Tuesday, August 28, 2007

The One-Two Punch in Venture Capital

Domain Associates’ Eckard Weber is now the master of the one-two punch in venture capital.

He finds a drug candidate no one cares about; creates a low-infrastructure company around it; finds a second drug to exploit the infrastructure and spread the risk; sells off the lead drug through an acquisition; keeps the second drug and same management, forms a new company around it; develops it some more; then sells it off again. The first deal at a minimum pays back the investors; the second deal juices the returns. (For more on the story, see the September issue of START-UP).

So far, Weber’s done the 'one-two' three times. He started with Peninsula and follow-on Cerexa (the former to J&J for $245 million in April 2005, the latter to Forest Labs for $494 million plus a potential earn-out in December 2006); meanwhile there was Conforma Therapeutics and follow-on Cabrellis (the first sold to Biogen in May '06 for $150 million plus earn-outs, the second to Pharmion only six months later for $59 million plus earn-outs); and most recently with NovaCardia (stage one completed with the Merck $350 million acquisition last month; stage two just getting started on NovaCardia’s second product).

It’s a good model – and now it looks like others are taking up the idea, too. In June, Amgen won an auction to buy the polymer drug specialist Ilypsa, which had created a platform for drugs that soak up various chemicals, like phosphate and potassium. The most advanced drug, the Phase II ILY101, was an improved phosphate binder that sops up excess phosphates in chronic kidney disease patients on dialysis. But there were other compounds behind it, including a nearly-clinical stage potassium binder also for use in CKD.

When Ilypsa went to partner ILY101 (they’d already sold Japanese rights, to Astellas), they got plenty of interest. And as the deal price rose, a few of the potential licensees broached the possibility of acquisition. Some of them wanted the whole company; others just the lead product. Amgen – with its erythropoietin-driven renal franchise under reimbursement assault -- was among the latter. It needed another product and was willing to pay what looked like an above-the-odds price to get it. $420 million later, Amgen had ILY101 and was ready to dispense with its other research programs (it’s watching its expenses pretty closely—a fact well known to the 2500 or so Amgenites who will be getting their pink slips), the 80 or so Ilypsa employees, and its headquarters.

Instead, some of Ilypsa’s investors – including original VC backers 5am Ventures and others -- apparently broached the topic of buying back the pieces of Ilypsa Amgen was about to chuck anyway. Amgen, which has done little out-licensing and fewer spinouts, seemed to like the idea since the parties have a preliminary deal on a newco. Amgen will get an equity stake and what looks like an inside track, if not exactly an option, on the next program, the potassium binder.

If so, Amgen’s doing the smart thing. It started by getting itself a Phase III product without hurting its P&L (it capitalized the vast majority of the purchase price). Now the VCs will spend their money on the next program while Amgen watches from a ringside seat.

If the drug passes its proof-of-concept test (Phase II trials should be fairly predictive on a non-absorbing drug that doesn’t fundamentally do anything to the body’s biology), Amgen will be able to pad its renal portfolio once again (and again without much affecting the P&L). It will, in effect, have backed into doing the kind of off-P&L R&D bankers and VCs have been urging pharma to do for years. And should it all work out, the VCs will go home pleasantly punch drunk.

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