Financings of the Fortnight Sees More Conflicting Indicators for Biotech VC

By Joseph Haas

Reading the sometimes conflicting data from the venture capital sector can be just a bit confusing. Last time out, for example, this feature tried to divine whether VC fundraising was on a slow pace or was rallying, with a pair of sources differing on the sector’s second-quarter take by nearly $2 billion.

As Congress would say, now we’re talking about real money.

One possible factor that could dampen the hopes of life sciences companies looking for VC investment is the difficulty some venture firms are having raising new funds themselves. See our Valuation Watch piece in the July/August 2010 issue of START-UP for details on how big life sciences backers like Polaris Venture Partners, Atlas Venture and Sofinnova Partners are closing new funds well short of stated goals and an update of our 'gas tank chart' that got, um, a lot of mileage last year. Of course at least a few VC firms recently met or exceeded their fundraising goals, including OrbiMed Advisors and SV Life Sciences. Once again, the indicators in VC financing appear somewhat conflicted.

Still, an attempt to read the quarterly trends suggest that the outlook for biotech companies looking for venture investment may be a sunny one, even as a few venture outfits lower fundraising expectations.

The life sciences sector (both biotechnology and medical device firms) saw venture capital investment increase during the second quarter by 52% in dollars and 36% in deal volume, according to the July 16 Money Tree Survey by PWC and the National Venture Capital Association, based on data from Thomson Reuters. Such investments totaled $2.1 billion as 234 deals were crammed into the April through June period; we covered the survey in-depth in “The Pink Sheet” DAILY.

Of those, biotech deals accounted for $1.3 billion spread across 139 deals. Biotech accounted for the largest share of venture capital financing during the quarter, enjoying a 59% uptick in dollars compared to the first quarter, as well as a 34% increase in the number of deals.

Overall, venture capital investment occurred at levels not seen since 2008, said Tracy Lefteroff, global managing partner for venture capital practice at PWC.

“The rise in companies lining up to go public in the life sciences space in Q2 was also a likely driver of the strong rebound we saw in investing in this sector during the quarter,” he said. “If the markets remain positive, we’ll likely continue to see robust investment levels for the remainder of the year, with VC funding in 2010 poised to surpass 2009 levels.”

Another hopeful trend suggesting an improving environment for start-ups during the second quarter was an increase in seed and early-stage investments. These rose 54% from the first quarter to the second quarter to a total of $2.3 billion, with deal volume rising 32% to 429. Likewise, first-time financings were up 7% during the quarter to $1.1 billion, with biotech leading the way among sectors in terms of first-time dollars raised.

Speaking of leading the way, it's time for another installment of ...

NuPathe: Central nervous system drug developer NuPathe revealed terms for its initial public offering, scheduled for next week. The Conshohocken, Pa.-based company is expected to sell 5 million shares for $14 to $16 apiece, raising about $75 million and giving it a market capitalization of about $212 million after the offering, based on the midpoint of the price range. Lazard Capital Markets and Leerink Swann are co-lead underwriters of the offering. NuPathe has completed Phase III trials on a patch that delivers the migraine drug sumatriptan through the skin via a small electric charge. NuPathe expects to file an NDA for its patch, called Zelrix, during the fourth quarter of 2010. NuPathe has raised $53 million in private funding to date; Quaker BioVentures, which led NuPathe’s $30 million Series B round in May 2008, is the company’s largest outside shareholder, while Safeguard Scientifics, Birchmere Ventures, Battelle Ventures and SR One hold smaller stakes.—Paul Bonanos

Euthymics Biosciences: A new company formed to advance and commercialize a novel anti-depressant, Euthymics raised $24 million in a tranched Series A round from a venture syndicate led by Novartis Venture Funds and Venture Investors LLC, along with Hambrecht & Quist Capital Management, GBS Venture Partners and the State of Wisconsin Investment Board. The Cambridge, Mass.-based start-up paid $2 million to acquire shuttered DOV Pharmaceutical Inc., which ceased operations last year when it ran out of capital. Publicly-traded DOV was in the midst of Phase II trials on a triple reuptake inhibitor that features unbalanced potency against the neurotransmitters serotonin, dopamine and norepinephrine, in an effort to reduce side effects such as weight gain, sexual dysfunction and cognitive impairment. Euthymics expects to use the funding for a Phase II/III trial on the drug, which if approved would be marketed to patients who do not respond to selective serotonin reuptake inhibitors. Among Euthymics’ founders are former Orexigen executive Anthony McKinney and longtime Lilly executive Frank Bymaster, who was on the original development team for Prozac in the 1970s.—PB

Xoma: Through a committed equity financing facility, antibody specialist Xoma has the option to sell up $30 million of its registered common shares at a discount to Azimuth Opportunity Ltd. over a 12-month period. Just for signing on July 23, Azimuth got 1.7 million Xoma shares. Despite diluting shareholder equity and having a potential short-term negative impact on the price, CEFFs help companies avoid the more time-intense and often more expensive FOPO path. Like with most CEFF arrangements – limited only in how much capital is drawn down within a specific time period – Xoma controls the timing, dollar amount and share price of each draw, is not obligated to dip into the fund, and is free to pursue other financing. Azimuth is no stranger to Xoma; the private equity firm provided $26 million last September through two separate CEFF draws and now holds about 42 million of Xoma’s shares (approximately 261 million were outstanding as of May 31). With $28 million cash in its coffers, Xoma’s priorities – according to CEO Steven Engle – include expanding IL-1 beta antibodies IP, pursuing new partnerships, and advancing other autoimmune, cardio-metabolic, inflammatory and oncology candidates. Lead antibody XOMA52 is in Phase II for diabetes and cardiovascular disease. Xoma's isn't the only CEFF signed this fortnight -- just this morning Omeros announced a $40 million/24 month CEFF deal with Azimuth.—Maureen Riordan

Immune Design Corp.: Nearly doubling its June 2008 $18 million venture financing, Seattle start-up Immune Design took in an impressive $32 million in a July 26 Series B round led by new backer ProQuest Investments, which was joined by returning Series A participants Alta Partners, Column Group and Versant Ventures. According to Elsevier’s Strategic Transactions, the only immunotherapy firm raising more in a recent Series B – in 13 such transactions done since January 2007 – was CureVac GMBH (in a $47.7 million round July 2007); in fact, the average take of vaccine players in a Series B raise during that time period was about $20.5 million. So how did IDC manage to secure such a hefty sum? Perhaps its strong management team led by Corixa alum Steve Reed, also founder of the Infectious Disease Research Institute, promoted investor confidence. Recent success of its IDRI-pioneered GLA adjuvant technology in a second Phase I study in flu, couldn’t have hurt either. The financing gives IDC at least two-and-a-half years-worth of cash to advance GLA as well as its second platform, known as DC-NILV, designed to target and stimulate dendritic cells (from David Baltimore’s Caltech research team). IDC’s near-future plans include a Big Pharma partner to further finance development costs.—MR