Look! Up In The Sky! It's Financings of the Fortnight!

It's a bird (yum!), it's a plane... no, sorry kitty, it was the year's first blast of biopharma IPO activity that we spied in the winter sky this past fortnight. As in 2010, there were several underpowered liftoffs, a couple failures to launch, and, if you'll pardon our mixed multimedia metaphor, very little catnip for public investors.

The first debut, Pacira Pharmaceuticals, went public just as our previous thrilling FOTF episode was going to press. The 2007 spin-out of SkyePharma PLC’s injectables business grossed $42 million by selling 6 million shares at $7, half the price of the low end of its anticipated $14 to $16 range. Since then, Endocyte and AcelRx Pharmaceuticals have also reached public orbit but, as with Pacira, only by bending to public market pressure and selling more shares at a lower price than they hoped for.

Other biopharmas couldn't get out at all. Clarus Therapeutics, a developer of reformulated oral testosterone replacement therapy, postponed its IPO on February 11; it hoped to sell 5 million shares between $11 and $13. And Italian antibody producer Philogen canceled its second attempt to list on the Milan stock exchange after partner Bayer HealthCare Pharmaceuticals terminated a license agreement for Philogen’s two Phase II cancer candidates, radretumab and darleukin.

It's worth noting that beyond biopharma, sequencing firm Fluidigm and diagnostic maker BG Medicine went public, as did Israeli company RedHill BioPharma on the Tel Aviv Stock Exchange, though its 51.6 million shekels ($13.6 million) raised were barely a blip. (Still, it's always fun to say, "That's a lot of shekels!")

Haircuts or not, companies at least are raising money. But what about investors? We've been following post-IPO stock performance, but it doesn't tell us much about the recent debuts. So now that the year's first IPO fusillade is over and no life-science debuts are pending, let's take a different measure. Of the 16 US biopharma companies to go public since the window re-opened in late 2009 (excluding PE-backed Talecris Biotherapeutics Holdings and biofuels company Amyris), the average step-up, defined as pre-IPO valuation divided by the private money raised, for the group is 1.65x. But that figure includes the outlier Cumberland Pharmaceuticals, which privately raised $16 million but had a pre-money IPO value of $291 million. That specialty pharma ended up with an IPO step-up of 12.5x, way above the mean. Remove Cumberland, and the average for the current class drops to 1.54x.

How does that compare to acquisitions? We found 21 biopharma acquisitions in the same period of time for which we could obtain venture data. Two were outliers: Marcadia Biotech, which raised $15 million from VCs and sold to Roche for $292 million in December; and AkaRx, which raised $11 million in venture and sold to Eisai for $255 million in late 2009. The rest of the group produced a step-up of 2x, slightly better than the IPO group.

Now, we fully realize that the IPO isn't an exit, it's -- let's say it together -- just another round of financing. So those IPO step-ups are strictly theoretical. That's why we'll keep monitoring post-IPO stock performance. By the time the lock-up ends, a new public company's stock price these days has often given its venture holders heartburn to go along with their haircuts. As of last week, the 15 biopharmas in the class of 2009-2011 had seen their post-IPO share prices fall an average of 5%. (Only four days public, AcelRx isn't included, but as of this writing it's lost 20% of its IPO price.)

At a time when markets are buoyant -- heck, even the Nasdaq biotech index is up 16% since the Jan. 1, 2010 -- the cumulative loss for the recent biopharma IPO class is disheartening. As Atlas Venture partner Bruce Booth tweeted this week, "It's tough out there."

Well then. So who’s on deck? Supernus Pharmaceuticals is a spin-out of Shire Laboratories’ drug reformulations unit with two extended-release versions of generic epilepsy medications in Phase III. Ambit Biosciences, a cancer company that has partnered with Astellas on its Phase II kinase inhibitor for relapsed/refractory acute myeloid leukemia, also submitted an S-1 in December. Other companies that filed in 2010 include Cutanea Life Sciences and Horizon Pharma.

Ready for liftoff? Remember, folks, in space no one can hear you scream, especially when you're reading...


Conatus Pharmaceuticals: Liver disease specialist Conatus announced a $20 million Series B round that remains open to additional investors. First-time backer AgeChem Venture Fund of Montreal joined Conatus’ existing investors, Aberdare Ventures, Advent Venture Fund, Bay City Capital, Gilde Healthcare Partners and Roche Venture Fund. The round builds upon the startup’s $27.5 million Series A from 2007. Formed by former executives at Idun Pharmaceuticals after Pfizer acquired that startup in 2005, Conatus’ funding needs increased last summer, when it bought at fire-sale prices Idun’s assets, which the Big Pharma left idle as a result of its reorganization. Nonetheless, Conatus says most of the new money is intended to support ongoing trials on CTS-1027, a Phase II hepatitis C therapy it licensed from Roche in late 2006. The former Idun pipeline includes emricasan, a Phase II candidate that was also investigated for hepatitis C, and other drugs designed to inhibit caspases, proteins that induce apoptosis. In conjunction with the new preferred stock round, Conatus also converted promissory bridge notes issued in the interim between rounds into Series B stock. AgeChem, which typically invests in therapeutics targeting disorders related to aging, took a Conatus board seat. -- Paul Bonanos

Optimer Pharmaceuticals: How's this for a movie tagline: "In a world of drugs versus bugs, the drug side just got richer." Optimer netted $73 million in a follow-on public offering that closed February 16, and it'll put at least part of the cash toward the launch of fidaxomicin. The narrow-spectrum antibiotic is aimed at Clostridium difficile, a gram-positive bacterium that infects the gut and causes severe diarrhea. Often acquired in hospitals and nursing facilities, C. diff infection often occurs after other antibiotics have been administered, upsetting the naturally occurring flora in the intestine. Optimer officials said recently fidaxomicin is expected to improve on the observed relapse rate of 20% to 30% in patients treated with standards of care vancomycin or metranidazole. With a priority review underway and a PDUFA date of May 30, Optimer could be looking at a roll-out of fidaxomicin in the second half of the year. In the secondary offering Optimer sold 6.9 million shares at $11.25 each, 10.5% below the closing price of its stock on February 10, the day it announced the offering. The cash raise, with Jefferies & Co. as lead underwriter, adds to the $68 million upfront Optimer is receiving from Astellas Pharma Europe for development and commercial rights to fidaxomicin in Europe and selected countries in the Middle East, Africa and Eastern Europe. Optimer retains rights in the US and Asia. Oh, and in the movie, we recommend that Jean Reno plays C. difficile. -- Alex Lash and P.B.

e-Therapeutics: The publicly traded British drug discovery firm netted £16.6 million ($26.7 million) on Feb. 15 in a placing with new and existing investors, including Invesco Asset Management, Gartmore Investment and Octopus Investments. The funds will be used to move e-Therapeutics's first potential products into clinical trials. In the placement one of the company's long-term investors, the UK hedge fund RAB Capital PLC, sold most but not all of its shares at a profit, CEO Malcolm Young told our "Pink Sheet" colleagues. The firm, which went public in 2007, placed 67.7 million shares at 26 pence each, a 2% premium to the closing price of 25.5p one day earlier. e-Therapeutics uses real experimental data to develop network analytics and identify a set of protein interactions thought to produce a beneficial effect. Compounds are then evaluated to see if they can produce that particular set of effects. It is a complex and laborious process of analysis, and not a simulation exercise or in-silico computer-added drug design, Young said. Compounds can also be evaluated for effects on healthy cells, so reducing the likelihood of side-effects. As an example, e-Therapeutics started to look for substances that would turn off the protection against apoptosis that cancer cells appear to have. Its researchers identified the regulatory proteins and promoters, then found a molecule that inhibited their protective effects. This compound, ETS2101, is expected to enter clinical trials later this year. The firm's advisor Panmure Gordon said that although Invesco will now hold 47.7% of e-Therapeutics, it does not intend to run the company or make an offer for the remaining shares, which under UK law would normally be required of investors that acquire 30% or more of a company. Instead, Invesco has obtained a waiver from the UK's Takeover Panel. -- John Davis

Versartis/Diartis: Versartis' $21 million Series B round and spin-out of its lead drug into a new company made for a lot of moving parts, but well worth tracking for at least two reasons. First, Versartis is in the middle of an asset-financing experiment that could point the way for other venture investors. The motto of this new movement could be, "Buyers want drugs, not companies." To that end, Versartis was initially a one-compound company funded by Index Ventures, the European firm out in front on asset-centric financing. But with a long-acting version of Type 2 diabetes drug exenatide on board, Versartis had the option to bring in two more compounds from Amunix, the extended-release technology firm that supplies Versartis' pipeline. With a second compound -- a human growth hormone treatment for kids -- in-house and ready for the clinic, Versartis' backers decided to spin the diabetes drug into Diartis and keep each entity focused on one drug. Theoretically, the separate structures will make each more attractive to potential buyers. Index and Amunix are clear that Diartis will be for sale once Phase 1b data is in hand, perhaps next summer. To push the HGH product forward, Amunix and Index rounded up new investors New Leaf Venture Partners and Advent Venture Partners for Versartis' Series B. Amunix is now the largest Versartis shareholder, according to Amunix co-founder Willem "Pim" Stemmer. -- A.L. and Chris Morrison

Amanda Micklus crunched numbers and wrote this week's intro. Thanks, Amanda.

Photo of LOLFOTFcat courtesy of flickr user LOLren.

Radius Bone Drug Delivers--Will Novartis Bite?

Radius Health yesterday released top-line Phase II data from its osteoporosis hopeful BA058, demonstrating statistically significant increases in bone mineral density (BMD) versus placebo in the lumbar spine and hip.

Big deal, you say. Well, it kind of is, since Novartis has an option on the compound, exercisable following Phase II evaluation, which is happening now. These days, option deals might be ten-a-penny, but back in 2007, when the deal was signed, they were less common. And Novartis took the option at the same time as the MPM/Novartis 'Strategic Fund', a joint program between the VC firm MPM Capital and Novartis' pharmaceutical business unit, made a $10 million equity investment in Radius. (Read this for background.)

Novartis has since signed option deals on a bunch of other assets, and created a separate venture fund, the Novartis Option Fund, which also inks option-based deals. (For more on their recent activity and the pursuits of corporate venture groups generally, check out this START-UP piece.)

The souring economy and the travails of traditional venture capitalists have made the MPM/Novartis experiment one worth watching. As the first product officially up for grabs, its hard not to see Novartis' decision to exercise--or not--its option to BA058 as a test case for the viability of this particular mix of business development and corporate VC. If Novartis says no, won't traditional VCs and biotechs think harder about the potential taint of an option spurned? Won't an early 'no' also make it harder for the side-by-side fund to ink future deals, especially if the capital markets come roaring back and traditional VCs put money to work again?

Radius' CFO Nick Harvey confirmed to The IN VIVO Blog that "Novartis do now have the Phase II data," but isn't revealing the time period granted to the Swiss group to decide whether to bite. Earlier this year, Joe Jimenez, Novartis Pharma's CEO, included BA058 in an email description of Novartis' osteoporosis development portfolio, suggesting Radius (and its investors) were onto a winner.

But at a recent Elsevier Business Intelligence conference, Novartis' head of BD and Licensing ,Tony Rosenberg, was more circumspect. Moreover, he downplayed the significance of the BA058 decision on the viability of the option model. According to Rosenberg, it would be naive to expect the drugmaker to exercise all the options it has currently taken. "Phase II compounds have a 20 to 30% success rate. If we do five deals, we should expect one or two of them to pay off," he argues.

Do investors buy Rosenberg's logic? Maybe. According to Biogen Idec's Michael Lytton, who invested in Radius while still at Oxford Biosciences and who has become a convert when it comes to these kinds of deals, there's still a bias against such transactions because of their potential to curb a biotech's future deal-making activity. In the case of Radius, Lytton says "co-investors partially accepted the answer that with a primary care product such as Radius' osteoporosis drug, Novartis was one of the few logical acquirers anyway." And after a thorough analysis, they grew more comfortable that the deal's economics were a reasonable approximation of what the biotech might hope to gain from a future partnership.

If it works, BA058--which is parathyroid hormone-related protein--will compete with Lilly's teriparatide (Forteo), a form of parathyroid hormone, and the only bone-building, or anabolic, drug on the market currently. (Check out this START-UP feature for some background on the space.) Appropriately, then, the Phase II trial included a Forteo arm, and, according to Harvey, the highest dose of BA058 boosted BMD at the hip (femoral neck) significantly more than Forteo. (Hip fractures are rarer than spinal ones, but more debilitating and thus costlier.)

Still, since "the trial was designed and powered to show a primary endpoint vs placebo," the Forteo-related statistics are therefore being regarded as "exploratory, rather than pre-planned," Harvey clarified. But he and CEO Richard Lyttle declare themselves pleased with the data, which they say looks "as we expected". Of particular interest: findings show only half the occurrence of hypercalcemia in the group taking the highest dose of BA058 versus those taking Forteo.

Radius reckons this is because BA058 has less effect on bone resorption than Forteo, which means it's less likely to lead to high blood calcium, currently a dose-limiting factor for parathyroid hormone--and the key reason NPS' Preos, for instance (a full-length PTH), never made it onto the US market.

Forteo sold about $800 million in 2008 despite a black box warning related to osteosarcomas, inconvenient administration, and a refrigeration requirement. Radius thinks it has a better molecule, one that's room-temperature stable, and which may be more convenient (Radius is working with an undisclosed partner on a transdermal delivery form).

So will all this plus the crucial Phase II data be good enough for Novartis? We may find out soon--although MPM has said it will support the company whatever the Big Pharma's decision. As to whether there might be any half-way house outcome, other than an opt-in or opt-out scenario, "we could never anticipate that there wouldn't be something [possible] in between," says Harvey.

(Image courtesy of flickr user rachel_r used with permission courtesy of a creative commons license,)

The IN VIVO Blog Podcast: Corporate Venture

Your amazing IN VIVO Blog team does it again--if we do say so ourselves. (And since we are incapable of humility, we will.) Another day. Another podcast.

Yesterday McAllen, Texas. Today the world of corporate venture capital, based on a comprehensive article Ellen Licking wrote for the May issue of START-UP. (Click here to take a gander at the story.)

Sadly, no word yet on whether President Obama has mandated this particular piece as required reading in the West Wing. Somehow we'll survive...

Don't feel inclined to dig into the story right now? Click the button below and listen to the podcast summary of what Roger Longman calls a "magnificent piece." Trust us, Roger never says that--unless he's trying to get a writer to do even more work. And don't forget, you can access the podcast via iTunes also.

What’s Wrong with Pharma? One Answer from JP Morgan

Sunday night we attended what we now think of as the kickoff to the JP Morgan meeting, the extraordinary concentration of biotech/pharma movers and shakers which is the MPM Capital dinner at San Francisco’s Ferry Building.

The dinner operates as a kind of temperature gauge for the industry; lots of folks with the power to actually do something looking for each other’s opinions and sharing their own.

Our quick sense this year: they were worried. But it was less the conversations that struck us as indicative of the industry angst than the unusually frank remarks of the dinner’s keynote speaker: Thomas Ebeling, once the GM of Pepsi in Germany, the CEO of Novartis Pharma and Novartis Consumer Health, and soon to be the boss of Germany’s largest broadcasting group ProSiebenSat.1 Group.

Ebeling’s a controversial guy. But he’s also got a very pretty broad view of the practical side of the business world. Which was why Ebeling’s theme -- a critique of the drug business – was so compelling.

There were plenty of things he said he liked about pharma (the passion to do good, for one; the extraordinary return-on-sales, for another). But there were plenty he didn’t. Not that the criticisms were particularly novel: you hear many of them in private conversations. But you rarely hear them publicly from one of the business's big shots and never aggregated. Here are the points we can remember (who thinks to take a reporter’s notebook to these shindigs?):

• Some of Big Pharma’s very senior managers (one assumes not excluding the speaker) are very sharp. But there’s a huge fall-off in quality as you get below the top.
  
  
• Big Pharma managers, trained in consensus decision making, don’t take individual responsibility. Not a lot of bold decisions, therefore, likely to get made.
  
  
• Pricing in pharma will change to a pay-for-performance model.
  
  

• This industry – and all its constituents – hates bad news. So rather than confront it, managers generally try to avoid it, exacerbating the problems pharma faces.
  
  

• Given the R&D productivity problems, in-licensing is crucial – but no one wants to say "yes" to them. Everyone will remember the executive who championed an in-licensing candidate that fails after millions in trial expenses. No one remembers the person who said “no” to Lipitor.
  
  
• If that ain't enough to block most deals, the not-invented-here syndrome can help. NIH remains a powerful force in pharma: fundamentally, all R&D heads all want to develop their own drugs.
  
  
• Pharma will evolve to a holding company model – it’s just too complex to run as it is.
  
  

Ebeling finished up his excoriation by answering a question from MPM partner Vaughn Kailian: “If you were appointed CEO of Sanofi Aventis what would be the first three things you’d do?”

The answer must have warmed the hearts of the biotechs in attendance – though the per-company math wasn’t particularly exciting. First, Ebeling would raise $800 million to $1 billion in capital and use the money to buy eight to ten biotechs. Then, because he wouldn’t be able to afford to develop all those products, he’d find Big Pharma partners to help. It’s a shots-on-goal strategy, he said: better 20% of something than 100% of the one asset you can afford to do yourself – and which doesn’t make it to market.

And finally: “I’d find a great head of R&D. Good marketing guys are common; great R&D heads are very, very rare.”

Picture from Der Aktionar Borsenmagazin

Venture Round: And now the bad news

It’s popular to suggest that the venture capital world is somewhat insulated by the turbulence on the public markets, but let’s get real. That’s not the case.

Last week, we offered a potential "bright side" scenario. The likelihood that boutique investment banks will finally get the sunlight and the attention to grow large enough to support a small, revenue-poor industry like life sciences.

But such a development, while positive, will take a while. Until then, we’re looking at a number of potential negative impacts, many of which we’ll explore in our upcoming magazines.



Fundraising: Three words. Forget about it. If you’re not a top-quartile, blue-chip fund you’re going to have a terrible time trying to raise a new fund.

And those firms that have raised new funds aren’t off the hook. One venture firm with AIG as an limited partner still hasn’t heard whether or not the insurance giant's commitment will be honored.

Even those firms with limited partners not being bailed out by the government could face some problems down the road as they begin to call down portions of the fund. Some LPs may simply say, no, sorry we don’t have the cash—or even the appetite—any longer.

This might lead to fund reductions, similar to what we saw after the technology boom busted. But in this case, GPs won’t be giving capital back for lack of investment opportunities. They’d be doing it because of lack of support from LPs. (In fact, one professorial type told PE Hub that VCs should be nice and give some of their money back. We're not really buying that one.)

Early-stage investing: Big funds probably won’t be doing it. Why should they when they can have their pick of later-stage companies that will be hungry for capital. As for the angels, well, they’ll obviously be a little risk averse given the current situation. But they too will have the option of investing in “later” early-stage companies, the kind of companies that VCs backed until now. We’re not sure if angels can provide enough of the capital those more established start-ups need, but they’ll be given the opportunity to invest.

Mid-stage investing: So you have a product about to start clinical trials, which puts it on track for commercialization in five or six years, maybe, after some serious infusion of cash? Good luck with that.

Late-stage investing: This could be a blood bath. VCs with capital will be obligated to find bargains in this market. At this point, no one is willing to admit this, but we’re expecting some serious hammering on existing investors. To be sure, VCs can’t be too cutthroat since they too have companies that will require outside capital, but if they can get a late-stage company at early-stage prices then they have to do it. And look for more and more PIPEs. (BTW, we ass-U-ME-d incorrectly last week. The Angiotech deal involving Ares and New Leaf Ventures is not dead yet. We're told something may indeed happen.)

Exits: It’s been said that we’ve been through IPO droughts before, and that’s true. But this isn’t just a drought. Somebody blew up the pipeline and poisoned what's left in the reservoir. As for the corporate buyers, yes, pharma and medical device companies SHOULD be buying. But will they? And if they do what sort of prices will they be seeking. Just as venture firms have to answer to LPs, corporates have shareholders who demand value when it’s available.

In fact, VentureWire Lifescience released some sobering statistics today. We’re back to 2003.

Health care companies have created $3.01 billion this year through IPOs and M&As, down from $8 billion at this point in 2007, a 62.2% drop. That's the worst nine-month performance in five years. Through September 2003, life sciences companies had produced $1.33 billion in M&A and IPO liquidity.

It’s worth pointing out that health care accounts for most of the liquidity activity since the entire venture industry generated $4.3 billion from sales and IPOs in the first three quarters of this year. PriceWaterhouseCoopers Money Tree report offers a similarly glum outlook.

Readers of START-UP already know our take on the acquisition of privately held biopharma companies. Colleagues Ellen Licking and Chris Morrison supplied an exhaustive study in the current issue.

So yes, we’re not dead yet. (We're keeping with the Monty Python theme.) But keep an eye out for the cart hauling dead folks. Oh that reminds us, we see one more significant development.

The Rise of Secondary Buyers: We already reported on their rise in our July START-UP. But, whether it's portfolio companies or stakes in general partners that LPs no longer want, secondary buyers likely will have an easy time finding bargains. Firms like Saints Capital will prosper.

Are we missing any?

Venture Capital: The Movie

The New York Times' Bits blog premieres (for us at least) a new video produced and distributed by the National Venture Capital Association.

The video tells the story of an entrepreneur who is trying to build a company around a device that can turn pollution into energy (be nice if it could do the same for sub-prime mortgages.)



Anyway, she's frustrated at every traditional turn--banks, government loans, and some odd hedge fund type--until she, of course, stumbled upon a venture capitalist. Well, he actually stumbles into her.

Readers of this blog won't learn anything from the video, but you might enjoy seeing a few of your colleagues in the cast. We didn't initially recognize Lou Bock from Scale Venture Partners who plays Jim, the oncologist/entrepreneur who has tapped out his friends and family to advance some cancer-related venture. Guess we've never seen Lou in a white lab coat before.

Stacy Leanos of Bay City Capital delivers a convincing performance as an uninterested low-level SBA bureaucrat.

Unfortunately Lou..er Jim quickly gets elbowed aside by the VC who is immediately captivated by the pollution-to-energy idea (Clearly, green energy has supplanted health care as the VC industry's feel good sector.)

But the many successes of life science venture capital investment get a fair representation throughout the film. Not as much hype as some others, but who is going to argue about the film's highlighting of Starbucks, Intel, Apple, Amazon, Google and other more household names.

Venture Round: Looking for the Bright Side

What if this is the best thing that could have happened for venture capitalists and their companies?

By “this” we mean the complete and utter destruction of Wall Street, and by “best thing” we’re obviously thinking long, long-term impact here. Clearly, things will be rough for a long time coming.
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But venture capitalists have been squealing about how Sarbanes-Oxley has regulated them right out of the IPO business, saying the costs and oversight were too much for their little start-up companies to bear.

Then, the bulge bracket banks—the big guys with the bankers, analysts and cash—began turning their eyes to bigger, exciting and, yes, revenue-generating deals, leaving their little biopharma and device companies that could under-covered and forgotten in the eyes of many VCs.

Well, those days are clearly done. The question now remains, what will rise from the ashes? Will the banking and analyst staff that once populated the highest offices in Manhattan find their way to some of the boutique banks that have made themselves a nice little business putting together smaller deals, bringing the experience and resources to grow those institutions?

Furthermore, as one institutional investor tells us, venture capitalists could help themselves and this nascent boutique banking industry by steering some of the choice work toward smaller investment banks, eschewing the cache and hoopla associated with one of Wall Street’s blue chip names.

Uh, former blue chip names.

PE Hub had a similar conversation about small tech companies with Paul Deninger, vice chairman of the investment bank Jefferies & Co. We're not buying all that he's selling, but read it here, including the blistering comments. (BTW, we'd hardly consider IPC The Hospitalist Company, a tech company. It's a health care company thanks very much.)

So, is this the end of the world as we know it? Or has the past few weeks been a necessary—and admittedly painful—cutting of the larger trees that will allow some sunshine and rain wash over the growth underneath?

***

As we said the short-term is pretty bleak. Witness this week's announcement that the spin-out of Angiotech Pharmaceutical is in danger, which likely means no investment by Ares Capital or New Leaf investment.

Also, VentureWire Lifescience and others reported on the recent fund-raising by Kalobios, which didn't include previous investor Lehman Brothers.

"We were all set to close on Friday of last week, until Lehman filed for bankruptcy," said KaloBios Chief Executive David Pritchard. "They had several million committed to the round, and while we only lost one business day...we had to rush to make that up."

Lehman had led KaloBios' $20 million Series C round in July 2007 through its health-care venture capital group. That group invests directly off the firm's balance sheet, unlike Lehman's IT-oriented venture partners group, which closed a $365 million fifth fund in September 2007. Randy Whitestone, a Lehman spokesman, said the venture partners group is part of the firm currently being auctioned off, and he said the firm is not certain of the health-care group's fate.

Pritchard described embattled Lehman as "a great investor and very supportive of the company." Jeffrey Farrell, a senior vice president at the investment firm, was an observer on KaloBios' board.

Pritchard said many of the round's other investors stepped in over the weekend to fill the hole left by Lehman, contributing above-pro rata shares. New investors Genzyme Ventures and Mitsubishi UFJ Capital led the round, joined by existing investors Alloy Ventures, 5AM Ventures, GBS Ventures, Lotus Bioscience Ventures, MPM Capital, Singapore Bioinnovations and Sofinnova Ventures.

***

Fred Wilson, general partner at Union Square Ventures, has an interesting little post on his A VC blog about how the New York Times came to profile his firm. The serendipitous origin of the article must broil PR pros who would kill to get their clients such a profile, but more often than not this is how such profiles come together.

Anyway, the article relays how Union Square Ventures is willing to take small stakes in tiny start-ups, exclusively in tech. That's easier to do with a $165 million fund, but it got us thinking. We wrote extensively about how larger venture capital firms are maintaining their early-stage medical device flow by committing small bits of capital in ventures started by proven entrepreneurs who are affiliated with the fund. But are there any life sciences VCs who exclusively make similarly sized bets in untested start ups?

Venture Round: Now where's that panic button?

Private equity investors, reeling from a weekend of news that ranged from bad to really bad to really, really bad, met for a group hug this week at the Private Equity Analyst’s annual conference in New York. But there wasn’t a lot of love to go around.

The typical bravado of the private equity world seemed to be in short supply at the conference. IN VIVO Blog was particularly shaken as we wound through the revolving door on the Park Ave side of the Waldorf Astoria. A young, private equity professional—the kind of person who typically reeks of overconfidence—declared simply to his cohorts. “I’m terrified.”

Thus the tone was set.

To be fair, we did hear a bit of “this is good for the industry” talk, and there’s some truth to that. Richard Caputo, managing principal of The Jordan Company, a PE shop, says many of the debt structures that fueled the rise in private equity are as shaky as any of the sub-prime mortgages that are sinking the US economy. Private equity investors will have to go back to doing smaller deals requiring little or no debt, which will require honest and thorough due diligence to assure the acquired companies are worth the dough. “The world has changed and we’re going to have to work harder,” Caputo says. “There is going to be a lot of carnage before it gets better,” adding that in six months we’ll be looking at the “good old days of Sept. 2008.”

But here’s the good news. Health care is a safe haven again.

Terrence Mullen, managing director of Arsenal Capital, says health care companies still are a strong bet. He didn’t elaborate much during the session, but after the meeting, Mullen said the fundamentals of the business aren’t going away. People will get sick. They’ll need to get better, and companies will get paid to provide the products and care. These facts are irrefutable. They’re also word-for-word what we were hearing when the technology industries collapsed eight years ago, forcing venture investors and private equity folks to rediscover health care.

Arsenal Capital isn’t one of those come lately types. But don’t be surprised if interest in health care deals get a little frothy, particularly in those companies (or divisions within larger companies as you can read here) that generate solid revenues.

Given the interest private equity firms have shown in pharma, it will be interesting to hear the feedback at our Pharmaceutical Strategic Alliances conference next week in New York.

***

Attendees at the last session on Tuesday had the opportunity to vote on several questions regarding the state of the industry. The polling showed that 79% of the attendees don’t think the credit crunch will break for private equity investors until later next year; 50% say the IPO window won’t open until 2010; and 62% say that venture firms will need to change their investment models in order to find faster routes to liquidity.

Bayer/Direvo: Platforms Trump When It Comes to Exits

Yesterday, Bayer HealthCare announced its intent to spend €210 million to acquire Direvo Biotech, a privately held start-up with a promising next-generation protein-engineering platform.

Bayer is the latest in a string of pharmas to bolster its large molecule capabilities via the acquisition route. Other privately held companies with novel technology platforms snapped up by Big Pharma in recent years include GlycArt (Roche), GlycoFi (Merck), Domantis (GlaxoSmithKline), Adnexus (Bristol-Myers Squibb), Agensys (Astellas), Morphotek (Eisai), and CovX (Pfizer). (Are you beginning to see a trend here?)

START-UP recently undertook a comprehensive review of private biotech M&A, analyzing 184 deals that took place from January 1, 2005 to August 31, 2008 to identify possible trends, including age at acquisition, as well as the clinical status and therapeutic focus of a start-up's most advanced program. (You can read the whole article here.) Interestingly, fewer than half of the acquisitions reviewed resulted in a reliable exit for investors, and those numbers appear to be trending downward.

But if M&A has become not so much an exit opportunity as a chance to revamp one's business card, there's one group that has continued to hold value in the eyes of acquirers: the platform biotechs, especially those capable of generating multiple therapeutic products of the large molecule variety. In all, 56% of the private companies acquired during the 2005-2008 time period were platform-based. And of those companies that made healthy exits, nearly 60% were platforms. (See chart above--click to enlarge.)

And that's been very good news for the private investors who've ponied up the cash for these start-ups. For instance, HBM Bioventures, Atlas Venture, Polaris Ventures, Flagship Ventures, and Venrock poured $54.5 million into Adnexus from 2002 until its acquisition by BMS in 2007. But they netted an almost 8-fold return in the process. (And if the company realizes certain developmental milestones, earn-outs could drive the return up nearly 10-fold.) Meanwhile, CoGenesys's backers, which include New Enterprise Associates and OrbiMed Advisors, invested $55 million into the Human Genome Science's spin-out and earned a 7.3x return on their investment when Teva purchased the company earlier this year.

Direvo, too, netted quite a nice return for its backers, which include TVM Ventures, Danisco Ventures AS, S-Equity Partner, and Mulligan BioCapital. (A full list is here.) The company, which spun off from Evotec, has raised more than €30 million over three private rounds since its 2000 founding; by our calculations that's an ROI of 7x.

One reason the return for TVM and others was so high: the sale of Direvo was apparently a competitive process. "There were several parties in the race," Direvo President and CEO Dr. Thomas von Rüden told the IN VIVO Blog.

Late in 2007 and early in 2008, Direvo also inked research agreements with both Pfizer and MedImmune. Financial terms of those deals weren't disclosed--and probably didn't generate a tremendous amount of money for Direvo. But it's clear those deals served their purpose, helping validate the technology in the marketplace. "It put us on the landscape," admits von Rüden.

Certainly Bayer, which has been somewhat late to the biologics party, didn't have the capabilities Direvo was offering. "We can optimize antibodies, proteases, other proteins, and do glyco-engineering. Nobody else offers all this together," notes von Rüden, who will be staying on until year's end to aid the start-up's integration into Bayer Schering.

It's true the pace of acquisitions of these monoclonal- or protein-centric outfits has slowed somewhat. Direvo is only the second such company to be acquired in 2008; back in May, Daiichi-Sankyo purchased another German stand-out, U3 Pharma AG, for €150 million. Still, Big Pharma's desperation to quickly add biologics expertise means we're likely to see out-sized returns for platform start-ups of this type.

And despite a worsening M&A climate, that's definitely good news for the VC community.

image from flickr user bk-robat used under a creative commons license

Domain, No More

In what's become a familiar storyline over the past five years, a general partner--this time Robert More--has parted with Domain Associates.

More has joined Frazier Healthcare Ventures becoming a full partner in the Seattle-based firm's $600 million fund. More leaves Domain after eight years as general partner.

More is the third general partner to leave the venerable firm since 2004. Arthur Klausner was the first, leaving the firm shortly after it raised its $464 million fund. He went on to join Pappas Ventures, which is in the middle of raising a new fund. The following year, Olav Bergheim, another Domain general partner, left the firm to start Fjord Ventures. Both left the firm on good terms, saying their personal investment preferrences differed from Domain's.

In an industry where stability is highly valued, the departure of two general partners in two years raised some questions about the firm's succession plans, particularly as some of the firm's founding partners approached an age at which others might consider retirement. More, who first joined the firm as a Kaufmann fellow, appeared to be part of the long-term succession plans, but things played out differently.

More says his joining Frazier presented a new opportunity. "From my perspective, I'd been there for a long time," More said in an interview yesterday. "I really enjoyed the interaction with the partners. Jim Blair is someone I admire. But I think it's the right time [to move on] and I've known Frazier for some time."

More is jumping from on top-tier firm to another. But VCs rarely break from a general partnership merely to try something different. When asked why he'd leave a firm like Domain, More acknowledged that he'd had some "philosophical differences" with his former firm. He declined to give further detail, directing any additional questions to Domain. Partners Jim Blair and Brian Dovey couldn't be reached for comment.

Despite any differences, More says he leaves Domain on good terms, saying he'll likely co-invest with his former partners when possible. He'll also retain some of his board seats on Domain companies. At Frazier, More will work from the firm's Silicon Valley office, which is moving from Palo Alto to Menlo Park, investing in both biopharmaceutical and medical device companies. More has invested from Domain's San Diego area office for the past three years. He'll continue to live in the San Diego area.

Managing Partner Alan Frazier likewise says the hiring won't impact his firm's positive relationship with Domain. "We're pleased to get him and pleased this is supported by his friends at Domain," Frazier says. Frazier says the firm wasn't searching for a new partner when it began discussions with More. He said couldn't pass up the opportunity to bring aboard More, who counts among his wins Novacardia Inc., ESP Pharma Inc., Esprit Pharma Inc., Intralase Inc. and Proxima Therapeutics Inc.

To be sure, Domain will continue to be regarded as a top firm as it should be. But More's departure likely will raise questions about Domain's succession plans. Four of the firm's eight partners have been with the firm for at least two decades, including three--Blair, Jesse Treu and Chief Financial Officer Kathleen K. Schoemaker--who have been with the firm since its start in 1985. Dovey joined the firm in 1988.

In fairness, Domain's addition of new partners doesn't tend to draw as much ink as the departures, but the firm has added talent. Partner Eckard Weber, who you can read about here, joined in 2001. Partner Brian K. Halak made partner in 2006 after five years at the firm. Nicole Vitullo came aboard to manage the firm's public equity fund. She made partner in 2004.

Most recently, Dennis G. Podlesak became a partner in 2007 after founding and leading two successful portfolio companies, Cerexa Pharmaceuticals, and Peninsula Pharmaceuticals, which were sold to Forest Laboratories and Johnson & Johnson, respectively.

No word on whether Domain will be in the market for a new partner to replace More.

Venture Round: The BEAT Goes On

When we wrote about CardioNet's IPO back in March, we had no idea it would hold such historical importance.

CardioNet, trading under the symbol BEAT, remains the last venture capital-backed company to go public this year, including both life sciences and technology plays. And we have to admit its doing the VC-crowd proud.

But the company is doing so well one could argue it may have sold more shares than it had to.

You may recall the cardiac monitoring company entered into a unique structure with investors back in spring 2007 when it raised $110 million in a Series E. Investors were given stock that converted into common shares during the IPO. The company's management took a bit of a gamble as there were repercussions if the company didn't get out in a timely manner.

Well, it did go out at the lowest price allowed by the deal--$18 per share. As we noted back in March, the conversion of those shares depended upon the IPO price. Had CardioNet gone out at $23 per share, which it initially had hoped to do, those Series E investors would have held 5.9 million shares.

But if CardioNet went out anywhere between $18-$20, the Series E shares converted to 7.2 million shares.

Today, CardioNet shares are trading at $27.50, making it a darling among IPO stock pickers, with a nearly 53% gain in three months.

It's interesting that if CardioNet priced its IPO at $23, more than four dollars below where it's trading today, the company would have had to hand over one million fewer shares to its Series E investors.

We're being a bit facetious, of course. CardioNet's stock didn't really take off until the company posted better than expected numbers in mid-April. So this is the case of a company doing what it needed to do to go public, and then going out and proving its value to shareholders.

At the time, the company clearly wasn't getting traction at $23 per share. In fact, $18 per share seemed rather generous. It apparently wasn't.

While we're engaging in some 20-20 hindsight, Boston Scientific--which acquired a sizable stake in CardioNet through its purchase of Guidant--sold off 1.5 million shares at the time of the IPO, recouping $27 million.

Had it held on, its stake would be worth more than $41 million today.

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Edmund de Rothschild Investment Partners more than doubled its assets under management for life sciences by closing on €150 million last week for its third life sciences fund. The Paris-based firm previously raised €80 million and €26 million for its second and first funds, respectively, according to VentureWire Lifescience.

The firm expects to invest the new fund in 15 to 20 life science companies across all stages of development, including biopharmaceutical, medical device and diagnostic companies, mostly in Europe.

According to the firm, its investors include most of Edmond de Rothschild Investment Partners' life science existing investor base, including La Compagnie Financière Edmond de Rothschild, La Caisse des Dépôts and Amgen. Other investors include health insurance companies, public pension funds, social institutions and institutional investors.

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Attention any other venture firms in the market with new funds, save the postage. Washington State Investment Board isn't interested, according to a recent post on Private Equity Hub.

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Three Arch Partners, still investing its 2004 vintage fund, probably won't be in the market for a new one until next year.

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Fresh from the "I made a seven minute presentation to a bunch of lawyers and investors, and all I got was a lousy...." file.

As always, if you have any private suggestions, tips, or if you really, really, really hate the idea that we'll be running this column on Wednesdays instead of Fridays email me here.

(Image courtesy of Flickr user RWK through a Creative Commons license.)

Venture Round: Venture Capital To Go

That's the thing about Asian venture capital news. A week later and you find yourself still hungry for more.

Well, last week we profiled MPM Capital's first foray into India, a $20 million investment in Sai Advantium Pharma, a contract research organization. At the time, we declared it the first investment that a U.S.-based VC made in an Indian life sciences company, a designation we later had to undeclare as we failed to identify TPG Biotech (previously known as TPG Ventures, also recognizable as the venture firm affiliated with Texas Pacific Group) had invested in its own CRO, Matrix Laboratories Inc., two or three years ago.

Well, you're better off just reading what colleague Ellen Licking wrote about TPG's investment here or about other opportunities here.

But if you'd enjoy another little nibble. Dow Jones VentureSource's yesterday issued its first quarter report on venture investments in India. The report says India $99 million in venture investment with 16 deals completed, "a 27% drop from the fourth quarter that saw a record $135 million put into 17 deals."

Life sciences deals didn't account for much. The report mentions only two biopharmaceutical deals were done, totaling $11 million. Last year, life sciences and health care companies brought in $99.5 million, so in the words of Peter's Evil Boss Bill Lumberg "we need to sorta play catch up."

William Greene, general partner at MPM, says he expects other life sciences deals to follow the investment in Sai. "Given the quality of the deal flow and the interest these entrepreneurial companies have in accessing international venture capital I do think this is an area that is really going to grow," Greene says. But he's not ready to predict when the next deal might be done. "I can't say whether it's one month, two months or two years."

Well, after last week's experience, if he's not going out on a limb on this one, neither will we.

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Meanwhile, a few remote areas within the US are getting a little more attention, according to assorted reports.

Utah
VentureWire Lifescience reported that vSpring Capital well on its way to raising $200 million for its third venture fund. The firm is based in Salt Lake City, Utah and has offices in Albuquerque, New Mexico. vSpring invests in "Intermountain West region" companies operating in life sciences and other industries, according to the firm's web site.

Canopy Ventures secured $100 million for its second fund. The fund previously invested only in information technology companies, but General Partners Ron Heinz and Brandon Tidwell will target life sciences companies as well. Obviously, there's no shortage of opportunities there as we've written about opportunities and investments in medical device and personalized medicine.

San Diego
San Diego--which as we noted back in November suffers from an disproportionately low number of local VCs for a region so rich in pharma and research--has a new seed fund, again according to VentureWire. Mesa Verde Venture Partners, a successor firm to IngleWood Ventures, wrapped up $15 million for a seed fund in March, with some of the capital coming from two venture firms, vSpring and Sanderling Ventures. General Partner Daniel Wood--the Wood of IngleWood--and a team of venture partners scattered across the SouthWest will invest the capital in new health care start-ups in their respective regions. The strategy is an interesting one for Sanderling, which also has offices in San Diego. General Partner Fred Middleton told VentureWire the relationship provides Sanderling access to early-stage deals without committing too much partner time. It's made similar investments in the past in seed-stage firms in Pittsburgh and Silicon Valley.

Midwest

Finally, we leave you hopes and dreams from the Mid-West that coastal VCs will invest more capital in flyover states.

As evidence, the article--actually a report from a local venture conference--points to the recent $22.75 million spin off of Esperion Therapeutics from Pfizer Inc. as perhaps the beginning of a trend.

But clearly Esperion is too unusual a deal to build a thesis around. VCs will travel far and wide to invest in a ready made biopharmaceutical company led by its original CEO Dr. Roger Newton. You'll find an interview with Newton in our upcoming IN VIVO the Magazine. We'll link to it here when it's available.

But states like Minnesota and Michigan are drawing more attention from VC, particularly device VCs who see an fresh resource of talent coming from the recent spate of layoffs the spate of recent layoffs from Medtronic and Boston Scientific.

This rush of thousands of experienced medical device workers who don't have the require the same compensation as their Silicon Valley counterparts already is interest from coastal venture capitalists. New incubator--or accelerator--ConceptTx Medical Inc. is just one effort that will be able to tap this new pool of talent.

As always, if you have any private suggestions, tips, or if you really jonesing to talk venture this holiday weekend email me here. I'll get back to you Tuesday.

(Image courtesy of Flickr user Hfabulous through a Creative Commons license.)

Deals of the Week: Not Quite Exits, But OK Given the Circumstances

It’s hardly news that most biotechs can’t buy an investor. So it’s nice to see a few signs of progress.

Take pharma-ignored cell therapy. The stem cell world got a boost as two smart guys from biotech – Paul Grayson from Sanderling and John Mendlein, most recently CEO at biological-platform play Adnexus (sold for $500 million to Bristol-Myers Squibb) -- joined a bunch of scientists at Fate Therapeutics.

Elsewhere in the cell-therapy world: we’ve been wondering (in this post, for example) why big biotech deals so often cause biotech shares to drop. But not at Cell Genesys, whose Takeda deal started the company’s stock up a satisfyingly steep incline, virtually doubling as investors absorbed the news that somebody in Pharma, finally, had seen the value of cell therapy (albeit a pretty pharmaceuticalized version). Now it’s done the smart thing – raising $30 million from shares and warrants in a one-investor PIPE. It probably still feels the financing came at a pretty dilutive rate (something like $330 million pre-money) but hardly the dismal barely-above-cash-value price it was trading at a few months ago.

Now with that ringing endorsement we bring you ...

Intercell/Iomai: And as for exits – or quasi-exits: from the outside, things looked pretty bleak for vaccine-play Iomai, which had less than a year of cash when the Austrian Intercell said on Tuesday that it was buying the patch-tastic drug and vaccine delivery company for $6.60 per share, valuing the company at $189 million. Intercell gets a few mid-to-late-stage patch-vaccine programs from Iomai, including one for travelers’ diarrhea that may enter pivotal trials as soon as the first half of next year, as well as a second deal with Merck & Co. around Iomai’s patch with an undisclosed vaccine. Deal doesn’t do much immediately for the major investors, presumably the VCs like New Enterprise Associates and Essex Woodlands who have been stuck in the stock since taking it public in 2006 at $7/share at about an $85 million pre-money. They’ve got to take Intercell shares for their stake (which are at least far more liquid than Iomai’s were). We noted the predicament of these VCs and others who have found themselves ‘marooned in the public markets’ only last month in START-UP.

Antisoma/Xanthus: Similar issue for backers of Xanthus. Antisoma, the UK cancer-focused biotech, is acquiring the Boston-based start-up for ₤26.8 million in stock. Antisoma seems to have gotten a great deal. On a total of about $90 million invested from its VCs, Xanthus has managed to create a real pipeline, largely through in-licensing. It’s put four drugs into clinicals, with two leading the way: Xanafide is starting a Phase III trial in secondary acute myeloid leukemia under an SPA; and FDA has accepted Xanthus’ filing for oral oral fludarabine, to which its got US rights (the product is marketed in Europe and elsewhere). Most of Xanthus’ pipeline was spun out of Schering AG in a series of deals as that firm was integrating into Bayer, a deal we chronicled here in 2006. (Interestingly, before that, Xanthus had managed to grab another, earlier stage asset (P2045), a peptide coupled to a radioisotope which had originally come from biotech Diatide—which had been run by Xanthus CEO Richard Dean, PhD, and VP of development John Lister-James, PhD.) Xanthus’ backers won’t get free of Xanthus immediately: they’re putting about a third of the $42 million or so in new money Antisoma is raising simultaneously with the deal.

Merck/Ranbaxy: Now for something completely different. On Monday, Merck announced a partnership with Indian drug giant Ranbaxy in the anti-infective space. For an undisclosed up-front fee and milestones potentially totaling more than $100 million, Ranbaxy will search for anti-bacterial and anti-fungal compounds, taking compounds through Phase IIa before handing them back to Merck for additional human studies and commercialization. Merck won’t release details but Mervyn Turner, PhD, SVP for world-wide licensing and external research at Merck assures IN VIVO Blog that the proper incentives to keep both sides motivated have been built in. Still, it’s anybody’s guess what happens if Ranbaxy’s compounds don’t pan out. Does Ranbaxy get them back? Is the company still eligible for monetary compensation? “It’s all covered under the agreement,” says Turner.

This most recent deal comes on the heels of two other similarly structured deals Merck has inked in India: a November 2007 agreement with NPIL Research and Development (formerly part of Nicholas Piramal) in the oncology space and a 2006 partnership with Advinus Therapeutics in the metabolic disease arena. For Merck, the deals are all about expanding pipeline and pipeline capacity. Merck doesn’t have to fund much development, so doesn’t take a big P&L hit, but still has the right to step back in if something interesting results. We’re likely to see more such deals in the future. Increasingly Big Pharma is thinking virtual: companies once proud of their FIPCO status are openly discussing their desire to transform themselves into FIPNets (fully integrated pharmaceutical networks). Lilly, in particular, is a big proponent, and we have more on their strategy in a story in the May IN VIVO along with another piece in the same issue on Pfizer’s ideas for externalizing its pipeline.

BMS/KAI: We’ve already noted here the tie-up between Bristol-Myers Squibb and Kai Pharmaceuticals on an acute-care IV-delivery heart attack drug, KAI-9803. KAI had reformulated the compound from the original intra-coronary version it had licensed and gotten back from Sankyo, following that company’s merger with Daiichi, but the deal is also the second in Bristol’s so-called string-of-pearls strategy (after its Adnexus acquisition in 2007). No longer as big a Cahuna in the drug world as it once was, Bristol has been transforming itself into a specialist player, looking to layer in externally sourced next-generation R&D programs. If they’re good, they’ll come at a Big Cahuna cost, however -- pretty much just as Plavix is losing patent protection and with it a huge chunk of Bristol’s current operating cash flow. That’s why the company is trying to raise money now to fund its strategy, selling off Convatec ($4.1 billion) to a couple of private equity groups and IPO’ing Mead Johnson, keeping 10-20% and reaping maybe $900 million - $1.7 billion (with the possibility of selling off more over time).

Venture Round: Asian Flavor

A few years ago, back when it seemed like a firm bent on world domination, MPM Capital led a $48 million first round in TaiGen Biotechnology, a small molecule drug discovery company focused on oncology and immunology.

The real news at the time was that TaiGen was based in Taiwan. MPM had teamed up with a number of local firms to back the company, becoming the first U.S.-based VC to invest in a Taiwanese biotechnology company. At the time, in 2001, MPM looked to be the tip of the sword as life sciences venture capital firms looked East (or West really) for the opportunity to make investment in Asian companies. But no one followed MPM’s lead until just recently when firms like OrbiMed Advisors LLC and others began sponsoring Asian-focused firms. Still, early-stage investment in Asian biotechnology companies are rare. (Our February feature on recent investments in Chinese firms is here and an earlier 2006 discussion of VC reluctance to drop money in China and India is here.)

Why are we bringing this up? Well, MPM Capital appears to be Lewis-and-Clarking it again, this time in India. MPM made a $20 million investment in Sai Advantium Pharma, a contract research organization in Hyderabad, India. MPM made the investment after spending the “past couple of years” developing its emerging market strategy and developing deal flow in India. “Out of that work came a handful of opportunities, one of them being pharmaceutical outsourcing,” says William Greene, the general partner who managed the deal. “We then in parallel asked our portfolio companies if they were using preclinical outsourcing services and if they were going to India or China to do it. What came back was more than a handful of companies saying that we are doing chemistry outsourcing and we use this company in India called Sai Advantium.”

MPM followed through with more traditional due diligence. Everything checked out and MPM came to terms with Sai. While MPM was examining the company, Sequoia Capital’s India fund arranged to buy the shares of a Sai executive who was leaving the company and wanted to cash out. Greene said MPM considered buying the shares itself, but it didn’t want to obtain a stake through a secondary purchase. It wanted a piece of the company. Furthermore, Sequoia is among the US VCs with most experience in India, so MPM welcomed the expertise, he said.

A cynic—okay we—might wonder whether MPM’s initial search was fruitful since the firm’s first deal came through a referral from portfolio companies. But Greene says, “There are definitely a lot of opportunities there.

“I think we have pretty good deal flow in India considering that we are largely working with partners and talking about doing our kind of investment. There is no shortage of growth equity opportunities in hospital and health care infrastructure and that is the sort of thing we could invest in.” But MPM prefers to stick with its core strategy of investing in life sciences companies. “Those types of deals are certainly [out there]. The fact is the entrepreneurial environment for biotech and medical devices is early there. But even in the two or three years we’ve been traveling there, the fact of the matter is the country is poised, I think, to be a really good target for life sciences.” MPM also benefits from having Reliance Life Sciences, an India-based life sciences group, as a limited partner in its current fund.

Greene isn’t comfortable making this statement, but we’re going to go out on very wide limb and say this is the first significant investment that a US-based life sciences VC has made in an Indian company. “I’ve had a hard time finding [comparable investments],” Greene says. Buyout firms, however, are finding deals in more established health care companies.

(Update: Well, that limb wasn't as wide as we thought. We should have directed you to TPG Biotech's investment in Matrix Laboratories Ltd. , a contract research and manufacturing outfit in Secunderabad, India. Yes, TPG is affiliated with Texas Pacific Group, the buyout megafund. But it's still venture fund. Read all about it in our April 2006 START-UP here and here.)

Still, MPM, once again, finds itself ahead (check that, at the head) of the pack. However, unlike in Taiwan with the Taigen investment, we probably won’t have to wait very long for another venture firm to step up.

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Fund-raising Tidbits: Greene wouldn't say this, but it appears as if MPM will be out raising a new round, maybe as early as this year. It has invested more than half of its fourth fund.

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Merlin Nexus announced a first close of $40 million Merlin Nexus III, L.P. As it's done with its previous funds, Merlin (not to be confused with the former UK-based firm now operating under the Excalibur brand) will invest in late-stage private and public companies in the biotechnology, medical device, specialty pharmaceutical and molecular diagnostic fields. Merlin Nexus III has a $125 million target.

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Meanwhile, MVM Life Science Partners has closed on GBP130 million ($253 million) toward its third venture fund, according to this morning's VentureWire. MVM expects to hit its GBP150 million ($292 million) target in a few weeks.

As always, if you have any private suggestions, tips, or if you know if the Sunday Red Sox game is likely to be rained out email me here.

Golden Temple photo @ Wikimedia Commons

Venture Round: Finding the Exit

This week brought on a flurry of news reports about venture capital firms setting out to raise new funds. VentureWire Lifescience reported that Atlas Venture, Scale Venture Partners, Pappas Ventures are at varying stages of raising new funds.

Toss in the news about Orion Healthcare Equity Partners hiring some new personnel, and the list of firms setting out to raise new funds just gets longer. (We first reported on Orion here and talked about other fund raisers Interwest Partners and Versant Venture's fund raising here)

It’s always nice to read about the flow of fresh new capital coming into the sector. Eventually, these articles will be followed up with new ones on fund closing. (Hello, this week's news about Split Rock Partners and last weeks' post on Kleiner Perkins Caufield & Byers.)

But who’s watching the dollars after they’ve been invested? Well, we did this month.

Our April issues of START-UP and IN VIVO offer some unique, data-driven insights on the opportunity for exits in the biopharmaceutical and medical device industry. The pieces are written by our fearless leaders Roger Longman and David Cassak, who are aided with data from our own Strategic Transactions Database and other sources.

Roger’s Valuation Watch takes a look the status of biopharmaceutical companies that have gone public since 2003. We’re sorry to say, the picture is not pretty for the companies or their investors. Hence the headline, “Marooned! VCs Stuck in the Public Markets.”

Among the group of 76 still-independent biopharma-focused biotechs (only a small number of recently public companies have been acquired and only a handful of those have been acquired at even a moderate profit for their investors), 61 companies are trading below their IPO price. The average trades 24.3% below its IPO price, the median 46% below.

The report names names, offering a list of the most troubled companies and the VCs who look like they’re might be in store for a good soaking.

David, meanwhile, examines both big and small cap mergers and acquisitions in the medical device industry. After pouring through piles of transaction data from our database, David opens the story with this:

To anyone with a vested interest in medical devices, investors and company executives alike, anecdotally, the past several years have felt like good times. And, in fact, by one standard alone, the total dollar values of M&A in devices, things have never been better. Total M&A dollar volume in the period 2005-2007 was up almost three and a half times that of the three-year period just prior, 2002-2004. And while a couple of very large deals, most notably Boston Scientific Corp.'s play for Guidant and the private equity takeout of Biomet Inc., have helped to push deal values up, dollar volumes over the past three years would still be much higher, even if those outliers are factored out.

But it's one thing to say that payors are paying more for device companies than they ever have. It's another to ask, What exactly are they paying for?

David’s report goes onto answer those questions and more. Deal Analyst Amanda Micklus, meanwhile, compiled some impressive tables showing what companies have been the most active buyers and, more intriguing, on what disease or conditions are those buyers spending their dollars?

There you go, you’re all caught up. Not only do you know who is raising funds, but now you’ve got the means to find out what is happening to venture bucks already invested.

As always, if you have any private suggestions, tips, or if you would like to meet up at Heart Rhythm 2008email me here.

(Image courtesy of Flickr user Paulbence Photography through a Creative Commons license.)

S.R. One 2.0?

Andrew Witty hasn’t officially taken over the reins at GlaxoSmithKline from Jean-Pierre Garnier. But already there are signs of significant change. Last week came news of an impending management reshuffle. Now IN VIVO Blog has learned that Witty wants to create a new corporate venture fund that could have as much as $500 million at its disposal.

The eponymously named GSK Venture Fund, which hasn’t formally been announced, will have a two-fold agenda: First, the group will make strategic investments outside the company that will bolster the pharma’s internal R&D strategy; second, the venture group will commit capital to build start-ups around assets that GSK has deprioritized.

Russell Greig, currently GSK’s president of Pharmaceuticals, International, will take control of the fund on June 2, reporting directly to Witty. Prior to running Pharma International, Greig was senior VP of world-wide business development for GSK. No doubt he has a Rolodex—or even an Outlook folder—filled with contacts that will serve him well in the clubby world of VC. Rumor has it, he’s already off to an aggressive start: Greig apparently has spent the past few months renewing or establishing contacts with East and West Coast venture capital firms as part of the diligence required to start the new fund.

This isn’t GSK’s first foray into the world of corporate venture. Back in the 1980s, the pharma established SR One, an evergreen fund that to date has invested $550 million in 125 companies Those investments have been primarily passive—in other words, SR One hasn’t actively sought to gain rights for GSK to the products or technologies of the companies in which it invests. "We don't take options and there are no call-backs," said managing partner Joyce Lonergan, at Windhover's March Pharmaceutical Strategic Outlook meeting. "Our mission is to be on the outside edge of where GSK's BD guys are," said Lonergan.

It seems likely that won’t be the exclusive modus operandi for the GSK Venture Fund, of which SR One will now become a part. Rumor has it that one reason Witty is so keen to start this new fund is that SR One's investments haven't had much impact for GSK. Said one insider, SR One “doesn’t move the needle for GSK.” Certainly, Greig and his team will have unprecedented access to GSK’s top brass, something SR One has never enjoyed. (Until this restructuring, the SR One group reported to GSK’s head of business development, Ad Rawcliffe, who in turn reported to Moncef Slaoui, GSK’s head of R&D.)

GSK is just the latest pharma to take a more active interest in corporate VC. As we reported back in November, big pharma is reaching far and wide for new business development strategies that might help them fill their pipelines without having to overpay for the best licensing and M&A deals. They're are eager to function more like traditional stand-alone venture capital firms, with an eye toward locking early into the best deals and identifying new industries that might help them broaden their product portfolio. Pfizer Inc.'s venture group, for example, is investing heavily in diagnostics while Novartis' venture group is investing in medical device companies. In addition, Novartis company also has a $100 million option fund for investing in companies with early stage platform technologies. The idea: at the time of investment, the fund takes a no-cost option on a given start-up's program--usually after its reached clinical proof-of-concept--giving the pharma (theoretically) cheap access to new compounds.

Nor is GSK unique in looking for new ways to monetize low-priority assets. Every major pharmaceutical company we’ve talked to recently is thinking aggressively about out-licensing and risk-sharing options. (Even Pfizer, which made news last week with the spin-out of Esperion 2.0. We’ll have more about that Big Pharma’s BD strategy in the upcoming May IN VIVO.)

The new bus dev mantras? First, out-license products for cash and royalties, preferably with an option to buy back the product if it’s successful. Alternatively, consider teaming up with another Pharma—preferably one with deep pockets that is willing to share development and commercialization costs—and therefore the risk—much the way Bristol Myers Squibb did in its deals with AZ (two diabetes compounds) and Pfizer (the anti-coagulant apixiban). Pharma companies are also looking to start new companies around non-strategic assets, getting equity in the newco in return for contributing the compounds.

The creation of the GSK Venture Fund raises numerous questions. First, what happens to SR One? The group has been making venture capital investments for more than two decades. Just how will the fund will function as part of this newer, larger GSK Venture Fund entity isn't clear. It's worth noting that despite its 20-year history, management of SR One has seen some significant turnover ever since founder Peter Sears left the group.

Second, GSK already had tried and failed to build a program to license unwanted assets. The now-defunct GSK Ventures had been set up to invest not money but GSK assets--technologies, early-stage compounds, patents--into new venture-backed companies. The program took a hit when its founding managers left GSK to start their own firm. But observers tell us GSK's R&D group simply balked at providing the assets. This is where Greig's direct report to Witty might help just a bit.

Finally, how far afield might GSK Ventures go? Will the group look outside of its core industries as Pfizer and Novartis have done? Could diagnostics, devices, or even services be part of the group's future portfolio?

Venture Round: Kleiner: You want solar power with that?

Is Kleiner Perkins Caufield & Byers (KPCB) evolving into a franchise? Over the past few years, the venture firm has attached its venerable name to a series of funds or investment initiatives targeting very specific niches: Java technology, vaccines, green technologies, even the iPhone.

Just this week KPCB announced the raising of a $500 million Green Growth fund. (The good news is KPCB still plays in the generalist space as well as it also announced the closing of $700 million for its 13th fund this week. More on that below.)

It’s a strategy that’s uniquely KPCB and leads one—okay us—to wonder whether all the specialization is really necessary. After all, we’re talking about Kleiner Perkins. Clearly, the firm could invest in green technologies just fine without the pomp and publicity that goes with industry-specific initiatives. (Personally, we do applaud KPCB for emphasizing green technologies and hope it bears fruit.)

Partner Dana Mead, who joined the firm in 2005 from Guidant, says the specialization strategy just plain works, insisting it has opened more doors and established networks more quickly than investing from a traditional venture fund would. The dedicated capital draws luminaries like Al Gore to Kleiner’s table while serving as bright green neon Open-for-Business sign for entrepreneurs and companies looking for capital. “The way you make money is to predict the next big thing and invest heavily in that area,” Mead says. “We did it with biotech with Genentech, semiconductors, Netscape, Google. We think we’re doing it with personalized medicine and we see green tech as that next big opportunity”

Again, KPCB was a first mover in all those areas without the benefit of specialty funds. But who are we to argue. The firm’s limited partners appear to be satisfied with the strategy (although what institutional investor would pass up the opportunity to invest in a KPCB-anything fund?) Plus, Tom Perkins must know what he's doing to afford a boat this big.

Time will tell whether it will produce solid returns as Kleiner’s green tech investments haven’t produced any exits yet. Mead, however, says green technology companies are very much like biotechnology companies: they require significant capital and time to mature.

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KPCB will be pulling back on the specialization strategy in at least one case. Mead says Kleiner isn’t likely to raise a follow up to the $200 million KPCB Pandemic Preparedness and BioDefense Fund, which is fully invested in 10 companies. Mead says Kleiner raised that fund for two reasons. “Number one to make a difference and number two to create a fund that makes good investments for our LPs,” he says. The jury remains out on number two, but Mead is comfortable saying that the pandemic fund helped to drum up support from the federal government, the pharmaceutical industry and not-for-profit entities like the Gates Foundation. He acknowledges that no other venture capital firm followed suit, “but in every one of our investments we have other venture firms as investors.” You can view the portfolio here. One intriguing company not mentioned is Breathe Technologies Inc.

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Now, as far as investing the $700 million KPCB XIII Fund, Mead says KPCB will invest equally among green tech, information technology and life sciences. In the life sciences space, “We do love personalized medicine and you’ll see us doing more diagnostics. We really like medical devices and continue to do significant investments there. We like orthopedics (except for overheated areas like dynamic stabilization) right now, imaging and the opportunities in consumer medicine,” Mead says. KPCB is also looking heavily at cancer companies including those employing epigenetics as well as companies trying to stem cancer metastasis. Mead says KPCB will continue to incubate companies inside its own walls, and that the firm incubated five of the 10 life sciences companies in the portfolio of its prior fund.

Abingworth's Growth

IN VIVO Blog was happy to see the news this week David Mayer joined Abingworth to help manage the firm's growth equity stage investments. Mayer brings a wealth of private equity investment experience from his time at Thoma Cressey Equity Partners including a role in some high profile investments like ESP Pharma Inc. and Jazz Pharmaceuticals Inc. Check out the press release for more information.

What you won't see in the press release is new that Abingworth is in the process of raising $100 million to $200 million for a small fund that will supplement the firm's growth equity investments. In the case of larger deals, Abingworth might draw capital from its new growth equity fund as well as its $587 million main fund.

Mayer says Abingworth Growth Equity fund would give the firm enough powder to in larger deals--up to $80 million--without syndication. It may still want to syndicate such deals, but co-investors wouldn't be necessary.

Mayer says Abingworth's flow of growth equity deals is already strong. He expects to invest in pharmaceutical and device companies. Abingworth might also invest in services companies if they work within the life sciences field.

Mayer says the fund target is intentionally small. Abingworth wants to sync any future fund-raising campaign with its main fund. Abingworth could raise a second growth-equity fund or just raise a larger single fund.

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