Clarus Ventures, which has been shifting iteratively from traditional venture investing to structured financings, completed its transformation with the close of Clarus IV LP, which topped its $750 million goal by attracting $910 million in assets. The size of the fund pushed the firm, which has offices in Cambridge, Mass., and South San Francisco, beyond $2.6 billion in assets invested across 50 private and public life sciences companies.

"We've been doing these structured deals for about nine years, and what we've found from experience is that they tend to be larger deals and they have great returns," Emmett Cunningham, managing director, told BioWorld. "We wanted to be able to participate commensurately, and that's why the larger fund."

Formed in 2005, Clarus placed the assets of its first fund in traditional venture financings across biopharma, medical devices, diagnostics and life sciences tools. In Clarus II, the firm introduced structured financings, which represented about 30 percent to 40 percent of the fund's investments, also across a broad life sciences portfolio.

Clarus III, which had a targeted raise of $375 million and closed at $500 million, took a decisive step toward risk-sharing and became the first Clarus fund to invest entirely in biopharma. Clarus III has 11 companies in its portfolio – all selected for having a breakthrough science approach and/or best in class assets – with commitments of about $15 million to $50 million to each. About half of the investments include R&D risk-sharing partnerships with the companies, according to Cunningham. (See BioWorld Today, June 9, 2015.)

"We've had great success with the fund, and we've responded to the pharma demand," he said, by fully dedicating Clarus IV to risk-sharing arrangements. "That doesn't mean that we'll never do venture again, but we're focusing for this next fund on structured financings."

Clarus IV is expected to invest in 10 to 15 late-stage assets that require more extensive development programs, "so you can see, doing the math, that they're larger deals" – in the range of $20 million to $100 million each, Cunningham pointed out. Disclosure of the first commitment is "imminent," he added.

'The appetite for biopharma remains strong'

The investment strategy for Clarus IV is to target assets that have "a certain cutoff" on probability of success.

"These are relatively lower-risk assets that are commensurate with our risk/reward profile and what we've promised to our investors," Cunningham said. "We are agnostic with respect to indication, if investments can reach that threshold."

Translation: Don't expect Clarus IV to invest in a company advancing an asset into a late-stage trial in Alzheimer's disease, which "would be difficult today because we don't have any reason to think the probability of success would meet our thresholds," he explained.

Exits also will be spelled out up front in each investment – mainly the achievement of development milestones that trigger an asset acquisition by a pharma partner or, in the case of a royalty purchase, a defined percentage of revenues.

"By definition, we've minimized the exit risk in this fund, which is one of its more attractive aspects, actually," Cunningham said.

Snowbridge Advisors LLC acted as exclusive financial advisor and institutional placement agent for Clarus IV.

Based on the company's experience in its first three funds, Clarus is bullish on biopharma.

"My read of the pulse of the market, although both cyclic and sometimes difficult to read, is that the appetite for biopharma remains strong," Cunningham said. "Investors have been able to raise money broadly for venture, and they're putting it to work in a rational way."

Investors also may be willing to go "a little earlier" than they did a decade ago, provided the asset comes with a strong scientific underpinning. "We've seen that in lots of funds," Cunningham pointed out.

Investment in biopharma "probably also has benefited from the tailwinds that we have from the last great run-up in the public markets and in offerings," he added.

A BioWorld analysis conducted at the end of the second quarter suggested that 2017 biopharma IPO market is 20 percent ahead of 2016, with 19 newly minted public biopharma companies that listed on U.S. exchanges during the first half returning an average share price increase of 12.3 percent. (See BioWorld, July 17, 2017.)

"There's money in health science venture, and people are putting it to work," Cunningham said. He was less optimistic about the outlook for diagnostics and med tech, which Clarus eschewed in its third and again in its newest fund.

"We've moved away from these sectors just because it's hard to see the returns that our investors expect," Cunningham explained, noting that exits can be perilous and unpredictable. A med-tech company seeking to list on the public markets or attract a buyer typically needs to show a mature product that is generating revenue and, ideally, achieving profits, he said.

"It takes a lot of cash to get to that point, and this is typically for products that have a fraction of the revenue potential of a drug and a much lower margin," Cunningham pointed out. "It's a business model that has to align perfectly, and that's why you're seeing so few breakaway successes on the device side."