now dubbed Luveniq) came through. Those results were somewhat positive, though not without hair (one of three Phase III studies was 'underpowered' and another did not hit its primary endpoint due to discontinuations), and for whatever reason a deal hasn't materialized. (Not terribly unusual for the venture-dollar-rich-but-relatively-exit-poor ophtho space.) But the company and its VCs remain confident that Luveniq has a bright future--and are doubling down on their initial investment to finance the ride. Lux announced this week a $50 million Series B supported by its existing investors SV Life Sciences, HBM Bioventures, Novo AS and Prospect Venture Partners (those same investors backed the company in a $49mm Series A in 2006). The cash (some of which has already been spent--it will be used to pay back bridge loans from those same VCs) should take Lux through Luveniq's expected US and EU filings later this year (the compound has orphan drug designation in both territories and fast-track status in the US, and Lux will apply for priority review) and--if all goes well--toward the drug's potential launch in 2010, CEO Ulrich Grau told us for a story in "The Pink Sheet" DAILY. Will suitors come a-callin' then?--CM