Single, Early-Stage Financings of the Fortnight Seeks Attractive Exit Correlation

One month ago, as the government shut itself partially down, this column wondered if the IPO window might undergo a similar fate.

Since then, the same number of biopharmas has gone public (one) as has withdrawn their registration. The former is Aerie Pharmaceutical, and the latter is GlobeImmune, which said in its SEC filing, “The terms currently obtainable in the public marketplace are not sufficiently attractive.”

A second life sciences company actually went public, the cancer diagnostic firm Veracyte (see description in the roundup below). And several more companies filed their S-1s in October. And yes, the shutdown's been shut down and we're temporary passed the budget impasse. Six weeks ago, we would have taken GlobeImmune's lawyerese excuse as a fantastic joke -- C'mon, counsel, stop it! You're killing us! -- but as we wait for the likes of Relypsa, Karyopharm and GlycoMimetics to take the plunge, well, let's just say we're still waiting to exhale.

To distract ourselves for a moment, we'd like to draw your attention to an interesting back-and-forth that occurred recently on the high-tech VC side. Well-known investor Fred Wilson blogged in September that the more cash a startup raises in seed and Series A rounds, the less successful it will likely be. Data house CB Insights decided to fact-check Wilson, and it pronounced him wrong: there is no correlation.

This was all about high-tech, though, so START-UP decided to run the numbers for biopharma, where the investment dynamics are worlds apart from high-tech strategies. The article won’t be out for another week or two, but we’ll give you the high level answer: There's no correlation in biotech, either. (See above. R² = 0.0261, in case you're wondering.)

We found other interesting data around that answer, too. For example, of the 307 Series A rounds we found between 2002 and 2007 with disclosed value, 57, or 18.5%, of those companies went out of business. Those that exited via IPO (9%) and acquisition (31%) combined nearly equal those that remain private and independent (41%). Or sliced another way, of the 5-year cohort of companies we looked at, exactly half are still around, either public or private. (We'll save the rest for the Start-Up article, co-authored by Amanda Micklus.)

Since there's no correlation between size of exit (or, in the case of public companies, current market cap) and their Series A commitment, how much cash should an investor group front a new company? That question is driving much of the exploration of new biotech funding models that we're seeing from groups like Atlas Venture, Index Ventures, and Versant Ventures – whose new fundraising efforts we note in our roundup below. (And too late for inclusion here, but, ahem, speaking of fundraising efforts... our Pink Sheet colleagues will have all the details on the OrbiMed news later today.)

Even though venture returns across various timelines showed some improvement halfway through 2013, according to the NVCA, biotech VCs are still under tremendous pressure to shorten their investment timelines and take less risky bets. Tranching rounds, of course, is de rigueur, and sometimes those big Series A numbers announced with great fanfare never fully materialize. That could be a good thing: when Shire bought Lotus Tissue Repair early this year, its sole backer Third Rock Ventures had only funneled a sliver of its $26 million Series A commitment into the company.

Or, the company’s original plan could fizzle, as we note in this week’s note about Calithera in the roundup below.

Of course, how much VCs put into a company, and in what configuration, is driven by how much they’re getting out at the other end. The IPO bounty of recent months has LPs impatient for returns, and VCs need to “put some points on the board,” as Atlas Venture partner and bloguero Bruce Booth puts it in his latest Forbes column. How they manage those post-IPO exits when trading volume is limited, however, is a delicate complicated dance, which Booth explains in detail. (Whether to distribute cash or stock to LPs is just one of many considerations.)

With so many biotech exits these days coming via IPO -- have you noticed the dearth of private companies? So have our blogmates at Deals of the Week -- it makes us curious to see if the correlation between Series A size and exit success will shift in a few years, when we use a different cohort of companies that weren't forced to brave the Great Recession. We certainly acknowledge that the times we live in, and the data we collect, could be of our moment. Or, there could be a shift in correlation with more acquisition-heavy exit data if the IPO wave recedes -- perhaps we should say “when,” since all waves must eventually recede from the shore. We’re keeping an eye on the surf line, because, as anyone who grew up along the Pacific Coast knows, the worst time to gather shells is when the water suddenly disappears.

Where else can you get your safety tips and Zen koans all at once? Sit down, grasshopper, and open your mind to…

Veracyte: The diagnostics firm launched an initial public offering of its stock October 30 and raised $65 million by selling 5 million shares at $13 each. It’s one of the few diagnostics companies to tap the public markets this year, as most of the life-science activity has benefited the biopharmaceutical sector. (Foundation Medicine is another exception.) As we described in detail in February’s IN VIVO, Veracyte of South San Francisco, Calif., was founded to help resolve the ambiguity that often comes from a cytology sample of thyroid nodules that are possibly malignant. When looking at the cells isn’t enough to determine course of action – about 25% of the time -- Veracyte’s test is meant to guide an endocrinologist in the decision for or against surgery, which otherwise is recommended for cancerous, suspicious, or even indeterminate modules. Its test, Afirma, uses 167 biomarkers, and has also begun to identify rare types of thyroid cancer that aren’t evident under the microscope but reveal themselves in genomic analysis. Veracyte launched Afirma in 2011, and in the twelve months leading to June 30, 2013, the company tallied revenues of $17 million but with a net loss of $23 million. Its main shareholders before the offering were Kleiner Perkins Caufield & Byers (22%), TPG (22%), Versant Ventures (23%), and Domain Associates (19%). Just before the IPO, on October 9, Veracyte enacted a 4-to-1 reverse split of its common stock. Underwriters were led by Morgan Stanley and have the option to buy up to 750,000 more shares in the 30 days after the IPO date. It closed on its first day of trading up 2% to $13.25 a share. – Alex Lash and Mark Ratner

Calithera Biosciences: Calithera is hardly the same company that announced a $40 million Series A round of funding in 2010. The high-flying start-up, which made our A-List that year, is now heading in a different direction. As announced October 29, the company is shifting focus with $35 million in fresh cash in a Series D round that includes some, but not all, of its original investors. Moreover, the company never raised the full $40 million initial round, designed to arrive in tranches. Founded by University of California, San Francisco professor Jim Wells to commercialize research on the role of caspases in inducing apoptosis of cancer cells, Calithera is now turning to an oncology program centering on glutamine metabolism that CEO Susan Molineaux tells FOTF was internally developed. Meanwhile, scientific co-founder Wells has left Calithera’s board of directors, as has U.S. Venture Partners’ Larry Lasky, an early investor. Another Series A backer, Mission Bay Capital, also did not participate in the new round; USVP and Mission Bay area still shareholders, however. In addition, Molineaux described the interim Series B and C rounds in an email as “tranches of the original $40 million Series A financing in June 2010,” and added that the total amount Calithera raised in all three rounds amounted to just $30 million. Two first-time investors, hedge fund operator Adage Capital Partners and VC firm Longwood Fund, joined existing backers Morgenthaler Ventures, Advanced Technology Ventures and Delphi Ventures in the Series D funding. Since backing Calithera initially, Morgenthaler and ATV’s life sciences teams have created Lightstone Ventures; Morgenthaler and ATV have ceased making new life sciences investments. – Paul Bonanos

Spark Therapeutics: For the first time, the non-profit Children's Hospital of Philadelphia has spun out a privately held, for-profit company. As our colleagues at "The Pink Sheet" described, the hospital has budgeted $50 million to support the launch of Spark Therapeutics, created to house a pair of gene therapy programs that the hospital’s Center for Cellular and Molecular Therapeutics has been working on for several years. CHOP chief executive Steve Altschuler said the hospital will supply Spark with cash when needed, and only when Spark executives can justify expenditures. Spark has a Phase III program for a type of inherited blindness attributable to a malfunctioning RPE65 gene, and a Phase I/II program for hemophilia B. Spark CEO Jeffrey Marrazzo said it also holds rights to other preclinical programs, including at least one in-licensed from another source. The cash commitment is designed to fund the opthalmological program all the way to the market, Marrazzo said. While considerable uncertainty remains in the gene therapy field, barriers have begun to fall, leading to more fundings recently. Paris-based GenSight Biologics, another ophthalmological gene therapy developer, received one of 2013’s largest Series A rounds to date, a €32 million ($41.4 million) commitment in April. – P.B.

Versant Ventures: The life science firm headquartered in Silicon Valley slipped toward the bottom of this year’s annual VC “gas tank” chart in Start-Up, not having raised a fund since 2008.

That’s apparently about to change. According to a regulatory filing, the firm is aiming for a fifth fund of at least $250 million, which would be half the amount of its 2008 vintage fund. If successful – the October 18 filing says none of the offering has been sold -- the new fund would come after a couple years of big changes at the firm. In late 2011 Start-Up reported the firm would head into fundraising mode without four veteran partners, two each from the biopharma and device sides of the firm. In the interim, its biopharma team began a shift toward smaller scale investments by building an unusual investment-R&D hybrid called Inception Biosciences. Inception is run by a drug discovery team that scouts for early-stage programs and works them into assets that could move forward in spun-out entities, some with pharma partners holding acquisition rights, some with more traditional backing. With the pharma team building Inception in San Diego and expanding it to Vancouver, the device team got START-UP’s attention with an industry-high quartet of Series A investments in 2012. Assuming Versant’s new $250 million target is a ceiling, not a floor, it stands to reason the biopharma side will continue to explore cost-sharing (and -saving) models like Inception. (Managing director Brad Bolzon declined to comment on the document or the new fund.) The SEC document, which you can view here, has other interesting tidbits. The firm is using three names: Versant Venture Capital V, Versant Affiliates Fund V, and Versant Ophthalmic Affiliates I. Our colleagues reported this spring that the first spin-off from the Vancouver team was in the works, so perhaps that last name holds a clue to what Versant’s Canadian team has been eyeballing. – A.L.

Best of the Rest (Highlights of Other Financing Activity This Fortnight): Immune Design headed up the late-stage venture financing category with its $49mm Series C round led by the Column Group and Topspin Partners (and five additional backers, including Sanofi-Genzyme BioVentures, also participated); the funds will progress proof-of-concept studies for its lead solid-tumor candidates IDLV305 and IDG305…with a $31mm private placement including a debt conversion and a 1-for-8 reverse stock split, another oncology drug developer, Arno Therapeutics, hopes to advance its breast and prostate cancer compound onapristone into the clinic…Dynavax Technologies raised funds to support Phase III development of its Heplisav hepatitis B vaccine, netting a total of $125mm through concurrent offerings: in a FOPO it sold 79.6mm shares at $1.075 (for $81mm) and brought in another $44mm through the sale of 43k shares of Series B convertible preferred stock at $1,075…Aerie Pharmaceuticals (ophthalmology therapeutics) netted $71.8mm in its IPO, selling 6.72mm shares at $10, below its anticipated $12-14 range. – Maureen Riordan