CMEA Ventures Into Development, But Not Tied To Lilly As Expected

Several biopharma venture investors are experimenting with new models to avoid the long timelines and massive pay checks typically required to nurture new biotech companies. One of those investors, CMEA Capital of San Francisco, officially debuted its model Thursday, June 23, but not before making a major strategic shift.

CMEA is trying its hand at asset financing, an investment strategy that prioritizes single drug programs over fully-integrated companies. The model has become, at least theoretically, more viable because big drug makers have drastically cut internal R&D staff and want someone to share the development risk of drugs now sitting idle on their shelves.

In such a paradigm, the outside investor or syndicate puts up the cash to move the candidate through proof-of-concept, and hopes either to sell the asset back to its originator at a premium or onto the open market faster, cheaper, and with less bureaucracy (Also see "With Pharma Ready to Pare Portfolios, Project Financing Funds Make Their Pitches" - In Vivo, 1 Jun, 2010.).

CMEA's so-called "Velocity" scheme was no secret; the firm has discussed it publicly for months. It was envisioned as part of Eli Lilly & Co. Inc.'s Mirror portfolio, in which the Indianapolis drug maker is recruiting VCs as drug-development proxies for pieces of its pipeline, reserving preferential rights to the drugs if the VC teams develop them quickly and successfully (Also see "Lilly's Evolving Corporate Venture Model" - Scrip, 1 Oct, 2010.).

CMEA was long rumored to be one of three Mirror funds, and CMEA fundraising material obtained by START-UP Magazine in April confirmed that Lilly was the preferred strategic partner for what CMEA hoped would become a $250 million fund (Also see "Atlas, CMEA Test New Biotech Model " - Scrip, 1 Apr, 2011.).

No longer. Velocity is now a "development corporation," much like an asset-financing scheme run by Boston-area firm Atlas Venture Partners. Structured as an LLC holding company for tax reasons, Velocity will still buy assets and develop them, but it is not aligned with Lilly or any other large pharma partner, said CMEA Managing Director and newly minted Velocity CEO David Collier.

Instead, Velocity will use $20 million from CMEA's current fund to launch itself, and reportedly anticipates raising a $40 million Series A within the next several months and a $50 million Series B by the end of 2012. That’s less than half of the cash CMEA initially hoped to raise for the effort.

Those figures came from CMEA Managing General partner Jim Watson, who talked with VentureWire earlier this month. Collier said he wasn't allowed to discuss fundraising, but he did not dispute the report. CMEA also invests in high tech and clean tech from its current $400 million fund, its seventh; Watson told VentureWire there are no plans to raise an eighth.

Velocity will use the cash for operations, spending a maximum of $12 million or so to develop each drug through proof of concept, for no more than three years. The cash is not meant for acquiring drugs, Collier said. Instead, he and his colleagues, including three biotech veteran executives, will pay sellers with equity in the one-off companies they create around each drug.

"Cash is dear, and people should be happy to take equity," he said. The blueprint is to offer a 20% stake, but Collier cautioned that was a "ballpark number to begin the negotiating process."

Is it a model that other venture firms might be forced to follow? Only if they're willing to give up venture compensation. The Velocity employees will basically be biotech employees, with an annual salary and stock options in each one-off company they create around the drugs they acquire. No management fees, although it remains unanswered how the $20 million carved out of CMEA VII will be treated.

A Lilly spokesman confirmed CMEA was not part of the Mirror fund program but did not say if Lilly was looking for a replacement. Lilly has previously announced one of its Mirror fund partners has two molecules in development. One is a potential congestive heart failure treatment sourced from an academic institution, and the other is from Lilly, with potential for bone healing and cancer treatment.

Velocity employs three biotech veterans with drug development experience: Ed Schnipper, the former head of clinical development at Alza Corp.; Andy Pearlman, a veteran of Genentech Inc. and Tularik Inc.; and Jim Larrick, who has founded the CRO and incubator Panorama Research Inc., among others. For its part, Atlas has also brought in operational expertise for its asset-development program, which is run by Dave Grayzel, formerly head of clinical development and regulatory affairs for Infinity Pharmaceuticals Inc.

By Alex Lash