Financings of the Fortnight Gets Comfortable In Genes

Twenty-three years after the first gene therapy clinical trial began, investors are finally showing confidence in the sector. The field still isn’t without risks, but some of its most daunting challenges are being resolved as clinical data broadens, regulators show support, and manufacturing improves.

The promise of gene therapy, which entails replacing a malfunctioning gene with a properly functioning copy delivered by a viral vector, is that its treatments are administered once with long-lasting, potentially curative results. That has tantalized scientists since the first gene therapy trials began in 1990, even as clinical research endured a standstill in the early 2000s after the deaths of several trial subjects. Their first big payoff came late last year, when European regulators approved uniQure’s Glybera (alipogene tiparvovec) to treat the rare disease lipoprotein lipase deficiency.

Since April, VC syndicates have backed two new companies studying new gene therapy treatments. First, Novartis Venture Fund, Abingworth, Versant Ventures and Index Ventures committed €32 million ($41.4 million) in GenSight Biologics’ springtime Series A round. Then Versant doubled down last month, contributing to Audentes Therapeutics’ $30 million Series A alongside OrbiMed Advisors and 5AM Ventures. Ophthalmological treatment developer GenSight and muscle-wasting specialist Audentes join a field of private companies that includes Celladon, Finland’s FKD Therapies, and uniQure.

More notably, gene therapy developer bluebird bio took advantage of the appetite for biotech listings in June, blowing past expectations with a $116 million IPO. In the aftermarket, bluebird shares touched $35, more than double their opening value; they currently trade above $27, giving the company a market capitalization of about $620 million.

Why has interest been renewed? “In terms of the investment community, the barriers to gene therapy as a therapeutic modality are being erased,” Celladon CEO Krisztina Zsebo told “The Pink Sheet” last month.

The body of evidence has grown significantly since 2006, with proof-of-concept shown across a variety of diseases. The manufacturing process has been industrialized and, while still expensive, occurs at a scale that appears sustainable. And in the wake of Glybera’s approval overseas, U.S. regulators have revised their guidance for clinical trials on therapies, suggesting cautious procedures but implying a willingness to approve a product when the time is right. It may be soon, as uniQure pursues Stateside approval.

It’s not just investors getting into the act. Several pharmas have their own programs, and others are striking high-profile deals. Celgene paid bluebird $75 million up-front in May, as the two inked a cancer research partnership, while uniQure teamed with Chiesi Farmaceutici for a territorial rights deal. Novartis and Boehringer Ingelheim have also licensed vector-related technology that could lead to new products as well.

Some risks are still very present. Many therapies pose a danger of “insertional oncogenesis,” the accidental triggering of a nearby gene that leads to cancer, although the vectors most commonly used today (adeno-associated virus and Lentivirus) are believed to be safer than the ones that led to patient deaths more than a decade ago. For now, the trailblazing companies are mostly operating in rare-disease fields where alternatives are scarce; as data sets grow, the treatment modality could soon be used in broader areas.

And although bluebird’s investors have reached liquidity, it’s tough to assess the value of gene therapy companies because of unresolved questions around product pricing. uniQure appears to be targeting a price of €1.2 million ($1.6 million) per injection, payable over a period of five years. That could induce sticker shock, but Versant venture partner Tom Woiwode argues that it’s quite reasonable, since a single, potentially curative treatment could ultimately cost less than a lifetime of chronic pharmaceutical use.

In the longer term, it’s also unclear whether gene therapies will really be permanently curative, or will need to be re-administered periodically. Moreover, a handful of early successes in rare diseases won’t necessarily carry over to more widespread disorders. Payer relationships haven’t yet been established, nor is there a precedent for a high-priced, one-time treatment before uniQure’s market entry. But each additional step offers a little more clarity for investors willing to risk their money on a treatment modality that holds so much promise.

We can't promise you, dear reader, a curative therapy, but if you don't mind a biweekly dosing schedule, we're always happy to bring you...

Edimer Pharmaceuticals: The tiny Cambridge, Mass. firm said July 30 it has raised an $18 million Series B round to test its protein replacement therapy EDI200 in newborns with X-linked hypohidrotic ectodermal dysplasia (XLHED), a rare genetic disease that can lead to fatal hyperthermia, as well as loss of hair and teeth in older patients. The Phase II trial, scheduled for six to ten newborns, comes on the heels of a Phase I trial in adult patients. The final data are still under analysis, Edimer CEO Neil Kirby told our Pink Sheet colleagues. Kirby is unsure what Edimer’s strategy will be for Phase III if EDI200 is successful in Phase II study, but said a partnership would likely be necessary to commercialize the drug if approved. New Enterprise Associates led the round, with Sanofi-Genzyme BioVentures also a first-time investor. NEA gets a seat on the board, while Sanofi-Genzyme, which can offer considerable expertise in rare disease drug development, will provide a board observer. Third Rock Ventures and VI Partners, which funded Edimer’s $22 million Series A in 2009, also are participating. -- Joseph Haas

aTyr Pharma: The San Diego biotech pulled in a $49 million Series D round as well as $10 million in venture debt to fund clinical trials of treatments for rare immune disorders. aTyr is developing protein therapeutics based on physiocrines, which are extracellular fragments of the tRNA synthetase family of enzymes. (You can find a deeper discussion of aTyr here in a recent START-UP feature on companies pursuing more phenotypic inquiry in the drug discovery process.) The firm's work on physiocrines -- which were first called "resectins" -- spun out of Scripps Research Institute and was backed by Alta Partners, Cardinal Partners, and Polaris Ventures, all of which participated in the new Series D. Domain Associates, which led aTyr's Series C, also participated, as did an unnamed global investment fund. The $10 million loan comes from Silicon Valley Bank and puts aTyr's total cash raised through equity and debt past the $100 million mark. tRNA synthetases have been well known for decades as humble helpers with protein synthesis within cells. No one gave them much thought as disease-modifying agents. Scripps reseachers realized the synthetases were also getting outside cells and being cleaved; part of the outcome of that cleavage were physiocrines, and that these fragments have extracellular signaling function that might also have disease implications. aTyr's focus on rare immune disease is fairly recent; in 2011, it quietly shelved its previous lead candidate, a thrombocytopenia treatment. -- Alex Lash

Dicerna Pharmaceuticals: This alumnus of the 2011 A-List said August 1 it has raised a $60 million Series C round, its first venture round in three years. The Boston-area biotech was part of the wave of companies to launch last decade, led by Alnylam Pharmaceuticals, to pursue therapies based on the breakthrough of RNA interference. Alnylam has had early clinical success, but generally the field's high expectations have been tempered because of drug-delivery limitations and other problems. Dicerna, however, has attracted a roster of new backers generally regarded as "crossovers," or public investors looking to buy into private companies to gain a foothold in a pre-IPO round. Dicerna's Series C was led by RA Capital and included Brookside Capital, Deerfield, and Omega Funds, which often buys shares from venture investors looking to cash out. The round also included all five of Dicerna’s existing institutional investors: Abingworth Management, Domain Associates, Oxford Bioscience Partners, Skyline Ventures and SR One. -- A.L.

BioMotiv: The drug-development accelerator based in Cleveland said August 5 it has raised $25 million from Nationwide Mutual Insurance and other investors, bringing its total cash raised to $46 million. That's about half of the firm's goal of $100 million to bring to fruition an asset-centric development model that looks to in-license preclinical compounds, work them into the clinic, and sell them to pipeline-hungry buyers with Phase Ib or IIa data. The only previously disclosed investors, which provided BioMotiv’s first $21 million, are University Hospitals of Cleveland and the Harrington family. BioMotiv is one piece of a $250 million initiative – The Harrington Project for Discovery and Development – spurred by the family to accelerate biomedical research into new therapies. Like many asset-based schemes, the BioMotiv structure allows returns from individual projects to pass through to investors. But as CEO Baiju Shah told our sister publication START-UP, which featured BioMotiv in its June Capital Matters column, the for-profit's investors are not limited partners; they function as direct investors with a certain amount of operational control, just as would the shareholders in a corporation. So when a return from a project comes in, investors will decide whether to distribute those earnings to themselves and management in an 80/20 split, or to plow them back into company operations. BioMotiv has already brought in eight compounds: two in oncology, three autoimmune-related, and one each in inflammation, ophthalmology, and infectious disease. The goal is 20 projects in hand at any one time. To maintain that steady state, the firm will have to reach another goal: an "evergreen" flow of capital to pour back into projects from successful exits. Shah hopes to have the first in the clinic in 2014.  -- A.L.

All The Rest: To support a clinical study of icaritin in advanced hepatocellular carcinoma, Shenogen raised $30M in Series C funds…Imperial Innovations led a £13.5M investment in the newly merged PolyTherics/Antitope…antibody company Apexigen completed a $20M Series A…vaccine player Vaxart raised $20M in a Series C financing...Karyopharm added $19M on to its Series B round, bringing the total to $67.2M…developing a Pfizer-discovered compound for premature ejaculation, Ixchelsis raised $14M from TVM Life Science Ventures VII…Merck Lumira Biosciences Fund led a $13.2mm investment in enGene…Rhythm Pharmaceuticals completed a second $11M tranche on its Series B, which now totals $44M…to advance monoclonal antibody linker technology, Meditope Biosciences closed a $3.6M Series A…Sialix, which is researching the role glycans play in cancer and inflammatory diseases, raised $1M in Series B funds from angel investors…AuraSense Therapeutics added on an undisclosed amount of money to its $5.4M Series B…days after completing reverse merger with Marathon Bar Corp., Lipocine privately raised $37.8M…to pay for clinical trials of cancer candidates Validive and Livatage, BioAlliance Pharma completed a €8.7M PIPE…Transition Therapeutics grossed $11M, enough funding to finish three major Phase II studies…cell therapeutics company TiGenix closed a €6.5M capital increase….Aeterna Zentaris raised $7.8M in a private placement to advance its zoptarelin doxorubicin (AEZS108) program in prostate cancer…CNS disorder-focused Vanda Pharmaceuticals closed on a $52.3M FOPO…Organovo, developer of 3D human biological disease models, publicly raised $40.5M…Opexa Therapeutics grossed $18M in a FOPO and plans to spend the money on Phase IIb studies of immunotherapeutic Tcelna...to pay for Phase I trials of BCX4161 for hereditary angioedema, BioCryst completed a $17.6M secondary offering…synthetic biology company Intrexon priced its IPO at $16, the top end of its range, to gross $160M...small-molecule cancer drug developer Onconova grossed $89M in its IPO…Conatus, focused on hepatic diseases, raised $66M in its IPO…stem cell manufacturer Cellular Dynamics completed its $45.6M IPO…Sophiris Bio set IPO terms at 5M shares…Acceleron Pharma, Five Prime Therapeutics, and Foundation Medicine filed for their initial public offerings…Emmaus Life Sciences, Paratek Pharmaceuticals, and Iroko Pharmaceuticals withdrew their IPO filings…through the offering of three series of senior unsecured notes, Celgene grossed $1.5B…and Telegraph Hill Partners closed on a $310M fund dedicated to life sciences and health care. -- Amanda Micklus

Many thanks to Paul Bonanos, who authored this fortnight's introduction on gene therapy. 

Photo courtesy of Flickr user certified su, who also has cool pictures of Australia. 

Red Rover, Red Rover, Let Financings of the Fortnight Cross Over

The Pacific Ocean has the Marianas Trench, the deepest place on Earth, more than six miles down. But Financings of the Fortnight has Crossover Canyon. And this fortnight, it went from zero to 210 million.

The zero was the number of dollars Radius Health raised trying to go public, and 210 million was the blockbuster financing for Intarcia Therapeutics. How fortuitous. As we noted in our previous column, our colleague Stacy Lawrence is working on a Start-Up feature about the return of crossover investors to biotech, and as if to punctuate her weeks of reporting that you’ll be able to enjoy just after Thanksgiving, Intarcia announced Nov. 15 a $210 million Series C, one of the industry's biggest rounds of private financing in memory, and it did so mainly by tapping crossover investors: the hedge fund Baupost Group, the diversified fund Farallon Capital Management, the multinational giant Fidelity Investments, and two other unnamed institutional investors. Existing venture backers New Enterprise Associates, New Leaf Venture Partners and Venrock also joined. The funding consists of $160 million in equity and $50 million in debt, and it’s all in one shot, Intarcia CEO Kurt Graves told our "Pink Sheet" DAILY colleagues. In other words, they don’t need no stinkin’ tranches.

The money will help push Intarcia’s lead product ITCA-650 in a set of Phase III trials. Intarcia has developed a formulation of the diabetes drug exenatide that can be implanted under the skin up to a year in a matchstick-sized delivery device. Exenatide, an analog of glucagon-like peptide-1, is marketed by Bristol-Myers Squibb and partner AstraZeneca as both Byetta and Bydureon, in twice-daily and once-weekly formulations respectively. The partners paid $7 billion to acquire Amylin, which previously owned the drugs, in June.

Meanwhile, Intarcia was once a whisker away from partnering ITCA-650 but backed off to keep full control. That helps explain the enthusiasm of the crossover investors, who have piled into to some of the year’s largest venture rounds, though none of course as large as the Intarcia deal. Crossovers want to take companies public; M&A is not their preferred exit. In fact, one factor in their resurgence is frustration as they’ve watched strategic buyers pick off the best biotechs before they, the public investors, can get a piece of the action. It’s worth mentioning that these days, those buyouts often happen in wildly favorable circumstances for the buyers – in structured deals with earnouts that only pay shareholders if the acquired company’s products hit milestones, as we explained in the March issue of Start-Up.

So when you see hedge and mutual funds featured in a biotech venture round, it’s a good bet that company will do its damndest to go public. With all that cash riding into Phase III, and a product that could address one of the world’s most burdensome diseases, don’t expect Intarcia and its new shareholders to jump quickly into a buyer’s arms.

The crossover road can be rough, too. Radius Health, with crossovers BB Biotech AG and Brookside Capital in the mix, raised $91 million in 2011 – also with a debt component – merged with a public shell, and pointed itself toward the public markets through a process known as Form 10, which lets a company list over the counter without the hullaballoo of a big IPO. It then opted to try for a big IPO, after all, and filed an S-1 in February. Those dreams were put on hold this week; the company said it would withdraw its S-1 because of general market conditions, and the stock is still not trading anywhere, even on the low-profile, low-volume exchanges.

Somewhere in between Intarcia’s $210 million and Radius’s zero is Ziarco, a new company that said Nov. 5 it received the first $6 million tranche of a potential $27 million Series A round. Consider it a small bite of Pfizer’s old Sandwich. Ziarco licensed four drug candidates that were developed at Pfizer’s now-shuttered Sandwich, UK labs, and part of the venture cash comes from Pfizer’s venture arm. But the lead financier is a very unlikely source: the hedge fund Biotechnology Value Fund, which typically invests in small- and micro-cap biotechs like this one. The crossover move is its first in five years, and it doesn’t seem inclined to make a habit of it. BVF partner Mark Lampert called the Ziarco deal opportunistic. Ziarco has four anti-inflammatory and anti-allergy drugs, on which Pfizer spent more than $100 million on R&D, said BVF’s Lampert. The most advanced is a histamine H4 receptor antagonist that has completed Phase I. CEO Mike Yeadon, who was VP and CSO of the allergy and respiration research team in Sandwich, told our “Pink Sheet” DAILY colleagues it could be a once daily low dose oral treatment for asthma, allergic rhinitis, pain, and inflammatory skin conditions. Pfizer Ventures’ stake is undisclosed, and it will receive milestone payments and royalties as the drugs progress.

Speaking of progress, we're almost to the blurbs. A quick programming note: This week we've added a new twist to FOTF. After the four blurbs, you'll find a lightning-round paragraph that takes you through the rest of the fortnight's financings. We hope you find it useful. Now on the count of three, let's all get a running start and jump headlong into...

Visterra: If the Cambridge, Mass. biotech has its way, Tamiflu will have competition. Visterra said Nov. 9 it closed a $26 million Series A round with $13 million from the Bill & Melinda Gates Foundation, Omega Funds, and its existing investors. The cash will help Visterra push its monoclonal antibody VIS410 into the clinic for seasonal and pandemic influenza. It’s a therapeutic, much like Tamiflu (oseltamivir), which is famously stockpiled whenever a new flu strain emerges amid whispers of “pandemic.” Visterra also sees it used as a prophylactic for first responders and others at near-term risk of flu infection. The infusion of cash from the Gates Foundation was undisclosed, but it’s significant nonetheless. Visterra is the third biotech in roughly a month, and fourth since March 2011, to sell equity to the Gates Foundation. In our previous edition we discussed the Gates investment in vaccine firm Genocea Biosciences. New head of global health Trevor Mundel said this summer the foundation would be more aggressive with its new investment strategy, and so far he’s right. (The upcoming issue of Start-Up takes a deeper look at the Gates biotech investment initiative.) So far, the foundation is targeting platforms, such as Visterra’s antibody discovery technology, so it can help point applications of the technology in directions beneficial to global human health. For example, roughly half of Gates’s Visterra investment is earmarked for a program in infectious disease (but not the flu). The other lead investor in the $13 million tranche, Omega Funds, usually buys shares of venture firms no longer able to hold positions in portfolio companies. But the Visterra investment is primary, not secondary, said Visterra CEO Steve Brugger. – Alex Lash

Abbvie: With a split from its parent company Abbott Laboratories imminent, the pharmaceutical unit AbbVie issued $14.7 billion in debt securities that will help it pay back cash to Abbott, as well as fund dividend payments to future shareholders. The debt issuance -- which included three-year fixed-rate, three-year floating-rate, five-year, six-year, 10-year and 30-year notes – was the largest dollar-denominated offering by a company in more than three years, and a sign that throughout market turmoil, health care reform, and other disturbances, Big Pharma has no problem convincing bond buyers of its seaworthiness. However, AbbVie did receive a slightly lower rating, Baa1, from Moody’s because of its untested independence and its overreliance on sales of rheumatoid arthritis drug Humira (adalimumab). Before AbbVie, the largest dollar-denominated debt offering was from Roche in February 2009 to help pay for its acquisition of Genentech. The company issued $13.5 billion in long-term debt, as well as $3 billion in commercial paper, a form of short-term debt. That same year Pfizer issued $13.5 billion in debt in conjunction with its acquisition of Wyeth. Amgen has also issued more than $10 billion in debt over several years to fund share repurchases. AbbVie issued $3.5 billion of 1.20% senior notes due 2015, $4 billion of 1.75% senior notes due 2017, $1 billion of 2.00% senior notes due 2018, $3.1 billion of 2.90% senior notes due 2022, $2.6 billion of 4.40% senior notes due 2042, and $500 million of floating rate senior notes due 2015. – Lisa LaMotta

Pearl Therapeutics: The Redwood City, Calif. company said Nov. 13 it has closed a $65 million Series D round to help move its combination chronic obstructive pulmonary disease drug, PT003, into Phase III testing by mid-2013. With four years of Phase II testing under its belt, Pearl Therapeutics wants to move into two pivotal trials and, it hopes, attract a partner for PT003. The Series D included the company’s four existing investors: 5AM Ventures, Clarus Ventures, New Leaf Venture Partners, and round leader Vatera Healthcare Partners. The company has raised a total of $167.5 million since 2007, including its $69 million Series C in 2010, which included the same four investors. Pearl expects to file for approval of its combo product, as well as each of the components in three separate New Drug Applications, by the first half of 2015. PT003 is a fixed-dose combination of glycopyrrolate, a long-acting muscarinic antagonist (LAMA), and formoterol, a long-acting beta-2-agonist (LABA). It uses a meter-dose inhaler (MDI) as a delivery device, and since MDI technology is already used with other medications, the company will not have to seek regulatory approval for the device, nor will it have to spend resources educating doctors and patients about the use of the device. – L.L.
 
Auspex Pharmaceuticals: Amid all our talk about public investors crossing over into the mezzanine rounds of private companies, we noticed that Auspex is having a different conversation. The San Diego-area company that makes deuterium-modified compounds has raised a $25 million Series D round that it hopes will fund its lead drug, an analogue of tetrabenazine, a treatment for chorea (involuntary spastic movements) associated with Huntington’s disease (HD). The original version, Xenazine, is marketed by Valeant Pharmaceuticals International through Lundbeck in the U.S. for the same indication. New investor Panorama Capital led the Series D round, with participation from existing investors Thomas, McNerney & Partners, CMEA Capital, and Sloan Biotech Fund. Gaurav Aggarwal of Panorama joins the board with the financing. Auspex has raised a total of $60 million since its 2007 inception. “We like the near-term nature of the product and the uniqueness of it,” Aggarwal told our friends at "The Pink Sheet". He was confident that Auspex could go public even if the syndicate can’t sell the company. Another deuterium modification company, Concert Pharmaceuticals, has advanced its lead candidate for diabetic neuropathy nephropathy into Phase II. Deuterium is an isotope of hydrogen, and substituting it for hydrogen bonds makes a molecule more able to withstand enzymatic breakdown and thus stay in the body longer. It also creates new chemical entities, their developers say. The patent office agrees: on Nov. 15 it granted a composition-of-matter patent to Auspex for its deuterium-substitute version of Pfizer’s JAK kinase inhibitor tofacitinib, which the FDA approved on Nov. 6. – A.L. 

The Best of the Rest: Shanghai Jingfeng Pharma’s venture round brought in $30 million led by Vivo Ventures…an OrbiMed-led Series B for Cardioxyl Pharma totaled $28 million…Roche Ventures and MedImmune Ventures participated in Ambit Biosciences’ $25 million Series E supporting quizartinib clinical trials… fellow diagnostics companies Metamark Genetics, Epic Biosciences, and Advanced Cell Diagnostics each raised Series B financings…STAR antibody platform play Alethia Biotherapeutics closed a $4.7 million Series B…Avexxin raised an undisclosed amount in Series B financing for chronic inflammatory disease development…Vivo Ventures and New Leaf Partners joined as new shareholders through MEI Pharma’s $27.5 million PIPE…Tavistock Life Sciences led a $Cdn26.1mm private placement for MethylGene…vaccine adjuvants developer Isconova raised SEK50mm through a rights issue…Idera Pharma completed a $7mm converted preferred stock and warrants sale…small-molecule cancer drug developer Array BioPharma’s FOPO grossed $65.7 million…in the only completed IPO of the fortnight, breast cancer testing company Atossa Genetics raised $6.5mm without taking a haircut…Enanta filed to go public, hoping to advance its anti-infectives…Cardiovascular diagnostics company Singulex postponed its IPO … AstraZeneca completed a $2 billion two-tranche bond issue… insurance provider Aetna raised $2 billion from the sale of senior notes to fund its acquisition of Coventry Health Care.

Photo courtesy of flickr user bumeister1 via a Creative Commons license.

Financings of the Fortnight Thinks You're Hot.... Or Not

A mother-in-law who's also a day trader sounds like the start of a "walks into a bar" joke. But trust us, such people exist. And they sometimes ask their sons-in-law for biotech trading advice, at which point their sons-in-law laugh out loud and say, "Here's the best biotech trading advice: Don't." 

Obviously a lot of people do, and (we assume) most of them understand just how risky the sector is. There are all kinds of bets to place on all kinds of companies and assets and perhaps, just perhaps, those with appetite for risk are starting to peek out from under the tarp (and we're assuming they don't duck again for cover in fear of the Gilead Sciences Hepatitis C results spreading end-of-bubble contagion over the sector). We say so because this past fortnight brought a fascinating group of financings in areas that, we can say charitably, are about as hot as a first date with Rick Santorum. 

For example, Alnylam Pharmaceuticals, once flying high on the therapeutic promise of RNA interference -- a discovery that won the Nobel Prize six years ago -- has seen much of the interest in the platform dry up and legal headaches crop up. But the firm, while cutting a third of its staff, is pressing on with its own clinical program for transthyretin-mediated amyloidosis, one of only a few RNAi-based drugs in the clinic, and last week it raised $87 million through a public offering of 8.6 million shares at $10.75 a piece. 

Another notable and counter-intuitive bet was the $100 million private placement issued by Vernalis, bought in large part by a major shareholder. Vernalis is a long-in-the-tooth UK biotech that slowly, steadily has built itself back up from a near-bankruptcy late last decade. Resilient, yes. En vogue? Mais non. As we explain below, most of the cash is being plowed into the firm's new guise as a cold-and-cough-drug marketer, a sharp and, to be frank, rather weird right turn for the long-time discovery firm. 

Staying across the pond, we note the French diabetes firm Adocia raised €25 million ($33 million) in the first European biopharma IPO of the year -- and the first one in nine months. In other words, paying newly public companies for their equity is something European public investors simply don't do these days, so when it happens, please take note. (It's also worth a mention that French orthopedic imaging firm EOS imaging went public on the NYSE Euronext February 15 and raised €38 million.)

 

But the most interesting deal for us this past fortnight is in Alzheimer's disease, where a lot of smart people are wondering how to treat a malady that, by the time symptoms start to appear, might be too late to treat. With huge clinical programs burning hundreds of millions of dollars to little effect, it's not a great time for start-ups to convince investors to back their early-stage work, especially when they've already had significant delays in getting to the clinic.

But Satori Pharmaceuticals said this week that three existing investors would put up $15 million in convertible debt as a bridge to the clinic -- and ideally to an exit. It could be the start-up's last chance to make a big impression in a field that, to some extent, is in retrenchment mode, with a growing realization of how vast the problem is, and even the federal government pondering how to step in. In the grand scheme of things, $15 million is chicken feed weighed against the chance of Satori bucking current conventional wisdom and having a disease-modifying effect with a drug that keeps nasty plaques from forming in the brain.

See our roundup below for a more detailed account, and let's all give a hip-hip-hooray for those with an appetite for risk, as long as they don't give our mothers-in-law any bad advice. Meanwhile, you can never go wrong hanging on every word of...

Satori Pharmaceuticals: The preclinical Alzheimer's startup said February 23 that its current venture backers have extended the firm $15 million in convertible debt to help push its lead compound into the clinic, with Phase I now slated to start in early 2013. When the firm sewed up its previous financing, a $22 million Series B round in 2008, officials were optimistic they could reach clinical studies by 2011, but the horizon retreated with the need to rework the unnamed compound, a gamma secretase modulator, into a once-a-day dosing formulation, executives say. The new cash is not equity, although officials said they contemplated raising a Series C. Instead, as the company races to file an IND, the debt option allowed faster turnaround because there was no need to negotiate a new company valuation or bring in new investors. The debt will convert to Series C shares if the company raises a new round, but Satori prefers that the $15 million bridge loan would attract Big Pharma partners -- and ultimately an acquirer -- by proving its lead drug's hypothesis in two Phase I trials. The first trial aims to show safety, without the side effects that have dogged gamma secretase inhibitors. Satori says its drug is more "selective," in that it allows the enzyme gamma secretase to do its beneficial work in some molecular pathways, while preventing it from creating the toxic amyloid beta-42 fragment that aggregates into the tell-tale plaques that foul the brains of Alzheimer's patients. In the second Phase I trial,  Satori aims to show by measuring cerebrospinal fluid (via spinal taps) that the drug indeed suppresses production of Aβ-42 without suppressing production of other amyloid beta fragments that don't appear to be harmful. Existing investors InterWest Partners, New Enterprise Associates, and Prospect Venture Partners bought the debt financing. Other Satori investors including PureTech Ventures could buy an additional $4.2 million of the debt as part of their pro-rata rights, but have not yet done so, according to Satori officials. -- Alex Lash

Ceptaris Therapeutics: Wait a second. Is venture debt hot? After changing its name from Yaupon Therapeutics to Ceptaris Therapeutics in January, Ceptaris has raised $15 million in a venture debt financing to help fund its transition from a clinical-stage company to one that anticipates commercializing its first product later this year. The product, formerly known as Clearazide, a topical gel formulation of the generic cytotoxin mechlorethamine, has a PDUFA date of May 27 for an indication of early-stage cutaneous T-cell lymphoma (CTCL). The company received $7.5 million at closing of the debt financing February 21, and is eligible to draw down the other $7.5 million upon FDA approval of the drug. The debt financing was backed by Silicon Valley Bank and Oxford Finance. Ceptaris, founded in 2002, had raised more than $33 million over four rounds of financing, most recently bringing in a $14.4 million Series D last August. Chairman and CEO Stephen Tullman explained that the non-convertible debt financing offered Ceptaris several advantages over another VC round, not the least of which was preventing further dilution of the company’s stock. "At this time venture debt offers us the lowest cost of capital,” he said. -- Joseph Haas

Vernalis: British biotech Vernalis joined the follow-on fiesta of the fortnight with a $104 million private placement of its stock to fuel its transformation into a marketer of prescription cold and cough medicines. The cash helps pay for a new development deal struck with privately held Tris Pharma, which has spent more than seven years developing 12-hour extended release liquid formulations. Vernalis will pay development milestones on up to six new cold drugs that Tris funds, develops and submits for approval to the FDA. The active ingredients are already marketed in the US, so the products could be ready for filing in 12 to 24 months, Vernalis CEO Ian Garland said in a February 10 conference call. Vernalis has exclusive marketing rights to the products, and their core patents on extended-release liquids expires in 2029, Garland said. It's a remarkable pivot and the latest incarnation for Vernalis, with roots going back two decades, although not a complete surprise that it would aim for a nearer-term product to in-license. In 2010 Garland said Vernalis was on the hunt for something in neurology or oncology. Also, Garland has experience marketing cough and cold medicine when he ran the US business of Celltech (now UCB Pharma) in the 1990s. That Vernalis could raise $100 million is also remarkable, considering it was nearly bankrupted by the US rejection of its migraine drug Frova (frovatriptan) in the expanded indication of menstrual migraine. It sold US rights and restructured in 2008, and soon after Garland took over with the plan to rebuild through licensing deals backed by its discovery platform, such as this 2009 tie-up with GlaxoSmithKline. The recent placement totals 342 million shares at £0.20 a piece, a 7% premium. It was sold to existing backers, including Invesco Asset Management, and new buyers. Invesco already owns 42.9% of Vernalis; its purchase would have triggered an obligation to buy Vernalis outright, but Vernalis is waiving the condition to let the sale go through. Shareholders must approve the sale February 28. -- John Davis

Exelixis: As Exelixis continues to push top candidate cabozantinib through a Phase III trial for medullary thyroid cancer, the oncology drug developer has again turned to the public markets for financing. Exelixis netted $65 million in its latest follow-on offering, selling 11 million shares to the public at $5.50 apiece, plus an additional 1.65 million to its underwriters. Goldman Sachs was the sole book-running manager in the offering, while Cowen & Co. was co-manager. Exelixis said earlier this month that it aimed to sell 10 million shares, but it raised its target upon pricing the offering Feb. 10. In a Feb. 22 regulatory filing, the company said it had $284 million in cash, cash equivalents, marketable securities and long-term investments as of Dec. 31. With anticipated payments from partners and the newly-raised cash, Exelixis said it has enough capital to cover its next 12 months’ worth of expenses. The company expects to pursue a more lucrative prostate cancer indication for cabozantinib if the drug is approved for MTC. Exelixis last raised money in March 2011, when it netted $180 million by selling shares at $11 apiece. The company raised about $285 million in four other secondary offerings between 2003 and 2007. -- Paul Bonanos

Photo courtesy of XcBiker via a Creative Commons license. Soooooo hot.

Financings of the Fortnight Looks for Its Shadow

We are always on the lookout for leading indicators, no matter how faint the signal. If you tend an herb garden on your back porch, you might prefer the "green shoots" metaphor. Ever hopeful that the second law of thermodynamics isn't really the guiding principle ruling our lives, we humans also imbue natural events and public rituals with significance. Earthquakes as divine punishment! The groundhog's shadow! That said, we should say right off the bat that Genmark Diagnostics is no Punxsutawney Phil.

Yes, Virginia, there was an IPO last week, and its name was Genmark. But it wasn't the sort that necessarily means a damn thing. An obscure UK diagnostics firm formerly known as Osmetech that creates a US subsidiary, reverse-merges into it to reach US shareholders -- and only pulls in $28 million after shooting for as much as $45 million, for that matter -- is only that. An N of one.

Yet it came at a time when we were already thinking about diagnostics, and funding, and the funding of diagnostics. The low-profile offering, tucked just in front of the long holiday weekend, was also sandwiched between two conferences that opened different windows on the application of genetic information. At a consumer genetics show in Boston this week, funding strategies weren't explicitly on the menu, but as our correspondents noted, it's becoming ever more clear that cost breakthroughs in sequencing will lead to identification of medically significant genetic variations in patients. The question then becomes, what do you do with them?

That was the topic last week at the C21 venture conference in California's Napa Valley, where the diagnostics panel drew an eager crowd looking for ways to put money into -- buzzword alert! -- low-cost innovation. (That is, really cool stuff that doesn't cost a lot to make.)

And as our colleague Mark Ratner noted in his recent IN VIVO feature, despite the early days of most genetic research, a trio of well-known VCs -- Kleiner Perkins Caulfield & Byers, Mohr Davidow Ventures, and TPG -- have spread their diagnostic bets further, particularly into cardiology, after hitting the jackpot with breast-cancer test maker Genomic Health. Genmark isn't in their portfolios, but as we've seen on the drug side, any IPO activity after the long dry spell of 2008-2009 is worth scrutiny, not just as an indicator for current portfolio companies but for investors looking to jump in. One of the keys to diagnostics is getting pharma's attention in a variety of ways, such as using tests as a marketing tool when a drug rep is out detailing. We'll let Ratner explain:

The raison d'etre of new molecular tests is to significantly add to the information available to physicians to enable or change critical clinical decision-making. Especially at a time when the pace of new drug introductions is slowing and the opportunities to meet face-to-face with physicians therefore diminishing, as molecular diagnostics moves into new and broad markets like cardiology and metabolic disease, pharma could use this opportunity to its advantage in many settings.

In the case of a specific cardio test called Corus CAD, Ratner writes, "There's sufficient novelty and interest in genetics and genomics associated with coronary disease that [drug reps] could start a dialog with a physician about Corus CAD and at some point change to their drug-oriented message."

Diagnostic brethren such as LabCorp, Roche and Qiagen make splashy acquisitions; pure-play pharmas probably won't, though some are keeping their options open. Other deals will come from industrial giants such as General Electric and Procter & Gamble. But with massive hoards of cash to spend, any sign of pharma opening its coffers for diagnostics deals could mark a big change in the way VCs invest, which despite a few high-profile deals hasn't been that stunning. According to the Elsevier Strategic Transactions database, investment in diagnostics, over $1 billion annually for most of the past decade, is trending lower this year with $273 million through May.

Then again, life-science investing is down across the board this year. Have no fear, there's always plenty of material to bring you...



Tetraphase Pharmaceuticals: The antibiotic developer pulled in a $45 million Series C round to push its lead candidate into Phase II trials later this year, marking another step toward filling what public-health officials say is a ever-growing need: next-generation treatments to fight drug-resistant Gram-negative bacteria, as noted by our colleagues at START-UP. Tetraphase starts with a tetracycline backbone and then modifies the molecule at multiple positions to create an extremely large library. These molecules then can be screened for both their anti-infective properties and their potential to cause off-target toxicities. The lead compound, the intravenous TP-434, will likely focus initially on intra-abdominal infections. The Series C cash will also help push two more compounds -- TP-2758, for complicated urinary tract infections and TP-834, for the treatment of community acquired bacterial pneumonia -into Phase I. Excel Venture Management, a new investor for the biotech, led the round joined by existing backers: CMEA Capital, Fidelity Biosciences, Flagship Ventures, Mediphase Venture Partners and Skyline Ventures. Steve Gullans, managing director of Excel Venture Management, will join Tetraphase's board of directors. -- Carlene Olsen

NormOxys: The developer of small-molecule oxygen-enhancing drugs to treat a variety of diseases announced on May 24 a $17.5 million Series B financing. In addition to existing backer Index Ventures, Care Capital participated in the most recent financing round, with partner Argeris "Jerry" Karabelas joining the start-up's board of directors. It brings the firm's total funding to $30 million. With its novel platform technology and top-notch scientific pedigree, NormOxys has raised a sizeable but not extraordinary amount of additional cash from A-list backers and avoided too much dilution. It can now also aim for a more lucrative big pharma partnership -- whether it's a licensing deal or acquisition -- once the lead molecule, and thus the company's platform, have been derisked. The lead molecule is OXY111a, which the firm calls an "oxyren," for its oxygen-releasing capabilities. It changes the offloading capacity of hemoglobin so that more oxygen can be delivered to tissues where needed. If all goes to plan, it shouldn't result in excess oxygen delivery to normal tissue, which can cause damage because of free radical production. Equally important, say officials, is that the molecule triggering the actual physiological changes is oxygen itself, not the oxyren. Thus, potential off-target side-effects that have scuppered artificial blood substitutes such as Biopure's Hemopure, Northfield Laboratories' PolyHeme, and Baxter Healthcare's HemAssist, should be less problematic. OXY111a is entering Phase I trials with a later goal of testing it against chronic heart failure and an undisclosed cancer indication. -- Ellen Foster Licking

Exelixis: The San Francisco Bay Area public biotech is no stranger to all kinds of financing deals, and now it's turned again to debt to help expand the late-stage development of lead candidate XL184. Exelixis said June 3 it has secured loans worth $160 million from two lenders at an aggregate cost of capital under 10%. Part of the cash will pay back a loan from GlaxoSmithKline, a remnant of the firms' broad, six-year license-and-option deal signed in 2002. It will also fund XL184, which should enter Phase III trials for second-line glioblastoma by the end of 2010, with more Phase III trials possibly coming in 2011. XL184 was rejected by GSK before the six-year deal expired in late 2008, but Exelixis pivoted into a lucrative deal with Bristol-Myers Squibb, which pays 65% of XL184 development costs. It is currently in Phase III for medullary thyroid cancer and earlier-stage trials for glioblastoma. Exelixis is tapping Silicon Valley Bank for $80 million with a seven-year term loan at 1% interest. It's also borrowing $80 million from Deerfield Management, a five-year term with a maximum principal of $124 million. Interest is $6 million a year. Exelixis opened a line of credit with Deerfield in 2008 that, at the time, officials said they hoped never to draw down from. But with a 40% cut in staff in March the firm is shifting resources to late-stage development, which is still expensive even with big-pharma partners footing much of the bill. -- A.L.

Constellation Pharmaceuticals: Epigenetics pioneer Constellation added a corporate venture backer, GlaxoSmithKline's venture arm SR One, in a $22 million Series B financing announced June 2. In addition to SR One, previous investors Third Rock Ventures, The Column Group, Venrock Associates, and Altitude Life Science Ventures, which led the company’s $32 million Series A in 2008, all participated in the round. SR One’s cash should help Constellation keep pace with its main competitor, Epizyme, which obtained backing from Amgen Ventures and Astellas Venture Management in its own $40 million Series B last fall. Neither company has reached the clinic. Both are focused primarily on cancer, but Constellation of Cambridge, Mass. hopes to move eventually into diabetes, autoimmune, inflammatory and neurological diseases. Epigenetics focuses on chemical modification to chromatin, the proteins that package DNA, to create therapeutics that influence gene expression. Two classes of such drugs already are on the market: Celgene’s Vidaza and Eisai’s Dacogen, both DNA-methylation molecules approved for myelodysplastic syndromes, and Merck’s Vorinostat, a histone deacetylase (HDAC) inhibitor for T-cell cutaneous lymphoma. At least two other HDAC inhibitors are in late-stage development for oncology indications. -- Joseph Haas

Extra thanks to Mark Ratner for help with this week's post. Photo courtesy of flickr user avmaier.

Pelikan Scoops up a Pouchful of Cash

A wonderful bird is the pelican. In his beak, he can hold food for a week.

And also great wads of cash such as that gathered up by the bird’s namesake, Pelikan Technologies.

Pelikan (that’s the German word for pelican) announced this morning that it raised $69 million in cash and another $20 million in venture debt, bringing funds raised to date to a grand total of more than $150 million.

That sounds like an enormous amount of cash for a device start-up, but it’s not really, not for a company trying to take on the Big Four (Roche, Johnson & Johnson, Abbott and Bayer) in consumer glucose testing, a $7 billion world wide market.

Besides its great big maw, the pelican has other fine attributes. CEO Dirk Boecker told us, “The sea bird is perfectly adapted to its environment and is particularly efficient at catching fish just below the surface of the water, never diving deeper than necessary, nor causing excess ripples or waves.”

That’s how Boecker wants people to see Pelikan Technologies, which is trying to improve compliance in glucose testing. Today, diabetes patients generally don't comply with the clinical recommendations for testing, understandably, since conventional blood sugar tests require them to stick their fingers with a sharp object several times a day to draw blood.

Spun out of Agilent in 2001, Pelikan Technologies is developing a single small device that, with a single push of a button, can draw out a blood sample in a pain-free manner, feed it through microfluidic channels in the device for analysis, and read out results.

The company is still developing this integrated testing platform, which will get rid of all the paraphernalia that patients with diabetes have to carry around today—separate lancing devices, lancets, test strips and a glucose meter--but it has already introduced, as a first stage, a pain-free lancing device, the Pelikan Sun, which it is selling over the Internet.

Pelikan Sun has been launched in Australia and Europe, and the company is on the eve of its US launch. The device still pokes people in the finger, but the company claims it doesn’t hurt because it lances at an exact pre-determined and adjustable depth to reach the capillary loops without perturbing nerve endings, thereby avoiding pain altogether (so they say), and it only needs a tiny blood sample to do its job—60 nanoliters, the smallest requirement in the industry, Boecker says.

Not just any diabetes start-up working to make glucose testing pain-free and convenient can command the kinds of funds that Clarus Ventures LLC, HBM BioVentures Ltd. Global Life Science Ventures, Mannheim Holdings LLC, and Bio*One Capital have put into Pelikan. Non-invasive glucose monitoring companies, for example, are pretty much anathema to VCs because so many have failed, or if they haven’t failed yet, have consumed ten years worth of cash with still nothing to show for it.

Pelikan is attractive because it’s innovating along the same lines as those other icons of success in glucose monitoring, MediSense, and TheraSense, which made incremental but meaningful improvements to conventional blood glucose testing. Both were acquired for a premium by Abbott Laboratories.

MediSense introduced a biosensor-based point-of care blood glucose meter for home use that was more accurate and less expensive than competing products. TheraSense moved testing off the sensitive finger tips to other sites of the body that were less painful to puncture. In fact, this has been the most successful strategy since the very beginning of consumer glucose monitoring back in the 1980's; pioneer LifeScan’s success was due to added convenience; its test strip didn’t need to be blotted and wiped like the tests that came before.

Pelikan still has to face the demands of manufacturing a medical-grade device on the scale of consumer electronics--the challenge of making a complex but robust product in high volumes-- but it doesn’t have to break new ground here either.

Insulin pump manufacturer Insulet Corp., which was struggling to meet an overwhelming demand for its disposable pods of insulin, recently signed an agreement with contract manufacturer Flextronics International, which will help it get up to its goal of producing 200,000 pumps per month by the end of 2008 to meet demand. Coincidentally, Flextronics is Pelikan’s manufacturer too. (Check out the next issue of START-UP for more on glucose monitoring start-ups.)

Venture Debt in Europe: Opportunity Missed?

European biotechs may bemoan their funding disadvantages relative to US counterparts—the lack of specialist investors, fragmented public markets, poor liquidity and meagre or non-existent PIPEs—but some of the trouble is of their own making.

They’re simply not seizing the alternative funding options available to them—such as venture debt, for instance. At least, that was the message from a panel of—you guessed--venture debt providers, speaking at the UK’s BioIndustry Association's BioFinance Europe 2007 meeting last week.

Venture debt has been going strong in the US for at least 20 years; it offers VC-backed companies the opportunity to leverage their equity capital by borrowing quickly, non-dilutively, without affecting valuation, and usually without relinquishing any board seats or voting rights. Last year the US life sciences sector borrowed about $1 billion of this kind of money, according to executives at venture debt providers ETV Capital and GE Financial Services. In Europe, the equivalent figure was less than $50 million.

So what’s going on? That's what the debt providers wanted to find out.

Emotions and ignorance were the top two answers from the panel discussion. The emotional barrier is that these debt providers need to secure their loan—naturally enough—and typically do that against a company’s IP. At a minimum, borrowers may have to sign a “negative pledge” promising not to use their IP to raise debt elsewhere during the course of the loan. But since IP is what the CEO-founders have often spent several decades creating, they’re not, in general, keen to mortgage it, the panellists suggested.

Lack of confidence is another way of putting it: European biotech management and VCs see venture debt as too risky, was the suggestion, because they don’t think they will be able to create sufficient value to pay back the loan—and thus fear that their assets will be seized.

And indeed, venture debt isn’t a lifeline for struggling companies. It’s intended for firms that expect to create value in the near to mid-term and need tiding over—for “high return” situations, as one debt-provider explained in his presentation. If the borrower isn’t in a (relatively) strong position, the deal gets too risky for the lenders. “Companies must have VC support and more than 12 months’ cash” to qualify for venture debt, noted the panellists.

They’ll need enough cash to pay back the loan, too—plus up to 14% interest, and the legal fees associated with the loan. As in any business sector, creditors take priority over the shareholders if things go pear-shaped, which is why management does need to be pretty sure the next round is an up-round, or that the exit they’re after comes at a nice premium. The debt providers require that confidence, too: none will lend without taking share warrants so that they can participate in the hoped-for value creation and meet their return criteria.

Still, for any company not on its knees, venture debt offers “an option to use someone else’s money to create equity value,” the debt providers argued, at least if you think you can create more value than the cost of the loan, and do so before you need to pay it back.

But on to the other reason venture debt hasn't caught on in Europe: management and VCs in Europe just don’t get debt, according to Peter Keen, a partner at VC firm Esprit Capital Partners, chairing the panel. “When you start talking about debt, their eyes glaze over,” he says. Apparently your average European biotech board meeting doesn’t often include a discussion of cost-of-capital, either—and if it does, “that goes right over their heads,” Keen continues.

Here’s the thing: equity is more expensive than debt in many situations. Equity investors expect a 20-30% return (or they used to). Even expensive debt may not cost half that—provided, of course, you can pay it back. So sometimes it’s cheaper, and therefore makes sense, to use debt rather than equity to fund capital expenditure and working capital.

A few European firms have cottoned on. Arrow Therapeutics took a £4 million venture loan to help tide it over while considering its exit options—it was in the end acquired by AstraZeneca for $150 million, so had no trouble with repayments. UK firms Vectura (now public) and Domantis (now part of GlaxoSmithKline) have also used venture debt in the past, according to the panelists, both in order to buy time during financing negotiations.

But these are exceptions. So far, the rest of the UK and European biotech sector either doesn’t like debt, doesn’t get debt, or doesn't feel confident enough in future value creation to take it on.

This may soon change. Public investors, the conference heard, are exiting biotech, not entering. The few specialist funds that exist in the UK and Europe by and large haven't made great returns on that portion of their holdings. US and foreign investors are blocked by pre-emption rights, granting existing shareholders the right to maintain their ownership share in any capital increase. PIPEs are frowned upon (and not easy to do, also because of pre-emption rights).

So soon enough UK and European biotechs may have no choice but to look more pro-actively at alternative financing sources, including venture debt. Especially as M&A continues to offer the prospect of future value-creation.

Meanwhile the inexorable rise of private equity, across all sectors, may help change attitudes too. If anyone knows how to do debt, private equity does. And they’re all getting rich, so eventually perhaps the love-debt message will trickle down to biotech.