Editor's Note: This is Part I of a two-part series. Part II, inThursday's BioWorld Today, will examine two very differentfinancing strategies for young companies: sequential rounds offinancing based on milestones vs. a bolus of cash up-front.WASHINGTON _ On Sept. 23, the same day that D. Blech &Co.'s biotechnology financing machine ground to a screeching halt,a three-quarter page advertisement ran in Science magazine seeking15 to 20 "talented scientists . . . to bring forth their best ideas andcontribute their creative spirit" to "an innovative San Francisco BayArea biopharmaceutical company" called ParnassusPharmaceuticals Inc.Eight days later, on Oct. 1, Parnassus was forced to lay off its entire25-person workforce. The company, which received a monthlycheck from David Blech to cover its operating expenses, stoppedgetting those checks about two weeks ago. It now has a balancesheet of zero. Although a handful of top Parnassus executives arestill scrambling _ unpaid _ to salvage the Alameda, Calif.-basedcompany, the prognosis is grim.Parnassus has joined the growing number of biotechnologycompanies that are faltering after a financial crisis forced D. Blech& Co. to shut its doors last month. That crisis has affected stockprices, the industry's image, and the lives and careers of scientistsand executives, like those at Parnassus, who sought to buildcompanies. Insiders predict that boatfuls of lawyers will soon bebobbing along in the wake of the Blech disaster, filing lawsuits thatcould take years to resolve.Fledgling Parnassus was first wooed by and then became a victimof David Blech's financing strategies combined with a relentlesslybear market. While few people were willing to speak on the recordabout the Parnassus debacle, BioWorld has pieced together thebroad outlines of the company's history using documents filed withthe Securities and Exchange Commission and interviews "onbackground." (The company's top officials declined to commentabout the status of the company but did confirm facts obtained byBioWorld and reported here.)Parnassus took its name from the hilltop street with a breathtakingview of the San Francisco Bay that runs the length of the Universityof California at San Francisco's (UCSF) medical school. The firmwas the brainchild of Daniel Santi, a UCSF professor ofbiochemistry and biophysics and of pharmaceutical chemistry.In 1992, Santi hatched the idea of a "tools" company _ a companywith a "toolbox" of technologies that included molecular biology,biochemical pharmacology, automation technology, structuralbiophysics, computational chemistry and synthetic chemistry. Theidea was to apply the tools flexibly to a wide number of projects ofstrategic interest and therapeutic value.A cadre of UCSF scientists and professors joined in Parnassusbrainstorming sessions. Ultimately a group of 13 of them formedthe company's Scientific Advisory Board (SAB). "It was prettythrilling and unique," SAB member and UCSF professor RobertFletterick told BioWorld. "We'd meet late into the night and it wasextraordinary. You had medical doctors, chemists, X-raycrystallographers, geneticists and immunologists all actuallylistening to one another and who wanted to listen to one another."The technologies Santi gathered together and his concept for acompany attracted interest from a number of top-drawer California-based venture capital firms, among them Kleiner, Perkins Caufield& Byers, the Mayfield Fund and InterWest Partners. In the fall of1992, Santi was courted extensively by Kleiner, Perkins andMayfield, who proposed a traditional venture capital deal involvingsequential rounds of financing.But in January 1993, at the annual Hambrecht & Quist life sciencesconference, Santi met David Blech. The charismatic Blech was atthe peak of his powers, having been recently involved in a numberof eye-popping regulation D private placements, including the $45million Ariad Pharmaceuticals Inc. deal, the $35 million CellularTherapeutics Inc. deal and the $30 million Neurocrine Biosciencesdeal. By the end of January, Santi had spurned the advances ofother venture capitalists (VC) for what one source called "the sirencall" of a start-up plan based solely on D. Blech & Co.In a letter dated Jan. 25, 1993, Blech promised to raise a minimumof $30 million and a maximum of $50 million for Santi's companyin a private placement. It was a triumph for the New York-basedBlech, who effectively snatched a promising deal with prestigiousUCSF scientists right from under the noses of California VC firms.Those firms had refused to commit such a large sum up-front to acompany that had no management team in place and an ambitiousbusiness plan.Over the course of 1993 and into early 1994, Parnassus assembled amanagerial team with D. Blech & Co.'s aid. In February of 1993,Michael Venuti left his position as director of bioorganic chemistryat Genentech Inc. in South San Francisco and joined Parnassus aschief scientific officer. In early 1994, M. Ross Johnson left his jobas vice president of chemistry at Glaxo Inc. Research Institute inResearch Triangle Park, N.C., and moved to California to becomepresident and CEO of Parnassus. And Matthew Megaro, chieffinancial officer at Athena Neurosciences in South San Francisco,left that company to become Parnassus's chief financial andoperating officer.In order to induce these executives to leave the relative security oftheir jobs for the risky venture of a start-up, Blech personallyguaranteed their salaries for three years _ a commitment that totalsmore than $1.7 million given their employment contracts. Sourcesclose to the company said that given the state of Blech's financestoday, it's unclear whether those guarantees will hold. No otheremployees of Parnassus had a similar guarantee.The bear market for biotechnology equity deals eventually thwartedBlech's plans to inject Parnassus with a huge bolus of cash.Apparently, Blech decided the best route to take was an initialpublic offering (IPO) rather than a private deal. In May of this year,Parnassus filed for an IPO of 2.5 million shares at $6 a share. Themaximum net proceeds for the deal, if completed at the plannedoffering price, would have been $15.8 million. After paying downdebts, Parnassus would have had about $12.9 million, or 12 to 15months worth of cash at projected burn rates.The sole underwriter of the offering was D. Blech & Co. The IPOprospectus revealed that since January 1993, Parnassus has operatedunder a $7 million line of credit from D. Blech & Co. Uponcompletion of the IPO, $5 million worth of the credit was to convertto common stock to be owned by The Edward Blech Trust (EdwardBlech is the minor son of David Blech) and any other accumulateddebt was to be paid back to D. Blech & Co. in cash . Other than thisarrangement, similar to a "bridge loan," Parnassus had no otherfinancial backing. Rather than loaning the $5 million in a lumpsum, D. Blech & Co. meted out the money to Parnassus month-to-month. Now that D. Blech & Co. has no money to give, Parnassushas an empty bank account and faces dissolution."It's tragic because we assembled a superlative group of scientists,"said Thomas Kornberg, Parnassus's interim vice president ofbiological sciences and a UCSF professor. Kornberg said thatParnassus's founders went with Blech's approach over that of moretraditional VC firms because "our hope was to be able to not bedistracted by the constant financing needs."Where we ended up was very different from where we started," hesaid. n
-- Lisa Piercey Washington Editor
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