Thursday, October 18, 2012

Financings of the Fortnight Goes Around The Middle Man

This fortnight’s theme is DIY. That’s shorthand for “do it yourself,” in case you’re one of those people who has only used a hammer to pry open a beer bottle.

There’s a fancier word for DIY, often heard during the first dot-com boom: Disintermediation. Cutting out the middle man. If you want to get something done, don’t pay someone else to do it. Buy your pet food straight from the source, online! Some of those ideas didn’t go over so well at first, but more than a decade into the Internet age, people and businesses are catching on. (And some businesses have simply figured out how to be better middle men.)

The same might be said about life-science venture capital. VCs are, in effect, middle men and women (middlepeople?), standing between those who manage giant pools of cash and the businesses that need cash to make a go of it. The shakeout has left fewer middlepeople, er, VCs, standing. But there are still giant pools of cash, and people managing them. This past fortnight, we’ve had some indications of them taking matters into their own hands.

First up, an intriguing paper was published October 9 by a tag team from Harvard University and INSEAD, the top French business school, that purports to show LPs might do better investing directly than via an intermediary. “Direct investments generally outperform fund investments,” the authors write.

The study doesn’t specifically address the life sciences, and in fact there’s a caveat that might make it less relevant in our little corner of the world: “We also find that the outperformance is driven by deals where informational problems are not too great, such as more proximate transactions to the investor and later-stage deals, and by an ability to avoid the deleterious effects on returns often seen in periods with large inflows into the private equity market.”

“Informational problems” are a tough nut to crack, for sure, especially with early stage, cutting-edge R&D that’s years away from clinical trials, let alone the commercial markets. That’s why some VCs are going later stage; one such firm, Longitude Capital, made a successful pitch to LPs and has closed a new health-care fund. See our description in the round-up below.

One type of cash holder making more direct investments are drug companies themselves. Nearly every major firm – which, if nothing else, have plenty of cash to spare – has a venture group. And they’re getting bolder, investing in biotech firms earlier, even helping to shape company formation. That’s what happened twice this past fortnight, as we detail below in our roundup. First Roche, then Celgene, made sure they were present at the creation, or nearly so, of two firms related to the former Amira Pharmaceuticals. We’re seeing it more and more: Big pharmas and biotechs provide crucial early funding, either for equity or as non-dilutive R&D dollars, for an option to buy the company outright if all goes well. The company might be in fact a single asset, more or less, but that’s no coincidence. What passes as a biotech these days is often one product packaged in a way that makes acquisition as hassle-free as possible.

Another big group with plenty of cash is also making direct investments. The Bill and Melinda Gates Foundation’s new head of global health, ex-Novartis head of global development Trevor Mundel, said this summer his group would start taking ownership stakes in biotechs while it continued its bounteous grant-making largesse.

Its highest profile commitment to date was announced October 10, participating in a $30 million Series C round for Genocea Biosciences, a Cambridge, Mass. vaccine developer. Gates led the scientific due diligence, said Genocea CEO Chip Clark, and an affiliate of the Chicago family investment firm Henry Crown and Co. – not a name you see much associated with private biotech funding – led the financing.

It makes sense for The Gates Foundation, which knows vaccines perhaps better than any organization on the planet. Genocea has developed a platform to create vaccines from T-cell immune response, instead of B-cell response. The difference is that there’s genetic diversity of T-cell response in humans that to date has been impossible to capture in a vaccine, which by definition is broadly administered. Genocea’s discovery platform recreates human T-cell responses to pathogens in vitro and finds common targets on pathogens that, with a thousand or more proteins, are hard to investigate with traditional methods. That’s the aim, at least. The amount of the Gates investment is undisclosed, but Genocea CEO Chip Clark told FOTF that roughly half the cash is earmarked for Genocea’s malaria program. The malarial parasite Plasmodium falciparum has a huge proteome, and the Gates money will help Genocea interrogate it more thoroughly. “We think we’ll have one of, if not the most robust malaria antigen discovery efforts,” Clark said.

The financing is tranched but not dependent on hitting milestones in the malaria program to trigger future payments, Clark said. Gates does not have a board seat.

So far, the direct biotech investments from The Gates Foundation have targeted vaccine discovery technologies. In late September the start-up Atreca said the foundation would put in $6 million to push the firm’s antibody survey technology. Last year, the foundation invested $10 million in Liquidia Technologies, a North Carolina developer of particle engineering technology it hopes will improve vaccine delivery and manufacturing.

A Gates representative was not available for comment by press time, but it's worth noting the Big Kahuna himself has been a vocal advocate for a wide array of mechanisms, from a global tax on financial transactions to private investment in public infrastructure, to improve global health and education programs. As he said at the 2011 G-20 meeting in Cannes, France – a speech in which he advocated for a financial-transaction tax to fund anti-poverty programs -- "It’s important to keep experimenting with new business models, because impact investors could eventually bring a great deal of money into development.”

We hope to have more soon for you on the Gates Foundation, and of course whenever anyone experiments with business models, we'll have the breakdown for you in...

PharmAria: The six-month-old start-up announced Oct. 15 that Celgene has provided its seed funding, will help fund its Series A round and has taken an option to buy the company. Celgene’s equity stake in the new company is undisclosed, but the deal structure hews to the big biotech’s philosophy in recent years of finding early science, partnering deeply with the company, and having its own cash riding on the outcome. For example, Celgene and Versant Ventures are the only backers of Quanticel Pharmaceuticals, which we wrote about here. Funny we should mention Versant. PharmAria was started by three former executives of Amira Pharmaceuticals, which Bristol-Myers Squibb bought in 2011 for $325 million. One of Amira’s biggest backers was Versant, and the West Coast venture firm helped turn Amira’s post-acquisition assets and talent into new enterprises with new business models. (See Inception 3, below.) The connections don’t stop there: One of the ex-Amira executives now at PharmAria, Jilly Evans, worked for Celgene as consultant after the Bristol buyout. The start-up, which plans to develop small-molecule therapeutics for cancer and fibrotic diseases, would not discuss the amount of money it is seeking or other terms of the deal. The goal, however, will be to raise enough money for PharmAria to advance its first candidate through Phase I, president John Hutchinson told “The Pink Sheet” DAILY. -- Joseph Haas

Inception 3: PharmAria is not the only new company to rise recently from the Bristol buyout of Amira in 2011. Amira investor Versant Ventures and former Amira CEO Peppi Prasit have formed Inception Sciences, an incubator and drug discovery platform, with the intent of spinning drug candidates out into satellite companies. The candidates could come from Inception’s own “drug hunters,” as they like to call themselves, or from outside sources. The latter has provided Inception with its first public deal. It has created a subunit – called Inception 3 – to discover and develop small-molecule drug candidates for sensorineural hearing loss based on technology licensed from Stanford University. Versant is Inception 3’s sole equity financier for now, and Roche is the development partner. Roche will fund Inception 3’s work with milestone-based R&D payments, and the Swiss firm will hold an option to acquire the program upon filing of the first IND based on the Stanford technology. “The reason we didn’t go for a straightforward collaboration with academia here … is that the fact that it brings in a team of drug-hunters with a great track record of discovering drug candidates for intractable targets and then driving those to the IND stage,” explained Shafique Virani, head of neuroscience partnering at Roche. The various parties are not disclosing any financial details about the collaboration nor providing a timeline for a potential IND filing. However, Clare Ozawa, chief business officer at Inception and a former officer at Versant, said the combined capabilities of Inception and Roche should result in rapid progress toward a clinical candidate. -- J.H.

Longitude Capital: The expansion-stage investor said October 10 it has closed its second health care-only fund, Longitude Venture Partners II L.P., with $385 million in new capital. The fund exceeded Longitude’s $325 million goal, which would have matched the size of its 2008-vintage first fund, and it bumps the Connecticut firm to the top of Start-Up’s gas tank chart, which we most recently published here. Longitude plans to target both biotechs and device companies, with emphasis on mid-to-late-stage opportunities as well as what it calls “special situations”: spin-outs, recapitalizations, investments in public companies and structured transactions. Managing director Juliet Tammenoms Bakker told “The Pink Sheet” DAILY that Longitude received renewed commitments from many limited partners in its first fund, but also retained Probitas Partners as a placement agent for the new vehicle. She declined to discuss exits from the first fund, but said Longitude has received partial liquidity in two companies and full liquidity from another. The firm typically invests between $10 million and $30 million over time in each portfolio company, and expects to make about 20 investments from the new fund; about 30% of the money will be deployed in public companies, Tammenoms Bakker said. Longitude Venture Partners I L.P. invested in public companies such as Amarin Corp., Jazz Pharmaceuticals, Corcept Therapeutics, and Cadence Pharmaceuticals, and private drug developers such as Civitas Therapeutics, Collegium Pharmaceutical, InfaCare Pharmaceutical and Xanodyne Pharmaceuticals. – Paul Bonanos

Kythera Biopharmaceuticals / Intercept Pharmaceuticals: We’re putting these two together because they’re twins, of a sort. They both emerged into the publicly-traded world on the same day, October 11, with initial public offerings that raised $70 million with a $278 million post-money valuation for Kythera, and $75 million with a $225 million valuation for Intercept. It’s an odd occurrence at a time when biotechs aren’t going public much at all; analysts predict the count, now at 11, could hit 15 or 16 by the end of the year. Both also priced at the top of their ranges; no haircuts this fortnight. Kythera, which makes a cosmetic treatment that breaks down the fat in a double chin, sold 4.4 million shares at $16 per share, after aiming for the $14 to $16 range. Intercept sold 5 million shares at $15 per share; its range was $13 to $15 per share. The firm has a compound to treat primary biliary cirrhosis, a condition that can lead to liver failure. It expects Phase III data in 2013 from the drug, which is a bile acid analog it acquired from the University of Perugia in Italy. And that makes for another odd coincidence: Kythera’s treatment, for a vastly different indication, is a formulation of sodium deoxycholate, a component of human bile that breaks down fat. As of this writing, both companies’ investors have no reason to spew bile. Kythera shares closed October 17 at $23.41, up nearly 50% from the IPO. And Intercept closed at $19.78 a share, up nearly a third. There’s a long way to go however until investors, including Versant, ARCH Venture Partners and Prospect Venture Partners (for Kythera) and Italian investment firm Genextra (for Intercept), can reap gains. Even if share prices stay buoyant, investors have a lot to recoup. Both firms raised more than $100 million in private capital before going public. – Lisa LaMotta


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