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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Aye for an Eye

Well isn’t this just what the VC ordered?

Bausch & Lomb’s move to acquire privately held eyeonics Inc. certainly will be welcome news to medical device VCs wondering who the next acquirer will be. Last year wasn’t a good one for VCs who counted on mid-tier device companies to make up for the lazy pace of traditional acquirers.

Instead of emptying VC portfolios, these folks bought each other. Hologic merged with Cytyc. EV3 bought Fox Hollow. St. Francis bought Kyphon before being acquired by Medtronic. “If I come out of a meeting and find out that someone bought Arthrocare I’m going to shoot myself,” one VC told IN VIVO Blog at the JPMorgan conference.

A bit of hyberbole, perhaps.

Nevertheless, with public investors being somewhat squeamish VCs need smaller companies like Arthrocare to step up their acquisition pace. Now Bausch & Lomb, fresh from its acquisition by Warburg Pincus, may be prepared to help out, at least in picking up a few of the more mature or promising eye companies out there.

This is a fairly new strategy for B&L. In the past, Bausch & Lomb has shown a stronger interest in acquiring pharmaceutical companies with the acquisition of a controlling interest in Shandong Chia Tai Freda Pharmaceutical Group, the leading ophthalmic pharmaceutical company in China, as being one of the biggest. So the move toward devices is encouraging.

Bausch & Lomb does have a considerable surgical business. It offers a line of intraocular lenses (IOLs) and phacoemulsification equipment (used to remove a patient’s natural lens) as well as disposable surgical packs. Sales of cataract and vitreoretinal surgery products accounted for 17% of the company’s $2.292 billion 2006 revenues. It’s the third largest manufacturer of these products behind Alcon and AMO, according to the company’s 2007 annual report.

But sales of these products rose only 1 percent, according to the report. A pittance compared to what eyeonics is doing.

Eyeonics developed and sells its crystalens IOL, the only FDA approved accommodating IOL used to treat cataracts. The crystalens IOL replaces the eye’s natural lens and has been implanted in more than 95,000 eyes worldwide, according to the company.

In a statement, Ronald L. Zarrella, chairman and CEO of Bausch & Lomb, says the acquisition "immediately places Bausch & Lomb into the rapidly expanding premium IOL market." The release reports that market is growing more than 20% annually. "In 2007, eyeonics generated revenues of approximately $34 million, an increase of 100 percent over the prior year revenues of approximately $17 million. Its crystalens IOL is estimated to represent approximately 30 percent of the presbyopic IOL market in the United States," according to the release.

The acquisition automatically adds 10% to the surgical group's revenues. Still, the company has run into some challenges. Check out our MedTech Insight report here. For an early profile of the company click here.

The good news is another potential buyer is in the market. The less-than-good news is eyeonics is no spring chicken. Founded in 1998, the commercial stage company last summer filed to raise $86 million in an IPO. Yet it opted to be acquired. Venture investors include Versant Ventures, Brentwood Associates, Pequot Private Equity, ABS Ventures, and Entrepreneurs Fund.

Versant's Bill Link first invested in the company when he was still with Brentwood. (Link later would leave Brentwood to form Versant.) Together, the two groups owned 33% of the company.

So did eyeonics sell because its IPO chances were iffy? Or did Bausch & Lomb make them an offer literally too good to refuse? (So-called twin-tracking certainly happens in both the device and biopharmaceutical side of the industry.) Until we find out the terms, IN VIVO Blog is leaning toward the latter.

In any case, it's good to have another buyer out there.

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Orion to Cover Both Sides of the Atlantic

In most venture circles, talk around forming an international strategy generally leads to VCs staging fact-finding missions to China and India. But a great deal of opportunities still lie in the Old World as VCs grapple with how they might do a better job at investing in Europe where the industry is maturing but the capital can sometimes be scarce.

A new firm is in the market to raise a fund that will target this particular problem. Orion Healthcare Equity Partners, founded by Mark Carthy, who has left Oxford Bioscience Partners, and Joël Besse, formerly of Atlas Venture, is seeking a $250 million fund to invest in both sides of the Atlantic, according to people familiar with the effort.

The new firm will maintain offices in London and Boston and expects to bring aboard additional partners later this month or early next. Orion apparently will pursue clinical-stage companies or assets in the U.S. and Europe. It’s unclear whether the firm would attempt relocate assets from one continent to the other, but that seems to be a possibility.

Carthy and Besse certainly have expertise in straddling the Atlantic. While at Oxford, Carthy served on the board of UK-based Solexa Ltd., the genomic sequencing company that would be acquired by Illumina Inc. He also represented Oxford in its investment in another UK company, PowderMed Ltd., which Pfizer would acquire after several Trans-Atlantic transactions.

Meanwhile, Besse managed many of Atlas’ European investments from its London office. He was among the founding investors in publicly traded Actelion Pharmaceuticals Ltd. and Novuspharma S.p.A.

Clearly, Orion will have some homegrown competition (or co-investors depending upon how you want to perceive things). We've been writing about VCs and VC investments in the UK, France, Germany and Spain. But a little more capital certainly wouldn't hurt.

What will be interesting to see how institutional investors view a trans-Atlantic fund. In years past, firms with strategies that covered both sides of the Atlantic had to work hard to sell their plans to limited partners. But times have changed. The investment climate does show some positive signs of life, and the world is a considerably smaller place than it was four or five years ago.

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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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Frazier Joins $600m Club

As we reported two weeks ago, Frazier Healthcare Ventures wrapped up $600 million for its sixth and largest health care fund to date.

The new partnership maintains Frazier’s place near the top of the venture peak. Only Domain Associates manages a larger fund. Essex Woodlands Healthcare Ventures closed on $600 million last year.

Managing Partner Alan Frazier says the strategy behind the new fund won’t be significantly different than the one used to deploy the $475 million from its fifth fund. “The increase of the fund is really being devoted primarily to growth equity,” Frazier says. “I continue to believe that venture capital itself is not something that scales terribly well. “

Frazier says the larger fund won’t prohibit the firm from investing in start-ups. In fact, the majority of new investments made by the firm likely will be in early-stage companies. Frazier suggested most later-stage commitments will go to the firm's own portfolio companies.

“We have as of late put in a little more money into our own companies,” Frazier says. “I think that is reflective of the fact that the IPO market for biotechs requires a little bit further development. It’s a rather unpredictable market so you want to make sure you have enough capital.”

Over the last 14 months, nine of Frazier’s portfolio companies have gone public or been acquired including three biopharmaceutical companies Cadence Pharmaceuticals Inc., Trubion Pharmaceuticals Inc. and Amicus Therapeutics Inc. Frazier says the firm has maintained its position in each company.

Frazier has benefited from the rush to acquire venture-backed biopharmaceutical companies as well. On the acquisition front, two biopharma companies from Frazier’s portfolio—CoTherix Inc. and Cerexa Inc.—were acquired earlier this year. Four portfolio companies that had drawn growth equity investments from Frazier—CHG Healthcare Services Inc., Aspen Education Group, Priority Solutions Inc. and MedPointe Inc.—also were acquired.

Biopharmaceutical investments will account for roughly half of the new fund, Frazier said, while medical device investments will draw anywhere between 20% to 30% of the capital. Growth equity opportunities—established companies with products and revenue—will draw roughly the same amount of capital, he said.

Frazier says the final total matches the hard cap the firm had set when it began raising the fund. The capital principally came from investors in Frazier’s previous funds, but the new partnership brought in some additional LPs.

With the new fund, Frazier will maintain its team of general partners: Frazier, Dr. Nathan R. Every, Patrick Heron, Trevor J. Moody, Nader J. Naini, and Dr. James N. Topper as well as Thomas S. Hodge, the firm's chief operating officer.

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Who Needs VCs?

Apparently not Neurimmune Therapeutics, a University of Zurich spin out that began operations in April this year. This antibody-focused start up plans to go direct from seed- to deal-funding, according to CEO Ed Stuart, skipping the VCs entirely. “It’s a new business model,” says Stuart, former managing director and CBO at Munich biotech firm U3 Pharma.

So far, so good. The company started out with $5 million of seed money, most of which came from chairman and lead investor Karsten Henco, a former CEO of Evotec and founder of various other biotechs including Qiagen. Yesterday it upped the ante somewhat, and signed a deal with Biogen Idec that could be worth up to $390 million.

Ok, so we’re skeptical about biodollars. But Stuart assured the IN VIVO Blog that it “wasn’t all post-approval milestones,” and that there was a good chunk of up front money too. Those funds, along with the seed finance, “will fund the company for a number of years,” he said.

For now, Neurimmune’s only got about 10 employees, so it’s not a big burn. But this is nevertheless a rich and validating deal for the young firm that’s hardly out of the blocks. So what’s it doing? Something rather simple, actually. It seeks out antibodies among healthy individuals and uses a range of assays and other selection techniques to identify those that might be useful in fighting certain diseases—particularly CNS diseases.

So in the Biogen deal, Neurimmune will identify antibodies that bind to amyloid beta, thought to be the main culprit behind the neuro-degeneration and loss of cognitive function among Alzheimer’s patients. “We have already found a number of antibodies among healthy patients that recognize amyloid-beta,” explains Stuart. And since Biogen now has access to that entire program, it will receive several amyloid-beta-relevant antibodies over the next couple of years that it will go on to develop and commercialize.

Neurimmune calls its platform Reverse Translational Medicine, since “we’re starting not with disease, but with healthy people,” explains Stuart. It’s a logical approach—if someone at risk doesn’t have Alzheimer’s, what’s protecting them? Importantly, it also skirts the IP roadblocks that prevent many new antibody companies from using conventional techniques such as phage display or transgenic mice to create antibodies against certain well-validated targets. “We don’t face the normal IP issues,” notes Stuart, “since we’re not tampering with antibodies in any way at all. We’re getting out of people something that has already been optimized—by Nature.”

Mother Nature’s never that simple. It’s likely that several antibodies are required to protect people against certain diseases, and this range probably varies among different sets of individuals. As with many small molecule drugs, several moieties might be required to interact with several receptors. “It’s too early to tell,” says Stuart. And if Neurimmune's scientists aren't tampering with antibodies, just finding them, what’s to stop others doing the same? It’s all in the selection assays and the clinically-relevant questions asked of those individuals supplying the antibodies, says Stuart.

Anyway, Biogen Idec is apparently sufficiently convinced to have signed what is, in Henco’s words, “among the largest pre-clinical deals,”—and to have done so while much of its management’s attention is on selling the company. So does Neurimmune have a robust change-of-control clause in place? “We’re smart people,” said Stuart.

Maybe that’s why they’re avoiding VCs, too.

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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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Where's the Love?

Medical device VCs, when asked what sectors and technologies intrigue them the most, often cite aesthetics and neurostimulation among the two more fascinating and game-changing opportunities.

But IPO buyers don't appear to be as fascinated by the potential, at least not yet.

Over the past day, we heard of the EnteroMedics Inc. disappointing IPO and Reliant Technologies Inc. reluctance in trying to go public at all.

EnteroMedics is developing an implantable device to stimulate (or modulate) the vagus nerve to suppress a person's appetite. The technology has other gastrointestinal applications as well, but the combination of obesity AND neurostimulation convinced VCs to invest $45 million in the company just last year.

The proceeds of the IPO--now only $46 million--will go toward funding clinical trials to prove the device works. So public investors might be pardoned for backing off an early-stage company without a product to sell.

But Reliant Technologies is selling its Fraxel laser systems. It's got FDA clearance to treat several skin conditions from lesions to wrinkle reductions. The company reported total net revenue of $57.5 million in 2006, albeit with a net loss of $20.9 million. In 2005, the company reported a net loss of $18.2 million on total net revenue of $33.8 million. The company had hoped to raise $62 million through the sale of 4.7 million shares.

It's always difficult to understand the appetites of IPO buyers, but these aren't the only disappointing stock stories in these sectors. Shares in Thermage Inc., another aesthetics company, still hover below the $7 price tag buyers paid in its own IPO last November. Thermage shares did spend a few winter months in the double-digit neighborhood earlier this year before sinking back down.

Meanwhile, shares in Northstar Neuroscience Inc., one of the more ballyhooed neurostimulation companies, sunk back into the single digits, partly due to some disappointing communications with the FDA over its cortical stimulation device that might someday help people recover from stroke.

Northstar shares did go out at $15 in its May 2006 IPO, but they haven't been able to hold onto that value. The news that the company will have to delay its PMA filing by a couple of quarters isn't going to help things.

No doubt, VCs have to consider longer horizons than those folks buying into IPOs, and the potential in neurostimulation and aesthetics markets is huge. But it will be nice when (and we suppose if) public markets could give just a little of validation to their belief in these two promising sectors.

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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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Disappearing Act

As we noted yesterday, the scientific opinion pendulum may be swinging back in the direction of drug-eluting stents, but venture capitalists continue to look for a better way.

Witness the €5.5 million ($7.8 million) second round raised by Arterial Remodeling Technologies. Founded in 2002, the French company intends to use the capital to pursue CE Mark clearance for its experimental biosresorbable stents. No doubt, this field is crowded. Heck, we’ve profiled a number of companies in this area here, here and here, and all will be seeking funding at one point or another.

Oh and the profile for ART can be found here.

But ART’s approach seems fairly unique. Rather than developing a stent that is dissolved into the body after performing two functions: propping open the vessel and delivering anti-inflammatory drugs to prevent restenosis, ART’s stents—like their bare metal ancestors—won’t carry any drugs. The novel polymer from which the stents are built is both hemocompatible and biocompatible so they've caused minimal inflammation in preclinical studies involving rabbits and pigs.



“Every time you can go with a biological healing process you are in a much better position,” founder & CEO (and investor) Patrick Sabaria told us earlier this year. Sabaria, by the way, is also the former Vice President, Europe, for J&J Interventional Systems, where he introduced the world’s first approved-for-marketing coronary stent.

By our reckoning, Theracardia Inc., another start-up in this area, may be the only other start-up taking a similar approach. Find that profile here.

In this day of heightened concerns over the use of drugs and devices, ART, Theracardia and other efforts to develop stents that neither elute a drug nor leave behind a stent will be worth watching.

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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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Forsight Scores Big

With the Red Sox and Indians facing off in the American League Championship Series, IN VIVO Blog would like nothing more than to toss in an old baseball metaphor to describe how well investors in Forsight Labs second company did with their investment, but even the ever popular grand salami falls a bit short.

So with the shameless favorite sports team plug firmly inserted, we can go on to tell you that Forsight Newco II, founded just 10 months ago, raised approximately $5 million from investors to cover costs of product development and some early clinical testing of the company’s drug-eluting ocular punctual plug, a technology that can deliver drugs through the eyes’ own tears. For a video showing the product go here.

Now, just 10 months after the company’s inception, QLT stepped forward to pay $42 million upfront for the company. But the potential returns don't stop there. QLT also agreed to pay $5 million payment upon the initiation of phase III clinical trial for the first product; $20 million for the first commercialization of a product; $20 million for the commercialization of a second product; and $15 million on first commercialization of each subsequent product.

For those keeping score at home, that’s $67 million if QLT succeeds in getting one of these products on the market; $87 million if it gets two; $102 million for three and so on. To be sure, all of these potential payments are years off. QLT will need a few years to run the plugs through clinical study and isn't likely to get a product to market until 2011 or 2012.

QLT management is being criticized for overpaying, but Bob Butchofsky, president and chief executive officer of QLT, says the company’s punctual plug, which is inserted in one of the two ducts that drains tears from the eye, will put QLT in position to challenge the $6 billion eye drop market.

Unlike standard punctual plugs, which only slow the drainage of tears from the eye as a means of treating dry eye, QLT’s new plug contains a drug core. As the tear film flows against the plug, the drug is released delivering a steady stream of drug. The Newco identified glaucoma as a first application for the device, but the plug could be used to deliver any drugs currently delivered as eye drops. “I believe this is a start of a major change on how we treat ocular disease,” Butchofsky told analysts in a conference call this morning.

Others aren’t as impressed. QLT shares hit a 52-week low today after the deal was announced. An item on the Globe and Mail web site reported:

National Bank Financial analyst Prakash Gowd calls the deal pricey, citing “very limited data supporting the theoretical benefits of [ForSight’s] punctal plug technology. Moreover, he figures the technology is likely to be a “very competitive area and patents have not yet been clarified.”

QLT must be high on the technology as it made the only real bid for the company. Forsight CEO K. Angela Macfarlane says while Forsight had talks with other companies about its various programs, Newco II wasn’t being shopped around. (Curious about Forsight's first product? Go here.)

Robin Bellas, general partner at Morgenthaler Ventures, one of the investors, called the acquisition, "quite a surprise. We always expected to raise another round. It was unusual that QLT came to us and expressed strong interest in the program. We had no plans to sell it.”

For more about Forsight Labs go here.

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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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On the Beach at St. Tropez

Oh please, please Brer VC, please don’t make me go to St. Tropez.

But he did, and your blogger has endured the vins de Provence, smoked salmon and paté, chevre and Roquefort, moules mariniere, and breast of duck of Atlas Venture’s Riviera hospitality to provide you some personal takeaways from its Life Sciences retreat.

We’re not quoting attendees or speeches thanks to our journalistically questionable promise to ascribe none of the chit-chat to particular attendees—a promise we assume doesn’t apply to IN VIVO Blog's own presentation, which is available here for free downloading (thanks to Atlas’ Kevin Clancy for preparing the slides).

And oh yeah, it also doesn’t apply to the other day’s Myogen vs. the VCs post.

So what did we learn midst gawking at boats the size of our house?

The increasing leverage of biotech. Everyone agrees that the pivot point of deal values is proof-of-concept (for more on why, see here and here).

But will the prices continue to increase? Yup. Despite Big Pharma’s relatively rich early-stage pipelines, thanks in part to a better understanding of chemical challenges, the biological risk has soared—and with it the attrition rates. While we at least believe in the possibility that collaborations are now inching toward the asymptotic endgame of full value, one top Big Pharma executive argued--with the authority to do so--just the opposite: given the appetite from his and other companies for post-proof-of-concept candidates, deal prices will continue to rise on just about the same steep slope they’re on now.

No end in sight to the Big Pharma biologics appetite, whetted by lower perceived risk, higher pricing, and—thanks to the regulatory Berlin Wall against biosimilars—longer product lives. (For an in-depth analysis of pharma strategies here, see the upcoming October issue of IN VIVO). Particularly mouthwatering: technologies—like Adnexus’s Adnectins—which open up the IP spaces around validated mechanisms targeted by antibodies to improved fast-followers.

But not so fast. Let’s at least admit we really don’t know the risk of biologics, at least not in quantity. Think first about manufacturing, cautioned one former research chief. Are companies whose QA/QC processes were built around the relatively straightforward chemical characterization of small molecules really prepared for the kind of QC necessary for parallel bioprocessing of perhaps a dozen biologics (a slide on Pfizer’s pipeline, chock full of biologics, showed just how possible a flood of biologics might be)?

Then think about their commercialization. Given that more and more of these biologics will end up being used chronically (after all, Big Pharma wants to replace post-expiration chronic-care small-molecule drugs and most acute-care biologics won’t fill their revenue shoes).

Suddenly, said the ex-research boss, the number of patients on large molecules will dramatically increase the likelihood that unforeseeable signals will show up – like the two PML cases which yanked Tysabri off the market for a time and which would have been impossible for any approval statistics to uncover. At least with small molecules, we’ve got the tests for the likely toxicities, allowing us to shoot compounds in the head before they ever get developed. So with biologics: what signals are companies setting themselves up to look for?

Now let’s talk pricing and patents. Our reading of the meeting’s consensus opinion: BIO made a colossal mistake in stalling a pathway to approval for follow-on biologics, pulled by the nose—accused a variety of meeting attendees--by its richest members (Amgen, Genentech, Biogen Idec, J&J) while ignoring its smaller members. A panel on Washington matters was utterly dominated by the subject, with most of the audience (or at least the many in the audience who voiced their displeasure) apparently convinced that the biotech industry had thrown away its political white hat in favor of the guise of intransigent profiteers.

The political chance lost: a Republican majority which could have at least passed a bill reasonably attractive to biologics innovators while allowing in lower-priced competition. Now it’s payback time: a Democratic majority, more closely tied to a few large-ish generics players, heel-dragging for a bill with relatively minimal exclusivity provisions, speculated attendees.

We'll have more to say about the retreat once we’ve been to the gym to repent our hedonism.

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Dollens: Reimbursement Uncertainty May Slow Innovation

Ron Dollens knows a little bit about innovation, and he’s worried.

In a keynote address that opened our In3 East Conference, the former president and CEO of Guidant Corp. warned that the instability of the current reimbursement system is threatening innovation in the life sciences sector.

“Health care policy is the strategic issue,” warns Dollens before a packed room at the Westin hotel in Boston. “If health care policy is not right, this sector will not be able to attract the financing capital required for early-stage companies, and those are the companies where breakthrough things happen. And if the financial capital is not available then the intellectual and human capital won’t follow, and it’s the human capital that is the source of all the creativity.”

Dollens says the Centers for Medicare and Medicaid Services (CMS) needs to work more closely and cooperatively with industry as well as with the Food and Drug Administration. A green light from the FDA means considerably less without a reimbursement code with which a company—and ultimately its investors—get paid.

In his address, Dollens says “risk capital” aka venture capitalists pay for 20% of all innovation in life sciences and medical devices. The figure goes up if you factor in private equity firms, he says. If private equity and venture capital investors don’t see the potential for “above average return” on their investment, they’ll walk.

“Do VCs have to invest in life sciences? Are there any barriers to where the money flows? The answer is obvious. They are not,” says Dollens. “They’re not tied to health care. They are not tied to life sciences.”

Dollen holds Guidant up as a prime example of the power of innovation. The company was built around its ability to discover and develop new products. At any point in time, two-thirds of Guidant’s sales came from products that were less than 12 months old, and Dollens says that ability to innovate was an asset its suitors sought to acquire (along with its existing businesses, of course).

The Eli Lilly spin-off grew from a $1 billion company in 1994 to a $27 billion company in 2006 when Boston Scientific outbid Johnson & Johnson to buy the company. (For BSC CEO James Tobin's take on the integration of Guidant, go here.)

In a question and answer session with colleague David Cassak and the audience following the address, Dollens questioned whether Guidant’s rapid rise could be recreated today. “I think you could,” he says. “But I don’t think you’ll have the market capitalization because of the health care policy concerns.”

Patients and physicians have an appetite for new technologies, but Dollens wonders where there's an equal desire to pay for them. He suggests the primary purpose of Health Care Technology Assessments—the extensive study of a device's technology and impacts on health care—is to keep a lid on costs.

More ominously, Dollens recalled a meeting Guidant officials had with CMS “a couple of secretaries ago” seeking reimbursement for a new device that already had received FDA approval. The Guidant officials presented the data showing that the company's device improved mortality rates in a certain patient profile.

He said the secretary’s first question was, “`Well how many patients are we talking about?’”

“He can ask that question for one of two reasons: one because he could be concerned about how many lives we were potentially going to save…”

“Or,” Cassak offered, implying CMS was concerned more about how much the new device would cost.

“And I think it’s the 'or’,” Dollens concluded.

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High Noon at Myogen

Most VC meetings provide a feel-good story for the portfolio CEOs—usually a variation on the business resurrection theme. The Atlas Venture retreat, which just finished up in St. Tropez, is no exception.

But it’s rare to hear one as compelling, or as compellingly told, as the story Bill Freytag related at the Atlas meeting of the showdown between Myogen’s management and its venture board.

Freytag, then Myogen’s CEO, told the story of a board meeting in the middle of the deadly 2003 IPO drought. To get its pulmonary arterial hypertension drug ambrisentan developed, Myogen needed the kind of money only an IPO could deliver – and for which Freytag and his team had found, despite the extraordinarily dry weather, some investor interest.

But at the board meeting, the VCs said no. IPOs were impossible, several maintained. It was “slash and burn time”--cut research radically, pare back the company, and prepare to unload the business. One apparently stood up, pointed a finger at Freytag, and said: through the whole history of the company “you haven’t created any shareholder value!”

Which was in fact literally correct. For the last several rounds, the company had raised money at the same $7 a share price—though since the VCs controlled the financings, the blame could hardly be laid at Freytag’s feet.

Freytag is a mild-mannered man—you certainly wouldn’t expect him, or frankly the kind of managers you’d assume would gather around him, to play the Gary Cooper role in some business version of High Noon. But according to Freytag, “I said, ‘Time out,’ that the management needed to caucus. And we left the room.” In the hallway, Freytag says he told his managers that it was “D Day.” Did they really believe that, given the resources of an IPO, they could develop ambrisentan and its follow-on, darusentan—and build the company around it? Their unanimous answer was “yes.”

The group went back to the board room—“I was shaking in my shoes,” said Freytag, who realized that contradicting the venture board could mean his job. “We’ve heard your advice,” he recalls saying, “but we’re going to go forward with the IPO.”

In fact, Freytag probably had little real reason to be nervous: the board faced a management team united in its opposition to them and would hardly want to inherit the responsibility for running the company. And indeed the board backed down; the IPO went ahead, raising $81 million at $14 a share, and opened the window for a host of other IPO candidates. Myogen went on to sign a $100 million ex-US deal on ambrisentan with GlaxoSmithKline and finally to sell to Gilead for $2.2 billion--the ultimate happy ending for investors.

Freytag says he’d thought he’d end up in venture capital and talked to a number of VCs about joining a firm. But when Aspreva CEO Richard Glickman surprised the board by resigning this past summer, Interwest partner Arnie Aronsky asked Freytag to run the company.

It’s a very different kind of challenge for Freytag: with $325 million in cash and marketable securities at the end of the second quarter, annual cash flow of about $150 million a year, and a drug whose clinical value outside of transplant has so far been surprisingly difficult to prove while its patent-clock races toward expiration, Freytag is hardly likely to try to face down the board in favor of product development. (For an analysis of Aspreva’s original strategy in in-licensing Roche’s CellCept, click here.) There are probably better uses of Aspreva’s cash—and plenty of unloved biotech R&D programs around to soak it up.

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Another Look at Asia

As a small follow up to our post last week on Sofinnova Partners' hiring an Asia-focused professional, VentureWire Lifescience reported this week that Canaan Partners added a principal whose partial duties include finding deal flow from Asia.

Mickey Kim will from Canaan's Westport, Conn. office. He joined the firm in July according to his bio.

Mickey joined Canaan from Pacific Point Ventures, a venture capital fund investing in healthcare infrastructure companies in Asia. Prior to co-founding Pacific Point Ventures, he invested in biotech and medical device companies at BioVentures Investors, including ActivBiotics, Applied Spine Technologies, Cylene Pharmaceuticals, Hydra Biosciences and Sciona. Mickey also served as a strategy consultant at McKinsey & Company and CSC Healthcare, and co-founded an Asian technology venture capital fund.

Canaan doesn't appear to have any health care portfolio companies in Asia at this point. It does have two IT-oriented deals in India.

No doubt there will be more news like this to come.

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Strange Bedfellows: Novartis Marries VC & Business Development

We’ve been following the two Novartis VC funds for some time now, more extensively here in START-UP and also, in August, here at the Blog. The older of the two funds is a more traditional corporate VC group, reporting ultimately to the CFO.

The second, called variously the MPM Pharma Strategic Fund and the MPM Bio IV NVS Strategic Fund LP, is a joint program between MPM and Novartis’s pharmaceutical business unit, run by Thomas Ebeling.

What’s unusual is that both funds want to get options on research programs along with their investments. The first is looking for options on very early-stage programs and has already managed to sign several deals. But the pharma group’s fund wants options on the far more valuable later-stage candidates.

Now that second fund has closed its first deal: a $10 million equity investment in Radius Health and an option on Radius’s Phase II osteoporosis candidate, BA058.

The press release seemed to imply that the option came as part of the investment. Not true – although that’s originally what Novartis wanted, according to one source.

The Novartis-affiliated MPM fund bought its equity at the same price Radius’s venture investors (including MPM) had paid in its $57.5 million second round, which closed in April. But Novartis is also paying an undisclosed option fee, says Radius CEO C. Richard Lyttle, PhD, plus providing some “in-kind services”--access to Novartis expertise, presumably in the development of osteoporosis drugs. As for governance, Lyttle was a bit cagey: Novartis wouldn’t get a board seat “as a direct part of this deal.”

The option gives Novartis a few months (we estimate 90 days) to look at Radius’s Phase II data once it’s collected– during which time Radius can’t show it to anyone else. At the end of the option period, Novartis can say “no” and walk away (leaving Radius to shop the product to anyone they want)—or “yes” and trigger a pre-negotiated deal.

That deal is worth some $500 million in fees and milestones, $125 million of which go back to Ipsen—the French drug company from which Radius originally licensed the peptide, an analog of the natural peptide human parathyroid hormone-related protein. The terms, says Rich Lyttle, are equivalent to the money they would have gotten had they already had the Phase II data. He knows this, he says, because he talked to a number of Big Pharmas before signing the option agreement with Novartis, getting a good sense of what they’d be willing to pay.

Maybe. As most dealmakers will tell you, the dynamics of an auction aren’t predictable. It’s quite possible that Radius could have gotten a better deal when more companies were hooked with real Phase II data for a bone-building product.

But Lyttle says that even if they could have gotten a few extra dollars in an auction, the process of negotiating a deal would have taken months, delaying the Phase III primary-care trials Radius certainly can’t afford on its own, and ultimately destroying value. If Novartis triggers the option, he says, the program can start right away—and patients will get the drug faster. Certainly, Novartis would be motivated to move it along, he notes, since BA058 dovetails nicely with the Swiss company’s Aclasta, approved in various countries outside the US for Paget’s disease but in trials for osteoporosis (BA058 apparently builds bone rapidly; Aclasta prevents bone loss).

In any event, it’s certainly not a bad deal—the other VCs in the deal wouldn’t have let it happen if it had been obviously harmful to their interests. But it is nonetheless highly unusual, maybe unprecedented (we’d love to hear from you about any previous recent examples of minority investments bringing options on later-stage drug candidates—we don’t know of any).

Indeed, Novartis has managed to combine true business development with a venture-capital strategy. That’s clearly been a goal of many corporate VC programs: get some early looks at interesting technologies which have sometimes led to later transactions. But rarely if ever has the initial investment come with an option. The granddaddies of corporate VC, GlaxoSmithKline's SR One and Johnson & Johnson's J&J Development Corp., have been religious in observing the divide between the medical businesses of their parents and their own investment activities. They’ll facilitate deals—but not if they compromise their investment roles.

The MPM/Novartis fund is, on the other hand, a true melding of business development and VC. And that’s why the outcome will be important to watch. If the Radius deal is more than a one-off example, the fund will provide a popular model for product-poor Big Pharma to gain preferred access to the pipelines represented by VC portfolios. On the other hand, if the deal is seen as preventing Radius from getting a profitable exit for its investors, serving Novartis' needs at their expense, corporate VC will go back to the drawing board.

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A New VC On The Block. Finally!

News of Third Rock Ventures closing on its new $378 million fund got us thinking. It’s been a long, long time since a new potentially top-tier venture firm has hit the scene.

No offense to firms like Clarus Ventures or New Leaf Ventures. True, both raised their first funds over the past few years and both will try to raise follow on funds over the next few months. (Clarus will go out later this year. New Leaf is out, according to VentureWire LifeScience.)

But neither of those firms presented new stories. Clarus split from MPM Capital. New Leaf Ventures was an off-shoot of Sprout Group. Their teams and strategies were largely the same.

So IN VIVO blog is more than a little excited at the formation of Third Rock for a few reasons. First, the name is cool (kudos to partner Robert Tepper). Second, the strategy is unique and very ambitious. Third, limited partners lined up quickly behind a concept story that is has a fair chance for success given the team but is by no means a slam dunk. A new life sciences venture firm hasn't generated this much buzz since Care Capital in 2000.

It's worth noting that Third Rock’s success comes amid some bad news in the venture industry overall. Venture capital fund-raising, according to VentureOne, is way down. Venture capital firms raised $6.3 billion over the first six months of the year. If that pace continues—and second halves don’t typically exceed first halves—the $13 billion total would be the second or third lowest total in the past 10 years, matching the 2002 tally. Only 2003 stands out as the worst year with $9.9 billion raised. More recently, limited partners over the past two years have committed $25.3 billion and $24.7 billion in 2005 and 2006, respectively. So a $13 billion finish would be an enormous disappointment.

Also, there's been particular bit of bad news for many venture funds--namely, they don't exist any more. Check out this analysis by OVP Venture Partners. It suggests that there are half the VC firms around today than there was in 2000. Not really suprising, but an interesting study.

But the life sciences have largely been immune to this bad news. We haven't had any signficant blow up of venture firms, except the break up that created Clarus and MPM. But no significant firms are dissolving, giving back money or even falling on hard times.

Check out the fund-raising for the past few years. Our industry's top tier firms have done exceptionally well in fund-raising: Alta Partners, Clarus ($500 million), MPM ($550 million), SV Life Sciences ($572 million), Abingworth($587 million) Essex Woodlands Health Ventures ($600 million) and, of course, Domain Associates ($700 million.)

The good times should continue to roll for the industry's blue-chip. Clarus and New Leaf will get their capital. Meanwhile, IN VIVO Blog was told that Frazier Health Care Ventures shouldn't have much trouble securing the $600 million it'll be seeking for its new fund. And can Versant Ventures and Prospect Venture Partners be far behind? Both last raised their funds in 2004, so if they're not out this year expect them to be raising money in 2008 (probably along with Delphi Ventures as well.)

Meanwhile, we're anxious to see what Third Rock Ventures will be able to do.

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