Friday, April 20, 2012

Financings of the Fortnight Examines The Peter Thiel Principle

Iconoclastic investor Peter Thiel has famously offered smart young people money not to go to college. (See video above.) Now his personal foundation, through a venture called Breakout Labs, wants to play a role usually left to the Federal government: providing seed money to life science companies too young to attract venture capital.

Foundations, charities, and angel investors have also picked up some of the slack to boost what some VCs refer to as “science projects,” but these days, if it doesn’t quack like a product, the duck isn’t likely to come down and give you $50 (or $500,000).

So into the breach, again, steps Thiel, the billionaire founder of online payments company PayPal and one of the first backers of Facebook. He later co-founded Founders Fund, a venture firm dedicated to backing only entrepreneurs with audacious goals. In February's START-UP we profiled the firm as it moves more aggressively into the life sciences and health care. Beyond social networking and digital media, Founders Fund is now aiming to cure diseases, use data to change the way medical care is understood, and take advantage of mobile and analytical technologies to solve what its partners see as enormous human problems, rather than just improve drugs or treatments incrementally.

Some of those audacious goals are also part of the Breakout Labs modus operandi, or so they say. Unveiled in the fall of 2011, Breakout is a revolving fund, not unlike an evergreen venture fund. Operated by the Thiel Foundation and seeded initially with $5 million, the philanthropic program accepts royalties and warrants for equity in the start-ups it supports, typically taking an option for a 1% stake in each start-up. Breakout will then funnel those returns back into itself to seed more companies, with grants between $50,000 and $350,000 apiece issued on a rolling basis.

Its first six grants are ticketed for six companies which have what the Labs calls “radical ideas” in the life sciences. (Some of Thiel’s stated personal aspirations are a bit radical, too – living forever, say, or colonizing the ocean on stateless floating platforms.) Although Breakout says it prefers ideas developed outside of traditional academic settings, science director Hemai Parthasarathy notes that some have connections to academia: 3Scan, which aims to map the connections within the brain in a three-dimensional digital reconstruction, is based on technology developed at Texas A&M, and Longevity Biotech, a developer of artificial proteins that it hopes to use in orally available versions of biotech drugs, uses technology spun out of the University of Wisconsin.

The other programs funded, which Parthasarathy says include a few garage-level projects recently incorporated as LLCs, have auspicious implications, if not necessarily truly radical science. Arigos Biomedical would preserve organs in a cooled storage bank over a long period of time for future transplants, using cryonics techniques Parthasarathy acknowledges do not have a “high academic consensus” of approval behind them. Immusoft is developing a novel way to turn immune cells into therapeutic compounds within the body, applying technology discovered in Nobel laureate and CalTech professor David Baltimore’s lab to re-engineer B-cells and infuse them back into a patient’s body. Inspirotec is creating hand-held devices that capture airborne toxins, potentially affecting both epidemiology and bioterrorism, while Positron Dynamics is conducting particle science with implications that include medical imaging. All are in the early stages of research and development, so it'll be many years before anyone knows how dramatic an impact their projects might have. 

Founders Fund has been able to shake up the status quo on the tech side, but life sciences and health care -- areas with bedeviling development timelines, complex regulations, and hugely entrenched status-quo interests -- will be an interesting test of the firm's, and of Breakout Labs', outsized ambitions. Until then, look to Thiel, both through his foundation and through Founders Fund, to be an important source of capital in this corner of the world.

Whether radical, incremental, or somewhere in between, any new source of early-stage biomedical funding these days is newsworthy. You bet your life you’ll read about it in…

Alcresta: The founders of Alnara Pharmaceuticals, Alexey Margolin and Robert Gallotto, have teamed up with their former investors to launch two new companies based on their enzyme stability expertise. Alcresta is the latest, with a $10 million Series A round unveiled April 17. Third Rock Ventures, Frazier Healthcare Ventures, and Bessemer Venture Partners are the same investment group that backed Alcresta’s sister company, Allena Pharmaceuticals, with a $15 million Series A announced in November. “Sister company” isn’t quite the right phrase. Alcresta and Allena are more like Siamese twins: The two companies will be run by the same staff of eight people while producing completely different products. Alcresta is developing a nutritional supplement with omega-3 and omega-6 fatty acids that are more easily digested and absorbable. The fatty acids are an important part of cardiovascular and brain health, and most nutritional drinks and infant formula include the triglyceride form of the two acids, but certain patients – including premature infants, some elderly, and cancer patients – lack the proper enzymes to digest the nutrients in the triglyceride form. That’s where the Alcresta supplement would come in. The product would be used at point of care, including hospitals and in the home, and will join one of the fastest growing segments of the nutrional supplement market. The company expects to launch a product sometime next year and is already in talks with potential acquirers, Frazier partner Jamie Topper told our “Pink Sheet” colleagues. Meanwhile, Allena, which raised $15 million in Series A financing in November from the same investment group, will develop drug therapies with oral protein therapeutics aimed at treating nephrologic and urologic conditions. The founders expect the two companies to diverge at some point, but see the dynamic business model as a means of keeping costs down while products are in early development and can capitalize on the shared resources. -- Lisa LaMotta

Alder Biopharmaceuticals: Already richly funded by private investors and a lucrative partnership, antibody developer Alder has tapped into a new $38 million Series D round of funding, led by Novo Ventures. Since its previous venture round, a $40 million Series C in 2007, the eight-year-old start-up has received an additional $100 million in non-dilutive capital from a partnership with Bristol-Myers Squibb. BMS licensed Alder’s ALD518, a Phase II antibody that binds to interleukin-6, in autoimmune indications for $85 million up-front in 2009, then issued a $15 million milestone payment at the beginning of a Phase IIb study in rheumatoid arthritis in June 2011. While the licensing deal enriched Alder’s coffers, the company will need more cash to support several initiatives. For one, Alder still retains rights to ALD518 in cancer and is conducting a pair of Phase II trials in oral mucositis and acute graft-versus-host disease. The company had previously investigated the drug’s efficacy in combating cancer-related fatigue, cachexia and anemia, but Alder CEO Randall Schatzman said the regulatory path for those indications would be long and costly, and Alder has halted those programs for now. The D round brings Alder’s total private funding to $105 million. Prior investors Delphi Ventures, TPG Biotech, H.I.G. BioVentures, Sevin Rosen, Ventures West, and WRF Capital all followed on in the new round, but Novo’s participation was a factor in raising more private money instead of attempting an IPO. Novo is an evergreen fund backed solely by the Novo Nordisk Foundation, which often affords it more patience with its portfolio companies. Besides, said, Schatzman, “The public market is still a rocky place to play, with lots of down rounds in the public sphere. Early stage companies haven’t been trading well, so liquidity to investors has not been that great.” -- Paul Bonanos

H.I.G. Capital: One of Alder’s early backers, the investment firm H.I.G. Capital, announced the closing of its second life-sciences fund, H.I.G. BioVentures II, with $268 million committed. The firm says the fund, originally targeting $250 million target, was oversubscribed, and more than half the limited partners were not investors in the first BioVentures fund. Managing director Aaron Davidson told “The Pink Sheet” that the new fund will seek out companies with lead products that can be developed with $40 to $60 million. That ceiling likely precludes very early-stage technology or capital-intensive indications such as Alzheimer’s disease, although Davidson noted that breakthroughs can change the calculus within a specific field rather quickly. He cited the recent FDA approval of Eli Lilly’s Amyvid (florbetapir) imaging agent, which helps doctors and researchers map amyloid beta deposits in the brain and could help re-shape the risk of Alzheimer’s R&D. Notable investments from the first fund include Salmedix and Gemin X Pharmaceuticals, both of which were acquired by Cephalon, now part of Teva Pharmaceutical Industries; OncoGenex Pharmaceuticals, which went public in reverse merger with Sonus Pharmaceuticals; Novadaq Technologies, a Canadian device company that went public in 2005, and Tranzyme, a drug firm that went public in 2011. -- Michael Goodman

Supernus Pharmaceuticals: More than a year after first filing to go public, Supernus has dusted off its S-1 and decided to have another go at the public markets. A revised prospectus filed April 11 aims the company for an IPO of about $75 million, not including extra shares allotted to underwriters. It wants to sell 5.77 million shares in the range of $12 to $14 per share. The firm is based on formulation technology spun out of Shire in late 2005 and into the hands of a venture syndicate led by New Enterprise Associates (NEA). Its lead compounds are extended-release anti-epileptic drugs, reformulated with the Shire technology. SPN-538 (extended-release topiramate) is under review at FDA and has a PDUFA date in July. Epliga (extended-release oxcarbazepine) is also under review with a PDUFA date in October. Not only has Supernus built a pipeline from the Shire formulation technology, it has stretched its venture dollars by turning royalties attached to the technology into bulk cash payments. The technology has been used in several marketed products. The royalties for Sanctura XR (trospium chloride) and Oracea (doxycycline) were used to secure $75 million in debt raised in 2008. For Intuniv (guanfacine), an important product in Shire's portfolio, Supernus accepted in 2009 a one-time payment of $37 million to waive future royalty rights, as our START-UP colleagues explained when Supernus first filed to go public more than a  year ago. Heading into the IPO, NEA holds 45% of Supernus, followed by OrbiMed Advisors (18%), Abingworth (18%), and Shire (7%). CEO and founder Jack Khattar, a former Shire executive who founded Supernus, owns 11% of the company. The latest filing notes that certain large shareholders could buy shares at the IPO, but it did not indicate which ones or how much they might buy. -- Alex Lash

- Paul Bonanos wrote this week's introduction on Breakout Labs.

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