Early-Stage Funding: Replacing Dwindling VC and Alliance Dollars?

We live in strange times. Venture capitalists, the traditional support for research-stage biopharmas, have been pulling back from early stage investments. Some are moving downstream, some are choosing not to raise new funds, others are exiting life science investment altogether. A few stalwarts – firms like Third Rock, Flagship and Atlas – have stayed the course, continuing to invest in unprecedented, high-science ideas. Although they’ve shown themselves able to re-up their funds, in some cases out-raising their last funds by good measure, it’s too early to say that their portfolio bets will pay off.

Pharma has been stepping into the breach, acting as LP or co-investor with venture. But it’s not enough to reverse the fall in Series A rounds.

What’s odd is that, despite the decline in VC investment, we’re seeing a steady trickle of truly novel products come to market. Immunotherapy, epigenetics, gene therapy, optimized antibodies aimed at exciting new targets – they’re all working their way through the pipeline. But venture’s declining interest (overall) in early stage start-ups has been going on for over five years now. Shouldn’t we be seeing some signals of scarcity or a fall-off in quality?

So we speculated that maybe that other fount of early stage support, big pharma alliances, is compensating for the drop in venture dollars. Maybe big pharma through its business development activities is correcting for the absence of venture with non-dilutive support for fledgling companies.

But early stage alliance funding, as measured by disclosed upfront payments, has also been trending down. The chart above measures upfront dollars from big pharma/biotech collaborations and licensings.  At its current run rate – as best this can be predicted – the alliance line will finish 2013 at around $940 million, sharply reversing its five-year downward trend.

As to the apparent paradox of a healthy, productive pipeline in the absence of the high investment levels seen in prior years, it appears that the most interesting ideas continue to be funded. As Bruce Booth of Atlas Ventures wrote in his blog two years ago “. . . less capital chasing fewer companies with more disciplined investors offers a mix that bodes well for returns from early stage investing.”

Solid returns is good news for investors, for sure. But is that what pharma, whose own internal labs are sputtering, needs from these engagements? And what about the potential for new players, like crowdfunders, to disrupt the life science investment supply chain? In the next few years, we may be looking at a markedly different environment for financing early stage ideas.

We intend to probe these and other matters at Elsevier’s 2013 PSA: The Pharmaceutical Strategy Conference in the panel “Funding Biotech: New Ways to Create Value.”  We’ll be joined by Gregory Simon, CEO of Poliwogg; Martin Shkreli, CEO of Retrophin; Noubar Afeyan, CEO of Flagship Ventures; Mark Clein, President and Founder of Precision for Medicine; and Damien McDevitt, VP and Head of Business Development for R & D Therapy Areas at GlaxoSmithKline.

We hope you’ll join us.

Financings of the Fortnight Checks The Corporate Venture Numbers

How important is corporate venture capital right now to the life sciences? That’s one of the key questions in this year’s START-UP Life Science VC survey, the results of which will be published in a few weeks.

When asked about themselves, corporate VCs mainly said they were important (77%), and the rest (23%) minority said they were crucial. Not exactly unexpected.

But traditional life science VCs were right there behind their corporate counterparts. 22% said CVC was crucial and 69% said important. Of the rest, 7% agreed with the statement “It’s of growing importance but will be relegated to the sidelines once traditional VC returns,” and 2% said CVC was insignificant.

That’s even more glowing than what institutional VCs said in the 2012 survey. Here are the institutional VCs' answers in 2012 and 2013:

Click to embiggen.

 Corporate investors’ Q ratings are going up at the same time their wallets are opening. According to the National Venture Capital Association and PricewaterhouseCoopers, 18.3% of biotech deals in 2010 and 2011 combined had CVC participation, accounting for 8.0% of biotech venture dollars. The average investment per round was $4.0 million.

In 2012, the average investment per round jumped 20%, to $5.0 million, and 19.5% of all biotech deals had CVC participation. The share of CVC dollars was 10.9%. Tack on the first half of 2013, and the last 18 months continue along those lines: corporate venture was involved in 19.2% of all biotech venture deals from the start of 2012 through June 2013, and their dollars accounted for 10.1% of all biotech venture. The average amount of participation per round was $4.9 million.

We’re not just tracking the corporate venture story for biopharma. Here’s a story that looks at the growing influence of hospitals and insurers in health care venture; and here’s one that examines the flow of corporate venture to medical device start-ups. Those sectors have also seen an increase in corporate venture dollars, according to the NVCA. (You can download all their corporate venture reports here.)

With all the IPO activity this year, we’ll also be able to update another corporate venture story we track closely: the financial returns of start-ups with corporate investors on board. Look for an update of those numbers this fall or early winter. Last time we checked was October 2012, and we found that biotechs with corporate venture backing averaged a 1.6x step-up at IPO, slightly lower than the 1.8x for those without corporate investors. That’s the opposite of what we uncovered for acquisitions: corporate-backed biotechs fare better when selling, with an average 4.3x step-up, compared with those without (3.5x).

Is this the reality from now on? As one VC said in the survey comments, “It wasn't all that long ago that corporates were the last folks you'd call to raise money, and you'd only do so if you were desperate or if they were willing to pay up."

It's hard to imagine traditional VC roaring back to fill the early stage coffers of platform and early technology companies, a niche the corporates have begun to claim (more on that in the upcoming survey). But overall, let's not forget that even with this apex, CVC participates in one of five biotech venture rounds. There's a long way to go before corporate venture dominates the landscape the way, say, the freely available bi-weekly biotech financing roundup is dominated by...

Retrophin: Martin Shkreli’s fledgling biotech got another injection of capital on August 16 when the company tapped new and existing institutional investors for a $25 million PIPE (private investment in public equity) financing. Retrophin sold approximately 5.6 million shares of common stock and warrants. The company conducted a similar financing in February, issuing 3,333,332 shares of common stock and warrants to purchase an additional 1,530,559 shares of common stock, which resulted in $10 million in proceeds. The new PIPE proceeds will help advance the company’s early-stage pipeline. Proceeds will also help license an autism treatment from an undisclosed major pharmaceutical company. None of the programs in Retrophin’s pipeline have made the advancements the 30-year-old Shkreli has been promising since the company’s inception a few years ago.
A Phase II pivotal study of RE-021, its lead compound, was intended to begin in early 2013 for the treatment of focal segmental glomerulosclerosis but has yet to enroll patients, and timelines continue to be pushed back. The company has yet to conduct any clinical trials in humans for any of its compounds, but has released what it believes to be promising data from studies in mice. Shkreli started the company after leaving his hedge fund MSMB Capital, which he started in 2000. He wasn’t shy about making waves as a hedge-fund manager, such as when he led an activist shareholder battle against AMAG Pharmaceuticals in 2011. Shkreli and his fund pushed for the ousting of the company’s management should the merger with Allos Therapeutics take place; the issue was dropped when the merger failed. – Lisa LaMotta

Sophiris Bio: It wasn't pretty, but the Canadian-American biotech raised $65 million in an initial NASDAQ listing after nine years of being public on the Toronto Stock Exchange (TSE). The funding is expected to take it through 2015, including top-line data by the end of 2014 for a Phase III trial of lead candidate PRX302 (topsalysin) that's slated to start this half. PRX302 is a genetically modified protein to treat benign prostatic hyperplasia (BPH), also known as an enlarged prostate. Activated by prostate specific antigen (PSA), PRX302 binds to the GPI-anchored receptors on the cell surface of prostate cells. It induces cell death once activated. This, in turn, can relieve BPH-associated lower urinary tract symptoms such frequent and urgent urination, as well as a higher risk of urinary tract infections, urinary stones and bladder damage. Existing shareholders, including Tavistock with its 30.5% pre-IPO stake, committed to buy about $22.4 million worth in the offering. Other existing investors include Warburg Pincus (27.8%) and BC Advantage (6.6%). To lift its share price ahead of the offering, Sophiris executed a 52-1 reverse stock split on August 9. By August 14, that put its share price on the TSE at US $8.32. The offering priced at US $5 per share and sold 13 million shares on August 15; that's well below the last price on TSE. It had planned to sell only 5 million shares, when its TSE shares were each about US $13. In 2011, Sophiris moved its headquarters to San Diego from Vancouver, BC. – Stacy Lawrence

Regado Biosciences: The IPO window may be wide open for life sciences companies, but that doesn’t mean going public is always easy. Anticoagulant developer Regado scaled down expectations for its August 21 listing, finally pricing at just $4, far below its anticipated $14 to $16 range. The company sold 10.75 million shares in the offering, more than twice its original goal of 5 million, but still raised $43 million rather than the $75 million it hoped to take in. Regado will use the funds for a Phase III study of lead program REG1, a two-component anticoagulant used during heart surgeries. The therapy includes a therapeutic aptamer, pegnivacogin, and a control agent called anivamersin that reverses the aptamer’s effects. Physicians use the combination to balance the risks of ischemic events and excessive bleeding that can occur during percutaneous cardiac interventions. Shareholders in the Basking Ridge, N.J. company include Russian investment firm Rusnano, Fastenal Co. founder Robert Kierlin, Domain Associates, Edmond de Rothschild Investment Partners, Aurora Ventures, Quaker BioVentures and Baxter International Inc. Insiders purchased nearly $31.7 million worth of the shares sold in the offering, well more than 50%. – Paul Bonanos

Tigercat Pharma: The third project in the hands of Velocity Pharmaceutical Development Corp., the CMEA Capital-funded operator of virtual companies, now has a name. Tigercat Pharma was founded last year to study VPD-737, also known as serlopitant, as a treatment for chronic itching, or pruritis. Velocity and partner investor Remeditex Ventures of Dallas have since invested an undisclosed amount in it. A January regulatory filing suggests that Tigercat plans to raise up to $15 million, but at that time it had taken in $500,000 from a single investor. Tigercat licensed serlopitant from Merck & Co. Inc., which previously studied the neurokinin-1 receptor antagonist for overactive bladder. A clinical trial showed that it was no more effective than Pfizer Inc.’s Detrol (tolterodine) in treating the disorder, although it was well-tolerated by patients. Tigercat joins Spitfire Pharma Inc., Corsair Pharma Inc. and an as-yet-unnamed program among Velocity’s projects, funded by Velocity Pharmaceutical Holdings and operated by Velocity Pharmaceutical Development employees. Spitfire has VPD-107 for type 2 diabetes, and Corsair has VPD-380 for a pulmonary indication; neither has been tested in humans. (We’re guessing that the fourth project will also be named for a fighter aircraft, and we’re guessing it won’t be Fokker.) Velocity and Remeditex separately pledged to explore investment opportunities jointly. Regionally-focused Remeditex has confined its investments to Texas and Colorado previously, but expects to broaden its reach with the deal. – P.B.

Financings of the Fortnight Spins A Big LP

 

Since when did “LP” stand for “Lavish Pharma” – as in, lavishing cash upon the life science venture world?

Everyone in our corner of the playground has known for some time that corporate venture groups are making more direct investments, especially in funding early-stage biotechs. “We’re going in earlier and earlier,” Jens Eckstein, the head of GlaxoSmithKline’s longstanding venture arm SROne, told "The Pink Sheet" recently. “We’re now incubating companies and creating companies on our own.”

In 2012, 28% of the nearly 80 biopharma or diagnostic start-ups that raised A rounds had at least one corporate investor on board (and often had more). In 12 of those deals, the corporates took the lead. Eckstein also said that SROne invested $53 million in 2012, its most active year yet.

Big Pharma is filling the void left by limited partners, too. Again, one of the most aggressive spenders is GSK. The latest example, announced last week, is its $23 million investment in a fund run by French firm Kurma Life Sciences Partners to focus on rare diseases. Officially Kurma Biofund II, it’s the first instance of a fund specific to a disease or indication subsector that we can recall since Kleiner Perkins Caufield & Byers said it would set aside $200 million for a “pandemic and biodefense” fund in the midst of the avian flu frenzy. (That link is well worth clicking, by the way, if only for the San Francisco Chronicle file photo of Brook Byers rocking That ‘70s Hairdo.)

Glaxo, like most of its Big Pharma brethren, wants products with the possibility of accelerated approval and high prices that won’t get push-back from payors. The rare-disease rush has gone on for quite some time, prompting our colleagues to ask a year ago if it were a precarious bubble. Apparently GSK and Kurma’s other LPs that include New Enterprise Associates don’t think so.

To be clear, the money GSK is pouring into venture funds is separate from the capital under management at SROne. (SROne used to make LP investments but hasn’t for about six years, Eckstein said.)  In the case of Kurma, GSK feels its smaller partner is better suited to sniff out the opportunities in European research labs, a similar story it told when it agreed earlier this year to co-fund up to 10 single-asset startups with Avalon Ventures in San Diego. (Again, the cash did not come from SROne’s capital pool.) GSK isn’t a limited partner in the Avalon deals, per se, but it is leaning heavily on Avalon’s scouting expertise. “If we can’t find ten cutting-edge programs, we’re not going to get into ten,” Lon Cardon, GSK’s SVP of alternative discovery and development, told Start-Up in April. “But we’re pretty confident Avalon can source four, five, or six without too much trouble.”

The Avalon arrangement also gives GSK an option to purchase each entity as it produces a clinical candidate that can move into IND-enabling studies. But in its more straightforward LP relationships – at least the ones publicly disclosed – it invests with no such strings attached.

Since the start of 2012, GSK has made other big commitments. In March 2012 Index Ventures said it had closed its first life-science-only fund at €150 million ($220 million) with GSK and Johnson & Johnson combining to commit half the total.

In January 2013 GSK said it would pump $50 million into Sanderling Ventures’ new $250 million fund, a surprising bit of news if only because Sanderling’s previous fund closed eons ago in 2004. Based near San Francisco, Sanderling’s West Coast location, where GSK had not partnered with a venture firm at the time, was a factor in GSK’s decision. (Since that announcement, during this year’s JPMorgan conference, Sanderling has not filed any regulatory updates that would indicate more progress toward the $250 million goal.)

GSK also has invested in Boston-based Longwood Founders’ Fund, run by Boston biotech veterans Christoph Westphal, Michelle Dipp, and Rich Aldrich. Dipp and Westphal were GSK executives for a relatively brief and controversial time after the company bought their Sirtris Pharmaceuticals. The amount of GSK’s Longwood investment was not disclosed.

(Other examples of Pharma LP investments: VenBio’s first fund backed by Amgen, Baxter International, and the CRO Pharmaceutical Product Development; Merck & Co.’s Research Venture Fund initiative, which includes an investment in Flagship Ventures’ latest fund; and Eli Lilly’s “Mirror Funds,” which after a big opening splash in 2010 hasn’t produced news since 2011.)

The $64,000 question – or multibillion-dollar question, really – is whether all this activity will pay off with more drug revenue for GSK and its peers. There’s strong evidence that direct corporate venture bets have rarely led to the parent company acquiring the investment targets, but there’s nothing yet to help glean how much Pharma’s LP activity has helped. Let's take GSK: From 2010 to 2012, the firm was 461 million pounds in the red based on its purchase and sale of equity investments, so assuming the SR One and LP activity counts against those figures, it’s hard to say GSK is getting a good financial return. But all this corporate venturing, whether as GP or LP, not just a financial exercise; GSK personnel take scientific advisory positions in the funds it invests in, where they have a window into dealflow and emerging ideas and technology.

Perhaps it’s instructive to note that of all the Big Pharma, GSK has made the most noise about re-organizing its internal research with a more venture-like mindset. As companies like GSK, Merck, and J&J cozy up to innovative entrepreneurs and financiers, is the warm fuzziness of innovation rubbing off? That's their hope. And even though there's been little correlation between corporate investors and corporate acquirers, as noted earlier, it's no predictor of future behavior, so don't be surprised if the investments lead to buyouts. Pharma's co-investors -- the other LPs in their strategic funds and the VCs who syndicate with their corporate venture funds -- are likely to do well. (They already do; companies with corporate VC investment command better acquisition multiples than companies without.)


What remains to be seen is the influence Pharma's cash has on the recipients of said cash. A curmudgeon might note that big Pharma advice -- the bow wrapped around the gift of its early-stage investment dollars -- hasn't resulted in productive R&D within its own walls over the past decade. Directing more resources -- human and financial -- toward what Pharma thinks it wants right now may mean that other opportunities (ones Pharma doesn't realize it needs later on) might not get funded. Then again, without those Pharma dollars propping up the early stage ecosystem, we might see far fewer companies and drug candidates altogether.

Whew. With that, we've managed to put the "long-playing" back in LP. But DJ FOTF is never done dropping old-school science; we put the needle on the record when the drumbeats go like...

Esperion Therapeutics: The anti-cholesterol drug developer just pulled off what sounds like a zen koan or knock-knock joke: An initial public offering for the second time. The Michigan firm priced its IPO on June 26 and will raise $70 million by selling 5 million shares at $14 a pop, giving it at first a market capitalization over $200 million. It’s not really the firm’s second IPO; a previous iteration, also called Esperion, went public in 2000 and was bought by Pfizer in 2004 for more than $1 billion. The program Pfizer brought in ended up stalling, and the current version of Esperion was created to spin it back out. The program is ETC-1002, designed to lower LDL-C (the so-called bad cholesterol) in statin-resistant patients, and is currently in Phase II. The through-line in all this is Roger Newton, leader of the team that discovered Lipitor (atorvastatin) in the previous millennium at Warner-Lambert. He founded the first Esperion in 1998, stayed on at Pfizer after the first Esperion’s acquisition, and spun back out with ETC-1002 in 2008 to form the second Esperion with $23 million in venture backing from Alta Partners, Aisling Capital, Domain Partners and others. Longitude Capital Partners led a $33 million Series B. Pfizer also took a small stake at the time of the spinout; Esperion’s regulatory filings show Pfizer as a 10% owner before the IPO, thanks in part to a conversion of debt into equity, but Pfizer holds no rights or royalties to ETC-1002. Pre-IPO, Esperion’s largest shareholders were Alta, Aisling and Domain, all with nearly 20% stakes. Not unusual these days, existing investors including Newton pitched in to make the IPO happen, buying 1.2 million of the shares, or more than 20%. Newton owned more than 7% of the company before the IPO. Credit Suisse and Citi led the underwriting and will be able to buy up to 750,000 more shares. – Alex Lash

XO1: The Cambridge, UK start-up has formed to develop an anti-clotting antibody with an $11 million Series A investment from Index Ventures, the venture firm’s largest solo A round to date. The preclinical anticoagulant, ichorcumab, was synthesized by a University of Cambridge research team, based on an antibody produced by a patient with unusual blood-clotting patterns. Index’s David Grainger was a longtime Cambridge research scientist who became an advisor to Index in 2008, then joined as a venture partner in 2012. He told our Pink Sheet colleagues that his close ties to the school led to a quick deal, rather than a competitive process.XO1’s key asset was created after a head-injury patient in her fifties exhibited a rare trait. Grainger said the patient in question had “a benign tumor of the immune system,” naturally producing a previously unseen antibody at an “out-of-control” pace. Her rare condition allowed her to survive a hematoma without bleeding to death, despite a clotting profile apparently similar to that of a hemophiliac. Cambridge researchers produced a similar effect synthetically with an antibody that targets exosite 1 of the thrombin molecule. Index invested from its €150 million ($200 million) Index Life VI fund that closed in March 2012. As noted earlier in this column, half the fund’s money came from GSK and Johnson & Johnson, but neither receives special rights to the portfolio companies in return. – Paul Bonanos

PTC Therapeutics: Rare diseases make for frequent IPOs these days. The latest debut for a biotech working on treatments for orphan indications belongs to PTC, which sold 8.4 million shares at $15 each to net itself $117 million. The deal was upsized from the 6.9 million shares it aimed to sell in the $13 to $16 range. Founded in 1998, the firm raised more than $300 million in private cash and tried to go public in 2007, only to withdraw its filing. The company is spending most of its resources on ataluren, in Phase III in the US for Duchenne’s muscular dystrophy caused by nonsense mutations and under review for market approval in the European Union. It is also in Phase III for nonsense mutation cystic fibrosis, only one of a handful of firms working on a disease-modifying drug in the area. PTC’s IPO came days after bluebird bio, a gene therapy firm going after rare blood-borne diseases, raised $116 million in its debut. Another rare-disease firm, Prosensa Holding, could follow soon.-- A.L.

Valeant Pharmaceuticals: In the last fortnight, specialty pharma and serial acquirer Valeant raised a total of $5.5 billion in funds to pay for its most expensive takeover to date, eye care company Bausch & Lomb. On June 24, Valeant closed on a public offering of 27.1 million shares (including full exercise of the 3.5 million-share overallotment) to gross $2.3 billion, selling stock at $85 apiece. Days earlier, the company launched a private offer of $3.2 billion principal amount in senior unsecured notes due in 2021 and 2023. Valeant announced in late May the $8.7 billion acquisition of Warburg Pincus-owned B&L, creating one of the largest ophthalmology companies in the world that will sell prescription and OTC drugs, including Valeant’s existing AMD treatment Macugen, gained through the 2012 Eyetech acquisition, plus contact lens products and surgical devices. Warburg Pincus will receive $4.5 billion of the purchase price, and the remainder will be used to retire B&L’s outstanding debt. Valeant has previously focused on dermatology and neurology drugs, as well as branded generics. The B&L deal marks Valeant's 25th acquisition in the last five years, for an aggregate $19.4 billion in up-front payments and potential earn-outs, according to Elsevier’s Strategic Transactions. -- Amanda Micklus


All The Rest: In a Series B round led by Stanley Family Foundation, with Clarus Ventures and Takeda Ventures also participating, Heptares (GPCR drug discovery) raised $21mm…3-V Biosciences brought in $20mm in Series C funding to advance its Phase I cancer candidate…protein therapeutics firm Complix NV raised a $15.5mm Series B…Vasopharm GMBH completed a $6.5mm Series F round to fund start of Phase III of VAS203 for traumatic brain injury…Trigemina’s Series A-1 round garnered $4.5mm to advance Phase II TI-001, an intranasal oxytocin migraine candidate…A Series A round for Numedii led by Claremont Creek Ventures and Lightspeed Venture Partners brought in $3.5mm…University of Turku spin-out Forendo Pharma (treatments for endometriosis and low testosterone levels) received the first €1.2mm ($1.57mm) tranche from Karolinska Development, which gains a 21% ownership and over a three-year period will invest a total of  up to €3mm…Following a 2012 recapitalization, predictive biosimulation company Entelos received additional undisclosed venture funding from Clearlake Capital Group and Michaelson Capital…epigenetic neurological drug start-up Rodin Therapeutics received undisclosed seed funding from J&J Development and Atlas Ventures…Formed late last year by the merger of public European antibody and vaccine developers Vivalis and Intercell AG, Valneva SE raised €40mm ($53.5mm) in an underwritten rights offering…Repros completed a follow-on offering of 3.75mm shares at $19 for net proceeds of $67mm…FOPOS were also completed by Intercept Pharmaceuticals, $61.7mm; Cempra Pharmaceuticals, $47.7mm; Progenics, $35.2mm; Mast Therapeutics, $23mm; Biodel, $18.5mm; Echo Therapeutics, $10.1mm; and Soligenix, $9.2mm…Four initial public offerings went final: Gene therapeutics firm bluebird bio raised $108mm through the sale of 6.8mm shares at $17, above its initial $14-16 range; Esperion (cardiometabolic drugs) netted $65.1mm, selling 5mm shares at $14, the midpoint of its anticipated range; Aratana Therapeutics, which had postponed its filing of 4.3mm shares at an $11-$13 range, amended its IPO terms to sell 5.8mm shares at $6, raising $35mm; and Canadian drug design company Antibe Therapeutics netted $2mm, selling 3.9mm shares at $0.55…Prosensa Holding BV announced terms of a 5mm ordinary share IPO priced between $11-13…Several firms filed for IPOS: Liver disease therapeutics developer Conatus Pharmaceuticals; outsourced medical services provider Envision Healthcare; small-molecule cancer therapies developer Onconova Therapeutics (Baxter holds a 14.7% stake and a 2012 alliance with the company worth up to $565mm); and specialty pharmaco Iroko Pharmaceuticals…Through a $25mm senior secured term loan facility led by GE Capital, Navidea Biopharmaceuticals gains support for its Lymphoseek radiopharmaceutical agent platform…Hercules Technology Growth Capital provided Rockwell Medical (end-stage renal and chronic kidney disease treatments) with $20mm in debt financing…To help Phase II trials for its lead candidate for primary brain cancer, Diffusion Pharmaceuticals brought in $5mm through the sale of convertible notes to existing investors, adding onto a $5mm convertible note sale of September 2012…Following Elan Corp.'s withdrawal of its offer to acquire private Austrian drug company AOP Orphan Pharmaceuticals, AOP spun off its 80% ownership in cancer business Activartis Biotech GMBH to a group of private investors.

Photo courtesy of flickrer technochick, aka Angie Linder. Thanks, Angie!

Once You Start Up Financings of the Fortnight, It'll Never Stop

Your faithful FOTF correspondent is in San Diego this week for the CalBIO conference, specifically to wax journalistic on a panel trying to look into the future – 2030! -- and opine sagely upon what we see. Some call this prediction; others call this pulling objects out of one’s nether regions, which thankfully doesn't require the Jagger-like calisthenics seen at the start of this week's video flashback.

What we can predict with near certainty is that the upcoming issue of Start-Up, arriving soon in print or electronic edition according to your subscription preference, will be full of timely topics. We’ll go inside Third Rock Ventures, which has raised more than $1 billion since 2007 to invest solely in early stage biotech. And not just invest; Third Rock creates many of its own companies, then puts its own partners into temporary executive roles in those companies once they launch.

Is it working? Hard to say yes, definitively, until they start truly reaping what they’ve sown. (Only two exits so far.) But Third Rock has a 28% stake in one of the companies in the IPO queue, bluebird bio, and a 24% stake in Agios Pharmaceuticals, which filed its S-1 a few days ago. More might be coming this year. LPs have enthusiastically bought into the Third Rock promise, that's for sure. But that’s not to say the group hasn’t hit snags or that there aren't adjustments to make. (You'll have to read Start-Up to find out what those are.)

Third Rock’s not the only VC growing their own. Flagship Ventures has been at it twice as long, in fact, and about five years ago – right around the time Third Rock rolled into town – it decided to put a brand on its in-house start-up brewery: VentureLabs. They’ve been busy lately, with big – dare we say “Third Rock-like”? – Series A rounds to launch two high-concept start-ups, Moderna Therapeutics and Syros Pharmaceuticals. The new Start-Up will also look at the early days of Moderna, and how the Flagship/VentureLabs folks helped push what was at first an advancement in the induced pluripotency of stem cells toward a new therapeutic modality that, despite many question marks, almost immediately attracted a major Pharma partnership and nearly a quarter of a billion dollars guaranteed.

If bluebird or Agios goes public, it will be Third Rock’s first IPO, but Flagship’s been around the block many times. In the current window, it’s already notched two IPOs since the start of 2012 – Receptos and Tetraphase Pharmaceuticals – and it owns 16% of Agios. Others have ushered even more biotechs public in the same time frame: As we note in the next Start-Up, New Enterprise Associates and funds associated with Fidelity top the charts with five IPOs apiece.

But as our colleague Stacy Lawrence reports, there’s been no rush to exit: Among all major shareholders (those with 5% stakes or higher)  that went through IPOs in 2012, less than one third have reduced their holdings. Thirty of 43 have held tight or increased their shares, often in the IPO as part of an agreement to get the deal done.

Just published in "The Pink Sheet" DAILY, Stacy also talks to several VCs about what seems to be a reinvigorated IPO appetite for early-stage biotechs – a good sign indeed for the likes of Third Rock and Flagship. And what of the growing number of early-stage biotechs with corporate investors providing the backbone of support? Once quite rare, we’re now seeing new companies out of the gate mainly backed by corporates, such as Protagonist Therapeutics, whose JJDC-led Series B we describe below. Another, ArmaGen Technologies, caught our attention when it made Start-Up’s 2012 A-List for its intriguing receptor-mediated technology that draws therapeutics through the blood brain barrier, and for its unusual Series A syndicate: Four corporate investors splitting evenly a $17 million round. Our colleague Paul Bonanos was even more curious, and in the story he’s penned for -- you guessed it -- the new Start-Up, he noted this telling quote from one of ArmaGen’s backers: “When you take away the worry about losing your money, great opportunities arise.”

In essence, at least a couple of ArmaGen’s investors consider exposure to the company’s technology just as important, if not more, than their financial return. Outlooks like that among corporate investors should make for very interesting strategy discussions when it comes time to ready a company for sale or for a public debut. Then again, not all corporate VCs embrace strategic return more than financial return. (For a rather brusque counterpoint, see this story about Novartis Venture Funds and chief Reinhard Ambros' decision to drop its strategy-oriented option fund: "Strategic means you pay money for something intangible, and you waste money.")

If we don’t get to the blurbs soon, this column will go past the point of no return. So let’s sum up: If you like the topics of conversation here at FOTF, you should love Start-Up, perhaps even enough to subscribe. That ends our shameless plug; now back to our shameless prose, often referred to as...

Avaxia Biologics: The therapeutic antibody firm topped off its Series B round with an undisclosed amount of cash from the venture arm of AbbVie, bringing the round to $11.4 million. It’s a fascinating case for several reasons. First, Avaxia’s lead product, an oral TNF inhibitor currently in a Phase Ib study in irritable bowel syndrome patients, goes after the same target as AbbVie’s superblockbuster Humira (adilimumab). That might lead one to believe AbbVie wants a closer look at what could make a potential replacement for Humira. But that outcome would be a rare occurrence, indeed. According to our Strategic Transactions data, from 2006 to 2011 only two private companies backed by corporate venture funds were eventually bought by the funds’ parents: Avid Radiopharmaceuticals (bought by Eli Lilly) and Avidia (Amgen). AbbVie does not gain any rights to Avaxia’s lead, AVX-470, or other products, but it does take a board seat. Another reason this is one to watch is Avaxia’s antibodies. They’re not monoclonal, like Humira and so many other key biotech products. They’re polyclonal, essentially a gemisch of antibodies strained from cow’s milk, and therefore quite capable of surviving a trip into the gut. Avaxia comes along just as a few companies, led by Symphogen, are dipping a toe into the possibility of antibody combinations. But those combinations are made from monoclonals, not polyclonals. Other than serum products, it’s hard to find precedent to what Avaxia is aiming for. Just as notable is how far Avaxia has gotten with its platform, funded to this point by angel investors. Its A and B rounds, totaling nearly $10 million before the AbbVie add-on, were led by angel groups. – Lisa LaMotta and Alex Lash

Clovis Oncology: Clovis took advantage of a strong clinical data release with a public offering that brought in $240 million, the third largest secondary offering of the year behind Onyx Pharmaceuticals and Ariad Pharmaceuticals. The firm is the best performer from the biotech IPO class of 2011, with a 445% gain as of June 13, thanks in large part to a mighty ASCO bump – that is, data it presented at the recent American Society of Clinical Oncology conference that took Clovis’ share price from $36.56 to $74.59 in one weekend. The company reported Phase I/II efficacy data for its non-small cell lung cancer drug CO-1686 in patients with the T790M mutation, which confers resistance to current treatments. Clovis has done well with its strategy of in-licensing candidates and companion diagnostics; it brought in CO-1686 from Avila Therapeutics in 2010, then partnered with Roche to develop a test for the T790M mutation a year later.  Clovis’ recent run-up also benefited from positive initial data at ASCO for its drug rucaparib in ovarian cancer. Rucaparib is an oral poly (ADP-ribose) polymerase (PARP) inhibitor that Clovis licensed from Pfizer in 2011, and subsequently partnered with Foundation Medicine to create a companion test to find patients most likely to respond to the compound. -- A.L.

Protagonist Therapeutics: The peptide development firm said June 4 it has raised a $14 million Series B round, led by Johnson & Johnson Development Corp. JJDC joined Series A investors Lilly Ventures and Australian firm Starfish Ventures. Protagonist spun out of the University of Queensland’s Institute of Molecular Biosciences and, while headquartered in the San Francisco suburb of Menlo Park, Calif., it maintains discovery operations in the Queensland capital of Brisbane. It’s the latest example of early-stage biotechs drawing most or all of their venture funding from corporate-affiliated funds, which are helping fill the gap left by traditional venture moving their limited resources toward the later stages. Protagonist says it has developed a platform to identify disulfide rich peptides, a more stable version of a molecule that has limited therapeutic availability. Also called constrained or stapled peptides, the area is looking to Aileron Therapeutics, which recently completed the first clinical trial of a stapled peptide and answered some questions about the compound’s ability to remain stable in vivo and avoid safety concerns. The preclinical Protagonist has signed deals with Zealand Pharma and Ironwood Pharmaceuticals; one of the firm’s pursuits is the development of orally-active therapeutics for inflammatory bowel diseases. -- A.L.

Dermira: The firm developing treatments for acne and other skin disorders said June 11 it has raised a $35 million Series B financing to move into a Phase I/II trial its lead program, lemuteprofin, a photodynamic acne therapy, and two preclinical programs. Dermira’s Series A investors Canaan Partners, New Enterprise Associates and Bay City Capital all re-upped and were joined in the round by Maruho, a 100-year-old Japanese firm that specializes in dermatology and typically keeps a low deal profile. Dermira has now raised more than $70 million in venture funding; its $42 million A round helped it purchase Valocor Therapeutics, at the time the owner of lemuteprofin after its spinout from failed Canadian biotech QLT. -- A.L.

All The Rest: To fund work on Phase II AKB6548 for anemia associated with CKD, Akebia Therapeutics raised $41M in Series C financing…ResearchGate, which is developing a platform to share and search for scientific data online, closed a $35M Series C…Edge Therapeutics collected $18M in Series C funds to support Phase II of EG1962 in preventing delayed cerebral ischemia…Prism Pharma, which has a lead compound for fibrosis, completed a $15M Series C…GSK spin-off Autifony Therapeutics topped up its Series A with an additional £5.5M from Pfizer Venture Investments and International Biotechnology Trust…in addition to adding Janssen as a new partner, Second Genome completed a second tranche on its Series A, which now totals $11.5M…concurrent with a $2.3M grant from the Norwegian Research Council's BIA-Program, Targovax raised $1.4M in equity…Arcturus Therapeutics, focusing on RNAi for rare diseases, closed a $1.3M seed round…Baxter Ventures came in as a new backer for Ocular Therapeutix…ARCA biopharma publicly sold $20M in Series A convertible preferred shares…StemCells received the right to sell Lincoln Park Capital Fund up to $30M in common shares…Oncothyreon raised $10M in an RDO to fund up-front payment in Array BioPharma co-promote…an undisclosed health care fund bought $9.8M in Celsion’s common stock…BioTime grossed $9.1M through a PIPE…epigenetics company Epizyme grossed $77M in its IPO…PeptiDream floated on the Tokyo Stock Exchange, raising $52M…Israeli firm Kamada completed a $52M IPO in the US…Kadimastem, which commercializes pluripotent stem cell-derived products, raised $5.5M in an IPO on TASE…Heat Biologics, PTC Therapeutics, bluebird bio, and Esperion all set terms for their IPOs…stem cell producer Cellular Dynamics International and Agios Pharmaceuticals, which is targeting inborn errors of metabolism, filed for their IPOs…Array BioPharma offered $115M in convertible senior notes…and Anacor Pharmaceuticals received a $45M three-tranche loan facility from Hercules Technology. -- Amanda Micklus