Friday, July 08, 2011

Financings Of The Fortnight: Give Me An A

For START-UP's annual A-List (and effort, too).

Yeah, this blogger is well aware it's only July and that loyal readers have grown used to reading our annual analysis of biotech financing trends in January. But retailers big and small have long created a little marketing heat with post-Independence day sales. In that same spirit, surely IN VIVO Blog can take a quick peek at the health of early-stage biotech financings? Think of it as our version of Christmas in July. Or if you prefer, akin to the top-line clinical trial analysis drug companies do before releasing the final presser on a compound's efficacy.

Thus, midway through 2011 we pause to measure Series A commitments year-to-date, using the data as a metric for the health of VC investment in innovative new cos. How are we doing?

Much better than 2010, according to Elsevier Business Intelligence's Magic 8 ball, the Strategic Transactions database. Year to date, early stage biotechs have raised roughly $375 million in 24 Series A deals, with the average financing pulling in $15.6 million. And activity in June has been particularly robust, with announcements tied to rare disease plays UltraGenyx and Lotus Tissue Repair, and the computational drug discovery platform play, Nimbus (see below). Indeed, the Series A dollars announced in June alone total $129.8 million, about a third of the total raised so far in 2011.

It was, of course, hard to get much worse than 2010's stats. Last year, the total biopharma Series A dollars were a dismal $650 million with the number of Series A the lowest we've seen in at least five years. And when VCs were putting money to work, they were making smaller bets: the average biopharma Series A in 2010 was just $10.5 million.

The obvious uptick across three different metrics -- total Series A dollars, average raise, and number of deals (if the trend continues, we should see close to 50 Series As before 2011 closes out, well above the 42 observed in 2010) -- seems to suggest a renewed sense of optimism in the VC community. (Maybe all those dollars following tech start-ups like Zynga and LinkedIn will slosh into health care! Natch.)

In reality, the situation is more nuanced. For VC firms that have successfully raised money in the past couple of years (think Third Rock, OrbiMed, Essex Woodlands, and NEA among others), it's good times indeed. Lots of innovation needs funding and competition for deals has dropped as struggling firms baby existing portfolio companies. Indeed, according to a survey currently being conducted by START-UP (full results will be published in our September issue), 42% of VC respondents have a negative outlook about the future of venture (only 23% were positive). And, 100% of current respondents predict that three years from now the roster of VC firms will be shorter than it is today.

In other words, rising Series A averages and investment dollars don't change the fact that many believe the traditional biotech financing model doesn't work anymore. Time lines are too long and the returns are too poor for limited partners who back VCs. Thus, numerous venture groups are trying to avoid the zombie label by experimenting with new models, which all loosely comply with the single unifying theory for biotech company development know "capital efficiency".

Think Atlas's toe-dipping experiment with project-based financing or CMEA's new Velocity Development Corp. or willingly separating discovery from development ala Adimab/Arsanis & Versartis/Diartis.

The other strategy at play involves finding new ways to forge ties with the primary end buyer, pharma, a major topic at last week's BIO meeting in two separate finance-track panels. But how close is too close? Is syndicating with corporate venture a smart strategy? Do you really need multiple strategic investors in a syndicate to generate optimal returns? What about pharma as an LP? CMEA has clearly reconsidered the wisdom of having a big pharma as an LP, officially pulling out of Lilly's Mirror Fund, in what might be a danger sign for other pharmas considering similar experiments.

So many questions. (And for START-UP/IN VIVO subscribers, answers -- or at least data.) Until then, it's time for your biweekly bolus of biotech finance, brought to you by the letter A and the numbers 24 and 15.6.

Nimbus Discovery: In addition to the letter A, two other letters --L and C-- are critical to the success of Nimbus, a platform play seeded by Atlas Ventures in 2009 that aims to perfect computer-based drug discovery. The start-up has gone from stealth to acclaim in recent months, not just for its high profile investor, Bill Gates, but also for its limited liability company structure, which makes it possible for the biotech to return cash to its investors without taking a tax hit. As executives converged on the Washington Convention Center last week came news that Nimbus had pulled in a sizable $24 million Series A, with new investors SR One and Lilly Ventures helping lead the round. Between its recent financing and its effort to pull in multiple strategic investors, Nimbus has become the new case study for how certain VCs think nascent biotechs should be built. As we told you in this Start-Up piece, Nimbus differs from
traditional discovery ventures in that it explictly aims to separate drug discovery and development tasks. The discovery efforts are kept in the platform LLC holding company, which acts as an umbrella over target- or molecule-specific C-corp subsidiaries. Thus, each time a candidate drug is licensed, that transaction is effectively an acquisition of a company, and includes just the IP and the particular data package associated with the relevant compound. Nimbus is currently focusing most of its efforts on two drug discovery programs targeting the proteins ACC, which may play a role in cancer and obesity, and IRAK4, inhibitors of which may be important in treating diffuse B cell lymphomas as well as inflammatory diseases like rheumatoid arthritis and gout. The new money is slated to go toward both programs.--EFL

Redwood Bioscience
: The San Francisco Bay Area start-up said June 27 it's received an undisclosed amount of capital from Takeda Ventures (corporate venture!) to develop its chemical engineering platform for drug-conjugate development. The cash builds on Redwood's prior also-undisclosed infusion of cash from Mission Bay Capital, a new seed-stage venture firm that targets University of California spin-outs. Redwood is based on technology from the laboratory of Cal-Berkeley professor Carolyn Bertozzi, who
last year was the first woman to win the Lemelson-MIT Prize. Redwood's "aldehyde tagging" allows site-specific modifications of proteins for drug conjugation or other functional enhancements. The funding news comes as antibody-drug conjugates (ADCs) are on the cusp of commercial relevance after three decades of work. Seattle Genetics is expected to win FDA approval for its Hodgkins lymphoma treatment Adcetris (brentuximab vedotin), which would earn bragging rights as the only ADC on the market. Outside the US and Canada, Millennium Pharmaceuticals, the oncology division of Takeda, owns rights to Adcetris. Also in late stage is T-DM1, a conjugated version of breast cancer treatment Herceptin that Roche's Genentech division is developing with technology from ImmunoGen. As we explained in this IN VIVO feature, Takeda's antibody researchers -- headquartered a few miles away from Redwood -- and many other drug developers are looking seriously at ADC technology now that Seattle and Genentech/ImmunoGen have paved the way with clinical validation. -- Alex Lash

Zafgen: This week the letter A has to also share the spotlight with the letter C, which in the case of Cambridge, MA-based Zafgen stands for capital. The start-up announced a $33 million Series C round July 7, led by returning investors Atlas Venture and Third Rock Ventures. The two venture capital firms, which also led a $14 million Series B in 2008, were joined in the round by a handful of unnamed individuals, Zafgen CEO Thomas Hughes said. Zafgen will use the funds to advance its MetAP2 inhibitor, ZGN-433, for severe obesity through Phase II, with new trials slated to begin next year. Last month, the biotech unveiled Phase Ib data showing that ‘433 yielded significant improvement in cardiovascular risk markers, such as LDL cholesterol levels and C-reactive protein levels. Hughes believes his candidate can succeed even though the obesity space is a littered with failures (including Vivus' Qnexa, Arena Pharmaceuticals' lorcaserin, and Orexigen Therapeutics' Contrave), because ‘433 is intended to provide significant benefit to severely obese patients, many of whom have co-morbidities such as diabetes or heart disease. The Phase II program will test ‘433 in patients with a body mass index of at least 35 plus a co-morbid condition or patients with BMI of 40 or above without a co-morbidity, Hughes said. The trial will treat patients for a minimum of 12 weeks, with endpoints of body weight, glycemic control (for participants with diabetes) and cardiovascular risk factors. Thus, since '433 will be studied in a patient population of greater medical need, Hughes argues it will offer a substantially better benefit-to-risk ratio than other previously tested drugs. Given the skyrocketing obesity numbers -- 38% of states now have obesity rates exceeding 25%-- if Zafgen's drug is safe and even mildly effective, it's pretty likely some pharma will pony up a fat check to own rights to the product. —Joseph Haas

Clovis Oncology: Maybe this week's FOTF should have been sponsored by the letters I, P, and O. Investors are waiting to see if Clovis can follow through with an initial public offering despite a lackluster IPO environment. The Boulder, CO.-based biotech filed an S-1 with the Securities and Exchange Commission on June 23 proposing an IPO of up to $149.5 million. The prospectus explains that the financing would go toward advancing its pipeline of oncology drugs through commercialization as well as adding to that pipeline through further in-licensing. (Remember the deal with Pfizer for the PARP inhibitor?) According to its prospectus, Clovis plans to differentiate its products by pairing them with companion diagnostic tests that will help determine the proper patient population, a strategy payers will be more likely to espouse. While Clovis’ intentions are good, and its founder Patrick Mahaffy has delivered in the past (he was CEO at Pharmion when it was bought by Celgene for $2.9 billion), the IPO strategy has been tough to execute over the last few years. There have been only 43 biotech companies that have successfully completed an IPO since the beginning of 2008 according to the Elsevier Strategic Transactions database; that includes 10 biotech IPOs so far in 2011 earning a total of $378.85 million. And many of the biotechs in the 2009 -2011 couldn't even get out without taking massive hair cuts, making it tough for venture backers to get an actual return.--Lisa LaMotta

Image courtesy of flickrer Peter E. Lee used with permission through a creative commons license.

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