Friday, September 21, 2012

Financings of the Fortnight Takes The Snap and Runs The Option

Financings of the Fortnight is definitely more baseball fan than football fan. (Also: Dogs, not cats; salsa, not ketchup; and baths, not showers.) But we couldn’t help notice the odd coincidence of the past two weeks. Just as (American) football season starts, we see a spate of biotech option plays, er, deals. Three, by our count.

Like the option in the National Football League, options-to-acquire in biotech are rare, indeed, because investors shun attempts to limit their upside the way a running back stiff-arms a charging linebacker. Rare, but not completely lacking.

(For readers flummoxed by our nation’s savage pastime, in an option play the quarterback takes the ball and runs along the line of scrimmage with a running back shadowing him. With one eye on the defense, the quarterback has the option of keeping the ball and running downfield or pitching the ball to his teammate.)

For readers flummoxed by a biotech’s willingness to give a partner an option to acquire the company down the road, it’s a sign of the times: in the right situation, investors will accept a ceiling on their potential returns if they also come with a potential floor. Here are a few from the past twelve months: Constellation Pharmaceuticals signed a research partnership with Genentech in January that gives Genentech a right to acquire the start-up that was initially funded by Third Rock Ventures, Venrock Associates and The Column Group.

Third Rock also incubated Warp Drive Bio, built around a genomics “search engine” keyed to screen naturally occurring microbes for medicinal properties, then announced in January a massive Series A round that not only gives co-investor Sanofi certain rights to buy the company if certain milestones are reached, but also allows shareholders to force a sale to Sanofi if different milestones are triggered.

In November 2011, Celgene took an exclusive three-and-a-half year license to genomic analysis technology from Quanticel Pharmaceuticals, and also bought equity and an option to buy Quanticel outright if it likes what it sees from Quanticel’s platform and internal drug-discovery efforts.

Mind you, the options we’re talking about are not the same as earnout-driven deals, a much more common deal structure for private biotech acquisitions. Both feature downstream, often significant payments, but there’s a subtle but key difference: Options to buy leave the target company independent until the option is triggered; earnouts are paid out after the target company has been acquired and subsumed.

Ah, you say, but this is Financings of the Fortnight, not Deals of the Week. We’re talking options because in the past couple weeks, we’ve seen three more deals in which the option-to-acquire is part of a Series A financing. In other words, there’s not much waiting around to build the aforementioned floor and ceiling into a start-up’s future; no one’s going to spend years and tens of millions of dollars on a company and then limit the upside with an option. But if you can build it quickly and cheaply, knowing from the start there's a potential and contractually obligated buyer waiting at the other end of the development path, then capped upside could be better than no upside at all.

Case in point: Selexys Pharmaceuticals of Oklahoma City raised a $23 million Series A round led by MPM Capital but also signed a side deal granting Novartis an option to acquire if Selexys’s lead compound, an anti P-selectin antibody, succeeds in a Phase II trial against sickle cell disease. With the cash infusion the trial is slated to start next year and finish perhaps in 2015. Several top managers, including president and CEO Scott Rollins, are veterans of the rare-disease firm Alexion.

Vascular Pharmaceuticals announced a $16 million Series A led by Intersouth Partners and, whaddya know, MPM Capital again, to advance its preclinical compound against diabetic nephropathy. At the same time, it announced an agreement with J&J’s Janssen Biotech to grant an option to acquire after Phase II testing of the compound, which has gone through a certain amount of preclinical work at the University of North Carolina’s Chapel Hill School of Medicine. Janssen is paying undisclosed upfront fees and potential milestones for its option rights.

The third example is profiled below in our roundup: the asset financing group carved out of Atlas Venture’s most recent fund has announced its second entity, Annovation Pharma, a virtual company built around a next-generation anaesthetic. One difference between Annovation and the two described above is that the holder of the option-to-acquire is also a Series A investor: The Medicines Company bought into Annovation’s $8 million round and receives a right to buy the whole shebang if the drug reaches proof of concept.

You could argue that each of these start-ups is basically an asset wrapped in a bit of legalese; the buyers are keying on the progress of one asset only. In our second VC survey, now available through a subscription-only Web site near you, respondents with biopharma investment experience were fairly cool to asset financing: 


The 32% "not interested" was notably higher than the 20% who answered the same way in our 2011 survey. But it's clear from the past fortnight's activity that in certain circumstances, the model appeals to investors. Especially if they don't mind having -- or selling -- options.

You've read this far, brave soul, and the goal line is in sight. Your only option is to keep reading the latest edition of...

MyoKardia: Third Rock Ventures rolls on with a solo Series A funding of MyoKardia, launched to treat genetic heart diseases, with patients to be identified using a companion diagnostic. Third Rock has committed $38 million, and partner Charles Homcy will be MyoKardia’s interim CEO. Homcy told our "Pink Sheet" colleagues that the goal is to develop small-molecule allosteric modulators to treat a percentage of genetic cardiomyopathy patients whose disease is caused by a specific genetic mutation. No novel therapies for two of the main cardiomyopathies have come to market in more than a decade, Homcy said. The firm’s platform derives from the research of several academics who focus on muscle biology and cardiovascular genetics, including James Spudich of Stanford University, Leslie Leinwand of the University of Colorado, Christine Seidman of Harvard Medical School and Jonathan Seidman, also of Harvard Medical School. The Series A money for MyoKardia comes out of the $426 million second fund Third Rock closed in 2010. Its previous fund of $378 million closed in 2007. Third Rock has announced investments in seven other companies in 2012, most recently joining a syndicate that produced a $60 million Series C for bluebird bio. In June, it put up all $40.7 million of an A round for Global Blood Therapeutics. -- Joseph Haas

Biogen Idec: The big biotech said September 10 it has sold its royalty rights associated with the lupus drug Benlysta (belimumab) to Canadian private equity firm DRI Capital. Benlysta, brought to market by Human Genome Sciences in 2011, netted only $50 million in sales that year, a huge disappointment. GlaxoSmithKline bought the company in July 2012 and hopes to improve the drug’s momentum. Biogen Idec’s royalty stream stems from a European patent claiming a method of treating autoimmune diseases using an antibody to B-lymphocyte stimulator, which Benlysta targets. Biogen Idec licensed HGS and then-partner Glaxo exclusive rights in 2008. The deal numbers are paltry compared to Biogen Idec’s annual revenues, but it’s part of a slow outflow of holdings since CEO George Scangos took over in mid-2010 and said he would reorganize around Biogen's neurology franchise and shelve oncology. In late 2010 Biogen Idec said it would sell its San Diego campus – originally the “Idec” half of the company – and in April 2011 the firm announced it would out-license two preclinical kinase inhibitors to Takeda Pharmaceutical Co. Coming on board in late 2010, head of business development Steven Holtzman told IN VIVO  that divestment was a high priority: “We’re taking a two-track approach. One is out-licensing; the other is a spin-out,” he said. With the Benlysta royalties, DRI is paying Biogen Idec $18.3 million upfront, then undisclosed portions of the royalty stream until September 2014. After that, DRI keeps all royalties but could pay a contingency fee if cumulative royalties to DRI exceed an undisclosed amount. -- Alex Lash

Annovation Biopharma: The Series A financing for Annovation, established to develop a safer, next-generation anaesthetic, is all about speed – developing an anaesthetic agent from which surgical patients can be revived in minutes and creating a corporate structure that will allow a quick, profitable exit for Annovation’s investors. The $8 million A round, which can be extended to $11 million if needed, was led by Atlas Venture Development Corp., a standalone entity established by venture capital firm Atlas Venture in 2010 to create and operate single-asset companies that can be sold off quickly to generate returns for the parent company. Joining AVDC in funding the round were Partners Innovation Fund (PIF) and The Medicines Co. (TMC). The participation of TMC, a specialty pharma focused on hospital-based products, is crucial to the deal because TMC also gets an option to buy out Annovation at pre-negotiated terms once the lead drug reaches proof-of-concept. Seed funding for Annovation was provided by AVDC, PIF and Mass Medical Angels. The product is an anesthetic with a pharmacokinetic profile that would allow patients to be brought to consciousness minutes after their procedures conclude. The lead drug, which should enter clinical development in the first half of 2013, is based on research by Annovation founder Douglas Raines, a doctor at Massachusetts General Hospital in Boston. At the time seed funding was provided, Annovation was working on a pair of next-generation, small molecule drugs for anesthesia, sedation and sleep, called Rapidate and Ventidate. -- J.H.

Wellington Partners: A spot of new fund news cracks this fortnight’s lineup: European venture firm Wellington Partners announced September 19 the first closing of its new life sciences fund, Wellington Partners IV. The early total is €70 million. It aims to raise €120 million in total, which will be significantly larger than Wellington's third fund, which raised €78 million, the company said. Family-owned investment offices were among investors from Europe, the U.S. and the Middle East who contributed to the new venture capital fund. Major investors in the fourth fund included the European Investment Fund (EIF), LfA Foerderbank Bayern and Austria Wirtschaftsservice GmbH. The EIF is also a major partner in another Eurocentric fund announced this year, the $80 million CRT Pioneer Fund it launched in conjunction with Cancer Research Technology Ltd., the commercial arm of the sprawling charity group Cancer Research UK. Other European life-science funds to close this year include Edmond de Rothschild Investment Partners’ fourth BioDiscovery Fund and Index Ventures’ asset-centric €150 million fund backed by Johnson & Johnson and GlaxoSmithKline. Wellington’s life science team -- general partners Rainer Strohmenger, Erich Schlick, Regina Hodits, Harald Keller, Ernst Mannheimer and Rolf Dienst -- will invest in companies in the medical devices, diagnostics and biotechnology sectors across Europe. – John Davis

Are you ready for some FOTF? Photo courtesy of flickr user beatboxbadhabit.

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