Friday, September 07, 2012

Financings of the Fortnight Says It's Not Ova Til It's Ova

A two-year-old biotech trying to get listed on the over-the-counter exchanges wouldn’t normally qualify for much notice. But OvaScience is different. First, its founders include Christoph Westphal, who has co-founded and either sold or taken public several companies. The OvaScience CEO is Michelle Dipp, also a co-founder, as well as a partner with Westphal in Longwood Fund. Working together, their biggest coup was the sale of Sirtris Pharmaceuticals to GlaxoSmithKline for $720 million in 2008, and they also raised a few eyebrows while still at GSK for their side project selling dietary supplements related to Sirtris’s compounds.

OvaScience, which aims to start a pivotal trial by the end of this year for its fertility enhancement product, Augment, has gone public via a route normally traveled by shell companies to attract reverse mergers, using the SEC’s Form 10. Touted by some as a new alternative to burdensome and uncertain IPOs, the route hasn’t attracted many operating companies to date. If approved via Form 10, a company has the same disclosure rules as those that undertake an initial public offering, but its shareholders don’t have anywhere to trade until it can get listed somewhere.

That’s OvaScience’s situation.  In its latest SEC filing, the company says it’s shooting for an over-the-counter listing, but makes no guarantee of attaining it. It’s contractually obligated to try; its shareholders signed on with the expectation of liquidity at some point in the not too distant future. The list of shareholders includes OvaScience’s largest institutional investors, Bessemer Venture Partners, Longwood Fund, Fidelity Investments, and General Catalyst Group, but also dozens of individuals, some of whom are biotech boldface names. For example, Skyline Ventures’ John Freund and his wife Linda Grais, a former InterWest partner and currently CEO of Ocera Therapeutics, hold more than 5,000 shares in a trust; Dicerna CEO Doug Fambrough, also a former VC, owns 1,000 shares; Alnylam Pharmaceuticals top dogs John Maraganore and Barry Greene each have 3,636 shares. (Alnylam is one Westphal’s babies, which he helped take public in 2004.) The full list is here.

Westphal and Dipp were among the cofounders of Verastem, which managed to go public in January in a risk-averse market despite its cutting-edge science targeting cancer stem cells and early-stage pipeline (nothing even in the clinic). This time, however, they’ve eschewed the IPO process for a route that proponents say makes a lot more sense. “The beauty of the Form 10 strategy is that you’re custom-building the public company in a more rational way,” says William Hicks, an attorney at Mintz Levin Cohn Ferris Glovsky and Popeo in New York. “You’re not going through the SEC review process hoping to raise the money. You’ve already raised it.”

One limitation of the Form 10 process is having enough crossover investors – those who usually invest in public companies but have the capacity to make private investments – to support a deal. One such crossover is RA Capital in Boston. “It’s nice for a company when it has enough support from investors willing to do a deal before the company has a stock symbol,” says Peter Kolchinsky, managing partner of RA Capital, which owns 3.1% of OvaScience stock. “They know it will file the paperwork and get liquid, but they don’t need to get liquid right away."

Given the friends-and-family flavor of the investor list, it's no surprise to see RA on it. It was founded by and sports the initials of Rich Aldrich, now one of Westphal and Dipp’s partners at the Longwood Fund. RA crossed over to buy into OvaScience’s $35 million Series B round, and bought again in a small private placement OvaScience offered in August 2012 after it had become public. The placement, which raised only $4 million, was mainly a way to build a shareholder base and reach toward the minimum requirement needed to list on a major exchange. For now, however, OvaScience hopes to list over the counter, which should afford its investors some measure of liquidity if they’re inclined to sell. Seeing how the investor base is handpicked, it’s unlikely shareholders will rush for the exits. The firm is gearing up to test its lead product and, because it uses autologous material -- a woman’s own mitochondria extracted from her egg precursor cells and inserted into her eggs during in vitro fertilization (IVF), to potentially boost the odds of conception -- the company claims it won’t need FDA approval. The same won’t be true of a second product OvaTure that hasn’t yet begun preclinical development.

It remains to be seen if the Form 10 route becomes fertile ground for biotechs seeking wider capital access. OvaScience looks like it's on its way, but how many others can scramble through the side door with the help of dozens of friends in high places?

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StemCells Inc: The San Francisco Bay Area company has been awarded a second $20 million grant from the California Institute for Regenerative Medicine (CIRM) under its Disease Team Therapy Development Award program. As reported in “The Pink Sheet” DAILY, the money will support pre-IND development of adult neural stem cell technology for the treatment of Alzheimer’s disease. HuCNS-SC, which consists of purified neural stem cells derived from human brain cells, is an allogeneic treatment, administered as a direct transplant to the hippocampus, the spinal cord, or the eye during a single procedure. The grant, announced September 6, comes a few months after CIRM awarded StemCells $20 million to support the pre-IND activities of its HuCNS-SC cells in patients with cervical spinal cord injuries. Both grants are based on the expectation that StemCells will file INDs for both indications within four years. The grants will help the company move the programs forward; currently, StemCells has about $18 million in cash on hand and expects to burn cash at a rate of $18 million to $20 million annually. Data in Alzheimer’s were presented in mid-July at the Alzheimer’s Association International Conference in Vancouver, but the grant has been delayed as the company needed to prove to CIRM that the treatment does in fact migrate deep into the brain. Data showed that treated mice had significantly improved memory and recognition of their surroundings compared to untreated mice. According to StemCells, the money will start coming the next few months after its financials have been properly vetted by CIRM and terms of the grant have been negotiated. – Lisa LaMotta

Sanofi: When Sanofi bought Genzyme in early 2011 for $74 per share after a long pursuit, the book wasn’t quite closed. Part of the deal value included contingent value rights – one of a multitude of recent biotech buyouts that featured earn-outs – tied to the commercial prospects of Genzyme’s not-yet-approved multiple sclerosis therapy Lemtrada. Today, Sanofi is clearly less skeptical about that drug’s prospects than when it originally signed its $20 billion acquisition, and it said September 4 it wanted to buy back some of those CVRs while they’re still relatively cheap. The Genzyme CVRs were floated on the Nasdaq in late March 2011, and they trade under the words-with-friends friendly GCVRZ symbol. Sanofi wants to buy 86,766,040, or about 30% of them in a modified Dutch auction process that would value the biobucks somewhere between $1.50 and $1.75 per share.  A modified what? Essentially Sanofi will let holders tender their shares at any price in that 25-cent window. It will buy up to 86,766,040 of them, and price the offering at the lowest possible price that allows them to pull in that number of shares. (Once the process is complete, Sanofi will pay the same amount for each CVR, the price at which the 86,766,040th cheapest share was tendered.) Buying some of the CVRs now – there’s potentially $13 per CVR left to be paid out, but only a dollar of that is attached to pre-commercial Lemtrada milestones – could cost the French pharma from $130 million to $152 million, a 7% to 25% premium to the shares’ pre-announcement value. But the offer allows Sanofi to save a little cash in the longer term should Lemtrada win FDA approval and begin to rack up sales. Prior to the Sanofi announcement, the GCVRZ shares were trading at $1.40. They quickly shot up in value and are trading at $1.72 as of the end of September 6. The tender offer expires at 5pm Eastern on October 5. Dutch auctions in biotech sound familiar? Not too long ago WR Hambrecht & Co. was marketing its own version of the process under its OpenIPO brand, a path followed by companies like New River Pharmaceuticals and Avalon Pharmaceuticals. – Chris Morrison

Avalon Ventures: San Diego-based hybrid venture firm Avalon is attempting once again to close a fund $50 million larger than its previous vehicle. The firm disclosed in an August 30 SEC filing that it has raised the first $202 million of Avalon Ventures X, a proposed $250 million fund which would be its largest yet. It’s been just 20 months since Avalon closed its $200 million ninth fund in January 2011. That exceeded the firm’s $150 million goal, which would have matched its 2008-vintage eighth fund. The firm has enjoyed some lucrative exits lately: It had stakes in vaccine developer BioVex, sold to Amgen in 2011 for $425 million up-front, as well as Amira Pharmaceuticals, for which Bristol-Myers Squibb paid $325 million up-front later the same year. Avalon traditionally splits its funds 50-50 between life sciences and tech; the firm’s biggest recent exit arrived from the IPO of online game developer Zynga. The firm has been a holdout among hybrid firms as some other VCs have split their teams or funds in order to focus on either tech or life sciences individually. Avalon is also known for taking early stakes in life sciences start-ups and running them itself as virtual companies for a couple of years before bringing in senior management, a strategy we explored last year in START-UP’s Capital Matters column. Key partners Kevin Kinsella and Jay Lichter didn’t respond to a request for comment, so we’ll have to wait and see when the firm tops off the tank. – Paul Bonanos

Aerpio Therapeutics: This Cincinnati-based spinout of a spinout said August 30 it has raised $27 million in a Series A round to push forward a drug for diabetic macular edema, a disease characterized by leakage of blood proteins into tissues behind the macula of the eye, causing a thickening of that tissue. DME is the leading cause of vision loss in diabetics. The round was led by Novartis BioVentures and joined by Venture Investors LLC, Triathlon Medical Ventures, Kearny Venture Partners, Athenian Venture Partners and AgeChem Venture Fund LP. All were previously investors in Akebia Therapeutics, itself spun out from Procter & Gamble five years ago. Both companies are run virtually and share a CEO, Joseph Gardner, who told “The Pink Sheet” DAILY that the money will fund a Phase Ib/IIa trial of AKB-9778, a Tie-2 activator that works by inhibiting human protein tyrosine phosphatase beta, an enzyme which counteracts vascular leakage to restore Tie-2 signaling. The 28-day dose-escalation study will begin in September and will test the safety and tolerability of ‘9778 in 30 patients with DME. Gardner said the company also is hoping to see strong signs of efficacy including decreases in retinal thickness and improvements in visual acuity. Results from that study are expected next spring. Once the Phase Ib/IIa study has been concluded, the remainder of the funds raised will be used to fund a second Phase II study with 100 patients “that will get the attention of partners and make future financings a bit easier in this dry funding environment,” said Gardner. Results from this trial are expected in 2014. – L.L.

Eggcellent photo courtesy of flickr user Ecstatic Mark.

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