Thursday, August 15, 2013

Aisling, Clarus Crown Old Funds With Huge Royalty Deal

When was the last time a life sciences venture firm spent $50 million all in one go? It doesn't happen often. But in the past week, two firms did exactly that. Aisling Capital and Clarus Ventures announced Monday that they've each put up $48.5 million for a tiny slice of sales royalties from ibrutinib, a promising cancer drug that could receive FDA approval this calendar year or early next.

The firms joined Royalty Pharma to buy the ibrutinib royalty rights from Quest Diagnostics for $485 million, a deal first announced in mid-July without details of the VCs' involvement. (Quest obtained the rights when it bought Celera in 2011 for its diagnostics business.)

Royalty deals are happening more often, as we noted on this blog earlier this year, but this was an unusual deal for Royalty Pharma – and would be for any royalty fund – because the drug is not yet approved. Royalty investors, firms which pay up-front cash to scientists, institutions, biotechs and pharmas for royalty rights that they collect over time, don’t typically risk regulatory failure on top of commercial uncertainty. But Royalty Pharma has been more creative of late, even making an acquisition play for Elan Corp that was ultimately unsuccessful.

Royalty Pharma brought in the VCs to share the risk and to help assess regulatory and commercial uncertainties in the hematology-oncology space. (Clarus has people, including managing directors Nick Simon and Dennis Henner, PhD, who were executives at Genentech in the Rituxan era.)

For the VCs, investing from the end of their current funds with an eye toward new fundraising, it’s a less risky investment than they and their brethren are accustomed to. Sponsored by Pharmacyclics and Johnson & Johnson, ibrutinib has received “breakthrough” status from the U.S. Food and Drug Administration in three patient settings: chronic lymphocytic leukemia with a deletion of the chromosome 17, relapsed/refractory mantle cell lymphoma and Waldenstrom’s macroglobulinemia.

Even if ibrutinib garners multi-billion dollar sales at its peak, will it bring venture-like returns to Clarus and Aisling? Royalty Pharma officials recently told "The Pink Sheet" DAILY that the royalty stream they bought from Quest is in the mid-single digits as a percentage of total ibrutinib sales. We don’t know the exact number, so let’s call it 5%. Clarus and Aisling have each bought 10% of that stream; let’s call it 0.5% of total sales apiece.

Under that scenario, it will require nearly $10 billion in ibrutinib sales for each firm to recapture its investment; more than $19 billion to double it, and $29 billion to capture a “venture-like” 3x return.
Even by optimistic projections – last month, Barclays Capital estimated peak annual sales for ibrutinib between $2 billion and $3.6 billion, others have gone higher -- it will take years to reach those totals.

But the ibrutinib scenario could play out – and pay out – in two different ways. First, if ibrutinib is approved, the VCs will at least have a steady stream of returns to pass through to their LPs as soon as sales begin. Such near-term returns, however incremental, would be far less likely if each VC spread its $50 million among a few earlier-stage biotech companies or other investments.

Second, if ibrutinib is approved, the value of the royalty stream could jump. There are other investors, including other royalty funds, that don’t take pre-commercial risks. Eliminate those risks, and perhaps Clarus and Aisling could flip their royalty rights to new buyers. Aisling senior managing partner Dennis Purcell and Clarus’s Simon acknowledge both scenarios. “It certainly factored into our thinking,” says Simon. “We can hold for the entire the royalty period, and we also have the option to sell at some point once adoption of the drug establishes real commercial value.”

Seeing how Clarus and Aisling both are investing from the tail end of funds closed in 2008 and 2009, respectively, we'll speculate that there's a good chance this deal becomes, well, royalty speculation. We don't know the internal goals for the funds, but if ibrutinib is approved and buyers emerge, we wouldn't be surprised to see a flip of the rights for something less than a "venture-like" 3x return. As  Purcell notes, a big part of the venture equation these days is shortening the time from investment to liquidity.

Even with their big ibrutinib outlays, Clarus and Aisling say there's a little gas left in the tank for their current funds. Purcell says his group hasn't yet begun talking to LPs about raising a fourth fund, while Simon says Clarus is "actively contemplating" a third fund.

- Paul Bonanos contributed to this report. For more analysis of this deal and other avenues VCs are taking to find lower-risk returns, see our upcoming issue of START-UP.

Photo courtesy of flickr user Jodimu.

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