Thursday, August 04, 2011

Financings of the Fortnight Sits in the Cheap Tweets

It was a fail-whale of a bad day for the stock market and especially for biotech companies that said, oh, by the way, no one's buying our drug like we promised.

But crash, schmash. This is Financings of the Fortnight -- the column with the long view. And our favorite moment came earlier this week when Russian zillionaire investor Yuri Milner made yet another late-stage, follow-the-money tech investment, this time leading a Series G round (when was the last time you saw a biotech "G" round?) for Twitter? Milner is head of the fund DST Global and -- what? We forgot something? Oh yes. The round was $800 million.

That's not a typo. Half the cash is for the company, half is to cash out investors and employees who want to have their cake and tweet it, too. $800 million -- that's $5.7 million per character.

Milner's not shy about throwing cash around long after the early money's gone in deep. He's done similar investments in Zynga, Groupon and Facebook. Apparently in the world of high-tech musical chairs these days, the music never stops, although the sound we heard Thursday at market's close might have been the fat lady clearing her throat.

So what about getting some of that silly money on the biotech side of the venture fence? As far as we could tell, Milner's closest approach to health care came this week: Nearly lost in the Twitterstorm was his $50 million investment in ZocDoc, an online appointment service for doctors and dentists. That's a long way from drug discovery, development, and so forth. But there are plenty of late-stage private biopharmas with shareholders clamoring for exit, and once an oligarch has conquered the tweeps, friends, cyberfarms and cheapskates of social media, what better way to burnish his legacy than pouring millions of dollars into potentially life-saving medical products and technologies? Call it the Bill Gates Path to Probity.

Seriously though, the latest private biotech performance stats surely won't persuade the tech-obsessed Milners of the world -- even the fake ones -- to jump in. Cambridge Associates measures venture returns, including the internal rate of return for companies in various sectors based on their initial investment years. The gross IRR for the health care/biotech aggregate sector has trailed IRR for information technology in 12 of the past 14 years. Monster returns from the dot-com era put IT off the charts before the millennium, but even in the past decade the gap between IT and health care/biotech returns hasn't been close -- from a floor of about 2.5x to a ceiling of nearly 6x.

When compared to venture returns across all industries, biotech/healthcare lags in 11 of the past 14 years, although the gap isn't as pronounced. Other than the dot-com boom years, total returns outpace health care/biotech by a factor of 2x only twice, for vintage-2006 companies and vintage-2009 companies.

But there's a a glimmer of good news. When we take just the biopharma subsector, the gap closes further. Leaving out the two fat dot-com years of '97 and '98, biopharma returns have actually outpaced total venture returns in half the years since -- such as for vintage-2003 companies, which in biopharma have generated 22.6% IRR compared to 12.1% for all companies -- and rarely has the spread on either side been more than 2x.

The upshot? If you can convince a limited partner to put cash into venture capital -- no easy feat these days -- there's an argument to be made that biopharma can keep pace with venture in general. Who knows? Perhaps when the Web 2.0 mania comes crashing down like a fail whale, or the financial black magic starts to wear off, biopharma will look like a safe harbor.

The operative phrase there is "who knows." US health care reform is inching forward, there are a world of uncertainties surrounding the "Super Congress" and medical reimbursement, and European debt problems aren't going away. The only thing certain about the future is that you're about to read the latest edition of...

Horizon Pharma: Horizon became the eighth biopharma to make its debut on a US exchange this year, and just the third with a marketed product. The IPO grossed $49.5 million on July 28 after Horizon slashed the target price to $9 a share, down from its planned range of $10 to $12. The downgrade is typical of issues since the IPO window creaked open in late 2009, but unlike others (Tranzyme and AcelRx, for example), Horizon didn’t boost the number of shares for sale; it remained steady at the 5.5 million it outlined in early July. Horizon was formed last year by the merger of US company Horizon Therapeutics and Switzerland-based Nitec Pharma. The deal combined portfolios in pain and inflammation, including Nitec’s rheumatoid stiffness medication Lodotra (modified release prednisone), which is partnered regionally with Mundipharma outside the US, and Horizon’s Duexis (famotidine and ibuprofen), just approved in the US in April for rheumatoid arthritis and osteoarthritis with a launch slated for the fourth quarter. Among the two other companies with marketed products that listed this year, only Sagent Pharmaceuticals, a seller of generic injectables, has gained value, jumping 72% from its IPO price of $16 to close at $27.46 on August 1; Sagent also priced without taking a haircut. The other, traditional Chinese medicine vendor Tibet Pharmaceuticals, has dipped in price; a third company, Pacira Pharmaceuticals, has gained value as its postoperative pain drug Exparel (bupivacaine) nears approval. Horizon closed at $9.00 on August 3, on par with its debut price. -- Amanda Micklus

Argos Therapeutics: The Durham, N.C., biotech, focused on personalized immunotherapies for cancer and infectious diseases, filed a registration statement for an initial public offering July 29. For now the placeholder is set at $86 million, but with picky public investors making hopeful biotechs sweat, it's fair to say the placeholder would make an ambitious target. Founded in 1997 on research spun out of Duke University, Argos has three clinical programs and a fourth set to enter the clinic. All are based on dendritic cell biology. Its Arcelis technology platform is the basis for its two most-advanced programs: AGS-003, a personalized immunotherapy for metastatic renal cell carcinoma set to begin a Phase III trial in the fourth quarter of this year, and AGS-004, an immunotherapy currently in Phase IIb against the HIV virus, a program completely dependent upon US government funding. The biotech also is advancing AGS-009, an anti-interferon alfa monoclonal antibody in Phase Ia for lupus, and AGS-10, a CD83 recombinant protein it plans to study in warding off rejection of implanted organs. Argos, which fully owns all four programs, most recently raised $35.2 million in 2008 through a two-tranche Series C round led by TVM Capital and also backed by a syndicate of nine other investors, including development partners Kirin Pharma. It has also raised $3.5 million in debt as a bridge to the IPO. -- Joseph Haas

BrainCells: When FOTF first met with BrainCells CEO Jim Schoeneck at a long-ago JP Morgan conference, we heard the voices of all the people in our past who warned that once you kill your brain cells through various unsavory activities, you can't grow new ones. The San Diego firm begs to differ. But its platform for neurogenesis -- stimulating the growth of new neurons via stem cells in the brain -- has yet to translate into late-stage therapeutic candidates. Last year its lead candidate failed to show differentiation from placebo in severely depressed patients, though the company said it found a silver lining in a subpopulation. On August 1 the firm disclosed in a regulatory filing it has raised the first $1 million in a planned $14 million round of debt and other securities. It comes amid a management overhaul: BrainCells' Web site shows longtime consultant and former Arriva Pharmaceuticals CEO Robert Williamson as its new acting CEO, and its chief scientific officer has moved on as well. Former CEO Schoeneck took over at DepoMed this spring. Exactly one year ago BrainCells in-licensed a Phase II compound, sabcomeline, from Proximagen Neuroscience, for up to $51 million, including an upfront fee, development and sales milestones. BrainCells aimed to put the compound into a Phase 2 clinical trial as augmentation to SSRIs for the treatment of major depressive disorder, but it was unclear as of this writing whether that trial went forward as planned. Not including the current open round, the firm has raised $77 million to date from investors including MedImmune Ventures and New Enterprise Associates. Worth noting: In START-UP Magazine's first venture survey, results to be published next month, we asked participants for the disease or technology areas they found attractive. Less than half who made biopharma investments said central nervous system was either compelling or very compelling. (Alas, we failed to poll respondents about their enthusiasm for robots that replace balding men's hair follicles.) -- Alex Lash

Baxter Ventures: The global firm Baxter International best known for its blood products is joining the corporate venture fray, joining several big firms that have recently established funds, including Merck-Serono, Shire, Boehringer-Ingelheim, J&J's Red Script fund, and Merck (the US folks). Some have invested more prominently than others; Shire alone has disclosed participation in four financings this year, which makes a sizable dent in the firm's aim to invest in 10 to 15 companies from the $50 million fund. Baxter Ventures will invest up to $200 million -- which, really, could mean anything -- in early-stage companies working on therapies that "complement Baxter's existing portfolio." So, a frank admission that this is strategic, not financial, which is no big surprise. With less R&D yet hungry pipelines to feed, it's a direction corporate venture has been shifting toward for some time. The venture group will report to Baxter's chief scientific officer Norbert Riedel, the firm said. -- A.L.

"Fail Whale Stencil" image courtesy of flickrer Podknox under a Creative Commons license.

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