AZ Makes Its Move in GI

Back in November we broke the news that AstraZeneca may be spinning out its gastrointestinal R&D. (Those news outlets that only read the Swedish papers caught up on the news this week.)

Well we can report now that the Big Pharma has made its move, though it's not the move that some reports were salivating after. In fact, it's quite modest in scope compared to most rumors, even if it is a strategic leap for AstraZeneca.

AZ has teamed with Nomura Phase4 Ventures to create a new Swedish biotech, Albireo, around one clinical and an undisclosed number of preclinical GI assets from AZ. David Chiswell, a founder of Cambridge Antibody Technology and a man who knows his way around the European biotech scene, is the firm's executive chairman.

AZ is hanging onto a significant minority interest in the newco, which has raised $27 million out of a planned total $40 million Series A from Nomura, TVM Capital, and Scottish Widows Investment Partnership. AZ retains its GERD franchise (namely the blockbuster Nexium) and reflux R&D.

As we said at the time: AZ is simply too big to manage the internal research it’s got – let alone depend on the notion that it can afford big bets on areas unlikely to generate big advances in medical care. (For an in-depth discussion of GI R&D strategies, see this story in the November IN VIVO).

It isn't the first pharma to spin off its GI assets--Movetis took a handful of Johnson & Johnson projects when it spun out backed by €49 million from Sofinnova et al. back in early 2007. But this is the first such move in any therapeutic area from AZ--a taste of what's to come?

image from flickr user red5standingby used under a creative commons license

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Cardiovascular Systems Antes Up

IN VIVO Blog heard some muted, but optimistic tones about this year's device IPO market at the JP Morgan conference. But Cardiovascular Systems Inc. must have heard a ear-splitting rendition of "Happy Days Are Here Again" that convinced it to file for an $86.25 million offering.

Don't get us wrong. The filing pleased as well as surprised us. We’re pleased because we identified Cardiovascular Systems as one of our notable Series A deals of the year in 2006. Imagine the sound of us tooting our own horn here.

But we’re surprised because, well the company just started selling its Diamondback 360° Orbital Atherectomy System, a minimally invasive catheter system for the treatment of peripheral arterial disease. That's because the FDA just granted Cardiovascular Systems 510(k) clearance in September.

In fact, the company says it “commenced a limited commercial introduction of the Diamondback 360° in the United States in September 2007.” By the end of the year the company shipped more than 1,700 single-use catheters to 57 hospitals and generated revenues of approximately $4.6 million, according to the S-1.

That’s a nice start, no doubt. But is it enough to go public on?

IN VIVO Blog says yes. Here's why.

Hedge Fund Maverick Capital, with 15% of the company, is among its biggest investors. Maverick is increasingly well regarded as a patient investor in start-ups, but when a company pursues a public offering the firm--with a reported $9 billion or more under management--can bring its considerable public market-oriented resources to bear. If Maverick isn't investing in the IPO itself, it already has a pretty good idea about who will.

Easton Capital is another large investor. A few years ago, Maverick and Easton seemingly brought another cardiovascular company to the public markets way too soon.

That company, Conor Medsystem Inc., also didn't have revenue or FDA-approval for its drug-eluting stent technology, giving an opening to critics who thought the company was unwisely testing the IPO market in 2004. Conor did spectacularly well in the IPO and post-IPO performance, well enough on the public markets to be acquired by Johnson & Johnson acquired the company for $1.4 billion, admittedly with disappointing results but also some new hope.

Some may see Cardiovascular Systems filing as an unwise move or the issuance of a 25-page "For Sale" sign. IN VIVO Blog, however, will be betting on an IPO.

Photo 'A Roll of the Dice' by Flickr user Darwin Bell used under a Creative Commons license.

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REVA's a Keeper

Perhaps the most interesting part of Reva Medical Inc.'s announcement that it raised $42 million isn't who joined the company as an investor. Rather it's who has remained an investor--Boston Scientific.

The struggling company has been busy divesting itself of most of its portfolio--up to 100 public and private companies--as part of its restructuring. (See the upcoming issue of IN VIVO magazine for a small report on Boston Scientific's weight loss program.)

New CFO Sam Leon told investors at one conference that the company's portfolio looked more like a venture capital firm's portfolio than a business development important so it's shedding those investment that aren't in line with its core focus and "building a wall" around those that are.

It appears that REVA hasn't been kicked off the Natick, Mass. compound. No reason to wonder why, the company is working a bioresorbable stent, and Boston Scientific has the exclusive option for global distribution for both the corornary and periperal products.

Think Boston Scientific would be interested in one of those? Yeah, IN VIVO Blog thinks so too.

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Pelikan Scoops up a Pouchful of Cash

A wonderful bird is the pelican. In his beak, he can hold food for a week.

And also great wads of cash such as that gathered up by the bird’s namesake, Pelikan Technologies.

Pelikan (that’s the German word for pelican) announced this morning that it raised $69 million in cash and another $20 million in venture debt, bringing funds raised to date to a grand total of more than $150 million.

That sounds like an enormous amount of cash for a device start-up, but it’s not really, not for a company trying to take on the Big Four (Roche, Johnson & Johnson, Abbott and Bayer) in consumer glucose testing, a $7 billion world wide market.

Besides its great big maw, the pelican has other fine attributes. CEO Dirk Boecker told us, “The sea bird is perfectly adapted to its environment and is particularly efficient at catching fish just below the surface of the water, never diving deeper than necessary, nor causing excess ripples or waves.”

That’s how Boecker wants people to see Pelikan Technologies, which is trying to improve compliance in glucose testing. Today, diabetes patients generally don't comply with the clinical recommendations for testing, understandably, since conventional blood sugar tests require them to stick their fingers with a sharp object several times a day to draw blood.

Spun out of Agilent in 2001, Pelikan Technologies is developing a single small device that, with a single push of a button, can draw out a blood sample in a pain-free manner, feed it through microfluidic channels in the device for analysis, and read out results.

The company is still developing this integrated testing platform, which will get rid of all the paraphernalia that patients with diabetes have to carry around today—separate lancing devices, lancets, test strips and a glucose meter--but it has already introduced, as a first stage, a pain-free lancing device, the Pelikan Sun, which it is selling over the Internet.

Pelikan Sun has been launched in Australia and Europe, and the company is on the eve of its US launch. The device still pokes people in the finger, but the company claims it doesn’t hurt because it lances at an exact pre-determined and adjustable depth to reach the capillary loops without perturbing nerve endings, thereby avoiding pain altogether (so they say), and it only needs a tiny blood sample to do its job—60 nanoliters, the smallest requirement in the industry, Boecker says.

Not just any diabetes start-up working to make glucose testing pain-free and convenient can command the kinds of funds that Clarus Ventures LLC, HBM BioVentures Ltd. Global Life Science Ventures, Mannheim Holdings LLC, and Bio*One Capital have put into Pelikan. Non-invasive glucose monitoring companies, for example, are pretty much anathema to VCs because so many have failed, or if they haven’t failed yet, have consumed ten years worth of cash with still nothing to show for it.

Pelikan is attractive because it’s innovating along the same lines as those other icons of success in glucose monitoring, MediSense, and TheraSense, which made incremental but meaningful improvements to conventional blood glucose testing. Both were acquired for a premium by Abbott Laboratories.

MediSense introduced a biosensor-based point-of care blood glucose meter for home use that was more accurate and less expensive than competing products. TheraSense moved testing off the sensitive finger tips to other sites of the body that were less painful to puncture. In fact, this has been the most successful strategy since the very beginning of consumer glucose monitoring back in the 1980's; pioneer LifeScan’s success was due to added convenience; its test strip didn’t need to be blotted and wiped like the tests that came before.

Pelikan still has to face the demands of manufacturing a medical-grade device on the scale of consumer electronics--the challenge of making a complex but robust product in high volumes-- but it doesn’t have to break new ground here either.

Insulin pump manufacturer Insulet Corp., which was struggling to meet an overwhelming demand for its disposable pods of insulin, recently signed an agreement with contract manufacturer Flextronics International, which will help it get up to its goal of producing 200,000 pumps per month by the end of 2008 to meet demand. Coincidentally, Flextronics is Pelikan’s manufacturer too. (Check out the next issue of START-UP for more on glucose monitoring start-ups.)

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Emergent Emerges

A $60 million Series D for any device company is interesting, but perhaps one of the more eye-catching elements of Evalve Inc.’s new round is the participation of Emergent Medical Ventures, the new firm founded by serial entrepreneurs and investors Tom Fogarty and Allan May.

In a phone call from Piper Jaffray’s health care conference, May confirmed our belief that this is Emergent’s very first investment, and it’s an atypical one at that.

As we wrote back in the spring, Fogarty and May hope Emergent Medical will redefine early stage medical device investing or at least--as Fogarty states--return the practice to its roots when the VC's focus wasn't on investing per se, but on "actually starting companies—to take them through the process of innovation and value creation."

In the phone call, May says the firm will make a handful of “one off” investment in later-stage companies intimately familiar to Fogarty. Evalve is the first. Fogarty invested in the company while he was with Three Arch and had remained a board member, although he is stepping down as part of this round.

Cyberheart will be the second. That round should close later this week, May says. (Check out our profile on the company here.) May asked that the third not be identified yet, but IN VIVO magazine readers will recognize the name.

Emergent—as the name suggests—will spend the bulk of its time and capital on starting medical device companies the ole fashioned way. May said he hopes to close on the first $100 million fund by the end of this year. (They’ve already secured two-thirds of it.) Emergent also added to its team bringing aboard general surgeon Ken Baker as an associate, May said.

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Venture Rounds: You Stay Classy, San Diego

San Diego's life sciences start-up community took a bit of a hit recently. Enterprise Partners Venture Capital suspended its fundraising after an ill-advised attempt to raise a life sciences-focused fund instead of its traditional formula of investing heavily in information technology and life sciences companies.

The blow to Enterprise Partners represents the latest in a string of disappointing fundraising results for local firms. We swapped emails with Partner Drew Senyei but he declined to discuss the fund raising. (Tip of the cap to PE Week Wire which first reported the news.)

Unlike the Bay Area and Boston, San Diego doesn’t boast a network of homegrown venture capital funds. Enterprise Partners probably had been the largest but now it sits on ice. Forward Ventures, for example, settled on a $150 million fund in 2003 after failing to secure larger funds. The firm—which invests exclusively in life sciences—is still investing that fund and has no immediate designs on raising a new one, according to Partner Standish Fleming.

Meanwhile, we haven’t heard much from smaller San Diego-based firms like Windamere Venture Partners and Hamilton Bioventures. In an email, Scott Glenn, managing partner of Windamere, says the firm is still making investments but it apparently hasn’t raised a new fund since 2001. We tried but couldn’t reach Hamilton BioVentures in time for this post.

Yet, the region keeps chugging along as one of the top recipients of life sciences venture capital. According to the....take a breath...The MoneyTree Report by PricewaterhouseCoopers and the National Venture Capital Association based on data from Thomson, which tracks data by region, San Diego biotech companies raised more capital in the first three quarters of this year than they did all of last year. (We'll give you details in the upcoming Start-Up.)

Avalon Ventures, of course, is building on past success. Founded by Kevin Kinsella, the firm invests both in life sciences and information technology--as Enterprise Partners once did. It's likely to keep building on that model. "From our perspective (the San Diego venture scene) is great," Kinsella says. "I don't care if there are any other firms. When we need to syndicate, we have the Bay Area and East Coast firms. If we like a deal the chances are one of our confreres will also like it."

San Diego's life sciences start-up scene has other obvious strengths. The first is an established life sciences industry, although the acquisition of Idec Pharmaceuticals may have put a kink into that. The second is it's a relatively short flight from the Bay Area and Silicon Valley so firms can send a partner down for the day or set up offices as Sofinnova Partners and Sanderling Ventures have done.

The third is the weather, which can be particularly appealing to East Coast firms like Domain Associates. Partner Jim Blair says two Domain general partners spend half their time in San Diego where they're joined by two full-time general partners and three principals.

Check out the next issue of Start-Up for more.

Step Ups

According to one institutional investor, Frazier Healthcare Ventures is ready to close $600 million for its sixth fund. It previously closed on $450 million in 2005.

Frazier likely had little difficulty reaching the once unfathomable peak of $600 million (remember MPM's second fund?). Skyline Ventures quickly wrapped up its own $350 million fund this week, shooting past its $300 million target right up to the hard cap. "All of our significant limited partners from the previous funds came back and we got a number of new ones," says John Freund, managing director. "We got them the way we like to get them from referrals by our existing LPS." Skyline will employ the same strategy with the fund as it did to deploy its previous $200 million fund.

HealthCare Ventures, which recently lost general partner Eric Aguiar to Thomas, McNerney Partners, likely will be in the market for a new fund next year. Augustine Lawlor, who was named managing general partner over the summer, says the firm’s focus and fund size will remain the same.

Essex Woodlands Health Ventures added Lisa Ricciardi, former Licensing and Development SVP at Pfizer, as an adjunct partner. She'll be responsible for both sourcing deals and working with portfolio companies, giving her a completely different take on partnering. "I was on the buy side of a company that could do anything it wanted," she tells IN VIVO blog. "The goal was to look at a potential partner and see 30 opportunities when others only saw 10. To be on the other side—working with small companies that are really struggling with decisions on the $5 million to $10 million level, I hadn’t appreciated that a trade sale or partnering decision had such an enormous impact. It’s so interesting. It’s the absolute other side of the coin."

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Dicerna Announces Series A, Nastech Announces Spin-Out of MDRNA

As we wrote about two weeks ago here, the new RNAi play Dicerna has closed its Series A, which was led by Oxford Bioscience Partners with participation from Skyline Ventures (which coincidentally concluded its own fundraising recently, which it announced today and VentureBeat reports on here). As anticipated, Dicerna brought in $13 million to advance its dicer-substrate RNAi projects. The full description of the Dicerna deal and its IP and technology is available in this month's Start-Up.

And, as we also pointed out back on Hallowe'en, Dicerna's IP, licensed exclusively from City of Hope, is nevertheless not quite 'exclusive.' Nastech Pharmaceutical coincidentally said yesterday--and elaborated on in a conference call today--that it would be spinning out its own RNA interference assets, also built around a license to that same Rossi/Behlke IP, into a newco called MDRNA Inc.

Nastech chairman/pres/CEO Steven Quay, MD, PhD, said on today's conference call that the current plan was to seek a private investment in MDRNA from institutional investors or VCs, followed by a Nasdaq listing for the firm.

Beyond the company's core IP and ongoing RNAi programs at Nastech that will be transferred to the newco, relatively little is known about MDRNA. Quay offered no details on who will manage the company, who will advise it and who will comprise the board--though "the boards are being built as we speak," he said.

Nastech's hard luck, (most recently) dominated by the decision of partner Procter and Gamble to give up on the companies' nasal-delivery osteoporosis project and documented here by the WSJ's Health Blog, has led to predictable restructuring. That restructuring--also announced last night and discussed today on Nastech's call--either forced the company's hand in disclosure of the spin-out or perhaps more likely led to the decision to offload the assets in the first place, which will save the company $20 million in 2008 and shift approx 40 of its employees (70 positions are targeted in the restructuring).

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Dicerna Crashes RNAi Party

Life often imitates art, as the saying goes.

In “This Is Spinal Tap,” the classic rock and roll mockumentary chronicling the eponymous band, guitarist Nigel Tufnel famously brags that his amplifiers, unlike conventional ones that max out at a volume of ten, were specially designed to go “one louder.”

“These go to eleven,” he deadpans.

IN VIVO Blog has learned that in the world of RNA interference (RNAi), a new company aims to make some noise of its own not by going louder, but longer, while at the same time circumventing the IP barriers to entry in the exciting field.

Dicerna Pharmaceuticals Inc. is based on technology called Dicer substrate small interfering RNAs developed by co-founders John Rossi, PhD, from the City of Hope National Medical Center’s Beckman Research Institute and Mark Behlke, MD, PhD, from Integrated DNA Technologies Inc. (IDT). Dicer substrate siRNAs differ from traditional siRNA employed by companies like Alnylam Pharmaceuticals and Merck & Co.’s Sirna Therapeutics in that they are slightly longer oligonucleotides—between 26 and 30 base pairs (bp) versus 21bp for standard siRNA—which then get trimmed down to size once inside the cell.

Dicerna is expected to announce its $13 million Series A, which will be led by Oxford Bioscience Partners, at some point in November.

Dicerna hopes that its longer molecules not only confer an IP workaround strategy in the hot area of RNA interference therapeutics, but also a pipeline of highly potent drug candidates that will pique the interest of quite a few Big Pharma that have been so far left out of the increasingly expensive but important RNAi arms race.

The seminal patent licensed by both Alnylam and Sirna named after RNAi pioneer Thomas Tuschl, PhD, only covers isolated double-stranded oligonucleotides from 19 bps up to 25 bps, Dicerna co-founder and chief executive James Jenson tells IN VIVO Blog. Tuschl’s landmark work in RNA interference was conducted in Drosophila, says Jenson. “Beyond 21mers the activity of siRNAs drops off in Drosophila, which is reflected in the Tuschl patent applications, and the literature at the time teaches that limitation. It’s where the streetlight was shining and where the research was focused,” he says.

The Rossi and Behlke IP, owned by City of Hope and IDT, allows an adjacent doorway into RNAi from an IP perspective, Jenson claims. What’s more, Rossi and colleagues somewhat surprisingly discovered, in mammalian cells longer double-stranded RNAs worked better than the 21mers thought to be optimal under Tuschl; 26-30mer oligos are “typically five to ten fold more potent,” says Jenson, perhaps resulting in a longer duration of action that has been demonstrated in vitro by Rossi, et al. “In a technology where adequate delivery has been a challenge, the increased potency could be important,” says Jenson. The researchers have been publishing their results with Dicer substrate siRNA since 2005 in journals such as Nature Biotechnology and Nucleic Acid Research.

The process of RNA interference begins when the Dicer enzyme cleaves double-stranded RNA into 21bp oligonucleotides, which are then incorporated into the so-called RNA-induced silencing complex (RISC); RISC then targets messenger RNA sequences determined by the siRNA sequence. Because one end of Dicerna’s 30bp Dicer-substrate siRNAs will be clipped by Dicer and removed to form the active 21mer, various targeting agents can be attached to the non-coding end of the molecule, says Jenson.

Jenson has been busy reaching out certain investors and potential partners since completing an agreement with City of Hope in late September on a license to the IP. He’s been joined by Dicerna chairman and co-founder Douglas Fambrough, PhD, a general partner at Oxford and a former director of, and early investor in, Sirna.

Dicerna's IP hasn’t gone completely unnoticed; in fact, Dicerna isn’t even the first company to license it. Nastech Pharmaceutical Co. gained a more limited license to the technology in late 2006; it holds exclusive rights to the Dicer-substrate technology for five undisclosed targets and broad, nonexclusive rights to siRNAs directed against all mammalian targets (subject to undisclosed limitations).

Fambrough says that Sirna held discussions to gain access to the technology as well, but “for whatever reason those talks never went anywhere. When we sold the company to Merck I was aware of the IP and Jim Jenson and I had been talking about doing something in RNAi for oncology, but we thought, why just go after oncology?”

Dicerna now has an exclusive license for all remaining rights on the Dicer-substrate IP, says Fambrough, and previous licensees won’t affect Dicerna’s plans or the value of the IP to potential acquirers, partners or investors, he maintains.

Nevertheless, it’s still early days. “Only recently have people woken up to this additional doorway into the RNAi space,” says Jenson. In part, he suggests, that’s because Alnylam and Sirna, the companies with access to the Tuschl IP, have done such a good job convincing the world that theirs is the only pathway. Those two firms have certainly been at the forefront of the field, consolidating IP early and almost exclusively garnering the attention of Big Pharma. And some observers feel the patent battles—which may heat up as product candidates inch toward the market—have barely begun.

Alnylam’s early deals gave a small handful of companies, led by Novartis, an early entry into the field. Merck broke new ground in RNAi dealmaking when it acquired Sirna in late 2006 for $1.1 billion. Most recently, Alnylam has upped the ante with a broad strategic alliance with Roche, whereby Roche has paid $331 million for a non-exclusive license to Alnylam’s platform and IP over several therapeutic areas.

Dicerna hasn't specified a therapeutic focus, reflecting perhaps the reality that the firm’s initial targets will likely be dictated by its future pharmaceutical partners as much as by any internal strategy. Those pharma alliances will almost certainly be struck with one eye on an M&A exit.

"Ultimately the technology belongs in a large pharmaceutical company, and we would like to partner early on in ways that do not jeopardize an eventual acquisition and in ways that aren’t overly dilutive,” says Jenson. “There are other approaches out there but few if any that will allow you to compete with Tuschl this way.”

The full text of this article will appear in the November issue of START-UP.

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Venture Round: Ascension Raises Second Fund

One of the most active venture capital investors in health care companies—both in number of investments and opportunities for exits—isn’t a venture capital firm at all. It’s Ascension Health Ventures, and the group is about to get more active.

Founded in 2001, Ascension Health Ventures operated as an experiment of sorts, a venture capital group backed with $125 million from the largest not-for-profit health care system in the U.S.

Unlike other hospital-affiliated investment groups, Ascension Health Ventures didn’t look inside its own hospitals’ walls to find investments. Rather, it swam with other VCs, identifying both early and late-stage health care companies with products that might someday be used by its own hospitals and doctors.

After managing a successful debut fund, the St. Louis-based group announced today that it secured a second fund that counts two other hospital systems as limited partners. Catholic Health Initiatives and Catholic Health East agreed to participate in CHV II, L.P., a $200 million fund that will be invested along the same parameters as Ascension’s first $125 million fund.

Ascension Health remains the largest investor in the fund, which will be managed by Ascension Health Ventures II, LLC, the general partner of the fund. Each of the systems will have a representative on the six-person management committee that’s required to approve all new investments. The group also invests directly in venture funds. With its last fund it took part in funds raised by CB Health Ventures, Essex Woodlands Health Ventures and Sanderling Ventures. Now, with its new fund, it already made a commitment to the recent fund raised by SV Life Sciences.

Ascension’s portfolio company count from its first fund is at 19, including 10 medical device companies. Three of those companies staged strong IPOs—Emageon Inc., Stereotaxis Inc. and TomoTherapy Inc.—while a fourth, Confluent Surgical Inc., produced an exit through an acquisition by Covidien Ltd.

For more on the fund raising check out our October Start-Up.

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If Hamlet Were a VC

To tranche or not to tranche, that is the paraphrasing of a tired cliché.

Cliché or not, it’s an important question venture capitalists often ask themselves when financing a start-up that potentially could require significant capital. (We ask it here.) The obvious benefits are clear. Venture investors can commit large bits of capital to these companies—enough perhaps to carry a company to commercialization—without actually having to hand all the money over at once. (As an added benefit, they boost their IRR by shortening the time between their distribution of capital and their realized--they hope--returns.)

This morning’s panel at our In3 East conference in Boston examined two specific cases of companies running on tranched financings: atrial fibrillation company Endosense SA and spinal implant maker Innovative Spinal Technologies Inc. (IST) In the spirit of obtaining both sides of the argument, the panel included an investor perspective—delivered by Thomas Pollare investment director at 3i and lead investor in Endosense—and management—represented by Scott Schorer, president and CEO of IST.

The discussion—led by colleagues David Cassak and Stephen Levin—didn’t come to any definitive conclusion, pro or con. Pollare and Schorer obviously endorse the concept since each agreed to tranched financings in 2005. Pollare negotiated a $20 million Series A financing with Endosense, which is developing a catheter capable of delivering radiofrequency energy that scars heart tissue and disrupts the irregular electrical flow that leads to atrial fibrillation.

Schorer, meanwhile, signed a $39 million Series B with Orbimed, MPM and JPMorgan Partners taking equal parts. The company is currently selling and developing several new spinal implants.

Both suggested the tranched financing structure gives companies the capital necessary to make serious headway on a business plan. Pollare suggested the inclusion of milestones aligns the interests of management and investors as both will be rewarded by the execution of the business plan. “As an investor it’s important to have the capital working for you so it can be used efficiently,” Pollare said. “Obviously, it’s important for a second reason because if they don’t hit milestones something is wrong. You have to rethink the plan and the valuations.”

Schorer agreed but warned that the milestones could easily become a problem if management and investors don’t share the same interpretation of milestones and results. “I generally don’t like milestones and, as I was telling myself that, I looked back at the last few deals I’ve done and I realized that they all have contained milestones,” Schorer said.

IST, according to Schorer, drew down $20 million in July 2005 when it first closed on the $39 million Series B. The second $19 million came later, after the company and investors renegotiated the terms of the second tranche when the company missed some of its milestones. “We did that in reasonable terms,” Schorer says, concluding that the key to the success of tranched financings is high level of trust and respect between investors and management. The biggest risk is that investors and executives don’t share similar interpretation of results, so disagreements can arise over whether or not milestones have been met.

“There is nothing you can build into the deal structure to make it smoother,” he added. “You have to trust the people you’re working with to be fair.” IST is raising a $30 million to $35 million Series C round. It hopes to close on the financing early next year.

An audience member challenged the structure, saying it was unhealthy because it automatically put management and investors at odds. Experienced investors should be capable of judging management, evaluating performance and rewarding results without dangling the carrot and stick of a tranche investment.

Pollare, however, defended tranching, saying it gave investors an additional level of control over how their capital is used. “You can’t just give the check and say, `Call me in three years,'” he said.

“That, would be ideal,” Schorer joked.

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Going, Going.....Google

Two bits of follow up on previous posts about the health care IT space.

AthenaHealth absolutely hit one out of the park with its IPO.

Shares opened at $18 and nearly doubled, hitting $35.50. This could be a big win for its VC investors including Oak Investment Partners, Venrock Associates, Draper, Fisher Jurvetson and Cardinal Partners. All together the four owned 65% of the company prior to the opening. IN VIVO Blog talked about the importance of this IPO back in June.

Meanwhile, speculation abounds that Google, in a bid to bolster its presence on the Web, is eyeing an acquisition of health care Web site leader WebMD. Last month, IN VIVO Blog admitted to being slightly underwhelmed by the early glimpses of Google's health offerings.

Apparently, we're not the only ones. Dan Penny, director and lead analyst for publishing Outsell Inc., a market research firm focused on the publishing industry, writes:

Implications: The discovery in 2005 that 12% of individuals would consult Google before seeing a doctor has sent a message to the search giant that it should be doing something with health information, but it doesn't seem to know how to add value to an area where others have stolen a march. Google Health, as it stands, is a confusing experiment that offers little more than an old-fashioned portal for health information. Google now realises that it needs to do more than aggregate, because the boom in online health information has sent users flocking to WebMD and similar sites, such as AOL Health and RevolutionHealth. A year ago, the idea of Google acquiring WebMD would have seemed rather bizarre, but since the purchase of YouTube, Google has proven its willingness to spend, and to spend on content as well as technology. Moreover, its rival, Microsoft, bought Medstory earlier this year in a clear attempt to secure some of the healthcare vertical for itself.

Oh yeah, and Google's health care push probably wasn't helped by the fact the fellow in charge of the effort is leaving.

Now back to your regularly scheduled programming....

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Why Financiers Like Virtual Companies

Capital hates a vacuum.

In this case, the vacuum is Big Pharma’s late-stage pipeline. As deal prices rise for post-proof-of-concept products, investors and clever packagers of financing are stepping into the financing void which, at least relatively speaking, opens up pre-POC. For more on this, see our analysis here and here.

Take Drug Royalty. It’s made a good business monetizing royalty streams from approved products but now is moving upstream, looking to package still unapproved products on which they’d take a percentage of future revenues.

Or Morgan Stanley. Its PhaRMAs (Pharmaceutical Royalty Monetization Assets) likewise package a set of development-stage products into a debt security. The earlier-stage the assets, or the smaller the portfolio, the higher the interest rate. But for the issuer—the biotech with the products--the return is capped: once it’s paid off the investors, the biotech gets all the upside.

It isn’t just biotechs, like NPS and Alkermes, which are exploiting Morgan’s PharMAs. Morgan also used its security idea to place $150 million in mezzanine debt for private-equity firm Celtic Pharma – essentially an investment management team, funded by a set of limited partners, which has acquired a set of eight projects from various biotechs.

Despite its financial structure, Celtic looks a lot like a virtual biotech, exploiting a network of consultants and CROs to get its products developed. And like other virtual biotechs, it has no intention of creating any sort of sales force. The point is to serve the needs of investors, the supreme anti-infrastructuralists.

Most of these investors, usually hedge funds and insurance companies, want “alpha” from these kinds of investments – in this case, a return uncorrelated with major public markets like equity, debt or real estate. Since Big Pharma buys rights to these products regardless of what the markets are doing, they theoretically should provide plenty of uncorrelated return. But once a product is wrapped in infrastructure—into a real company, with an HR department, office politics and an investor-relations group—then its returns begin to correlate with the equity markets.

And the reality is, says Celtic’s founder Stephen Evans-Freke, products are worth more “without the companies wrapped around them.” Big Pharma, he says, needs “more fixed costs like a hold in the head.” And once there’s infrastructure, companies have social and economic incentives to keep working on programs which should be killed. For investors, the faster a developer kills a drug that’s already fated to die, the better – money, being fungible, can be applied elsewhere. Less easy to do with employees.

“The only reason to wrap all that corporate infrastructure around these projects it to take them public,” says Evans-Freke – who, in his days at PaineWebber or in founding companies like Sugen, found plenty to like about IPOs.

And there are indeed other virtues to owning infrastructure. Discovery doesn’t get done without it, for one thing. Happy accidents—like discovering an alternative use for a drug, for example—would be less frequent. It’s hard to think Genentech could have happened without enough R&D infrastructure to figure out which biologies made a difference.

But the virtual is also now real—and investors like it. The development is another unintended consequence of Big Pharma’s earning-driven appetite for variabilizing its costs, creating a vast and technically expert world of CROs and consultants available for anyone to hire. Whether that’s a good thing or not for Big Pharma (and we think in general it’s a good thing—another way to get products), it certainly has opened up a new way for disenchanted pharmaceutical investors to stick with the industry.

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Is it Getting Breezy in Here?

No, seriously. Did somebody open a window?
Don't get us wrong, we still believe that both venture capitalists and biotech management teams deep down think that M&A is their best exit opportunity. But biotech IPOs seem to be gathering steam, as evidenced by the chart above, created from data we pulled from Windhover's Strategic Transactions Database.

We discuss the phenomenon in a little more depth in the upcoming September START-UP magazine. What caught our eye is the frequency with which we're seeing S-1 filings: just in the past week or so Archemix, Precision Therapeutics, and Biolex have filed to go public. There are a few big boys in the queue too, like Reliant Pharmaceuticals and Talecris Biotherapeutics.

In fact in the past year there have been significantly more IPOs filed than in the previous 12-month period, though quite a few have yet to price their offerings. Those IPOs that have priced in the past year have cumulatively raised 50% more cash from public investors. The averages shown above illustrate where that money is coming from: IPO hauls have been getting better.

Things aren't completely rosey. The pricing environment is still difficult, even for top-tier companies (see Jazz Pharmaceuticals). But we've suggested before that IPO values will increase, thanks at least in part to competition from Big Pharma acquirers and an influx of crossover private/public investors. It seems like that shift is already happening.

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The One-Two Punch in Venture Capital

Domain Associates’ Eckard Weber is now the master of the one-two punch in venture capital.

He finds a drug candidate no one cares about; creates a low-infrastructure company around it; finds a second drug to exploit the infrastructure and spread the risk; sells off the lead drug through an acquisition; keeps the second drug and same management, forms a new company around it; develops it some more; then sells it off again. The first deal at a minimum pays back the investors; the second deal juices the returns. (For more on the story, see the September issue of START-UP).

So far, Weber’s done the 'one-two' three times. He started with Peninsula and follow-on Cerexa (the former to J&J for $245 million in April 2005, the latter to Forest Labs for $494 million plus a potential earn-out in December 2006); meanwhile there was Conforma Therapeutics and follow-on Cabrellis (the first sold to Biogen in May '06 for $150 million plus earn-outs, the second to Pharmion only six months later for $59 million plus earn-outs); and most recently with NovaCardia (stage one completed with the Merck $350 million acquisition last month; stage two just getting started on NovaCardia’s second product).

It’s a good model – and now it looks like others are taking up the idea, too. In June, Amgen won an auction to buy the polymer drug specialist Ilypsa, which had created a platform for drugs that soak up various chemicals, like phosphate and potassium. The most advanced drug, the Phase II ILY101, was an improved phosphate binder that sops up excess phosphates in chronic kidney disease patients on dialysis. But there were other compounds behind it, including a nearly-clinical stage potassium binder also for use in CKD.

When Ilypsa went to partner ILY101 (they’d already sold Japanese rights, to Astellas), they got plenty of interest. And as the deal price rose, a few of the potential licensees broached the possibility of acquisition. Some of them wanted the whole company; others just the lead product. Amgen – with its erythropoietin-driven renal franchise under reimbursement assault -- was among the latter. It needed another product and was willing to pay what looked like an above-the-odds price to get it. $420 million later, Amgen had ILY101 and was ready to dispense with its other research programs (it’s watching its expenses pretty closely—a fact well known to the 2500 or so Amgenites who will be getting their pink slips), the 80 or so Ilypsa employees, and its headquarters.

Instead, some of Ilypsa’s investors – including original VC backers 5am Ventures and others -- apparently broached the topic of buying back the pieces of Ilypsa Amgen was about to chuck anyway. Amgen, which has done little out-licensing and fewer spinouts, seemed to like the idea since the parties have a preliminary deal on a newco. Amgen will get an equity stake and what looks like an inside track, if not exactly an option, on the next program, the potassium binder.

If so, Amgen’s doing the smart thing. It started by getting itself a Phase III product without hurting its P&L (it capitalized the vast majority of the purchase price). Now the VCs will spend their money on the next program while Amgen watches from a ringside seat.

If the drug passes its proof-of-concept test (Phase II trials should be fairly predictive on a non-absorbing drug that doesn’t fundamentally do anything to the body’s biology), Amgen will be able to pad its renal portfolio once again (and again without much affecting the P&L). It will, in effect, have backed into doing the kind of off-P&L R&D bankers and VCs have been urging pharma to do for years. And should it all work out, the VCs will go home pleasantly punch drunk.

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No Wait! Make it a Venti!

Yesterday's post on Globus' might have contained error, but we got bad info.

Seems the press release on the deal sold the company short. Private Equity Hub is reporting that the company actually raised $110,000,001.65., allowing it to top CardioNet as the largest "venture" round to date.

PE Hub gets info directly from the SEC filings, which aren't available on the Internet YET, so IN VIVO Blog has got to believe the larger figure is right. (BTW, sign us up for the Free the Form D Campaign that's going on. Read here and here.)

Also, the next START-UP will have more on Clarus' likely fund raising plans.

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Seeing Double: Ophthotech's $36mm Series A

IN VIVO Blog has several different varieties of deja vu.

SV Life Sciences, HBM BioVentures, and Novo AS have just funded an ophthlamology start-up with a $36 million Series A that will pay for the acquisition of two interesting drug candidates. Didn't that happen last year? It sure did, in May 2006. The company was Lux BioSciences.

OK, how about this: David Guyer, MD, and Samir Patel, MD, have teamed up as founders of an ophthalmology specialist based on in-licensed aptamer drugs and hope to make headway in the tricky macular degeneration space. SV (then Schroder Ventures Life Sciences) was an early investor. No, no, no, that was way back in 2000. Eyetech, right? Absolutely.

Well, talk about getting the band back together: On Monday, BioCentury broke the news that SV and co. were launching Ophthotech with a $36 million Series A, which Patel will helm as CEO and co-founder Guyer (who is a venture partner at SV and also on the board at Lux) will chair. Everything old is new again. Next you'll be telling us the Spice Girls are getting back together. What? Nooooo!

The cash will pay for the in-licensing of two aptamer projects, each of which should be in the clinic by the end of the year, SV managing partner Lutz Giebel, PhD, told IN VIVO Blog.

The first asset comes from OSI Pharmaceuticals' troubled and for-sale ophthalmology group, which just happens to be Eyetech (!), Guyer/Patel's former outfit they somehow had convinced OSI to pay the better part of $900 million for back in 2005--to the market's, and now OSI's, chagrin. That deal brings in an old Eyetech anti-platelet derived growth factor (PDGF) aptamer program with the lead compound E10030, which Giebel calls "an IND in a box," for a familiarly undisclosed mix of up-front cash, milestones, and royalties.

The second deal brings in more aptamers, this time from Archemix. (Funnily enough, Archemix got its start by licensing in the therapeutic rights to Gilead Sciences' aptamer technology back in 2001, which Gilead had acquired along with NeXstar in 1999. The only therapeutic aptamer rights Archemix didn't get turned out to be Eyetech's Macugen.)

Ophthotech and Archemix are also not releasing terms of their deal, which gives Ophthotech worldwide rights to all ophthalmic uses of Archemix's aptamers targeting the C5 component of the complement cascade, a hallmark of many inflammatory diseases.

Beyond all the coincidences, what seems a little strange to us is that these products didn't wind up in Lux BioSciences, and that basically the same investor base felt the need to reinvent the wheel by starting up another company. At this point, Guyer, HBM's Axel Bolte, and Novo's Thomas Dyrberg all sit on Lux's board of directors as well as Ophthotech's.

True, Lux is for the moment focused on uveitis and corneal transplantation and is further along the value chain than these preclinical assets--LX211, the company's lead uveitis treatment in pivotal clinical trials, just received fast-track designation from the FDA. But Lux has told us before that it intends to get into back-of-the-eye diseases like AMD in the future, particularly as it contends that AMD is at least partially an inflammatory disease, which is in Lux's sweet spot.

Perhaps the firms' management and investors weren't so keen on diluting Lux's focus; a successful LX211 pivotal trial could provoke a quick takeout by Big Pharma, and keeping managment's eyes on the prize could have been a factor. "Lux had looked at the C5 aptamer from Archemix, and stage-wise, it just didn't fit," Giebel tells us.

He should know: he led SV's investment in Ophthotech but has not taken a seat on the board, since he remains on Lux's board (besides Guyer, SV's representative on the Ophthotech board is Henry Simon, PhD, partner at SV and former chairman of [you guessed it!] Eyetech). Giebel downplays the multiple potential conflicts of interest between the two companies, saying that while there's always potential for that sort of problem, there are many ways of managing it.

We reached Lux CEO Uli Grau, PhD, to get his take. "It is a bit of an unusual situation," he agreed. "And we share large parts of our boards and even though the two companies are positioned somewhat differently, there might be times where we'll have a tough time carving out exactly what is whose territory."

Nevertheless, he says, "I'm a little relaxed because we have a tremendous relationship with our board, the members are honest and trustworthy, and there's no indication that there is a problem."

Lux's take on the Archemix project? "You have to ask yourself," says Grau, "complementing a late stage pipeline with an interesting but early-stage approach, is that giving us value recognition by the time we are looking at a strategic exit?"

Lux can also take comfort in the presence of Prospect Venture Partners--the one investor in Lux that hasn't also invested in Ophthotech. The smiling guy on the right here is David Schnell, MD, managing director at PVP and on the board at Lux. IN VIVO Blog thinks of him as the enforcer. If Lux identifies new opportunities it doesn't want the competition to know about (and however nice everyone involved seems to want to play, the companies are competitors), Prospect provides that additional muscle.

Oddly enough, only a few years ago, it would have been a sure thing to keep all these assets under one corporate roof, because the VCs would have been hoping for an IPO exit, and investors like to see multiple clinical projects at IPO hopefuls. Now that M&A is the preferred exit, the assets are siloed. For now.

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Once in a Blue Moon: SGP's Stock Offering

When everyone and their pharmaceutical brother decides it's time to buy back their own stock, leave it to Schering-Plough to buck the trend.

The Big Pharma, fresh off the news it had emerged from the five-year old consent decree after righting all the wrongs at two manufacturing facilities ($500 million for the poorer, though), said it was selling a boatload of stock. The proceeds of this expected offering will cover some of the expense of its $14.5 billion cash takeout of Organon BioSciences, announced earlier this year (we covered the acquisition in depth, here).

The move marks the first time in months years decades? that a Big Pharma has decided to sell common stock to public investors (there have been plenty of debt financings and lots of cash raised via many divestments and spin offs, but zero equity offerings in a very long time as far as we can tell).

Schering-Plough is selling 50 million common shares (plus up to 7.5 million more in the greenshoe), which at yesterday's close would rake in nearly $1.5 billion toward the Organon tab. Simultaneously the company said it would sell $2.5 billion in convertible debt.

The fact is that Big Pharma rarely need to dilute shareholders since debt is readily available and they are often sitting on piles of cash that -- thanks to strong cash flow and goofy measures like the American Jobs Creation Act (oh yeah, how'd that go?) -- can resemble some of the minor peaks in the Alps. In fact most go out of their way to appease shareholders by buying back shares, the wisdom of which we question here.

But Schering-Plough has enjoyed success of late with Vytorin and Zetia, and has been growing both its top and bottom line nicely--so why not take advantage?

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Adimab gets backed by Polaris and SVLS

IN VIVO Blog has learned that Tillman Gerngross, professor at Dartmouth and the founder of GlycoFi (and part of the brains behind that company's yeasty glycoengineering platform), and Dane Wittrup of MIT (who has pioneered the use of yeast for displaying libraries of antibodies and ab fragments) have started up a new antibody play with lead backing from SV Life Sciences and Polaris Venture Partners, called Adimab.


Gerngross tells us that the concept behind Adimab stems from the financial and organizational hassles that Big Pharma must endure to bring the necessary continuum of antibody-related know-how in house. The process, from soup to nuts, requires a host of technologies often licensed from disparate sources. "They need to have deals to get display technology, affinity maturation technology, protein expression technology, you need to line up a long series of technologies, and wind up with a royalty stacking issue and a very complicated set of relationships," he says.

Adimab--which stands for Antibody Discovery Maturation Biomanufacturing--is developing a platform that's deliberately engineered to minimize and potentially eliminate third party royalties, offering a one-stop-service-shop to a select few Big Pharma partners.

Gerngross declines to get into specifics of IP, and though he admits that it's complicated, he remains convinced that Adimab has found a way to engineer a technically superior and economically favorable approach to antibody discovery. Sticking to one system, yeast, should allow Adimab to move more quickly from discovery through antibody selection, he says.

"We're not pretending to be the only ones in this space," Gerngross says. "But we're building a business that will service pharma better than anyone else and on that could very quickly trigger an acquisition."

Adimab's as-yet announced Series A will bring in roughly $6.2 million to get the ball rolling. Its backers--which happen to be those same VCs that got behind GlycoFi from that company's outset--are aiming for another GlycoFi-like return: VCs invested a total of about $35 million since 2000 in that company, which Merck bought last year for $400 million.

We'll have more on the newco in the next START-UP.

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Moody's Blues

European pharmaceutical companies may soon find themselves in a bind at the bank.

The credit ratings company Moody's Investors Services said yesterday that high credit ratings for these companies could soon be a thing of the past, as companies like AstraZeneca and Shire use debt to finance their acquisitions of expensive biotech companies.

What's the catalyst for the Moody's report? Nothing specific as far as we can tell, aside from the acquisitions mentioned above and others, such as Merck KGAA's takeout of Serono last year. Moody's has simply woken up to the facts that a) pharmaceutical companies aren't very good at keeping their pipelines full all by themselves and b) those companies they turn to--the biotechs--have all the leverage in deal negotiations, resulting in top-dollar takeout and alliance prices. Many future deals could, like AZ's Medimmune buy, be financed with debt; that said debt will become more expensive is bad news.

For an industry with generally pristine credit ratings this "moderately negative" outlook isn't going to rock the boat too much. But at the same time as Big Pharma increasingly borrow to buy back their own shares and bulk up pipelines, it's another sign that things aren't what they used to be for several of the industry's blue chips. If borrowing becomes much more expensive and patent expirations tweak cash flow, the decline could accelerate.

Hat tip: Reuters, via Pharmagossip

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Private Equity: Muscling in on Big Pharma at Biotech's High Rollers' Table

Talk about co-dependency. Pharma needs biotech’s products; biotech needs pharma’s cash. Oh, they say they need other things, but when it comes down to it – that’s about the equation.

So if biotech had a different source of cash (or Pharma had a different source of products), well – this marriage would turn open.

That’s why private equity has become such an interesting game changer. PE firms, stuffed with too much cash as it is and incentivized with management fees to stuff themselves still further, are all chasing the same buyout opportunities, throwing ever greater sums at owners and managers in order to get into the deals.

Biotech, which certainly needs cash, doesn’t return money on anything like a PE firm’s preferred timeline. But biotechs are also relatively unmined territory. Therefore cheap. That’s why you’re beginning to see major private equity players doing things private equity rules say they shouldn’t do.

Consider this progression. In 2004, KKR put something like $200 million into Jazz Pharmaceuticals—a theoretically stable, spec pharma-ish kind of investment. The financing underwrote Jazz’s takeover of the commercial-stage Orphan Medical, so KKR at least got some cash flow, which PE investors like to see. And there was no discovery risk—but certainly development risk. (Not that it's worked out brilliantly, so far. See our recent post.)

Two years later, New Mountain enables the Ikaria/Ino deal – creating a theoretically self-financing company (like Jazz, it has a commercial organization providing the requisite cash flow) but it nonetheless depends for its success on the crapshoot of discovery.

And now The Invus Group is putting $205 million into Lexicon, with the potential to add another $345 million down the road. They’ll get a minimum of 40% of the company and could end up owning far more. But now the whole thing is based on discovery – and not just me-too discovery, but Lexicon’s novel-target, novel-compound approach (see our upcoming article in the July/August IN VIVO).

In short, private equity is moving into pharma territory, funding companies the way only pharmas once could. The whole point is to build organizations of such size that a biotech can do its deals on relatively equal terms with pharma – which means that if it doesn’t get its deal price, it can walk away and do its own development and commercialization, continuing to increase its assets’ value.

The theory underlying this game is that biotechs are still leaving way too much value on the negotiating table. That’s the value the PE investor needs to retain in order to counterbalance his basic disadvantage as a purely financial, not strategic, buyer. That strategic buyer—Big Pharma--can pay more for particular assets because they can do more with them (like shoring up a fading portfolio or keeping profitable and busy a sales they don’t want to lose). Can PE use its money to extract that strategic premium biotechs on their own can’t? It’s an interesting gamble: both biotech and Big Pharma need to get to know the new dice-throwers at the high-rollers’ table.

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