Financings of the Fortnight Knocks on a Boutique Door

To the chagrin of many, the biggest banks emerged from the recession not just intact but with engines full throttle and little fear of a yellow flag from regulators. The bulge bracket is a few members smaller, what with the demise of Bear Stearns and Lehman Bros., but no less powerful. But biotech has always leaned on the vitality of smaller banks, the boutiques, to help raise cash and find deal partners. So when FOTF heard that under-the-radar bank GCA Savvian, the product of the 2007 merger of a Japanese M&A advisory firm and a San Francisco boutique, had hired West Coast health care banking veteran Cabot Brown, we decided to check in.

As he takes the helm of the global health care practice at the 225-person firm, Brown says his group will rely on M&A for two thirds of its business. Two thirds will also be US, one third overseas, and half of clients will be on the private side. The split between pharma, device and diagnostics is about 30/30/20, says Brown, with the rest in IT and services. In other words, he'll be spending much of his time trying to find buyers for US venture-funded drug and device companies. There will be financings, too, but probably not IPOs. There was a glimmer of hope at the dawn of the new year, Brown says, but first quarter activity fizzled. A company with a clever approach to a big therapeutic category might get investor attention, but "as a routine course of financing a business and realizing value, no one I know is counting on the IPO market." When companies get out, he says, "it's a matter of luck and circumstance."

Brown says "people are also wising up" to the important threshold of $300 million in market capitalization, below which it's tough for a company to tap into the "virtuous circle" of attention from institutional investors and analysts. Only three venture-backed US drug firms that have gone public since the window re-opened in late 2009 have market caps over $200 million, and only Ironwood Pharmaceuticals is north of $1 billion. Even if IPOs return, Brown isn't sure the boutiques can make a viable business from them, as the bulge bracket banks so thoroughly dominate. "The chance you'll get more than 30% of the economics underwriting a deal is zero," he says, which means helping take companies public is a loss-leader for boutiques, he says.

The sorry state of institutional venture means more room for corporate VCs. "With one thing I'm working on now, the lead investor is a corporate investor who will invest on same terms as other investors. The corporate VCs sense weakness in the venture community, and the corporate business-development people see venture as a way to demonstrate action" to their higher-ups, says Brown. "It's a lot easier to go to your board and say 'I know I shouldn't buy things, but I need a window on important innovations.' It's allowing activity to continue in a risk-adjusted way."

Even when buying, big firms are generally doing so tactically, not strategically. In other words, without much long-term vision. Marching orders boil down to "we've got a few holes to fill, go fill them, but don't get caught up in filling the pipeline two years out," says Brown. "We say to potential buyers, look at your business two or three years out and think about how this asset fits in, and they say, 'Great analysis, but I don't care.'"

When we discuss the frustration of VCs, such as Avalon's Kevin Kinsella, who accused Big Pharma of "predatory business practices," Brown holds a certain amount of sympathy for the Big Pharma BD people. "The news comes that another 15,000 were just fired, and you're asking me to spend time on a high-risk, very interesting, early-stage therapeutic company that may or may not be useful in our pipeline, which itself may or may not exist in two months. Am I being a jerk if I drag my feet?"

Risk adjustment is everywhere. Another manifestation is earn-out heavy deals, already common in buyouts of private companies and spreading quickly to the public side, as our colleagues have noted frequently. "Earn-outs have always been there, especially for early stage deals, but now the ability for seller to say 'I'm only doing a full acquisition' is gone," says Brown. "This is a market where venture funds are under pressure to get realizations. Financings are dear. People have to be pragmatic."

How much pressure are VCs feeling? "There are a number of firms not raising their next fund, or one a quarter size of the previous fund, or quietly saying no new investments, just focusing on their current portfolio. They're hanging in with the assets they want to support, looking for a good outcome, but they're not going to support companies at the bottom of the portfolio, and it's happening to a much greater extent than I've ever seen," says Brown.

No surprise that emerging markets and product diversification are squarely on Brown's radar. He cites Endo Pharmaceutical Holdings' $2.9 billion buyout of American Medical Systems, a urology device maker, as part of a "bold and distinctive strategy." FOTF asked if taking over a firm with deep Japanese roots in the wake of the earthquake and tsunami has changed his outlook or strategy. He noted that the shock to the country's infrastructure could spur Japanese drug firms, aggressive the past few years with international expansion, to be even more so. Mostly, though, he was struck by his colleagues' demeanor, "the Japanese version of the British 'stiff upper lip,'" he says.

Our show, too, must go on. Or, as they say in Japan, 頑張る("Ganbaru"). Welcome to another edition of...

Ascletis: Lately some well-connected entrepreneurs have avoided taking VC money, opting instead for large angel rounds in which wealthy individual investors stand in for institutional ones. The biggest deal yet of that kind belongs to Ascletis, which raised a $100 million Series A to build a pharma company that will split operations between the U.S. and China. Real estate billionaire Jinxing Qi led the first $50 million tranche alongside other unnamed individuals. Ascletis will aim to develop and commercialize drugs in a two-way pipeline, in-licensing pharmaceuticals to seek approval, manufacturing and commercialization in China while discovering and developing new compounds that can be partnered out for global sales. Although its current eight-person staff is centered in Chapel Hill, N.C., CEO Jinzi Wu anticipates that about 80% of Ascletis’ scientists will eventually be based in Hangzhou, China. Not every U.S.-Chinese hybrid company has taken off -- LEAD Pharmaceuticals, for example, sold for a disappointing $18 million up-front last year -- but Ascletis and its investors are betting that China’s burgeoning life-sciences talent pool and booming middle-class spending power will bring it success. The company hopes to in-license a drug for sale in China, likely for cancer or infectious disease, within five years. -- Paul Bonanos

Blueprint Medicines: While Ascletis preferred hands-off investors, oncology startup Blueprint is working with the most hands-on variety. Third Rock Ventures, known for its intensive guidance of its portfolio, incubated the company and provided all of its $40 million in Series A money. The deal is Third Rock’s largest first-round funding ever and its latest commitment to cancer research, following investments in such companies as Constellation Pharmaceuticals and Agios Pharmaceuticals. Blueprint’s lofty goal is to screen for molecular mutations, genetic translocations or other aberrations that lead to various cancers, then develop drugs such as kinase inhibitors that can be linked to patients with those traits or resistances to existing drugs. Ideally, those drugs would follow in the footsteps of Gleevec (imatinib), which turned chronic myeloid leukemia into a manageable condition. With that in mind, Blueprint has hired Gleevec’s discoverers, Nicholas Lydon and Brian Druker, for its scientific advisory board. Blueprint says it will use proprietary software and both public and private data sets to compare normal and diseased tissue and build its own chemical library in search of drug candidates. It hopes to choose a preclinical candidate before seeking additional funding, which could include a Series B round with new investors. Third Rock made another investment this week as well, leading an $18.3 million Series B for bladder disorder specialist Taris Biomedical alongside existing backers Flagship Ventures, Flybridge Capital Partners and Polaris Venture Partners. -- P.B.

Tranzyme: Five months after filing its S-1, GI- and metabolic-focused Tranzyme completed its IPO on April 4, grossing $54 million. The company sold 13.5 million shares at $4, a steep discount to the $11 to $13 price range it had planned, continuing a trend that we've seen since the IPO window re-opened in late 2009: companies squeezing through but only by taking drastic haircuts. In its 13-year history Tranzyme raised more than $73 million privately from backers including HIG Ventures, Thomas, McNerney & Partners, Quaker BioVentures, and BDC Venture Capital, and it has secured a pocketful of partnerships, thanks in large part to the medicinal chemistry technologies gained through its 2003 acquisition of Neokimia. Tranzyme found Big Pharma validation for its MATCH (Macrocyclic Template Chemistry) platform, which enables creation of synthetic libraries of orally administered, drug-like, macrocyclic compounds, in its 2009 drug discovery deal with BMS. And the biotech recently partnered lead candidate ulimorelin (TZP101), an intravenous ghrelin receptor agonist in Phase III for postoperative ileus, with Dutch spec pharma Norgine, which received rights in Europe, Australia, New Zealand, the Middle East, South Africa, and North Africa in exchange for $8 million up front and up to $150 million in total milestones. Tranzyme reported 2010 revenues of $8.5 million and a $7.3 million net loss. Up next, perhaps, is specialty injectables firm Sagent Pharmaceuticals, which on April 6 set a goal of selling 5 million shares at $14 to $16 each. -- Amanda Micklus and Maureen Riordan

Royalty Pharma: We don't often highlight the funder instead of the fundee, but the private-equity fund Royalty Pharma said April 4 it has spent $487 million for the rights to royalty streams of two drugs, Lexiscan (regadenoson) and Cubicin (daptomycin), from the same undisclosed seller. We couldn't sleuth out the anonymous seller by press time, but we did find a whole bunch of intriguing connections. First, the cardiovascular imaging agent Lexiscan originally belonged to Astellas Pharma (then Fujisawa), which licensed North American rights to CV Therapeutics in 2000. CV sold 50% of those royalties, for $185mm, to TPG-Axon Capital in 2008. As you might remember, TPG-Axon ventured into project financing for two Eli Lilly Alzheimer's drugs, one of which, semagacestat, hit a late-stage clinical setback last fall. Gilead Sciences now owns Lexiscan after its $1.3 billion purchase of CV in 2009. The other drug in the Royalty Pharma deal, Cubicin, also has Gilead and Lilly connections. The antibiotic to treat drug-resistant staph infections was originated by Lilly, which licensed rights to Cubist Pharmaceuticals in 1997. In 2001, Gilead licensed exclusive rights to commercialize Cubicin (then known as Cidecin) in 16 European countries, but the deal was terminated a year later. Also worth noting: Royalty and Gilead know each other, having joined up in 2005 to pay $525 million for Emory University's royalty rights to the antiretroviral drug Emtriva (emtricitabine). -- Maureen Riordan

Updated 04/15/2011 (1:30pm). In a previous version of this post, IN VIVO Blog incorrectly identified Third Rock as a backer of Epizyme. We regret the error.

Image courtesy of flickr user B€rn@rd.