2013 Financing Of The Year Nominee: GSK/Avalon Team Up

It's time for the IN VIVO Blog's Sixth Annual Deal of the Year! competition. This year we're once again presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are: M&A of the Year, Alliance of the Year, and Financing of the Year. We'll supply the nominations (about a half dozen in each category throughout over the next week or so) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

Pharma needs innovative pipeline candidates. VCs need faster, cheaper and easier exits. The partnership between Avalon Ventures and GlaxoSmithKline aims to accomplish both.

In April, the pair put their money where their chocolate-and-peanut-butter-filled mouths are: up to $30 million from Avalon and up to $465 million from GSK will fund up to 10 new companies, each built around a single drug candidate. We'd say that that's a lot of "up to," but like our headphone-wearing pals in the video below, you'd be all "WHAT?" So never mind.

The pharma's portion includes funds for seed financing and R&D support, as well as preclinical and clinical milestones. The initial financing for each company is expected to be around $10 million, with about $3 million coming from Avalon and the remainder from GSK.

The co-investors plan to take about three or four years to create all the newcos. The first company resulting from the deal, Sitari Pharmaceuticals, was disclosed just last month. The start-up was staked by Avalon and GSK with a $10 million Series A round (though GSK's contribution isn't necessarily cash, but could be in-kind services).  Sitari is working to address celiac disease, an autoimmune digestive disease caused by intolerance to gluten, by inhibiting the transglutaminase 2 (TG2) pathway. The intellectual property licensed from the Stanford University lab of Chaitan Kholsa. (Oh and if you're sitting there saying, 'hey In Vivo Blog, doesn't this belong in the alliance category?' Well then just imagine the nomination is for Sitari. Feel better?)

Celiac disease isn’t a precise fit with GSK’s major product areas, which are infectious diseases, cancer, heart disease, respiratory indications including asthma and chronic obstructive pulmonary disease (COPD), as well as epilepsy.  But GSK does have a handful of autoimmune clinical candidates such as vercirnon, a CCR9 antagonist that is in Phase III testing to treat Crohn’s disease. It also has at least three Phase II autoimmune candidates: a Sirtuin 1 (SIRT1) activator to treat psoriasis, a Janus kinase 1 (JAK1) inhibitor to treat lupus and psoriasis and a chemokine receptor 1 (CCR1) antagonist to treat rheumatoid arthritis.

Under the Avalon/GSK structure, the pharma can exercise an option to acquire each newco once it produces an IND-ready candidate. If GSK declines to exercise an option, Avalon retains all rights to that asset and can proceed with IND-enabling work on its own or with other partners.

An acquisition would return three to four times Avalon’s investment, Avalon managing director Jay Lichter told our START-UP colleagues. Once in GSK’s hands, a drug’s progress could earn Avalon milestone payments and bump the return to 14x by the time it launches.

Avalon sometimes favors a strategy of founding a company, investing a minimal amount and then partnering or selling the company; it’s had at least a couple of exits matching that description this year.

Avalon and GSK also plan to save money by sharing managerial, operational and R&D resources among their portfolio companies. To that end, they created COI Pharmaceuticals, which stands for Community of Innovation. It will provide operational support, a fully equipped R&D facility and an experienced leadership team to Sitari and the other start-ups, including Avalon portfolio companies.

If it works, the Avalon/GSK model could provide a less painful and more seamless model for VCs and pharma to transition academic research projects into pharma clinical candidates.

"WHAT?" Just vote for Avalon/GSK and enjoy your Reese's.