Third Rock's a Charm

It’s one of the oldest stories out there. Successful management team, a few years removed from running their own successful biopharmaceutical company, decide to get back into the business by raising their own venture fund.

In the past, such an effort might elicit some snickers. But this is likely to be a story with a happy ending. Third Rock Ventures—a venture firm started by four former Millennium Pharmaceutical executives—is out raising $300 million for a first-time venture firm, an effort one institutional investor already has deemed a “hot commodity.”

The team includes former Millennium CEO Mark Levin, who actually is returning to his venture capital roots. Levin was a partner at Mayfield when he started Millennium and left in 1994 to run the company.

Levin joins Robert Tepper, Millennium’s former head of research and development at Millennium, Kevin Starr, Millennium’s former CFO, and Nick Leschly, who had been the project leader for Velcade. (Nick is the third Leschly to become a VC, joining father, Jan of Care Capital, and brother, Mark, who is with Rho Capital.)

No details yet on the strategy, but some expect Third Rock to look at early-stage, product-focused companies. "True venture capital," in the words of one IN VIVO Blog source.

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Ouch. The Pain of Pain

The wheels grind slowly but they sure do grind.

After four years of legal wrangling, this morning, Purdue Pharma--one of the biggest private drug companies in the US--and three top executives pled guilty in Virginia court to mishandling the pre-2001 promotion of Oxycontin, the company's blockbuster pain drug. The punishment: $600 million.

Purdue can afford the settlement; it won't lay off anyone, apparently. Except its own top management--the company's president Michael Friedman, one of the executives pleading guilty--is getting the boot and, according to the New York Times, an $18 million fine; likely to follow is chief legal officer Howard Udell, who also pleaded guilty (and, says the Times, is on the hook for $9 million). The final misdemean-er--former research head Paul Goldenheim--left Purdue in 2004 for Transform Pharmaceuticals, which was sold soon after. He'll owe $7.5 million.

The settlement is bad news--potentially really bad news--for other companies in the pain space, in particular Cephalon and Endo. Both of these public companies are being investigated for over-aggressive promotion. If those two companies end up with a settlement anything like Purdue's--and federal and state attorneys are likely to feel pretty good about their chances, given the success of the Virginia US attorney--the picture won't be pretty.

Purdue itself, leaderless now, will drift. The company's hired Russell Reynolds to do a CEO search, but no one's looking forward to that one. Friedman, the first non-Sackler to run Purdue, had spent 20 years building up the trust of the family, hardly an easy group to work for. Indeed, talk about an insider board: Purdue's has members: the 90-plus year old founding brothers, Mortimer and Raymond Sackler; their wives; and the founders' four adult children.

They could bring in an internal candidate--like Ed Mahony, the current CFO, a savvy finance guy who's managed to keep enough cash to pay the fines. Or they could bring on someone from one of the international affiliates. Possibles: John Stewart, a long-time employee who manages the Canadian, New Zealand and Australian businesses, or--less likely given his shorter tenure--Ake Wikstrom, the GM of Munidpharma in Europe.

But no Sackler is likely to step in and settle all this hash. None of the 2nd generation Sacklers have ever managed the company. When times were good, the family rejected many offers to buy the business, or take it public. Now that times are really bad--and now that the family doesn't have a CEO they can depend on--they may just decide enough is enough.

In fact, the whole scandal could really be laid at the doors to the family's often empty offices at Purdue's headquarters: though they approve decisions, they let others watch what is a deceptively simple business. In selling addictive pain drugs, there are lots of complex details to follow. For too long, Purdue's management didn't recognize them; neither did its board.

That complexity colors the benefits of the whole pain strategy. Purdue, like Cephalon and Endo, are in the pain business because they can minimize R&D risk with high-margin reformulations of old and effective pain drugs. But there's no free lunch: the risk they avoid in development they run in the marketplace selling opiates.

Already, many pharma companies--AstraZeneca and Pfizer being two recent examples-- are being roasted for promotional improprieties. With Purdue's blood in the water, the legal sharks aren't likely to grow any less hungry.

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Europe's Best-Kept Biotech Secret?

European investors pining for a biotech champion used to muse about the lack of a Genentech- or Amgen-equivalent on the Continent. (Despite Amgen's recent woes--of which you can read a detailed analysis in May's IN VIVO--a few probably still wish for one.)

But maybe some are overlooking what’s in their own back-yard. Shares in Denmark’s Novo-Nordisk have almost doubled in the last two years as the firm has quietly pushed to number one in the insulin market, beating big guys Eli Lilly and Sanofi-Aventis.

With sales of €5 billion ($10 billion) last year, and a market cap just short of $40 billion, Novo’s only half an Amgen. But its challenges aren’t half as big, either.

For one thing, Novo doesn't face a Mircera-equivalent competitive challenge to its insulin portfolio. Nor does it face safety issues--in part since insulin isn't widely used in indications outside diabetes. Insulin's also less expensive than many other protein drugs, so, although on payors' hit lists for bio-genericization, it faces not quite the same reimbursement risk as EPO. (That's probably why insulin is almost completely absent from European biosimilar firms' pipelines.)

Although patents on basic recombinant insulin are long gone (while Amgen still holds on to EPO and sons), engineered analogs have a while to run. And anyway, new entrants still struggle, it seems, even Pfizer-sized ones.

More importantly, the glucose-control pathway offers a related protein, GLP-1, for Novo to take mastery of. Glucagon-like peptide is a hormone that enhances insulin secretion in a glucose-dependent way. Shame for Novo that Lilly and Amylin are already there, selling first-in-class Byetta and doing fine, thank you.

Still, Novo's CSO Mads Thomsen told the IN VIVO Blog they can do better with likely second-to-market GLP-1 analog liraglutide; in terms of administration, dosing and side-effects. Meantime Novo is hedging its bets in the growth hormone space, in hemostasis management, and with newer efforts in inflammation and cancer.

But unlike Amgen, whose pipeline betrays a future with many more small molecules, and in many more therapeutic areas, Novo is sticking to its core capabilities—protein engineering. That’s why it yanked its oral anti-diabetic efforts in January (too competitive, too genericized, and what can follow Merck's Januvia anyway?).

Novo needs liraglutide to work as well as says it does. But if liraglutide does come good--we could know early in the second half of this year when the first batch of Phase III data is due--Novo may yet be likened to Europe’s Amgen. Albeit, perhaps, the Amgen of last year, not this year.

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Bristol & Isis: Stop Making Sense

Bristol-Myers Squibb must have missed the memo about the obsolescence of antisense therapies in light of RNA interference advances. The pharma is paying Isis Pharmaceuticals--a prolific and formidable conjuror of IP and drug candidates--$15 million upfront for exclusive rights to the biotech's PCSK9 antisense research program for prevention and treatment of hypercholesterolemia.

Bristol will pay all the bills associated with the discovery, development and commercialization deal, which will focus on Isis' second-generation PCSK9 inhibitors and backup compounds. Isis will also get at least $9 million in research funding over the next three years, up to $168 million in development and regulatory milestones, and high-single-digit to low-double-digit milestones on sales of any drugs. Solid figures for a realtively new discovery program that barely warrants a mention in Isis' own corporate materials.

Did Bristol pay over the odds for such an early stage program? Not necessarily: the deal's financials are roughly in line with its last pre-clinical deal in the space, a more traditional small molecule adventure with Exelixis back in 2005. This time the target (longwindedly, proprotein convertase subtilisin kexin 9) is a protease that helps to regulate levels of LDL cholesterol. Too much PCSK9, too much LDL cholesterol (just why is still undetermined).

And PCSK9 has proven impossible to modulate using small molecules or protein therapeutics, which is why it has drawn attention in the nucleic acid therapy crowd, namely Alnylam Pharmaceuticals and partner UT Southwestern. The RNAi company considers PCSK9 the most intriguing cardiovascular target out there, and aims to file an IND for an injectible PCSK9 inhibitor this year. If Bristol felt the same way about the target, they didn't have many options.

But wait, you say. Statins are cheap, orally available, and generally work well at lowering LDL cholesterol. All true--but Alnylam is targeting the several hundred thousand patients (out of the millions on statin therapy) whose LDL remains out of control despite statin therapy.

Going after a smaller, unsatisfied segment of a massive market like the statins with a specialty therapy may pay off handsomely for biotechs like Alnylam. It will be interesting to see whether Bristol (which has signed two excellent, risk-hedging, biotechy out-licensing deals this year with AstraZeneca and Pfizer) can further embrace the biotech ethos and do the same.

If so it may also take a close look at Isis' apolipoprotein B-100 inhibitor, ISIS 301012, a compound we picked as one of our top-10 licensable cardiovascular projects a few months ago. That Phase II candidate, also being tested as an LDL lowerer against a traditionally undruggable target, ought to land a much more lucrative deal than PCSK9, Isis CEO Stanley Crooke told Reuters today.

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Lilly's Shadow Government

Senior Republican staff in Washington are beginning to look for good, safe places to go until the political winds change. One top Health & Human Services official has found that haven in Indianapolis where a number of Republicans have gone previously for respites during a period of Democratic control.

Eli Lilly’s recruitment of the former Deputy HHS secretary Alex Azar continues a long tradition at the firm of offering shadow government posts to well-placed Republican figures.

Azar: Indiana jonesin'

Going back to George H. W. Bush, Lilly has served as a temporary home and launching pad for loyal Republicans. The former President served a three-year tenure on the Lilly board after leaving his final Ford Administration post as CIA director.

Azar, who played a major role in putting his stamp on HHS policy from two subcabinet level positions (first as general counsel and then as deputy secretary) will be senior VP-corporate affairs and communications.

The senior VP corporate affairs position is the very job held for nine years during the 1990’s by the current Indiana Governor and former OMB director, Mitch Daniels. Prior to joining Lilly, Daniels was the political director for the Reagan White House.

All big pharma companies obviously play an active game of political influence and are on the lookout for knowledgeable and experienced Washington insiders, but Lilly’s approach is unique in its focus on an ideological fit. The company appears to be less pragmatic and more idealistic in its choices. Azar, who reportedly marked his departure from HHS with a poignant note about praying for advice on his future choice of careers, fits the mold of idealistic conservative that Lilly likes to groom for higher positions. And, with a president and OMB director to its credit already, the company has not done too badly.

For a company that publicly espouses disdain for government-controlled functions, Lilly has done well with government business. Its antipsychotic Zyprexa always appears among the top products purchased by the government; it was also one of the first products to benefit dramatically from the shift from Medicaid to Medicare in 2006. Medicaid programs were getting more effective at forcing down the price and purchases of the product.

Lilly also has had great access to Washington from Hoosier politicians that it has backed aggressively. During the Reagan Administration, for example, Otis Bowen, a former Indianan governor, headed HHS for three years. During the presidency of George H. W., the firm basked in an Executive Branch headed by a former board member and a former Indiana senator, Vice President Dan Quayle.

Lilly likes to point out that Azar has broad knowledge of a number of key government constituencies: the “agencies under his direction included, among others, the Food and Drug Administration, the Centers for Medicare and Medicaid Services, the National Institutes of Health, and the Centers for Disease Control and Prevention.” Perhaps, more importantly, Azar planted a series of aggressive general counsels throughout HHS. At FDA, for example, Azar worked with Dan Troy, a former colleague from private practice at Wiley, Rein & Fielding.

Bringing a political pro into the corporate structure can raise some practical issues. Lilly tried to move Daniels into a line operating position in charge of the US pharmaceutical business but quickly found that he was more valuable in government relations and policy. He could run the government budget and the state of Indiana but did not satisfy Lilly’s demands for running a drug company.

The Azar appointment, announced on May 4 three months after his departure from HHS, comes soon after one Lilly connection to Washington went sour. Former Lilly Chairman Randall Tobias recently resigned from an assistant secretary at the State Department in charge of US foreign assistance and USAID following inquiries about his participation in the Washington escort service scandal.

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Love That Dirty Water

The may come as news to some folks but we Bostonians can be a bit parochial and self-centered. We like to think of our fair city as the origin of some pretty spectacular stuff. (Have you heard of the United States of America?< /Stephen Colbert voice>) And we wonder how people can ever get tired of hearing us yammer on about the Red Sox (We won a World Series you know. First time in 86 years.)












In All Our Glory (Writer not pictured)

So as the IN VIVO Blog's resident Massachusen VC-watcher, I’m of two minds when I hear that West Coast venture firms are opening Boston offices. First comes the understandable sense of validation—someone recognizes our place in the industry. Then comes the feeling that we’re somehow become an outpost for … egad … West Coast firms!

At a dinner a few years back, the managing partner of a VC firm, in explaining plans to open a Boston office, suggested Boston was an up-and-coming region that might be the next San Diego! The next San Diego? I always thought San Diego was the next Boston!

What’s driving this rant is the recent news that Skyline Ventures—a highly regarded Palo Alto firm—hired Stephen J. Hoffman, formerly of TVM, to head its East Cost office in Boston refreshed those conflicted feelings. Skyline joins Abingworth, Kleiner Perkins, Morgenthaler and 5AM as out-of-towners who opened Boston-area offices over the past few years.

Skyline founder John Freund says the hiring had more to do with Hoffman than with the East Coast or Boston. “We knew he’d fit in with our firm perfectly and he can’t move from Boston,” Freund says. “The more we thought about it the more we thought it would be an advantage to have an office in Boston. We’ve done a lot of investments in Boston over the last two years so having a presence on the ground would be an advantage.” Among the many attractions of Boston is an influx of pharmaceutical companies opening shop in the area (Merck and Novartis among the largest).

It’s great to have Skyline here in Boston. Same goes for Abingworth, Morgenthaler, 5AM and, of course, Kleiner Perkins (which technically didn’t open an office but did hire former Acambis CSO Tom Monath as a Boston-based partner). The more venture capital firms in Boston, the better off the biotech and medical device industries will be.

We’re lucky to have a strong core of venture firms like SV Life Sciences and Polaris Ventures. Still, it’s striking that the only new venture blood in town seems to come from branch offices. With the exception of Clarus Ventures, which broke off from MPM Capital, I can’t recall the start of any significant venture firms in the Boston area in the past few years. (Tell us if I’m missing someone.)

Still, wouldn't it be nice if Boston could be the home-base of a significant new venture firms, rather than an outpost?

Go Sox!

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At Novartis, competing venture funds aim to avoid the high cost of biotech innovation

As biotech deal prices skyrocket, pharma’s trying to get in on the ground floor, hoping for a bargain. But innovation-for-less, observed the IN VIVO Blog at BIO this week, is tough to engineer, and not everyone agrees on how it can be nurtured--and who is best placed to do the nuturing. Novartis’ dilemma is an interesting study.

The central set of actors: Novartis’ pharma division and its Cambridge-based research group, NIBR. Each has now set up competing visions of lower-cost venture-based paths to innovation. Neither, apparently, wants much to do with the other.

Novartis’ pharma division started its pharma option fund—a $100 million investment into a kind of side-pool of MPM Capital’s latest fund. The idea: as part of any investment it makes, Novartis Pharma gets a no-cost option, after clinical proof-of-concept, on one of the company’s programs, and thus—theoretically--cheap access to new compounds.

Very theoretical: it’s unlikely that the other investors in the round will take kindly to paying the same price without, like Novartis and its option, getting something additional. And it’s the rare biotech with valuable IP desperate enough to give away a free option on it. No word on any deals that have yet closed, though one collaboration is in negotiation (the option, in this case, won’t come for nothing—if a deal ever closes). One apparent reason for the fund: Thomas Ebeling is at loggerheads with NIBR’s chief, Mark Fishman. Ebeling’s pharma group believes they’ll never get products out of NIBR, either self-invented or through its business development activities. So they’ll find them on their own, thank you very much.

Meanwhile, NIBR execs started up a $200 million venture fund—the similarly named Novartis option fund--to actually found brand new companies, up to 10 of them. The group is run, however, not by NIBR, but by the parent’s finance group (not only could NIBR not have managed the fund—doesn’t have “a clue” on how to manage venture, says an insider—it didn’t want the hit to its budget should one of the ventures turn suddenly “impaired”). As part of its founding investment, Novartis will get a series of time-limited options on particular very early-stage programs. The price for the option increases as the project advances – and the option dies if it hasn’t been exercised by Phase I. No investments yet—and no real venture experience. One observer figures the fund should let more experienced venture investors lead the way in its first few investments.

The key message from all these contortions: biotech deal prices have started to hurt. Venture seems to be the general territory for the answer. And pharma’s different constituencies are fighting to get there first. If there’s a there there.

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