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

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

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

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

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

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

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

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

Had your fill of bad puns? You'll only egg us on by reading the latest edition of...

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

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

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

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

Eggcellent photo courtesy of flickr user Ecstatic Mark.

Financings of the Fortnight Hops Around

We’ve got a short attention span this week, what with magazine deadlines, an overnight trip to Seattle to help interview participants at this lively Xconomy event on biotech business models, and preparations for a week of solo parenting.

So we’ll keep our intro brief while doing a bit of globe-hopping: New sources of biotech funding were unveiled this past fortnight on three different continents. In Europe, Cancer Research UK and the European Investment Fund joined forces for the $80 million CRT Pioneer Fund aimed at helping projects -- not companies -- bridge the valley of you-know-what between preclinical work and mid-stage clinical studies. Read more about its unusual asset-centricity here. (Our suggestion: If you must pass through the Valley of Death, do it in the spring after a wet rainy season.) In Asia, the Malaysian government revved up its second biotech fund, this time for $100 million, as our PharmAsia colleagues describe here.

In North America, Merck is getting granular, contributing $35 million to the Merck Lumira Biosciences Fund for early stage companies in Quebec, part of its Canadian division's promise to contribute $100 million to Quebec-based life science R&D after it closed its Montreal lab in 2010. The fund is targeting a $50 million final close and will be managed by Lumira Capital of Montreal.

Then there’s Russia, which spans two continents. Its sovereign nanotech fund Rusnano is looking for cash from sources other than the Russian government to plow into more investments – many of which so far have been US-based biotech companies, as our START-UP colleagues explained in this profile. Investing in Rusnano is akin to investing in Russia, to an extent, because companies that receive direct investments from Rusnano must pledge to establish a footprint in Russia. Rusnano’s top executive in the US, Dmitry Akhanov, told VentureWire this week that Rusnano expects its first exits this year, “which is very important for valuation” as it goes out to fundraise. Rusnano wants to sell 10% of its $10 billion fund by the end of the year, says Akhanov: "The (Russian) government has decided that Rusnano is mature enough to become private and grow without direct government support."

Notice anything in common with all these funds? Exciting vacation destinations, perhaps – Montreal is certainly near the top of FOTF’s list in the summer months – but we were thinking more of who’s putting the money forth. With the exception of the Merck Lumira fund and the small slice of contributions from les VC, these funds are VC-free. They might, like Rusnano, partner with VCs, but the wellspring is located elsewhere. Could just be the way this fortnight rolled forth, but as serial entrepreneur John Mendlein put it at the Xconomy confab this week, it’s all about the cost of capital these days. For many corporations, foundations and sovereign states, cash is easy to come by, and a lot of those eggs are going into the baskets VCs are either unwilling or unable to fill. And with that, it's time to crack open another edition of...

Merrimack Pharmaceuticals: The cancer therapeutics firm raised $100 million in its initial public offering, selling 14.3 million shares at $7 a piece on Wednesday, March 28. The 20-year-old firm which began under the name Immtek was queued up to go public in January with loftier ambitions – 16.7 million shares in the $8 to $10 range – but postponed due to the ever-present “market conditions.” (Never mind that in the same fortnight, three other biotechs went public.) One big difference between Merrimack and its more successful peers at the time was insider participation; the other three, Cempra Pharmaceuticals, Chemocentryx and Verastem, had it, and Merrimack did not. (At least, it didn’t report it in its SEC filings.) Having previous investors cross over and take shares in the IPO is one of the inducements IPO buyers look for, as we reported in this START-UP story. (For those without a subscription, a shorter version is here.) Lo and behold, Merrimack’s filings this time around show that at least one existing investor (and its largest), Fidelity Investments, lined up to buy nearly $29 million of the offering. Fidelity was the largest purchaser of Merrimack’s most recent private fundraising, the $77 million Series G round (yes, G) it sold in April 2011. The round brought the company’s total private financing to $270 million. Its lead compound MM-398, a reformulated version of the chemotherapy irinotecan, is in Phase III to treat patients with metastatic pancreatic cancer who have failed gemcitabine. It has orphan drug designation in the US and EU. JPMorgan led the underwriting team with help from BofA Merrill Lynch, Cowen and Co. and Oppenheimer & Co. Underwriters have 30 days from the IPO date to buy up to 2.1 million additional shares. Merrimack shares closed at $6.01, down 14% from their IPO price, on April 4. -- Alex Lash

Promethera Biosciences: Belgian cell therapy company Promethera is the latest to join the crowd developing medicines for rare diseases. Promethera has raised $31.4 million in a Series B round, the largest venture financing this year in Europe, to support the start of clinical trials of its progenitor hepatocyte product, Promethera HepaStem, for orphan liver diseases like Crigler-Najjar syndrome, urea cycle disorder and phenylketonuria. Industry interest in its technology is evident from the presence among the new investors of two corporate VC funds, Shire and Boehringer Ingelheim. Japanese firm Mitsui Global Investment and US culture systems company ATMI Life Sciences also have re-upped for the B round. Shire has had a focus on regenerative medicines ever since it bought Advanced BioHealing in May 2011, and Boehringer Ingelheim is already a leading contract manufacturer of biopharmaceuticals using cell culture systems. Promethera's progenitor cells are isolated and cultured from one liver using its proprietary methods, and are expected to treat more than 100 patients without inducing rejection. Although cell therapy companies have disappointed in the past, the sector is starting to show greater promise, with better understanding and controls over cell culture and manufacture. Belgian and UK regulators already have cleared Promethera to begin Phase I/II studies of its hepatocyte product. -- John Davis

ADC Therapeutics: The new Swiss company is less an independent entity and more an extension of Spirogen, a UK developer of cytotoxic small molecules called pyrrolobenzodiazepines (PBDs) to be used in antibody-drug conjugate cancer drugs. Both are portfolio companies of Celtic Therapeutics Holdings, a private equity firm with a complicated past. Celtic has pledged up to $50 million to ADC Therapeutics, which will take the cytotoxins and linker chemistry from Spirogen and try to marry them with antibodies licensed from third parties to create ADCs that could treat several types of cancers. ADC hopes to have its first two candidates in the clinic within 18 months. It will develop the drugs only to Phase II proof of concept, then look for larger partners to help with expensive late-stage development and commercialization. Celtic general partners Peter Corr and Stephen Evans-Freke will sit on ADC Therapeutics’ board, along with the new company’s CEO Michael Forer, Spirogen CEO Christopher Martin, former National Cancer Institute Director Samuel Broder and Barrie Ward, the former CEO of KuDOS Pharmaceuticals. Forer also is a partner in Spirogen. Celtic currently is looking for a director of R&D for ADC Therapeutics, to be based at the London headquarters of Spirogen and travel between the two companies. The $50 million investment will be given to the company as needed for drug development over the next three to five years. -- Lisa LaMotta

Enterome Bioscience: The French firm said March 22 it has raised a 5 million Series A round led by Lundbeckfond Ventures and Seventure Partners. It is one of several companies exploring the human microbiome – the gene pool of the bacteria living within our bodies, particularly in our intestines. Enterome is developing biomarkers to measure abnormalities in the bacterial mix of the intestine, with the goal of eventually developing therapeutics to treat bowel and metabolic diseases mediated by the gut microbiota, such as non-alcoholic fatty liver disease, non-alcoholic steatohepatitis, obesity and type-2 diabetes. Enterome says changes in the bacterial composition that could signal disease include alterations in gut permeability that lead to insulin resistance, low-grade inflammation and metabolic endotoxemia (an increase in the level of bacterial lipopolysaccharides in the blood, often from a sustained high-fat diet). Founders include former executives at Fovea Pharmaceuticals, which was acquired by Sanofi in 2009. Enterome isn’t the only start-up betting that technological advances will release insights into the microbial universe and lead to drugs. Northern California firm Second Genome raised $5 million in 2011 to develop its discovery platform based on the PhyloChip, which analyzes the entire 16S ribosomal RNA gene sequence present in every bacterial genome to measure the relative abundance of the thousands of forms of bacteria in nature.  -- A.L.

RIP Haley. Photo courtesy of flickrer Valeehill through a Creative Commons license. 

Changes at Versant

Last week’s column in Fortune Magazine by venture capitalist Lisa Suennen of the Psilos Group appropriately asked “Hey, where are all the health care investors going?” As evidence, Suennen cited the departures of CMEA Ventures from medical devices and Highland Capital from health care (both of which were reported in Start-Up several months ago). But Exhibit C – “that Versant Ventures appears to be on the verge of reducing its health care practice” – surprised us.


After a few days of beating the bushes and collecting rumors by the bushel, we reached Managing Director Ross Jaffe, one of the founders of the firm, to get the details. Jaffe (careful not to tread into talk of fund raising so as not to violate securities regulations) did speak to changes that will occur at Versant.

The good news is the firm isn’t going anywhere. Versant will raise a new fund, although we believe that it will likely be smaller than the $500 million partnership it closed in 2008.

The less than good news is the roster of Versant managing directors is shrinking. Jaffe says four of the firm's managing directors opted out of participating in the next fund.   The departures shouldn’t impact the firm’s overall investment strategy. Two of the departing partners – Brian Atwood and Camille Samuels – invested in biopharmaceutical companies while the other two – Kevin Wasserstein and Rebecca Robertson – managed medical device investments. The firm generally balances its fund between the two sub-sectors. Jaffe declined to discuss specifics of a fund but said their fund size always derives from the number of partners sitting around the table

All four will continue to invest from Versant’s fourth fund. The decisions not to continue as active investors came during Versant’s planning for a fifth fund, Jaffe said, when each managing director was asked outright if they’re in for the long haul of a 10-year partnership. “If you are going to build a venture capital firm for the long haul you need to be thinking about individual partner’s plans and how the firm itself will evolve,” Jaffe says.

The four partners in question either declined comment or did not return requests for comment for this story.

According to Jaffe, Atwood and Wasserstein intend to remain active in the life sciences industry, while Samuels and Robertson are backing away from active investing. Atwood will concentrate on his current portfolio and may assist in new deal flow but won't be taking on new board seats. Wasserstein will work more closely with smaller device companies, including possibly some within Versant's portfolio.

Versant did promote Kirk Nielsen in January to managing director. He joins Bill Link in Versant's Orange County office while Brad Bolzon, Charles Warden, Jaffe and Samuel Colella work from Menlo Park.

No doubt, some might see Versant's decision as another knock on the prospects for life sciences investors as firms like Prospect Venture Partners and Scale Venture Partners scrap plans for raising news funds. Jaffe says Versant’s intentions shouldn’t be seen as a sign of weakness for the firm or the industry. “While everyone agrees this is a challenging investment environment with the FDA, reimbursement and other issues, we continue to see great opportunity for firms that have capital,” he says. “And we’ve had pretty good success.”

The firm was an early investor in several medical device companies that commanded significant prices from acquirers including LenSx, developer of surgical lasers for the eye, atrial fibrillation company Ablation Frontiers, balloon sinuplasty device marker Acclarent, laser vision correction company IntraLase,  and St. Francis Medical, maker of a spinal implant.

On the biopharma side, the firm exited Amira Pharmaceuticals this summer through a sale to Bristol-Myers Squibb for $325 million upfront plus earnouts. More recently it participated in the much-anticipated IPO of Clovis Oncology, in which Versant and other investors bought more than 40% of the offering at the $13-a-share offering price. That leaves Versant holding 2.2 million Clovis shares, worth about $27.6 million at the end of trading Monday, November 21.  

Like other biopharma investors, Versant has recently explored new models in acknowledgment that the traditional build-a-biotech strategy is increasingly difficult to justify. One idea, which sprang from the Amira exit, is a drug discovery kitchen dubbed Inception Sciences (we wrote about it here) that will spin out compounds into separate corporate entities that let potential buyers choose assets a la carte instead of having to buy the whole restaurant. The second idea binds a potential acquirer to a start-up right away, which Versant did recently with the cancer genomic analysis firm Quanticel Pharmaceuticals. At launch, Celgene paid $45 million upfront for exclusive technology rights, a small equity stake, and exclusive options to buy Quanticel a few years down the road. 

Several non-Versant sources familiar with the firm's plans told us that Versant is under the same pressures as its peers, as LPs become increasingly fearful of larger funds and unwieldy teams. Jaffe sees it differently: “We have a very different business culture at Versant. Each of my partners is thoughtful about how we approach our business and how we handle our careers. People will believe what they want to believe but this is what is going on.”


Alex Lash contributed to this report.

Essex Looks to Stretch Many Bucks

Daily Dow watchers who were looking for a quick read on the private equity market might have felt a happy little jolt from the news that Essex Woodlands Health Ventures closed on a $900 million fund. After all, limited partners are supposed to be down on private equity and venture capital fund-raising, right? Is this a sign that the storm clouds are clearing?

Well, we're sorry to disappoint. But, as we reported a year ago, Essex Woodlands actually closed on nearly all of this capital in the first half of last year, before the walls really started tumbling down. General Partner Immanuel Thangaraj is correct in remind us that the market wasn't exactly rosy before the September meltdown, but still, times weren't nearly as tough as they've become.

In fact, Thangaraj admits the firm fell a little short of its goal. After institutional investors began lining up behind the eighth fund early into the fund raising, the firm's partners set a $1 billion goal with a $1.25 billion cap. Essex Woodlands wrapped up roughly $800 million in the first half of last year when potential LPs were ready to stuff the fund, but when the economy took a nose dive they retreated, leaving Essex with "only" $900 million. Essex held the fund open until last week to accomodate a few smaller investors who needed time to complete the transaction.

But Thangaraj and his partners clearly aren't complaining. In fact, Thangaraj presents a convincing argument that a $900 million fund in this current market carries considerable more muscle than it would have just a year ago. With public equities down up to 50% or more and private valuations dipping as well, Essex Woodlands has the necessary muscle to negotiate good prices for shares in great companies that simply need capital. If the partners place wise bets the returns from this fund could be the firm's best.

Essex Woodlands will invest the capital to match the times. The firm could put roughly two-thirds of its capital into later-stage, growth-equity style investments in companies with products or commercialization in sight. The remainder would go into earlier-stage venture capital style investments, including start-ups. "It's hard not to reflect the times, but I don't think directionally we've changed."

Thangaraj says Essex first three investments reflect the diversity of the future portfolio: early stage biopharma Catalyst Biosciences Inc.; publicly traded device company ATS Medical Inc. and specialty pharma company Victory Pharma Inc.

The $900 million figure matches the 2002 fund raised by MPM Capital, a vehicle that caused some consternation in the venture industry as many saw it as a sign of too much capital flowing into the sector. That's not a concern today. Every dollar is welcome by VCs and companies alike. In between 2004 and today, Aisling Capital, Clarus Ventures (the spin off from MPM), Domain, Frazier Healthcare Ventures, MPM and Prospect Venture Partners have all gone to raise between $500 million and $700 million in their most recent funds.

MPM Capital previously had the distinction for raising the largest venture capital fund. Asked if Essex Woodlands' partners were tempted to raise just a bit more to top MPM's mark, Thangaraj admitted that Essex Woodlands, in fact, had raised slightly more than $900 million, but only because the capital was available. But the partners preferred to publicize the $900 million, at least partly so as not to look like they were intentionally trying to top MPM's 2002 high water mark.

But Thangaraj says in this market, the value of each dollar of the fund is almost as important as the number of dollars. Valuations are dropping and capital is scarce. "We've not seen this combination in the last 25 years of operation," he says. "We have incredible purchasing power. The billion we though we had in 2007 or 2008 would probably be less effective [at that time] than the $900 million we actually have today."

Focus or Diversify? For VCs, Why Not Both?

What to make of the new €350 million fund raised by Index Ventures? That the firm's LPs apparently like focus, except when they don't.

Index's Index Ventures V is billed as an early stage and seed fund and is the fifth such fund the venture firm has raised in the past ten years--clearly Index is on to a winning formula with its emphasis on the very early stages of company formation and development. The firm has been consistent in its fundraising--no small feat these days. Index Ventures IV was raised just over two years ago and also topped out at €350 million.

But not too long ago Index decided it wanted to invest in later-stage opportunities as well. Not wanting to diminish that early-stage focus in its existing funds, it decided to raise a separate fund for those more mature investments in early 2008: Index Ventures Growth Fund (IG).

To date, IG has invested in two biotech companies--both of them public. Last week Index announced it was an investor in the recent $24.3 million Ariad PIPE deal and in 2008 it co-led Micromet's $40 million PIPE as well.

That's a slightly different twist than what many other venture outfits are doing these days. It's no secret that VCs are attracted to the public markets given the beating publicly traded biotechs have taken in recent months. (Valuations of private companies by comparison still look sky high.) But most VCs aren't choosing to develop a separate fund for such investments, instead committing money already raised as a diversification strategy. Call it one version of venture's Plan B.

But if Index's two funds allow for focus--late-round investments and PIPEs versus seed and starter rounds--there's also plenty of room for diversification. That's because Index's funds invest across life sciences, high tech and clean tech, by no means an odd or niche strategy but one not as popular as it once was. Like other diversified funds--say, Polaris Ventures' or Interwest's--Index has been spread across multiple sectors for some time and has a loyal LP following. Today's announcement notes that Fund V was raised "almost entirely from the firm's existing base of limited partners."

Those partners likely appreciate the variations in risk, return and business models between, say, cleantech and biotech, especially in today's awful economic climate. Maybe it's best not to have too many eggs in one basket, even within a particular fund.

image by invivoblog.

Venture Round: And now the bad news

It’s popular to suggest that the venture capital world is somewhat insulated by the turbulence on the public markets, but let’s get real. That’s not the case.

Last week, we offered a potential "bright side" scenario. The likelihood that boutique investment banks will finally get the sunlight and the attention to grow large enough to support a small, revenue-poor industry like life sciences.

But such a development, while positive, will take a while. Until then, we’re looking at a number of potential negative impacts, many of which we’ll explore in our upcoming magazines.



Fundraising: Three words. Forget about it. If you’re not a top-quartile, blue-chip fund you’re going to have a terrible time trying to raise a new fund.

And those firms that have raised new funds aren’t off the hook. One venture firm with AIG as an limited partner still hasn’t heard whether or not the insurance giant's commitment will be honored.

Even those firms with limited partners not being bailed out by the government could face some problems down the road as they begin to call down portions of the fund. Some LPs may simply say, no, sorry we don’t have the cash—or even the appetite—any longer.

This might lead to fund reductions, similar to what we saw after the technology boom busted. But in this case, GPs won’t be giving capital back for lack of investment opportunities. They’d be doing it because of lack of support from LPs. (In fact, one professorial type told PE Hub that VCs should be nice and give some of their money back. We're not really buying that one.)

Early-stage investing: Big funds probably won’t be doing it. Why should they when they can have their pick of later-stage companies that will be hungry for capital. As for the angels, well, they’ll obviously be a little risk averse given the current situation. But they too will have the option of investing in “later” early-stage companies, the kind of companies that VCs backed until now. We’re not sure if angels can provide enough of the capital those more established start-ups need, but they’ll be given the opportunity to invest.

Mid-stage investing: So you have a product about to start clinical trials, which puts it on track for commercialization in five or six years, maybe, after some serious infusion of cash? Good luck with that.

Late-stage investing: This could be a blood bath. VCs with capital will be obligated to find bargains in this market. At this point, no one is willing to admit this, but we’re expecting some serious hammering on existing investors. To be sure, VCs can’t be too cutthroat since they too have companies that will require outside capital, but if they can get a late-stage company at early-stage prices then they have to do it. And look for more and more PIPEs. (BTW, we ass-U-ME-d incorrectly last week. The Angiotech deal involving Ares and New Leaf Ventures is not dead yet. We're told something may indeed happen.)

Exits: It’s been said that we’ve been through IPO droughts before, and that’s true. But this isn’t just a drought. Somebody blew up the pipeline and poisoned what's left in the reservoir. As for the corporate buyers, yes, pharma and medical device companies SHOULD be buying. But will they? And if they do what sort of prices will they be seeking. Just as venture firms have to answer to LPs, corporates have shareholders who demand value when it’s available.

In fact, VentureWire Lifescience released some sobering statistics today. We’re back to 2003.

Health care companies have created $3.01 billion this year through IPOs and M&As, down from $8 billion at this point in 2007, a 62.2% drop. That's the worst nine-month performance in five years. Through September 2003, life sciences companies had produced $1.33 billion in M&A and IPO liquidity.

It’s worth pointing out that health care accounts for most of the liquidity activity since the entire venture industry generated $4.3 billion from sales and IPOs in the first three quarters of this year. PriceWaterhouseCoopers Money Tree report offers a similarly glum outlook.

Readers of START-UP already know our take on the acquisition of privately held biopharma companies. Colleagues Ellen Licking and Chris Morrison supplied an exhaustive study in the current issue.

So yes, we’re not dead yet. (We're keeping with the Monty Python theme.) But keep an eye out for the cart hauling dead folks. Oh that reminds us, we see one more significant development.

The Rise of Secondary Buyers: We already reported on their rise in our July START-UP. But, whether it's portfolio companies or stakes in general partners that LPs no longer want, secondary buyers likely will have an easy time finding bargains. Firms like Saints Capital will prosper.

Are we missing any?

Orion to Cover Both Sides of the Atlantic

In most venture circles, talk around forming an international strategy generally leads to VCs staging fact-finding missions to China and India. But a great deal of opportunities still lie in the Old World as VCs grapple with how they might do a better job at investing in Europe where the industry is maturing but the capital can sometimes be scarce.

A new firm is in the market to raise a fund that will target this particular problem. Orion Healthcare Equity Partners, founded by Mark Carthy, who has left Oxford Bioscience Partners, and Joël Besse, formerly of Atlas Venture, is seeking a $250 million fund to invest in both sides of the Atlantic, according to people familiar with the effort.

The new firm will maintain offices in London and Boston and expects to bring aboard additional partners later this month or early next. Orion apparently will pursue clinical-stage companies or assets in the U.S. and Europe. It’s unclear whether the firm would attempt relocate assets from one continent to the other, but that seems to be a possibility.

Carthy and Besse certainly have expertise in straddling the Atlantic. While at Oxford, Carthy served on the board of UK-based Solexa Ltd., the genomic sequencing company that would be acquired by Illumina Inc. He also represented Oxford in its investment in another UK company, PowderMed Ltd., which Pfizer would acquire after several Trans-Atlantic transactions.

Meanwhile, Besse managed many of Atlas’ European investments from its London office. He was among the founding investors in publicly traded Actelion Pharmaceuticals Ltd. and Novuspharma S.p.A.

Clearly, Orion will have some homegrown competition (or co-investors depending upon how you want to perceive things). We've been writing about VCs and VC investments in the UK, France, Germany and Spain. But a little more capital certainly wouldn't hurt.

What will be interesting to see how institutional investors view a trans-Atlantic fund. In years past, firms with strategies that covered both sides of the Atlantic had to work hard to sell their plans to limited partners. But times have changed. The investment climate does show some positive signs of life, and the world is a considerably smaller place than it was four or five years ago.

Frazier Joins $600m Club

As we reported two weeks ago, Frazier Healthcare Ventures wrapped up $600 million for its sixth and largest health care fund to date.

The new partnership maintains Frazier’s place near the top of the venture peak. Only Domain Associates manages a larger fund. Essex Woodlands Healthcare Ventures closed on $600 million last year.

Managing Partner Alan Frazier says the strategy behind the new fund won’t be significantly different than the one used to deploy the $475 million from its fifth fund. “The increase of the fund is really being devoted primarily to growth equity,” Frazier says. “I continue to believe that venture capital itself is not something that scales terribly well. “

Frazier says the larger fund won’t prohibit the firm from investing in start-ups. In fact, the majority of new investments made by the firm likely will be in early-stage companies. Frazier suggested most later-stage commitments will go to the firm's own portfolio companies.

“We have as of late put in a little more money into our own companies,” Frazier says. “I think that is reflective of the fact that the IPO market for biotechs requires a little bit further development. It’s a rather unpredictable market so you want to make sure you have enough capital.”

Over the last 14 months, nine of Frazier’s portfolio companies have gone public or been acquired including three biopharmaceutical companies Cadence Pharmaceuticals Inc., Trubion Pharmaceuticals Inc. and Amicus Therapeutics Inc. Frazier says the firm has maintained its position in each company.

Frazier has benefited from the rush to acquire venture-backed biopharmaceutical companies as well. On the acquisition front, two biopharma companies from Frazier’s portfolio—CoTherix Inc. and Cerexa Inc.—were acquired earlier this year. Four portfolio companies that had drawn growth equity investments from Frazier—CHG Healthcare Services Inc., Aspen Education Group, Priority Solutions Inc. and MedPointe Inc.—also were acquired.

Biopharmaceutical investments will account for roughly half of the new fund, Frazier said, while medical device investments will draw anywhere between 20% to 30% of the capital. Growth equity opportunities—established companies with products and revenue—will draw roughly the same amount of capital, he said.

Frazier says the final total matches the hard cap the firm had set when it began raising the fund. The capital principally came from investors in Frazier’s previous funds, but the new partnership brought in some additional LPs.

With the new fund, Frazier will maintain its team of general partners: Frazier, Dr. Nathan R. Every, Patrick Heron, Trevor J. Moody, Nader J. Naini, and Dr. James N. Topper as well as Thomas S. Hodge, the firm's chief operating officer.

Venture Rounds: You Stay Classy, San Diego

San Diego's life sciences start-up community took a bit of a hit recently. Enterprise Partners Venture Capital suspended its fundraising after an ill-advised attempt to raise a life sciences-focused fund instead of its traditional formula of investing heavily in information technology and life sciences companies.

The blow to Enterprise Partners represents the latest in a string of disappointing fundraising results for local firms. We swapped emails with Partner Drew Senyei but he declined to discuss the fund raising. (Tip of the cap to PE Week Wire which first reported the news.)

Unlike the Bay Area and Boston, San Diego doesn’t boast a network of homegrown venture capital funds. Enterprise Partners probably had been the largest but now it sits on ice. Forward Ventures, for example, settled on a $150 million fund in 2003 after failing to secure larger funds. The firm—which invests exclusively in life sciences—is still investing that fund and has no immediate designs on raising a new one, according to Partner Standish Fleming.

Meanwhile, we haven’t heard much from smaller San Diego-based firms like Windamere Venture Partners and Hamilton Bioventures. In an email, Scott Glenn, managing partner of Windamere, says the firm is still making investments but it apparently hasn’t raised a new fund since 2001. We tried but couldn’t reach Hamilton BioVentures in time for this post.

Yet, the region keeps chugging along as one of the top recipients of life sciences venture capital. According to the....take a breath...The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson, which tracks data by region, San Diego biotech companies raised more capital in the first three quarters of this year than they did all of last year. (We'll give you details in the upcoming Start-Up.)

Avalon Ventures, of course, is building on past success. Founded by Kevin Kinsella, the firm invests both in life sciences and information technology--as Enterprise Partners once did. It's likely to keep building on that model. "From our perspective (the San Diego venture scene) is great," Kinsella says. "I don't care if there are any other firms. When we need to syndicate, we have the Bay Area and East Coast firms. If we like a deal the chances are one of our confreres will also like it."

San Diego's life sciences start-up scene has other obvious strengths. The first is an established life sciences industry, although the acquisition of Idec Pharmaceuticals may have put a kink into that. The second is it's a relatively short flight from the Bay Area and Silicon Valley so firms can send a partner down for the day or set up offices as Sofinnova Partners and Sanderling Ventures have done.

The third is the weather, which can be particularly appealing to East Coast firms like Domain Associates. Partner Jim Blair says two Domain general partners spend half their time in San Diego where they're joined by two full-time general partners and three principals.

Check out the next issue of Start-Up for more.

Step Ups

According to one institutional investor, Frazier Healthcare Ventures is ready to close $600 million for its sixth fund. It previously closed on $450 million in 2005.

Frazier likely had little difficulty reaching the once unfathomable peak of $600 million (remember MPM's second fund?). Skyline Ventures quickly wrapped up its own $350 million fund this week, shooting past its $300 million target right up to the hard cap. "All of our significant limited partners from the previous funds came back and we got a number of new ones," says John Freund, managing director. "We got them the way we like to get them from referrals by our existing LPS." Skyline will employ the same strategy with the fund as it did to deploy its previous $200 million fund.

HealthCare Ventures, which recently lost general partner Eric Aguiar to Thomas, McNerney Partners, likely will be in the market for a new fund next year. Augustine Lawlor, who was named managing general partner over the summer, says the firm’s focus and fund size will remain the same.

Essex Woodlands Health Ventures added Lisa Ricciardi, former Licensing and Development SVP at Pfizer, as an adjunct partner. She'll be responsible for both sourcing deals and working with portfolio companies, giving her a completely different take on partnering. "I was on the buy side of a company that could do anything it wanted," she tells IN VIVO blog. "The goal was to look at a potential partner and see 30 opportunities when others only saw 10. To be on the other side—working with small companies that are really struggling with decisions on the $5 million to $10 million level, I hadn’t appreciated that a trade sale or partnering decision had such an enormous impact. It’s so interesting. It’s the absolute other side of the coin."

A New VC On The Block. Finally!

News of Third Rock Ventures closing on its new $378 million fund got us thinking. It’s been a long, long time since a new potentially top-tier venture firm has hit the scene.

No offense to firms like Clarus Ventures or New Leaf Ventures. True, both raised their first funds over the past few years and both will try to raise follow on funds over the next few months. (Clarus will go out later this year. New Leaf is out, according to VentureWire LifeScience.)

But neither of those firms presented new stories. Clarus split from MPM Capital. New Leaf Ventures was an off-shoot of Sprout Group. Their teams and strategies were largely the same.

So IN VIVO blog is more than a little excited at the formation of Third Rock for a few reasons. First, the name is cool (kudos to partner Robert Tepper). Second, the strategy is unique and very ambitious. Third, limited partners lined up quickly behind a concept story that is has a fair chance for success given the team but is by no means a slam dunk. A new life sciences venture firm hasn't generated this much buzz since Care Capital in 2000.

It's worth noting that Third Rock’s success comes amid some bad news in the venture industry overall. Venture capital fund-raising, according to VentureOne, is way down. Venture capital firms raised $6.3 billion over the first six months of the year. If that pace continues—and second halves don’t typically exceed first halves—the $13 billion total would be the second or third lowest total in the past 10 years, matching the 2002 tally. Only 2003 stands out as the worst year with $9.9 billion raised. More recently, limited partners over the past two years have committed $25.3 billion and $24.7 billion in 2005 and 2006, respectively. So a $13 billion finish would be an enormous disappointment.

Also, there's been particular bit of bad news for many venture funds--namely, they don't exist any more. Check out this analysis by OVP Venture Partners. It suggests that there are half the VC firms around today than there was in 2000. Not really suprising, but an interesting study.

But the life sciences have largely been immune to this bad news. We haven't had any signficant blow up of venture firms, except the break up that created Clarus and MPM. But no significant firms are dissolving, giving back money or even falling on hard times.

Check out the fund-raising for the past few years. Our industry's top tier firms have done exceptionally well in fund-raising: Alta Partners, Clarus ($500 million), MPM ($550 million), SV Life Sciences ($572 million), Abingworth($587 million) Essex Woodlands Health Ventures ($600 million) and, of course, Domain Associates ($700 million.)

The good times should continue to roll for the industry's blue-chip. Clarus and New Leaf will get their capital. Meanwhile, IN VIVO Blog was told that Frazier Health Care Ventures shouldn't have much trouble securing the $600 million it'll be seeking for its new fund. And can Versant Ventures and Prospect Venture Partners be far behind? Both last raised their funds in 2004, so if they're not out this year expect them to be raising money in 2008 (probably along with Delphi Ventures as well.)

Meanwhile, we're anxious to see what Third Rock Ventures will be able to do.

Third Rock Ready To Roll

Look around the newswires today and you’ll see Third Rock Ventures wrapped up $378 million for its debut venture capital fund. Great news, no doubt, but we have to ask: Can Third Rock Ventures really, as it intends, resurrect early-stage life-science VC?

As we reported back in May (Third Rock exceeded its $300 million target), the Boston-based venture firm started by a team of former Millennium Pharmaceuticals Inc. executives is intent upon performing “true venture capital.” You know, the kind of roll-up-your-sleeves, get-your-hands-dirty, or fill-in-any-other-tired-venture-capital cliché to describe the investing that you don’t see a great deal of any more from life sciences VCs, a number of whom seem quite comfortable putting millions into companies with late-stage clinical products.

The principals at Third Rock Ventures want to operate much further upstream. Their aim is to build “product engine companies” capable of employing a novel technique or technology—be it biological, chemical, intellectual or whatever—to develop multiple products and to target multiple diseases. In short, Third Rock wants to build the next Sepracor, Millennium, Alnylam, GlycoFi, Momenta, you name the big-picture company.

And when we say Third Rock wants to build these companies that’s exactly what they intend to do. The six general partners—including former Millennium CEO Mark Levin—expect to hold key management positions at these start-ups during the first year or so. They’ll negotiate the deals, set up the shop, do the hiring, etc., etc. to assure these companies get off to the right start. “We’ll be the start-up team,” says Kevin Starr, the former chief operating officer and chief financial officer at Millennium. The partners will serve CEOs, heads of science, whatever is necessary “to make sure these companies are built the right way, have the right cultures, hire the right people, and do the right partnerships. We are going to get involved in a hands-on way.”

Starr says Third Rock’s approach is “quite different than what is currently out there” in venture firms, and he’s right. No doubt, a handful of venture firms still start companies from raw research (See our recent visit with Polaris Ventures) but it’s usually just part of their portfolio, a small part. Starr expect 75% percent of Third Rock's portfolio to be “product engines” built by the firm's partners' own hands. The remainder will be less complex therapeutics companies developing new drugs or devices. Starr says Third Rock should invest the fund in 12-15 companies in three to four years.

That means Third Rock is providing considerably more than just the sweat equity of Starr, Levin and fellow partners Nick Leschly, Lou Tartaglia and Robert Tepper (they’ve all played big roles in Millennium and other companies, please go here for their full and impressive backgrounds). The firm will be positioned to invest up to $30 million into a single company, which, if the firm executes as it hopes, should provide significant stakes in these companies.

This capital plays into the second-part of Third Rock’s bid for “old school” venture capital—get bigger returns by creating companies that require less capital. The math is fairly simple. Venture investors pouring $100 million to $150 million into a company better hope to see the company’s value hit $500 million to $700 million at some time or another, or else they’re not going to see a venture-style return.

Third Rock’s answer: Max out venture investments at $50 million; get pharmaceutical companies to step in with the capital and infrastructure necessary to perform late-stage clinical trials. “It doesn’t make lots of sense to build large clinical groups in early-stage companies,” Starr says. “It doesn’t make sense to build large regulatory groups. Those are things that pharma does very well. We are going to do that collaboratively with pharmaceutical companies.”

All this sounds simple yet very, very ambitious even for a team accomplished as this one. It's the rare start-up that can, in its first few deals, demonstrate enough value to a partner to justify a major-dollar deal. On average, biotechs raise about $100 million in equity before they're ready to go public; most of the more significant acquisitions raise well north of $50 million before the buyer bites (e.g., NovaCardia had raised $88 million by the time Merck bought it for $350 million--a way-above-average return). For Third Rock Ventures to pull off its strategy, it will need to do...well... a Millennium: the company that managed, while Levin was CEO, to raise, via breathtakingly expensive discovery deals, more partnering capital per equity dollar than any other biotech, carving up the diagnostic and product rights to its technologies like a netsuke master.

Now you can quibble with what happened to Millennium--none of its pharma discovery deals drove value to its partners (for lots of reasons, not all of them Millennium's fault)--see, among our other commentaries, here and here. And largely because the discovery-partnership market dried up, and its discovery engine itself produced less than required, Millennium ended up developing precisely the kind of infrastructure Third Rock's partners say their portfolio investments will eschew.

But it's a new day. Discovery is back in fashion; so is the concept that biotech can make plenty of money providing high-value early-stage material for Pharma (and that Pharma might just as well ratchet way back on its own internal discovery spending). And Mark Levin is preternaturally capable of seizing, and commercializing, a trend. In any event, the new fund's limiteds have faith: the company reached its hard cap after less two months or so on the capital-raising trail. IN VIVO Blog certainly looks forward to watching and we would not bet against these guys. But we’ll tell you more, lessons learned from the Millennium experience, and what others have to say, in the upcoming issue of START-UP. Feel free to offer a comment.

Third Rock's a Charm

It’s one of the oldest stories out there. Successful management team, a few years removed from running their own successful biopharmaceutical company, decide to get back into the business by raising their own venture fund.

In the past, such an effort might elicit some snickers. But this is likely to be a story with a happy ending. Third Rock Ventures—a venture firm started by four former Millennium Pharmaceutical executives—is out raising $300 million for a first-time venture firm, an effort one institutional investor already has deemed a “hot commodity.”

The team includes former Millennium CEO Mark Levin, who actually is returning to his venture capital roots. Levin was a partner at Mayfield when he started Millennium and left in 1994 to run the company.

Levin joins Robert Tepper, Millennium’s former head of research and development at Millennium, Kevin Starr, Millennium’s former CFO, and Nick Leschly, who had been the project leader for Velcade. (Nick is the third Leschly to become a VC, joining father, Jan of Care Capital, and brother, Mark, who is with Rho Capital.)

No details yet on the strategy, but some expect Third Rock to look at early-stage, product-focused companies. "True venture capital," in the words of one IN VIVO Blog source.