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Since then, the same number of biopharmas has gone public (one) as has withdrawn their registration.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

Versant Looks For "Off-The-Beaten-Path" Deals In Canada, Europe

Versant Ventures has been deepening its commitment to international expansion lately. The firm is replicating its San Diego-based discovery engine, Inception Sciences, in Vancouver, tightening its ties with the Canadian research community and spinning out new companies as its predecessor has been doing for almost two years. And with new partners in its Basel, Switzerland office, the firm expects to forge new deals in Europe -- especially in off-the-beaten-path areas -- while enjoying closer proximity to both academic scientists and European acquirers.

Operating principal Jerel Davis says the firm has had some presence in Europe dating back to 2008, when venture partner Thomas Woiwode established a beachhead.  But new partners Guido Magni and Gianni Gromo, both former Roche colleagues of Versant partner Brad Bolzon, have arrived in recent months to flesh out the Basel office. The firm backed genetic vaccine start-up Okairos in September 2010, but more deals are expected soon. Stay tuned – the “Pink Sheet DAILY” expects to have full coverage of what’s on the way, and the next issue of START-UP will feature a deeper look at Versant’s international strategy.

The European office hopes to extend its reach throughout the continent and into Israel, while the Vancouver office will be in close touch with the Montreal research community while remaining “a short flight away from San Francisco and San Diego,” Davis says. He adds that the Canadian arm of Inception will likely spin out new companies in a fashion similar to Inception’s third project, which included an option for Roche to acquire it as it files an IND.

Alliance Deal of the Year Nominee: Versant/Roche/Inception 3

It's time for the IN VIVO Blog's Fifth Annual Deal of the Year! competition. Once again we're presenting awards in three categories to highlight the most interesting and creative deal making of the year. The categories are M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply a half dozen nominations in each category throughout December, and you, the voting public, will decide the winners, voting early and often once we've announced all the nominees. Strap yourselves in, it's The Race for the Roger™.

We’re nominating Inception 3 not because it will star someone other than Leo DiCaprio, who never signed on to do sequels, but because it’s a biotech deal that opens a window into an intriguing new hybrid model of company creation.

Don't vote for Leo...

Let’s back up a bit. When Bristol-Myers Squibb bought Amira Pharmaceuticals in 2011 for $325 million upfront, the core scientific team at Amira decided to stay in the drug-hunting business – a lucrative business for them, indeed.

...vote for Peppi.

 Amira chief scientist Peppi Prasit’s team not only shepherded its idiopathic pulmonary fibrosis drug into Phase II, but while previously at Merck, the group discovered two commercial hits: arthritis drug Vioxx (rofecoxib), now withdrawn, and asthma treatment Singulair (montelukast). With the help of Versant Ventures, they created Inception Sciences, a mothership that would poke around conferences and tap into academic connections to find intriguing projects or targets. The idea is to bring those projects in-house, into Inception’s labs, create individual daughter companies around each project, and work them into pre-clinical shape with enough original R&D to hold composition of matter patents. “Everything up to GLP toxicology, we do in-house,” says chief business officer Clare Ozawa.

Those daughter companies are a well-known asset-financing concept: with each product housed within its own company, the ultimate goal of a clean trade sale to a biopharma is more easily attained.  The discovery engine remains independent. But Inception has also created a feedback mechanism that it hopes will keep the mothership’s engine running. It has no products, nor does it hold equity in the daughter companies. Instead, it is the contractual service provider for the daughters, with about 30 full-time staffers doing chemistry, biology, business development and more.

Inception 3 is the first publicly disclosed test of the system. Instead of drug hunting first and finding a partner or buyer later, Inception found a hunting partner in Roche, which wanted to go after hearing loss but didn’t have the internal capabilities or resources to devote to this very new therapeutic area -- new, at least, for drugs. In turn they formed Inception 3 based on technology from Stanford University. Versant provided equity funding, and Roche has added funding that gives it an option to acquire Inception 3 upon filing of its first IND. Ozawa declined to give a development timeline. The partners will be looking for small molecule therapies to address sensorineural hearing loss, which is all too common, permanent, and afflicting more and more people in the age of the iPod.

None of the dollar amounts were disclosed, but in July Inception 3 filed notice of raising a little more than $1 million of an anticipated $10 million offering. Ten million was also the target offering of Inception 1 and Inception 2, which are built around neurology and oncology programs. Each has raised $5 million, according to SEC filings. Versant to date has been the only shareholder, and it funds them from its general fund, not from cash set aside for Inception projects, says Ozawa, who was a Versant associate before joining Inception: “Each daughter has to stand alone and make sense to Versant, just like any other start-up.”

If the concept takes off and Roche proves a reliable fiancé, Inception could find more gentlemen callers on its doorstep.

Financings of the Fortnight Goes Around The Middle Man

This fortnight’s theme is DIY. That’s shorthand for “do it yourself,” in case you’re one of those people who has only used a hammer to pry open a beer bottle.

There’s a fancier word for DIY, often heard during the first dot-com boom: Disintermediation. Cutting out the middle man. If you want to get something done, don’t pay someone else to do it. Buy your pet food straight from the source, online! Some of those ideas didn’t go over so well at first, but more than a decade into the Internet age, people and businesses are catching on. (And some businesses have simply figured out how to be better middle men.)

The same might be said about life-science venture capital. VCs are, in effect, middle men and women (middlepeople?), standing between those who manage giant pools of cash and the businesses that need cash to make a go of it. The shakeout has left fewer middlepeople, er, VCs, standing. But there are still giant pools of cash, and people managing them. This past fortnight, we’ve had some indications of them taking matters into their own hands.

First up, an intriguing paper was published October 9 by a tag team from Harvard University and INSEAD, the top French business school, that purports to show LPs might do better investing directly than via an intermediary. “Direct investments generally outperform fund investments,” the authors write.

The study doesn’t specifically address the life sciences, and in fact there’s a caveat that might make it less relevant in our little corner of the world: “We also find that the outperformance is driven by deals where informational problems are not too great, such as more proximate transactions to the investor and later-stage deals, and by an ability to avoid the deleterious effects on returns often seen in periods with large inflows into the private equity market.”

“Informational problems” are a tough nut to crack, for sure, especially with early stage, cutting-edge R&D that’s years away from clinical trials, let alone the commercial markets. That’s why some VCs are going later stage; one such firm, Longitude Capital, made a successful pitch to LPs and has closed a new health-care fund. See our description in the round-up below.

One type of cash holder making more direct investments are drug companies themselves. Nearly every major firm – which, if nothing else, have plenty of cash to spare – has a venture group. And they’re getting bolder, investing in biotech firms earlier, even helping to shape company formation. That’s what happened twice this past fortnight, as we detail below in our roundup. First Roche, then Celgene, made sure they were present at the creation, or nearly so, of two firms related to the former Amira Pharmaceuticals. We’re seeing it more and more: Big pharmas and biotechs provide crucial early funding, either for equity or as non-dilutive R&D dollars, for an option to buy the company outright if all goes well. The company might be in fact a single asset, more or less, but that’s no coincidence. What passes as a biotech these days is often one product packaged in a way that makes acquisition as hassle-free as possible.

Another big group with plenty of cash is also making direct investments. The Bill and Melinda Gates Foundation’s new head of global health, ex-Novartis head of global development Trevor Mundel, said this summer his group would start taking ownership stakes in biotechs while it continued its bounteous grant-making largesse.

Its highest profile commitment to date was announced October 10, participating in a $30 million Series C round for Genocea Biosciences, a Cambridge, Mass. vaccine developer. Gates led the scientific due diligence, said Genocea CEO Chip Clark, and an affiliate of the Chicago family investment firm Henry Crown and Co. – not a name you see much associated with private biotech funding – led the financing.

It makes sense for The Gates Foundation, which knows vaccines perhaps better than any organization on the planet. Genocea has developed a platform to create vaccines from T-cell immune response, instead of B-cell response. The difference is that there’s genetic diversity of T-cell response in humans that to date has been impossible to capture in a vaccine, which by definition is broadly administered. Genocea’s discovery platform recreates human T-cell responses to pathogens in vitro and finds common targets on pathogens that, with a thousand or more proteins, are hard to investigate with traditional methods. That’s the aim, at least. The amount of the Gates investment is undisclosed, but Genocea CEO Chip Clark told FOTF that roughly half the cash is earmarked for Genocea’s malaria program. The malarial parasite Plasmodium falciparum has a huge proteome, and the Gates money will help Genocea interrogate it more thoroughly. “We think we’ll have one of, if not the most robust malaria antigen discovery efforts,” Clark said.

The financing is tranched but not dependent on hitting milestones in the malaria program to trigger future payments, Clark said. Gates does not have a board seat.

So far, the direct biotech investments from The Gates Foundation have targeted vaccine discovery technologies. In late September the start-up Atreca said the foundation would put in $6 million to push the firm’s antibody survey technology. Last year, the foundation invested $10 million in Liquidia Technologies, a North Carolina developer of particle engineering technology it hopes will improve vaccine delivery and manufacturing.

A Gates representative was not available for comment by press time, but it's worth noting the Big Kahuna himself has been a vocal advocate for a wide array of mechanisms, from a global tax on financial transactions to private investment in public infrastructure, to improve global health and education programs. As he said at the 2011 G-20 meeting in Cannes, France – a speech in which he advocated for a financial-transaction tax to fund anti-poverty programs -- "It’s important to keep experimenting with new business models, because impact investors could eventually bring a great deal of money into development.”

We hope to have more soon for you on the Gates Foundation, and of course whenever anyone experiments with business models, we'll have the breakdown for you in...

PharmAria: The six-month-old start-up announced Oct. 15 that Celgene has provided its seed funding, will help fund its Series A round and has taken an option to buy the company. Celgene’s equity stake in the new company is undisclosed, but the deal structure hews to the big biotech’s philosophy in recent years of finding early science, partnering deeply with the company, and having its own cash riding on the outcome. For example, Celgene and Versant Ventures are the only backers of Quanticel Pharmaceuticals, which we wrote about here. Funny we should mention Versant. PharmAria was started by three former executives of Amira Pharmaceuticals, which Bristol-Myers Squibb bought in 2011 for $325 million. One of Amira’s biggest backers was Versant, and the West Coast venture firm helped turn Amira’s post-acquisition assets and talent into new enterprises with new business models. (See Inception 3, below.) The connections don’t stop there: One of the ex-Amira executives now at PharmAria, Jilly Evans, worked for Celgene as consultant after the Bristol buyout. The start-up, which plans to develop small-molecule therapeutics for cancer and fibrotic diseases, would not discuss the amount of money it is seeking or other terms of the deal. The goal, however, will be to raise enough money for PharmAria to advance its first candidate through Phase I, president John Hutchinson told “The Pink Sheet” DAILY. -- Joseph Haas

Inception 3: PharmAria is not the only new company to rise recently from the Bristol buyout of Amira in 2011. Amira investor Versant Ventures and former Amira CEO Peppi Prasit have formed Inception Sciences, an incubator and drug discovery platform, with the intent of spinning drug candidates out into satellite companies. The candidates could come from Inception’s own “drug hunters,” as they like to call themselves, or from outside sources. The latter has provided Inception with its first public deal. It has created a subunit – called Inception 3 – to discover and develop small-molecule drug candidates for sensorineural hearing loss based on technology licensed from Stanford University. Versant is Inception 3’s sole equity financier for now, and Roche is the development partner. Roche will fund Inception 3’s work with milestone-based R&D payments, and the Swiss firm will hold an option to acquire the program upon filing of the first IND based on the Stanford technology. “The reason we didn’t go for a straightforward collaboration with academia here … is that the fact that it brings in a team of drug-hunters with a great track record of discovering drug candidates for intractable targets and then driving those to the IND stage,” explained Shafique Virani, head of neuroscience partnering at Roche. The various parties are not disclosing any financial details about the collaboration nor providing a timeline for a potential IND filing. However, Clare Ozawa, chief business officer at Inception and a former officer at Versant, said the combined capabilities of Inception and Roche should result in rapid progress toward a clinical candidate. -- J.H.

Longitude Capital: The expansion-stage investor said October 10 it has closed its second health care-only fund, Longitude Venture Partners II L.P., with $385 million in new capital. The fund exceeded Longitude’s $325 million goal, which would have matched the size of its 2008-vintage first fund, and it bumps the Connecticut firm to the top of Start-Up’s gas tank chart, which we most recently published here. Longitude plans to target both biotechs and device companies, with emphasis on mid-to-late-stage opportunities as well as what it calls “special situations”: spin-outs, recapitalizations, investments in public companies and structured transactions. Managing director Juliet Tammenoms Bakker told “The Pink Sheet” DAILY that Longitude received renewed commitments from many limited partners in its first fund, but also retained Probitas Partners as a placement agent for the new vehicle. She declined to discuss exits from the first fund, but said Longitude has received partial liquidity in two companies and full liquidity from another. The firm typically invests between $10 million and $30 million over time in each portfolio company, and expects to make about 20 investments from the new fund; about 30% of the money will be deployed in public companies, Tammenoms Bakker said. Longitude Venture Partners I L.P. invested in public companies such as Amarin Corp., Jazz Pharmaceuticals, Corcept Therapeutics, and Cadence Pharmaceuticals, and private drug developers such as Civitas Therapeutics, Collegium Pharmaceutical, InfaCare Pharmaceutical and Xanodyne Pharmaceuticals. – Paul Bonanos

Kythera Biopharmaceuticals / Intercept Pharmaceuticals: We’re putting these two together because they’re twins, of a sort. They both emerged into the publicly-traded world on the same day, October 11, with initial public offerings that raised $70 million with a $278 million post-money valuation for Kythera, and $75 million with a $225 million valuation for Intercept. It’s an odd occurrence at a time when biotechs aren’t going public much at all; analysts predict the count, now at 11, could hit 15 or 16 by the end of the year. Both also priced at the top of their ranges; no haircuts this fortnight. Kythera, which makes a cosmetic treatment that breaks down the fat in a double chin, sold 4.4 million shares at $16 per share, after aiming for the $14 to $16 range. Intercept sold 5 million shares at $15 per share; its range was $13 to $15 per share. The firm has a compound to treat primary biliary cirrhosis, a condition that can lead to liver failure. It expects Phase III data in 2013 from the drug, which is a bile acid analog it acquired from the University of Perugia in Italy. And that makes for another odd coincidence: Kythera’s treatment, for a vastly different indication, is a formulation of sodium deoxycholate, a component of human bile that breaks down fat. As of this writing, both companies’ investors have no reason to spew bile. Kythera shares closed October 17 at $23.41, up nearly 50% from the IPO. And Intercept closed at $19.78 a share, up nearly a third. There’s a long way to go however until investors, including Versant, ARCH Venture Partners and Prospect Venture Partners (for Kythera) and Italian investment firm Genextra (for Intercept), can reap gains. Even if share prices stay buoyant, investors have a lot to recoup. Both firms raised more than $100 million in private capital before going public. – Lisa LaMotta

Say What: Inception Inks Hearing-Loss Deal With Roche

Inception Sciences, the discovery-stage biotech firm-slash-incubator created from the ground up to spin out assets in a buyer-friendly manner, has its first pharma partner.

The San Diego firm has created a spin-off dubbed Inception 3 that will house a technology platform from Stanford University and develop drugs to treat permanent hearing loss. Roche is the partner, pledging R&D funds via undisclosed milestones in exchange for an option to acquire the company when Inception files its IND package for the first lead compound.

If you're wondering what happened to Inception 1 and 2, they were announced when Inception was unveiled in the summer of 2011 with general therapeutic areas of focus, one neurology, one oncology. But to date there's been no word of their products, programs, or outside partners.

Inception itself came from the aftermath of Bristol-Myers Squibb's acquisition of Amira Pharmaceuticals, a lucrative but complicated affair that saw BMS extract Amira's lead candidate for idiopathic pulmonary fibrosis, plus a preclinical program, for $325 million in upfront cash. BMS did not take hold of other Amira assets, however, and spinning them into separate entities was a headache. So Amira CEO Peppi Prasit and Versant partner Brad Bolzon formed Inception in anticipation of Prasit's team, once a drug-hunting unit at Merck, remaining similarly productive.

In addition to the little Inceptions potentially housing the fruits of labor from Inception's drug hunting team, the company has also created a "build to buy" strategy, according to chief business officer Clare Ozawa. The idea is to hitch a program early to a potential acquirer with prearranged options. Versant has already accomplished the trick outside of the Inception structure with Quanticel Pharmaceuticals, also a Stanford spinout (unrelated to the hearing-loss program). After a long incubation, Versant brought Quanticel out of stealth in 2011 with Celgene on board.

The Roche deal for Inception 3 was revealed Wednesday in unusual fashion, in an "advertorial" article penned by Roche touting its neurology partnering program in the October 10 issue of Nature. Ozawa confirmed the deal but declined to comment further. Our "Pink Sheet" colleagues will have more details later today, so stay tuned. -- Alex Lash

2011 Exit/Financing of the Year Nominee: Quanticel

It's time for the IN VIVO Blog's Fourth 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 Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (a half dozen in each category throughout December) 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™.

Time was, the only words scarier than "carried interest tax" to a venture capitalist were "capped upside." So when Versant Ventures launched its latest portfolio company, Quanticel Pharmaceuticals, in early November, it was obvious we had entered a new era.

Incubated for more than a year at Versant, Quanticel is a genomic analysis firm spun out of two Stanford University labs, and Celgene has not only signed up for exclusive three-and-a-half-year rights to the technology but also has options to buy Quanticel outright. All for an upfront fee of $45 million.

In other words, Versant, the only venture investor in the company, is taking a higher ownership stake in exchange for a prenegotiated acquisition price -- a capped upside. Brad Bolzon, the Versant managing director involved in the deal, calls it a "different risk-reward ratio" than the traditional venture model, and he says he's looking to craft similar upfront arrangements with potential acquirers. Celgene could owe more milestone payments beyond the initial outlay; the triggers and conditions for their acquisition options are undisclosed.


To sweeten the lure, Quanticel wants to build its own pipeline in oncology indications unclaimed by Celgene. Their single-cell genomic analysis technology aims to shed light on the role of drug resistance due to tumor cell heterogeneity, which is the increase in the genetic diversity of cells as the tumor expands from a single ancestor. The aim is to learn which cells grow resistant to a drug regimen over time, and target new drugs, or combinations of existing drugs, accordingly. A top Celgene executive says the company has already chosen a number of cancers to which Quanticel's analysis should be applicable (but wouldn't disclose details).

The drumbeat for biotech investors and entrepreneurs working more closely with potential pharma acquirers is growing louder. Until the IPO returns as a viable exit strategy, if ever, drug companies with cash will have leverage to shape early-stage R&D and company formation, and investors still interested in company formation are wising up. (We were going to say "caving in," but we'll only go so far for a cheap joke.)

Celgene knows the score, too. In 2010 it paid handsomely ($130 million) to grab exclusive rights to much of the still-preclinical work at the cancer metabolism research firm Agios Pharmaceuticals, a tie-up that won last year's Roger for Alliance Deal of the Year. Agios isn't necessarily tied to Celgene's hip, however; it closed a $78 million C round in November to fund a rare genetic disorder program beyond the scope of the Celgene alliance.

Not so with Quanticel, with platform and pipeline bound tightly to its potential acquirer from the get-go. "We hope it ends in an acquisition by Celgene," Quanticel CEO Stephen Kaldor told us. "That's the design."

Photo courtesy of flickrers robstephaustralia via a Creative Commons license.

Washing Away Post-Deal Blues With A De-Sanofizer

There's nothing like a gathering of insiders to generate some candid chat about the latest doings, and that's what you can hear at the BioWindhover Pharmaceutical Strategic Outlook conference this week at the Grand Hyatt Hotel in New York. Despite threatening forecasts of snow and more snow (and it's falling heavily right now), some 300 or so people have gathered to swap tales and insights into the latest dealmaking trends.

On the topic of back-end loaded deals, Shelagh Wilson, a GlaxoSmithKline vice president who heads the European arm of the drugmaker’s Center of Excellence for External Drug Discovery, said Glaxo is making a point of adding milestones for achieving reimbursement, not just for achieving regulatory or sales goals. "What is driving all of this is the pressure from the payers for us to produce differentiated medicines, and the risk associated with that,” she said. “We’ve got to be innovative, not just in the drugs we bring forward, we’ve got to be innovative in the early stages of drug discovery, and that means taking more risk."

Of course, a perennial wild card for investors is gauging the FDA's next move, not only as a result of safety scandals - can you spell Vioxx or Avandia? - but with the hiring last year of FDA commish Margaret Hamburg, who continues to insist the agency will become more responsive to such problems. "The biggest issue with us for our in-licensing deals (for our portfolio companies) is misprojecting where FDA is going with regards to safety or efficacy," said Brian Atwood, managing director of Versant Ventures, explaining why his firm doesn't make investments in cardiovascular or metabolic opportunities.

Hoyoung Huh, meanwhile, garnered the day's biggest laugh. The chairman of BiPar Sciences, which Sanofi-Aventis acquired last year for $500 million and now operates as a wholly owned, independent subsidiary, confessed that retaining BiPar's culture can be challenging. So what did some employees do to underscore the point? "If you walk into the BiPar offices, the first thing you do is walk up to a hand sanitizer and it's called 'de-sanofizer,'" he said with a big grin. "It's not that we're trying to be rambunctious or nasty, though." And who was sitting two seats away? Sanofi's Philippe Goupit, vice president of corporate licenses.