Staff Writer

At a time when many venture capitalists are predicting a contraction of their industry, three biotech veterans have launched a new firm, Longwood Founders Management LLC, and closed an $85 million inaugural fund.

The Longwood Founders Fund LP will invest only in biotechs, with a focus on therapeutics. Although the fund can invest at any stage, its primary goal is to back early stage innovation – identifying new technologies and founding companies.

Starting up a new venture firm is no easy task in today's financial environment. According to the National Venture Capital Association, the amount of money U.S. venture firms were able to raise from their limited partners hit a seven-year low in the second quarter and remained lackluster in the third quarter. The $2.1 billion and $3 billion raised by VCs in Q2 and Q3 of 2010 is a far cry from the $9.2 billion and $8.4 billion raised in Q2 and Q3 of 2008.

Since the markets crashed in the fall of 2008, many limited partners – including retirement funds, insurance companies, university endowments and foundations – have lost their appetite for risky venture investing. Although some biotech VCs like Third Rock Ventures LLC have closed new funds, many others have been forced to postpone fundraising efforts . . . and industry experts fear some of those postponements may be indefinite. (See BioWorld Insight, July 19, 2010.)

How did Longwood achieve fundraising success? Spokespersons from the firm provided only limited information via email, but one factor was likely the fact that the nascent fund has already made two investments, one of which resulted in a fast, lucrative exit.

Boston-based Longwood was an investor in Alnara Pharmaceuticals Inc., which picked up liprotamase (a.k.a. Trizytek), a Phase III pancreatic enzyme replacement therapy for cystic fibrosis that had been dropped when developer Altus Pharmaceuticals Inc. ran out of funding. Alnara completed trials and structured an acquisition by Eli Lilly and Co. for $180 million up front and $200 million in potential milestone payments. (See BioWorld Today, March 25, 2009, and July 6, 2010.)

Longwood's second investment, made just last month, was in the $16 million Series A round for cancer stem cell company Verastem Inc.

Longwood has been increasing the size of its inaugural fund since early this year, and the Alnara exit probably went a long way toward convincing additional investors to come on board.

According to SEC filings, there were 50 investors in the $85 million fund, although the bulk of the money – about $50 million – came from the first 24 backers. Longwood called out only GlaxoSmithKline plc and Genzyme Corp. by name and declined to specify how much of its funding was provided by pharma firms vs. institutional investors. However, targeting investments from corporate players might have helped Longwood avoid the traditional limited partner crunch many venture firms are facing.

A Longwood spokesperson said GSK and Genzyme do not have any strategic rights to compounds or companies backed by the venture firm.

Some of Longwood's fundraising success may also have been due to the fact that the firm's three founders each are well known in biotech circles.

Rich Aldrich founded biotech investment fund RA Capital and helped start several biotechs including Vertex Pharmaceuticals Inc. Christoph Westphal used to be a general partner at Polaris Venture Partners and founded biotechs like Alnylam Pharmaceuticals Inc. and Momenta Pharmaceuticals Inc. Michelle Dipp worked in healthcare private equity at The Wellcome Trust. And together, the three built and ran Sirtris Pharmaceuticals Inc., which they sold to GSK for $720 million. (See BioWorld Today, April 24, 2008.)

After the Sirtris sale, Westphal and Dipp joined the GSK ranks. Both initially scored high-level positions in GSK's Center of Excellence for External Drug Discovery, although Westphal was later tagged to run GSK's corporate venture arm, S.R. One.

GSK appears to be unconcerned with any potential conflicts of interest created by Westphal managing both S.R. One and Longwood, given the big pharma's backing of Longwood's new fund. And neither the flame-out of Sirtris' lead product nor an online resveratrol sales scandal that cropped up earlier this year seem to have damaged Westphal and Dipp's relationship with GSK. (See BioWorld Insight, Aug. 23, 2010.)

In other financing news:

• BioSante Pharmaceuticals Inc., of Lincolnshire, Ill., is raising $18 million through a registered direct offering of stock and warrants. The company will sell 10.6 million units priced at $1.70 each, with each unit consisting of one common share and one five-year warrant to purchase half of an additional share with an exercise price of $2. Rodman & Renshaw LLC acted as the exclusive placement agent. Net proceeds of $16.9 million will support Phase III trials of LibiGel (testosterone gel) for female sexual dysfunction. Shares of BioSante (NASDAQ:BPAX) fell 39 cents, or 19.5 percent, to close at $1.61 on Tuesday.

• Provectus Pharmaceuticals Inc., of Knoxville, Tenn., set up a $30 million committed equity financing facility with Lincoln Park Capital Fund LLC, which also invested $1 million into Provectus. Lincoln Park Capital purchased 1 million units priced at $1 apiece, with each unit consisting of one common share and one warrant to purchase half of an additional share with an exercise price of $1.50. Proceeds will support PV-10 for cancer and PH-10 for atopic dermatitis and psoriasis.