BioWorld Today Columnist
In Tuesday's column, I discussed problems with the current model for forming and funding biotech companies. In my research, I've come across firms that have different approaches to taking a bet on early stage projects. Here is a sampling of the more intriguing ones.
Seed Deals Still Sprout: Academy Funds
Academy Funds was formed in 1998 to provide seed funding to inventors at North Carolina State University in Raleigh. The idea was born when John Ciannamea, then president and CEO of the North Carolina Technological Development Authority, attended an inventors' lunch at NCSU. He was impressed by the diversity and quality of research efforts represented at the lunch and approached the vice chancellor, Charlie Mooreland, about creating a venture fund based on the ARCH model.
ARCH Development Corp. was created in 1986 as a not-for-profit firm devoted to commercializing the snazzy technology coming from Argonne National Lab and the University of Chicago. Its first fund, $9 million raised in 1989, provided seed capital to 12 companies. The venture firm has raised more than $1 billion in five funds since spinning out in 1992, and still focuses on seed capital investments in IT, life sciences and physical sciences.
Ciannamea had spent a decade with the New York State Science and Technology Fund, at which he participated in 50 investments in a range of technology start-ups. He recruited Glenn Kline, a 20-year venture/private equity veteran.
The first fund, Academy Centennial Fund, provided $10 million for 15 companies created around life science, engineering and IT inventions from NCSU. A $26 million fund raised in 1999 supported seed investments throughout the state. Today, 17 companies have been funded and the team is in the process of organizing a third fund.
Ciannamea said: "The business model is to start with a small amount, even less than $50,000 in some cases, to get the technology to a key milestone. Once that happens, we reevaluate and decide whether to go forward with addition investment. We work closely with the tech-transfer folks, from whom about three-fourths of our deals come."
The first fund was based in an office on the NCSU Centennial Campus, created specifically to build bridges between academics and the outside business world. The campus contains numerous mixed-use buildings to encourage companies to locate close to their academic collaborators. The Academy Fund team found itself part of the tour when outside universities came to visit. Said Ciannamea: "This lack of early stage capital is universal, even for the large universities. They are always looking for models that work."
Ciannamea said the key is the right team with relevant experience, and sticking with the business plan. The team must be able to build syndicates for future rounds, and build management for investments that continue to grow. In addition to the classic business plan criteria, funding tranches must be tied to measurable milestones meaningful to investors who participate in the next level of funding.
Ciannamea said, "You have to be willing to walk away if those milestones are not met" - a sentiment echoed by Carl Weissman, CEO of Accelerator Corp. in Seattle. Accelerator was created with funding and support from MPM, the Institute for Systems Biology, ARCH, Versant Ventures and Alexandria Real Estate Equities. Accelerator acts more like a classic incubator, providing facilities and management support along with seed capital. But Weissman emphasizes the need to successfully hit milestones that act as decision points for future financings.
At The Interface: SRI, PharmaSTART
The University of California noticed back in 2002 that university licenses seemed to be leveling off, even though the rate of discovery was still accelerating. As the venture community moved away from discovery companies and focused increasingly on clinical-stage investments, there was a reduction in licensing and support for university projects.
PharmSTART was created in 2003 as a consortium between the University of California campuses at Berkeley, San Diego and San Francisco, Stanford University School of Medicine, and SRI. Those groups realized that academic researchers needed support to move their intriguing molecules from the bench into preclinical tests to identify any clinical candidates, which presumably would be fundable.
SRI was founded in 1946 by Stanford University specifically to translate discoveries into useful, commercially available products and services. Today, 2,000 staff members work at SRI, 180 of those in the Biosciences division. SRI has a full preclinical contract research group and is one of the largest NIH contractors. SRI works with corporate collaborators on drug candidates running the full development gamut from preclinical through market launch.
The first step of the PharmaSTART process is for the university tech-transfer offices to identify those projects with a clear therapeutic focus, good IP and a lead compound. SRI provides up to 30 hours of free services to generate a full-blown product development plan detailing experiments to be done, timetables, milestones and budgets all the way to the IND filing - that last step before clinical testing begins. SRI also can help investigators navigate the web of government funding programs and work on proposals.
Ted Spack, senior director of SRI's PharmaSTART program, said the idea is that potential investors will feel more comfortable putting their money in when they have a clear idea of the preclinical development plan and the cost/time required to reach certain critical decision points. Given the usual lack of extensive development expertise within most start-ups, that development plan definitely provides a valuable asset. Spack's tours of duty at InterMune Inc., Valentis Inc. and Anergen (acquired by Corixa Corp.) gave him first-hand exposure to drug development in a biotech setting.
Of course, the challenge still remains to get the funding to actually carry out the development plan. Several projects have gone through the process, and at least one was able to raise Series A funding based in part on the PharmaSTART documentation.
Bridging The Gap: Bridge Pharmaceuticals
Glenn Rice, founder of the PharmaSTART program while vice president of the Biosciences division at SRI, had watched the venture community evolve its investment strategy to reach today's product-oriented focus. He realized that there needed to be a new model for funding early stage research, hence PharmaSTART.
Rice wanted to drastically cut costs to make it more enticing for investors to take a chance on development. He also wanted to help dispel the idea that every cool invention deserved and needed a company infrastructure. The sector needed new ways to get development resources into the hands of the innovators, without having to keep building infrastructure over and over.
Bridge Pharmaceuticals, which spun out of SRI in 2004, is basically a contract research organization using SRI-proven protocols to direct work conducted in a network of qualified Asian labs, generating cost reductions of up to 60 percent.
The network includes Taipei-based Development Center for Biotechnology (DCB), run by a repatriated scientist who trained and co-founded biotech firms in the U.S. and Taiwan's Industrial Technology Research Institute, founded by the government in 1973 for transfer of innovative engineering and electronics technology into the commercial setting. ITRI added a biomedical division in 1999, and has spun out many commercially successful companies.
Bridge provides preclinical work only, but plans to extend into the clinical trial area. A challenge is getting the Chinese and Taiwanese groups to be comfortable with having "first in man" studies conducted solely in Asia.
Rice says there are a range of quality manufacturing facilities in Taiwan and China already generating advanced pharmaceutical intermediates, generic drugs and ingredients. Many of those groups in the Bridge network already sell products in the U.S. or have FDA inspections.
A big advantage of using Bridge, Rice said, is having a chaperone to navigate the network of global resources safely. Cost reduction is helpful only if coupled with dependable quality and meeting milestones and deadlines.
Rice is interested in leveraging the capacity of that international network by providing services to help universities and investors explore potential drug candidates without building infrastructure around those projects. He is at term-sheet-stage discussions with one university, and heading in the direction of something more like a joint venture than a license - the school provides the science, Bridge supplies the hands and operational know-how, and a joint management committee follows the progress.
Okay, but who pays for all that, and what does Bridge get? Rice envisions creating mini-drug syndicates that could be independently financed. Bridge would co-invest, trade work for equity. Bridge formed a collaboration with Taiwan's National Health Research Institutes, with an initial clinical development project focused on two potential cancer drugs that completed preclinical testing in the States. A relationship formed this year with the National Foundation for Cancer Research in Beijing is designed to accelerate cancer drug discovery and development on both sides of the Pacific.
Investment in those projects could be tranched to reach specific milestones. Since no fixed costs are incurred, and no infrastructure is created specifically for that drug candidate, costs can be controlled very tightly. If you get into Phase I clinicals successfully, it makes any transaction very simple, as there is no infrastructure to unwind.
Bridge is in the process of fund raising for itself to support continued growth of its network in Asia and for co-investment in promising individual projects. Rice said that Bridge is well-positioned as the first and (so far) only group in Asia doing FDA-compliant drug development. He plans to benefit from the increasing explosion of outsourcing and increasing belief that genomics will lead to smaller markets.
Rice is skeptical about the ability of U.S. venture investors to get serious about alternative models, but he has seen a lot of interest from the capital markets in Asia. Participants in his $3.5 million Series A round included ITRI and DCB, WI Harper, YFY and Singapore-based Springboard Harper.
Two Mints In One: Bioaccelerate
Bioaccelerate, with offices in New York and London, is an intriguing example of a hybrid business model aimed at optimizing commercial development plus financial return. I can't decide how to categorize the firm: Is it a pharmaceutical company that in-licenses all of its product candidates? A virtual contract research organization? A clever public shell financial structure that generates added value by creating companies and out-licensing opportunities?
The management team, led by CEO Frank Armstrong, is composed of international industry veterans with decades of product evaluation, development and commercialization under their belts. The group uses its extensive industry and academic network to identify and evaluate product candidates ranging from preclinical through Phase III development.
The company has an "interest" in 80 different projects in five different clinical areas, using the full range of in-licensing models - some owned outright, some in co-development deals. About one-third come from academic sources, the rest from independent medical centers, small pharma and biotech firms. Sixty percent are European, the rest U.S.-based. Most projects are in the clinic or within 18 months of entering clinical testing. Bioaccelerate sees itself as a drug development company, not funding basic research.
The idea is to create diverse risk profiles by grouping of up to 10 of these projects into portfolio companies, including different stages of development (preclinical through Phase III), plus new formulations and combinations of known drugs. Bioaccelerate provides senior management, and funds the initial development through its network of contract labs, subsidiary companies and academic teams.
How does Armstrong and his team get those pesky academics and small company inventors to participate? By actively involving them in the downstream development, offering attractive terms (liquidity event is close at hand), and by moving much faster than most big pharma BD teams can to conclude a deal.
As groups of projects move forward and hit that proof-of-concept stage and beyond, Bioaccelerate can out-license them to corporate partners or take them public on the Bulletin Board, where it resides. Armstrong sees that junior exchange as a platform to prepare spinout companies for further investment. He said it allows the young companies to avoid the usual events needed to drive an independent initial public offering, and to date has provided an advantage in M&A activity and fund raising. As they build value, they can move to other exchanges.
The first company taken through the Bioaccelerate process was BioEnvision, established in 1997 to in-license, develop and market cancer drugs. Armstrong said its lead product, Clofarabine, was approved late last year, and the company now resides on Nasdaq.
To date, Bioaccelerate has created 12 companies around project portfolios - four are public. Two of those used that public stock for acquisitions: Enhance Biotech acquired Ardent Pharmaceuticals, and Inncardio is in the process of acquiring Cengent Therapeutics (the former Structural BioInformatics). Those IPOs raised new money from a broad range of investors, both institutional and private.
So how does Bioaccelerate and its shareholders (predominantly management and some high-net-worth individuals) make money? The goal is to become an integrated biotech business through its various subsidiary companies and to continue building out-licensing partnerships that will deliver return over time. As the spinout companies mature, Bioaccelerate retains a substantial stake and can gain return via stock appreciation.
The challenge for the next couple of years is to demonstrate that the model works and delivers good return to shareholders.
Drug Hunters: Hunter-Fleming
Hunter-Fleming Ltd. was created in 1999 by some of the folks who brought us Shire Pharmaceuticals, now a £4 billion (US$7.1 billion) company and UCB Pharma, the current darling of biotech diz dev panels.
Jim Murray, Hunter-Fleming CEO and Shire co-founder, said that the entrepreneurial experience and scientific/clinical focus of Shire played a big role in the creation of H-F. The founding team defines itself as drug hunters, sifting through their networks of academic leaders to find candidate molecules with the best chances of becoming successful pharmaceuticals aimed at inflammatory degenerative disorders, and cardiac and renal diseases.
H-F looks a lot like a virtual global contract research organization with a savvy business development team attached. The firm has close ties to leading labs at several universities in the UK, the U.S. and Japan. Those academic folks are both sources of candidates and providers of contract research. H-F retains ties to the scientific teams by both sharing in any returns with the university and the inventors, and by conducting sponsored research in those academic labs on a range of projects originating from other universities in the H-F network.
H-F has 10 full-time specialists in-house, plus a network of consultants and advisers who provide services including market research, regulatory affairs, etc. The idea is to develop candidates through manufacturing, formulation, full preclinical PK and tox work, through the initial clinical testing in Phase I and IIa, and then sell that clinical proof-of-concept package to a third party for final development and commercialization.
A lot of the innovation still occurs in university labs, but all of the work needed for FDA-type registration is conducted by contract research organizations such as Quintiles. Said Murray, "This is similar to how we started at Shire; we started virtually, then added structure as we could afford it."
Today, H-F has shepherded three compounds through Phase I studies, originally aimed at Alzheimer's and neuronal repair. Two of those will be in Phase II in the next 12 months, the third is being out-licensed for an unexpected application in osteoporosis and fracture healing.
A device company has snapped up rights to a compound in the orthopedic arena, and one compound has attracted the attention of big pharma for its ability to regulate immune response via nasal or oral administration, making it great potential competition for the current IV TNF blockers.
Murray is in the process of lining up private funding to carry those projects forward, especially the two heading for Phase II testing. He is hoping that Phase II studies will support an IPO that can raise the remainder of funds needed to take the projects the rest of the way.
Murray sees H-F as a project mentor, an active selector and supporter of winning projects to move them forward to a point of generating significant return via partnering. His firm's combination of a portfolio of projects and highly trained management, coupled with its extensive virtual network of academic collaborators and external CROs, allows Murray to get much more bang for his buck. He is hoping Hunter-Fleming will make it across that funding gap to recreate a powerhouse of out-licensing opportunities sufficient to grow the business.
Freedom From LPs Pays Off: Cato Bioventures
Managing Principal Shawn Singh said Cato Bioventures, located in Durham, N.C., and South San Francisco, from Cato Research, evolved from a 200-plus employee CRO founded in 1988 by two big pharma veterans, Alan Cato and Lynda Sutton. Cato describes itself as a mid-sized CRO, 100 percent internally funded and profitable.
Cato Research entered the biotech start-up business when it came across some exciting technology through its network. Vascular Genetics Inc. was created in 1997 by Cato, Human Genome Sciences Inc., and St. Elizabeth Hospital to develop gene therapy for cardiovascular uses. The company was acquired in 2003 by GenStar, becoming Corautus Genetics. Cato also worked with RTP Pharma, acquired by SkyePharma in 1999.
Singh joined up to create a more proactive approach to Cato's venture activities and to couple it more strongly with the parent business. He pointed out that Cato is "patient" money - it can wait years for returns and is internally funded. It also doesn't require "10X" returns. He doesn't have to try and convince limited partners to support the strategy. The fund doesn't have to make distributions at less-than-optimal times, but can hold the stock long past the initial exit event.
Cato forms strategic master service agreements with its investment companies, allowing them access to a broad range of preclinical, clinical and regulatory CRO services in exchange for equity or debt. Cato can work with many clinical indications and technology platforms, such as stem cells, where the potential is huge if the technology can be developed efficiently.
Often, the most important thing Cato brings to the party is its in-house management capability. Said Singh, "These companies have little cash, small management teams, and sometimes are really a restart situation.
"We don't require companies to work with us as their CRO. In some settings, we offer them the chance to pay 80 cents cash, 20 cents in stock for services. If a CEO is in fund-raising mode and we believe a development plan would support a stronger valuation, Cato will provide that plan in return for stock based on the price at which the private round gets done. We are essentially bridging the company with CRO capital to strengthen its ability to raise cash."
Cato also likes undervalued public companies that need management shuffling. There are plenty of thinly traded public companies where the lead product failed and the board of directors and lead investors don't want to spend on what they see as a straightforward product failure.
But to Cato, some of those situations came about through poor management, faulty study design, less than optimal regulatory plan and poor interaction with the FDA. Cato takes public stock on the bet that it can fix those problems and turn the company around. Cato management can find itself part of the in-house team, working together to move the company to the next fundable benchmark.
Singh is working with one of the Cato companies, Vistagen, on a regular basis. Vistagen acquired Artemis Neuroscience, owned by Cato, to gain access to an interesting product candidate and technology that would complement its internal stem cell program. Cato's confidence in the Artemis product gave Vistagen confidence in its promise, and Cato's team has provided Vistagen with clinical, regulatory, grant-writing and business development capabilities - all without needing to hire staff!
The need for new sources of support to replace the ever-vanishing early stage venture capital funds has not escaped notice by other members of the service provider community. Singh said that a growing number of law firms, accounting firms, etc., have begun to look at ways to raise their own funds and provide services to help young companies generate a return. Cato is contemplating participating in such a structure, which would provide a broader base of important services than it can handle on its own.
Singh said that academic inventors often are Cato's greatest allies when dealing with the universities. "When politics are at play and the backlog of work faced by the tech-transfer groups is huge, drug candidates are sitting on the shelf when they should be moving through preclinical development. We are all about drug development, and can really help with that preclinical/IND package that will position them to raise capital for the company."
So how many of these deals can Cato handle? The CRO capacity is pretty elastic; really interesting opportunities don't have to be turned away. Once every couple of years, Cato can wrap a company around technology and bring it in-house. There is no real limit to the amount of venture-oriented CRO services that Cato can provide, so it's primarily an issue of choosing wisely.
Support The Young: Calvert Holdings
Rather than trolling academic labs for interesting molecules, Calvert Holdings, of Cary, N.C., is specifically looking to support young biopharmaceutical companies unable to generate venture capital to support their preclinical work.
Chiming in with views expressed above, part of Calvert's mission is to create more confidence on the part of the conventional investors. Said founder and CEO Russ McLauchlan, "If we put our endorsement behind these molecules via our participation, that should help the investment community feel more comfortable."
Russ sees Calvert as participating in the ongoing evolution of the CRO world, where service providers are investing in their clients as a way to hold onto the potential upside. The investment takes the form of capacity and expertise, thus allowing the client company to reserve its cash. Increasingly, the CRO's investment can include cash, as well as capabilities.
McLauchlan has been in the pharmaceutical business since the 1970s, including 20 years at Lederle, plus time at U.S. Bioscience and Immunomedics. His observations of the biotech industry led him to conclude that funding would only get harder for new companies as risk capital became more and more scarce.
McLauchlan was convinced that generating return for investors would be dependent on retaining rights to compounds as long as possible - the trick was how to let companies retain those rights and still have the ability to move the project forward.
That led him to the idea of building a CRO that would use its team's knowledge of what makes a good drug to identify start-ups with good candidate compounds, and couple development services with equity investment.
McLauchlan bought a preclinical testing lab in Scranton, Pa., from MDS and got it functioning efficiently and generating cash. That lab became the nucleating crystal for a growing business, with about 100 staff and the ability to do full-blown IND studies and regulatory affairs. McLaughlin saw an opportunity to use the excess capacity in the Scranton lab to provide services for early stage companies in exchange for fixed costs and stock, generating the data sets that would support their fund-raising activities.
Said Andy Burch, president of Calvert Research Institute, "It turned out that the opportunity was larger than expected." Calvert created a network of participating service companies, including manufacturing for small molecules and biologics, formulation and two clinical groups. "We basically have a pharmaceutical company sitting behind us," he said.
Choosing the best client on which to place that bet is key. Calvert and its network of service providers is able to look at the probability of each molecule moving forward in the development process to reach Phase IIb. They are more focused on whether the molecule can be manufactured in a cost-effective manner, and how it looked in subchronic toxicology, than in looking at the marketing endgame in depth. The group wants to see a real candidate molecule, not just a target.
McLauchlan said the team has had at least three dozen opportunities come in the door, has investigated 18, and four looked promising enough to move forward. He is enthusiastic about opportunities with great science and no management in place (that founderitis problem again!), because Calvert has strong project management to carry things forward until that data set is in place.
The next step is to raise a substantial fund that would allow Calvert to invest the first $2 million to $3 million in 20 or so of these early stage firms, enough to get the lead project to Phase IIb - that fundable nirvana.