BioWorld Today Correspondent

LONDON - Celtic Pharma is raising two new $750 million private equity funds as its first $250 million fund reaches the point of being fully invested, with exits promised for 2008.

The firm's two principals will each head up one of the new funds. The first, led by Stephen Evans-Freke will continue the model of the original fund, buying mid-stage programs and developing them through to later stages before outlicensing. Meanwhile, the second fund, run by John Mayo, will take controlling stakes in biotechs, small pharma and special purpose companies, directing the development of key products to the point that they can be sold.

"We are targeting the same space as the first fund," Mayo told BioWorld Today. "But we are scaling up, and a single large fund with a heterogenous investing model would be too unwieldy."

The funds have been launched and Celtic is now, "in a quiet discussion period with existing investors and others," said Mayo. Further announcements are likely in the first part of 2008.

The two partners said the success of the first fund has shown the private equity model can be applied to drug development, bridging the gap between the bare pipelines of pharma and the capital drought besetting European biotech.

Mayo said that unlike venture capital firms, Celtic has both the capital and the expertise to ensure that its products are developed to the standards required by pharma companies. "There isn't a big sucking sound coming from pharma. Pharma is more active, but is turning down a huge amount because of the quality [of development]" said Mayo.

Celtic uses a virtual model to steward products through the last two to four years of development and regulatory approvals, outsourcing all activities except strategic decision making.

The first fund closed on $250 million in subscriptions in 2006, and subsequently raised $156 million in debt in early 2007 against seven of the programs it has acquired. The foundation of the portfolio was the acquisition of UK biotech Xenova Group plc for $35.5 million in June 2005. This brought in two Phase II vaccines against nicotine and cocaine addiction that have since progressed into further trials, along with TransMID, a Phase III treatment for malignant glioma, which was later dropped.

Celtic subsequently acquired a 21 percent stake in IDEA AG of Munich, Germany, and following that with licensed rights to IDEA's Transfersome targeted drug delivery technology, along with a number of products formulated with the delivery technology. These assets are being developed by Celtic subsidiary Targeted Delivery Technologies.

The original fund is now over 75 percent committed, and term sheets have been drawn up on transactions that will account for the remainder. Mayo said that the first exits are in hand also, and he expects to complete deals early in 2008.

One of the advantages Mayo trumps for Celtic's model is that there is no sentimental attachment to long-nurtured products and programs. This pragmatism was on show earlier this year when TransMID was scrapped part way through a Phase III trial, when an interim analysis showed it would not show efficacy.

Mayo claimed this decision showed Celtic has the advantage as a private equity firm of being in control of its projects and not being subjected to external pressures to continue with programs. "It is an integral part of our investment philosophy to act on failing products early, in order to shift resources to more promising programs," he said at the time.

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