Thursday, June 27, 2013

Financings of the Fortnight Spins A Big LP

Since when did “LP” stand for “Lavish Pharma” – as in, lavishing cash upon the life science venture world?

Everyone in our corner of the playground has known for some time that corporate venture groups are making more direct investments, especially in funding early-stage biotechs. “We’re going in earlier and earlier,” Jens Eckstein, the head of GlaxoSmithKline’s longstanding venture arm SROne, told "The Pink Sheet" recently. “We’re now incubating companies and creating companies on our own.”

In 2012, 28% of the nearly 80 biopharma or diagnostic start-ups that raised A rounds had at least one corporate investor on board (and often had more). In 12 of those deals, the corporates took the lead. Eckstein also said that SROne invested $53 million in 2012, its most active year yet.

Big Pharma is filling the void left by limited partners, too. Again, one of the most aggressive spenders is GSK. The latest example, announced last week, is its $23 million investment in a fund run by French firm Kurma Life Sciences Partners to focus on rare diseases. Officially Kurma Biofund II, it’s the first instance of a fund specific to a disease or indication subsector that we can recall since Kleiner Perkins Caufield & Byers said it would set aside $200 million for a “pandemic and biodefense” fund in the midst of the avian flu frenzy. (That link is well worth clicking, by the way, if only for the San Francisco Chronicle file photo of Brook Byers rocking That ‘70s Hairdo.)

Glaxo, like most of its Big Pharma brethren, wants products with the possibility of accelerated approval and high prices that won’t get push-back from payors. The rare-disease rush has gone on for quite some time, prompting our colleagues to ask a year ago if it were a precarious bubble. Apparently GSK and Kurma’s other LPs that include New Enterprise Associates don’t think so.

To be clear, the money GSK is pouring into venture funds is separate from the capital under management at SROne. (SROne used to make LP investments but hasn’t for about six years, Eckstein said.)  In the case of Kurma, GSK feels its smaller partner is better suited to sniff out the opportunities in European research labs, a similar story it told when it agreed earlier this year to co-fund up to 10 single-asset startups with Avalon Ventures in San Diego. (Again, the cash did not come from SROne’s capital pool.) GSK isn’t a limited partner in the Avalon deals, per se, but it is leaning heavily on Avalon’s scouting expertise. “If we can’t find ten cutting-edge programs, we’re not going to get into ten,” Lon Cardon, GSK’s SVP of alternative discovery and development, told Start-Up in April. “But we’re pretty confident Avalon can source four, five, or six without too much trouble.”

The Avalon arrangement also gives GSK an option to purchase each entity as it produces a clinical candidate that can move into IND-enabling studies. But in its more straightforward LP relationships – at least the ones publicly disclosed – it invests with no such strings attached.

Since the start of 2012, GSK has made other big commitments. In March 2012 Index Ventures said it had closed its first life-science-only fund at €150 million ($220 million) with GSK and Johnson & Johnson combining to commit half the total.

In January 2013 GSK said it would pump $50 million into Sanderling Ventures’ new $250 million fund, a surprising bit of news if only because Sanderling’s previous fund closed eons ago in 2004. Based near San Francisco, Sanderling’s West Coast location, where GSK had not partnered with a venture firm at the time, was a factor in GSK’s decision. (Since that announcement, during this year’s JPMorgan conference, Sanderling has not filed any regulatory updates that would indicate more progress toward the $250 million goal.)

GSK also has invested in Boston-based Longwood Founders’ Fund, run by Boston biotech veterans Christoph Westphal, Michelle Dipp, and Rich Aldrich. Dipp and Westphal were GSK executives for a relatively brief and controversial time after the company bought their Sirtris Pharmaceuticals. The amount of GSK’s Longwood investment was not disclosed.

(Other examples of Pharma LP investments: VenBio’s first fund backed by Amgen, Baxter International, and the CRO Pharmaceutical Product Development; Merck & Co.’s Research Venture Fund initiative, which includes an investment in Flagship Ventures’ latest fund; and Eli Lilly’s “Mirror Funds,” which after a big opening splash in 2010 hasn’t produced news since 2011.)

The $64,000 question – or multibillion-dollar question, really – is whether all this activity will pay off with more drug revenue for GSK and its peers. There’s strong evidence that direct corporate venture bets have rarely led to the parent company acquiring the investment targets, but there’s nothing yet to help glean how much Pharma’s LP activity has helped. Let's take GSK: From 2010 to 2012, the firm was 461 million pounds in the red based on its purchase and sale of equity investments, so assuming the SR One and LP activity counts against those figures, it’s hard to say GSK is getting a good financial return. But all this corporate venturing, whether as GP or LP, not just a financial exercise; GSK personnel take scientific advisory positions in the funds it invests in, where they have a window into dealflow and emerging ideas and technology.

Perhaps it’s instructive to note that of all the Big Pharma, GSK has made the most noise about re-organizing its internal research with a more venture-like mindset. As companies like GSK, Merck, and J&J cozy up to innovative entrepreneurs and financiers, is the warm fuzziness of innovation rubbing off? That's their hope. And even though there's been little correlation between corporate investors and corporate acquirers, as noted earlier, it's no predictor of future behavior, so don't be surprised if the investments lead to buyouts. Pharma's co-investors -- the other LPs in their strategic funds and the VCs who syndicate with their corporate venture funds -- are likely to do well. (They already do; companies with corporate VC investment command better acquisition multiples than companies without.)

What remains to be seen is the influence Pharma's cash has on the recipients of said cash. A curmudgeon might note that big Pharma advice -- the bow wrapped around the gift of its early-stage investment dollars -- hasn't resulted in productive R&D within its own walls over the past decade. Directing more resources -- human and financial -- toward what Pharma thinks it wants right now may mean that other opportunities (ones Pharma doesn't realize it needs later on) might not get funded. Then again, without those Pharma dollars propping up the early stage ecosystem, we might see far fewer companies and drug candidates altogether.

Whew. With that, we've managed to put the "long-playing" back in LP. But DJ FOTF is never done dropping old-school science; we put the needle on the record when the drumbeats go like...

Esperion Therapeutics: The anti-cholesterol drug developer just pulled off what sounds like a zen koan or knock-knock joke: An initial public offering for the second time. The Michigan firm priced its IPO on June 26 and will raise $70 million by selling 5 million shares at $14 a pop, giving it at first a market capitalization over $200 million. It’s not really the firm’s second IPO; a previous iteration, also called Esperion, went public in 2000 and was bought by Pfizer in 2004 for more than $1 billion. The program Pfizer brought in ended up stalling, and the current version of Esperion was created to spin it back out. The program is ETC-1002, designed to lower LDL-C (the so-called bad cholesterol) in statin-resistant patients, and is currently in Phase II. The through-line in all this is Roger Newton, leader of the team that discovered Lipitor (atorvastatin) in the previous millennium at Warner-Lambert. He founded the first Esperion in 1998, stayed on at Pfizer after the first Esperion’s acquisition, and spun back out with ETC-1002 in 2008 to form the second Esperion with $23 million in venture backing from Alta Partners, Aisling Capital, Domain Partners and others. Longitude Capital Partners led a $33 million Series B. Pfizer also took a small stake at the time of the spinout; Esperion’s regulatory filings show Pfizer as a 10% owner before the IPO, thanks in part to a conversion of debt into equity, but Pfizer holds no rights or royalties to ETC-1002. Pre-IPO, Esperion’s largest shareholders were Alta, Aisling and Domain, all with nearly 20% stakes. Not unusual these days, existing investors including Newton pitched in to make the IPO happen, buying 1.2 million of the shares, or more than 20%. Newton owned more than 7% of the company before the IPO. Credit Suisse and Citi led the underwriting and will be able to buy up to 750,000 more shares. – Alex Lash

XO1: The Cambridge, UK start-up has formed to develop an anti-clotting antibody with an $11 million Series A investment from Index Ventures, the venture firm’s largest solo A round to date. The preclinical anticoagulant, ichorcumab, was synthesized by a University of Cambridge research team, based on an antibody produced by a patient with unusual blood-clotting patterns. Index’s David Grainger was a longtime Cambridge research scientist who became an advisor to Index in 2008, then joined as a venture partner in 2012. He told our Pink Sheet colleagues that his close ties to the school led to a quick deal, rather than a competitive process.XO1’s key asset was created after a head-injury patient in her fifties exhibited a rare trait. Grainger said the patient in question had “a benign tumor of the immune system,” naturally producing a previously unseen antibody at an “out-of-control” pace. Her rare condition allowed her to survive a hematoma without bleeding to death, despite a clotting profile apparently similar to that of a hemophiliac. Cambridge researchers produced a similar effect synthetically with an antibody that targets exosite 1 of the thrombin molecule. Index invested from its €150 million ($200 million) Index Life VI fund that closed in March 2012. As noted earlier in this column, half the fund’s money came from GSK and Johnson & Johnson, but neither receives special rights to the portfolio companies in return. – Paul Bonanos

PTC Therapeutics: Rare diseases make for frequent IPOs these days. The latest debut for a biotech working on treatments for orphan indications belongs to PTC, which sold 8.4 million shares at $15 each to net itself $117 million. The deal was upsized from the 6.9 million shares it aimed to sell in the $13 to $16 range. Founded in 1998, the firm raised more than $300 million in private cash and tried to go public in 2007, only to withdraw its filing. The company is spending most of its resources on ataluren, in Phase III in the US for Duchenne’s muscular dystrophy caused by nonsense mutations and under review for market approval in the European Union. It is also in Phase III for nonsense mutation cystic fibrosis, only one of a handful of firms working on a disease-modifying drug in the area. PTC’s IPO came days after bluebird bio, a gene therapy firm going after rare blood-borne diseases, raised $116 million in its debut. Another rare-disease firm, Prosensa Holding, could follow soon.-- A.L.

Valeant Pharmaceuticals: In the last fortnight, specialty pharma and serial acquirer Valeant raised a total of $5.5 billion in funds to pay for its most expensive takeover to date, eye care company Bausch & Lomb. On June 24, Valeant closed on a public offering of 27.1 million shares (including full exercise of the 3.5 million-share overallotment) to gross $2.3 billion, selling stock at $85 apiece. Days earlier, the company launched a private offer of $3.2 billion principal amount in senior unsecured notes due in 2021 and 2023. Valeant announced in late May the $8.7 billion acquisition of Warburg Pincus-owned B&L, creating one of the largest ophthalmology companies in the world that will sell prescription and OTC drugs, including Valeant’s existing AMD treatment Macugen, gained through the 2012 Eyetech acquisition, plus contact lens products and surgical devices. Warburg Pincus will receive $4.5 billion of the purchase price, and the remainder will be used to retire B&L’s outstanding debt. Valeant has previously focused on dermatology and neurology drugs, as well as branded generics. The B&L deal marks Valeant's 25th acquisition in the last five years, for an aggregate $19.4 billion in up-front payments and potential earn-outs, according to Elsevier’s Strategic Transactions. -- Amanda Micklus

All The Rest: In a Series B round led by Stanley Family Foundation, with Clarus Ventures and Takeda Ventures also participating, Heptares (GPCR drug discovery) raised $21mm…3-V Biosciences brought in $20mm in Series C funding to advance its Phase I cancer candidate…protein therapeutics firm Complix NV raised a $15.5mm Series BVasopharm GMBH completed a $6.5mm Series F round to fund start of Phase III of VAS203 for traumatic brain injury…Trigemina’s Series A-1 round garnered $4.5mm to advance Phase II TI-001, an intranasal oxytocin migraine candidate…A Series A round for Numedii led by Claremont Creek Ventures and Lightspeed Venture Partners brought in $3.5mm…University of Turku spin-out Forendo Pharma (treatments for endometriosis and low testosterone levels) received the first €1.2mm ($1.57mm) tranche from Karolinska Development, which gains a 21% ownership and over a three-year period will invest a total of  up to €3mm…Following a 2012 recapitalization, predictive biosimulation company Entelos received additional undisclosed venture funding from Clearlake Capital Group and Michaelson Capital…epigenetic neurological drug start-up Rodin Therapeutics received undisclosed seed funding from J&J Development and Atlas Ventures…Formed late last year by the merger of public European antibody and vaccine developers Vivalis and Intercell AG, Valneva SE raised €40mm ($53.5mm) in an underwritten rights offeringRepros completed a follow-on offering of 3.75mm shares at $19 for net proceeds of $67mm…FOPOS were also completed by Intercept Pharmaceuticals, $61.7mm; Cempra Pharmaceuticals, $47.7mm; Progenics, $35.2mm; Mast Therapeutics, $23mm; Biodel, $18.5mm; Echo Therapeutics, $10.1mm; and Soligenix, $9.2mm…Four initial public offerings went final: Gene therapeutics firm bluebird bio raised $108mm through the sale of 6.8mm shares at $17, above its initial $14-16 range; Esperion (cardiometabolic drugs) netted $65.1mm, selling 5mm shares at $14, the midpoint of its anticipated range; Aratana Therapeutics, which had postponed its filing of 4.3mm shares at an $11-$13 range, amended its IPO terms to sell 5.8mm shares at $6, raising $35mm; and Canadian drug design company Antibe Therapeutics netted $2mm, selling 3.9mm shares at $0.55…Prosensa Holding BV announced terms of a 5mm ordinary share IPO priced between $11-13…Several firms filed for IPOS: Liver disease therapeutics developer Conatus Pharmaceuticals; outsourced medical services provider Envision Healthcare; small-molecule cancer therapies developer Onconova Therapeutics (Baxter holds a 14.7% stake and a 2012 alliance with the company worth up to $565mm); and specialty pharmaco Iroko Pharmaceuticals…Through a $25mm senior secured term loan facility led by GE Capital, Navidea Biopharmaceuticals gains support for its Lymphoseek radiopharmaceutical agent platform…Hercules Technology Growth Capital provided Rockwell Medical (end-stage renal and chronic kidney disease treatments) with $20mm in debt financing…To help Phase II trials for its lead candidate for primary brain cancer, Diffusion Pharmaceuticals brought in $5mm through the sale of convertible notes to existing investors, adding onto a $5mm convertible note sale of September 2012…Following Elan Corp.'s withdrawal of its offer to acquire private Austrian drug company AOP Orphan Pharmaceuticals, AOP spun off its 80% ownership in cancer business Activartis Biotech GMBH to a group of private investors.

Photo courtesy of flickrer technochick, aka Angie Linder. Thanks, Angie!

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