Thursday, October 13, 2011

Financings of the Fortnight Surveys The Landscape

This column has never been one to sugar-coat or wax Pollyanna-ish. And we agree with much of the hand-wringing of the past month over the state of life-science venture. Starting with the NVCA/Medic survey, then the BioCentury "canary in a coal mine" story (and one of our favorite Police songs, by the way), then Atlas Venture partner Bruce Booth's nostra culpa blog post this week, it's been a festival of flagellation.

In fact, our own life-science VC survey notes many of the same problems: capital flowing out of life sciences and into health care IT/services or out of health care entirely; a world of blame laid at the feet of regulators; and agreement that the shakeout of funds -- the most recent casualty being Prospect Venture Partners -- will continue for at least two more years.

(In case you missed it, we published our survey in the September issue of START-UP, and you can find it online in two parts: a feature on biopharma and a feature on medical devices.)

Based on the articles published this week, you could conclude that life-science VCs might as well pack up their portfolios and find another gig; in fact that's a question we asked the more than 70 VCs who filled out our survey. (One wag said his dream job other than VC was "dog walker.")

But it's high time to interject a small contrary note, which our survey also exposed. Investors who self-identified as biopharma specialists were in fact fairly upbeat about the current investment climate. Really. We also dug up venture return numbers, with the help of the folks at NVCA, which showed biopharma returns in the past ten years have practically matched total venture returns. Indeed, Atlas venture partner Bruce Booth, doing similar research independent of us, found the returns, sliced in a slightly different manner, even more optimistic:

A widely held notion amongst GPs, LPs, and entrepreneurs is that Life Sciences/ Healthcare (LS) venture investing is too challenging and has underperformed IT and Internet (Tech) investing over the past decade and will only continue to do so. Nothing could be further from the truth – it seems that like Rodney Dangerfield, LS gets no respect.
If a life science VC can convince a limited partner to put cash into venture capital – admittedly no easy feat these days – there's an argument to make that biopharma, if timed correctly, could match or outpace general venture returns.

We also heard from VCs that those raising new funds don't expect any change in compensation structures despite the desperate fundraising straits and the long-running efforts of this group to, ahem, re-align the financial relationship between LPs and GPs. How's that for optimism?

Of course, the next ten years will be a vastly different landscape than the decade prior. Emerging markets, US healthcare reform and budget cuts, potential long-term economic stagnation... all upcoming factors that could disassociate future performance from historical indicators. But those who remain steadfastly committed to biopharma investing can count on one certainty: less competition in the years just ahead. Those who figure out how to be counter-intuitive won't just make a lot of money; they could wind up backing bold new treatments for Alzheimer's, diabetes (perhaps these folks?), HIV, and other health crises. And those are the VCs whose work will put meaning back into stale, self-important buzzwords like "innovation," "patient-centric vision" and "unmet medical need."

How's this for an alignment of interests: You want a biweekly roundup of biotech financing news, ornery viewpoints, and silly links. And we provide you...

Cleave Biosciences: Big Series A rounds have been few and far between lately, but Cleave Biosciences has pulled in one of the year’s largest, intended to support identification and clinical development of oncology drugs that work by addressing protein homeostasis, the balance between protein synthesis and protein degradation within cells. The Burlingame, Calif.-based start-up landed $42 million in first-round capital, mostly from four venture firms: 5AM Ventures, U.S. Venture Partners, OrbiMed Advisors and Clarus Ventures. The four contributed equally, according to USVP’s Larry Lasky. A smaller component came from Astellas Venture Management, the investment arm of Japan’s Astellas Pharma. Cleave chief executive Laura Shawver served as an entrepreneur-in-residence with 5AM last year, when she met Cleave’s three scientific co-founders. Two were veterans of Proteolix, the developer of proteasome inhibitor carfilzomib, which was acquired by Onyx Pharmaceuticals in 2009. After tracking the scientists’ progress for several months, Shawver formally sought investors; USVP led the process with a term sheet, and the four came together. Shawver isn’t saying which targets Cleave will pursue but says it has three programs that could yield clinical candidates. It will choose its priorities based on both scientific data and market opportunities as they emerge. Cleave expects to seek a partner that would supply non-dilutive capital for at least one drug, although an eventual Series B is likely as well. Shawver confirmed that the Series A round is tranched, but wouldn’t say how much Cleave has received already. – Paul Bonanos

Incline Therapeutics: Last year, we gave Incline a place on the end-of-year A-List for the creative spin-out and funding that formed the company around a discontinued electronic pain patch. More than a year after the deal was announced, Incline has received the balance of its $43.5 million Series A, adding $21.5 million to the $22 million it took in during June 2010, according to a Form D filing. It's more than the arrival of another big hunk of money, however. The second tranche was coincident with a $3.5 million option payment that keeps alive Cadence Pharmaceuticals' exclusive right to acquire Incline. Cadence, the maker of Ofirmev (intravenous acetaminophen), thought it might acquire the pain patch from Johnson & Johnson at first but decided it had other fish to fry -- namely getting Ofirmev approved. So it helped orchestrate the creation of Incline, and it structured a pair of non-dilutive $3.5 million option payments to acquire it down the road. Now that it has prolonged its option with the second payment, its exclusive right comes with a steeper price tag: it can buy Incline for up to $228 million plus a $57 million earn-out any time before the end of 2013 or before Incline files an NDA for its first product. (Before the second tranche came in, the price tag was $135 million.) The product in question is Ionsys, an electronic patch that delivers fentanyl through the skin via a small electronic charge; the product was previously approved in Europe for post-operative pain while in the hands of J&J-owned Alza, but was pulled from the market in 2008 due to a safety concern. Cadence CFO Bill LaRue wouldn’t say whether Cadence strongly considered buying Incline during the first option period, but confirmed ongoing interest in the company. – P.B.

DNAnexus: Google Ventures and TPG Biotech are leading the genomics firm's $15 million round, its second, with previous investors First Round Capital, SoftTech VC, K9 Ventures, and Felicis VC also on board. The firm is teaming with Google to mirror the Sequence Read Archive, a US government site that stores and makes publicly available next-generation genome sequencing data. The agency hosting the site, the National Center for Biotechnology Information, said earlier this year it was phasing out funds for the program. DNAnexus announced plans to host the free databank Oct. 12. It likely won't be the only effort to store and provide access to the vast amounts of genomic sequencing data, given the explosion of new platforms from companies like Pacific Biosciences, Roche's 454 group, Life Technologies’ Ion Torrent and sequencingstalwart Illumina, as well as the rapidly dropping price of sequencing. Personal genome sequencing isn't quite ubiquitous, but the day is coming. DNAnexus is offering a free personal sequencing and $20,000 cash to employees who successfully refer software engineers to the HR department. (What, a 2-for-1 coupon for dinner at Chevy's isn't enough anymore?) With the DNAnexus deal, Google has taken another step into the health field. Not all have gone well. The search and data firm said in June it would shut down its Google Health project that aimed to let individuals store their personal health records online. Google's venture arm has also invested in monoclonal antibody platform firm Adimab, stem-cell researcher iPierian, and personal genomics firm 23andMe, which is run by Anne Wojcicki, married to Google founder Sergey Brin. -- Alex Lash

Zeltiq Aesthetics: You caught us. Four paragraphs after we fume over VCs shying away from true unmet medical need, we write up this piece of work. Cosmetic therapies aren't usually our thing, as you know, but when a panel of well-heeled life science VCs are backing a company that's trying to go public, well, these days that's worth noting. Even if the company is hawking a high-tech procedure that it says will get rid of your spare tire. This isn't a treatment for obesity; it's more like a Dustbuster that zaps your "annoying bumps and bulges of stubborn fat" with a blast of cold without killing surrounding skin and tissue. That's the claim. The FDA approved the device, called CoolSculpting, in 2010. As of June 30 it had 629 systems installed in medical offices worldwide. On October 7 the firm set terms for an IPO at 7 million shares to be sold at $14 to $16 per share, which would raise $105 million at the mid-range price. The main VCs are Advanced Technology Partners, Aisling Capital, Frazier Healthcare, and Venrock. All except Aisling bought at least 2 million preferred shares at $3.42 each in Zeltiq's Series C round in 2008, with each preferred share convertible to 1.07 common shares at the offering. In 2009, all four participated in a $10 million convertible bridge loan and soon after a related financing round. (Details are in Zeltiq's latest SEC filing here.) Aisling says it might buy 10 million shares as part of the IPO, but it's not a binding commitment. Underwriters are led by J.P. Morgan Securities and Goldman, Sachs; they have 30 days after the offering to buy up to 1.05 million additional shares. Zeltiq is expected to price next week. Meanwhile, antibiotic drug developer Cempra filed on Oct. 12 to go public. -- A.L.

Photo courtesy of flickr user Cat Sidh via a Creative Commons license.

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