Financings Of The Fortnight Wonders How Wide-Open Is The Window?

The beginnings of ominous signs are appearing in the flourishing biotech IPO market. Plus news on recent financings by Foundation Medicine, Arvinas, Moderna Therapeutics and Frazier Healthcare.

Who’s lining up next? It’s become quite the parlor game, now that the window for biotech initial public offerings has been wide-open for months. But all the fun might be on hold as Washington works to sort itself out (or get further entangled) and Wall Street starts to worry over the potential economic instability. What if the days of the federal government shutdown turn into weeks?

Already, we’re seeing a small but ominous sign: There are no IPOs on the list of current road shows, despite the queue of those – including MacroGenics Inc. and Relypsa Inc. – that are on file. Perhaps the seven biotech IPOs in the past two weeks – Acceleron Pharma Inc., Five Prime Therapeutics Inc., Bind Therapeutics Inc., Foundation Medicine Inc. (see our roundup below), Ophthotech Corp., Evoke Pharma Inc. and Fate Therapeutics Inc. – were the SEC equivalent of a rush job to avoid the potential politically induced volatility.

Once biotech IPOs started to show signs of life last fall and then took off this spring, everyone wondered what would burst biotech’s bubble. Many assumed it would be bankers pushing out too much worthless paper, but perhaps it will be the idiocy in Washington, particularly if it extends past the debt default deadline of Oct. 17. If Wall Street starts steep-selling and recessionary fears turn into reality, biotech IPOs will be a swift casualty of the broader market.

For a few more days, at least, the IPO machinery will grind away. The SEC has enough cash under the mattress to keep the lights on for a few weeks, unlike so many other government agencies. But it will clang to a halt if the shutdown drags on; the folks who deal with registrations are not deemed essential staff.

It seems as if all the headlines (and tweets) are focused on the effect on Twitter’s pending IPO, but arguably no sector has benefited more than health care from the IPO changes this year, as all manner of companies at various stages of development have become public. IPO data house Renaissance Capital says health care companies have launched 42 IPOs and raised $7.6 billion this year, the most of any sector. They’ve also scored the highest aggregate returns year-to-date, 64%. (By comparison, technology firms have had 30 IPOs, raising $3.3 billion and gaining 44% on average.)

It’s only fair to mention that the health care numbers include the likes of giant CRO Quintiles Transnational Holdings Inc. ($947 million raised) and Pfizer Inc.’s animal health group Zoetis ($2.2 billion raised), but the argument still holds: A prolonged and wholly unnecessary drought would hurt biotech disproportionately.

As for who’s next, we already mentioned MacroGenics and Relypsa, which filed publicly this past week to raise up to $126.5 million. Among companies that haven’t declared – at least publicly – Moderna Therapeutics LLC might make a fine candidate, but who else?

Our colleagues at START-UP wrote this summer about Forma Therapeutics Holdings LLC’s decision to re-structure itself to make spinouts of single assets easier; CEO Steve Tregay was quick to say that, if need be, the company could convert back to a more traditional corporation and go the IPO route (Also see "To Meet Demand, Forma Aims To Boost Discovery Supply" - Scrip, 26 Jul, 2013.).

“At the time in 2009 when we started talking about [becoming a holding company], it wasn’t obvious you’d see a robust IPO market,” said Tregay. “We knew we wanted to provide liquidity to our shareholders, and we wanted to commoditize assets. Can we convince Wall Street to believe in sustainable R&D companies? We think so. But our first objective was and is to create a sustainable research engine, and to do that we needed to do things differently than the old ‘R-then-D’ model.”

You can’t talk about IPOs without mentioning Third Rock Ventures, which has pushed three portfolio companies public this year. Might we see more before the New Year? If FOTF had to bet, we’d go with Blueprint Medicines Corp., Constellation Pharmaceuticals Inc. and SAGE Therapeutics Inc., which just saw interim CEO and Third Rock partner Kevin Starr hand the reins to Jeff Jonas, the former head of Shire PLC’s regenerative medicine group.

Foundation Medicine

It isn’t quite four-years old, but cancer diagnostics specialist Foundation Medicine is already public, and in a big way, its share price nearly doubling the first day it traded and holding those gains for a week. The Cambridge, Mass., company priced its offering Sept. 25 above expectations at $18 per share, ultimately grossing $121.9 million [See Deal].

Foundation sold nearly 6.8 million shares, including a “greenshoe” option for underwriters, substantially more than the 5 million it planned to sell for $14 to $16 apiece. The young company last year began selling its first product, a diagnostics platform that matches individual cancer genomes with a broad database of genomic alterations in order to optimize care. Stakeholders receiving liquidity via the offering included venture firms Third Rock Ventures, Kleiner Perkins Caufield & Byers and Google Ventures; crossover investors Deerfield Partners, Casdin Capital and Redmile Group; and individuals including Microsoft founder Bill Gates, Russian billionaire Yuri Milner and Digene CEO Evan Jones.

The IPO is the third this year for Third Rock, which is on quite a roll (Also see "Third Rock Ventures Rolls Its Own" - Scrip, 18 Jun, 2013.). It’s also a notable exit for Google Ventures, which quietly has built a small but influential health care portfolio. With the company’s market capitalization hovering around $1 billion, the investors who pumped in $89 million in two rounds of funding have earned a hefty return. It’s yet another sign that the public markets are welcoming for life-sciences companies with a strong story to tell – even young ones.

Arvinas

Many drugs work by blocking or inhibiting proteins and the reactions they cause in the human body, but only about 25% of the roughly 20,000 proteins in the body can be inhibited with molecular therapy. New company Arvinas Inc. is pursuing the opportunities presented by a different approach to disease-causing proteins – degradation – and will get its work underway with a $15 million Series A announced Sept. 26 (Also see "VCs Put $15M Into New Start-Up From Proteolix Founder" - Pink Sheet, 26 Sep, 2013.).

Canaan Partners and 5AM Ventures led the A round, with participation from Elm Street Ventures and Connecticut Innovations, a state-funded venture firm with a goal to keep innovation by Connecticut researchers within the state. Along with the Connecticut Department of Community and Economic Development, Connecticut Innovations is supplying to the New Haven biotech an additional $3.5 million in non-equity funding, some of which is tied to hiring milestones. The state also took a $1 million equity stake in Arvinas through Connecticut Innovations’ investment in the A round.

The company’s work stems from research at Yale University by Craig Crews, a professor of chemistry and pharmacology, focused on inducing a cell’s own protein-degradation capability to bind to a specific protein and mark it for degradation, which would remove it from the system entirely. He previously founded the biotech Proteolix Inc., which also focused on protein degradation and was bought out in 2009 by Onyx Pharmaceuticals Inc., bringing that company the multiple myeloma candidate Kyprolis (carfilzomib).

Moderna Therapeutics

The Flagship Ventures company said Oct. 2 it had received a grant worth up to $25 million from the Defense Advanced Research Projects Agency (DARPA) – birthplace of the Internet – to develop treatments for infectious disease and bioengineered attacks. Moderna is working on a new drug modality, in which modified messenger RNA (mRNA) are injected into a patient to spur endogenous production of therapeutic proteins.

Shortly after emerging from stealth, Moderna’s platform received validation – and a boatload of cash – from AstraZeneca PLC. But the firm has yet to prove in clinic that its mRNA analogs can evade the immune system, which is primed to recognize RNA as a viral invader, and trigger a patient’s ability to make proteins in the right quantities to fight pathogens.

Moderna has raised $40 million from its Series A from Flagship Ventures and individuals, including its own CEO Stephane Bancel, after a long evolution from a Harvard University researcher’s idea to create induced pluripotent stem cells more efficiently (Also see "Venture Creation Story: The Early Days Of Moderna" - Scrip, 18 Jun, 2013.). The AstraZeneca deal brought $240 million in upfront fees, plus potential milestones and royalties, for the rights to as many as 40 compounds across several therapeutic areas [See Deal].

The DARPA grant runs for five years and focuses on the production of therapeutic antibodies. Moderna’s appeal to public health officials in a pandemic or emergency situation is to simplify the distribution of treatments. Its mRNA-based injectable agent would need to be produced, shipped and stored, but potentially with less complication and cost compared to other types of stockpiled or rapid-response agents.

Frazier Healthcare

The veteran venture firm said Sept. 30 it has closed its seventh fund with $377 million committed, topping its $300 million target. Its previous fund was a $600 million vehicle that closed in 2007, and in the intervening years the firm has indicated it will shift some focus toward growth stage companies, although the area is not new to Frazier (Also see "As Some VCs Refill, Others Are Running Out Of Gas" - Scrip, 18 Jul, 2013.).

Currently, there are nine companies in its growth portfolio, ranging from makers of health care product packaging and orthotics to dialysis services to outpatient facilities for bariatric surgery patients. To that end, for FH VII it has promoted two members who have worked on the firm’s growth buyout investments. Brian Morfitt is now a general partner, and Ben Magnano is now a partner.

That said, Frazier continues to make early-stage bets, too. It most recently co-led a $16 million Series A financing for Millendo Therapeutics Inc., which is developing a small-molecule treatment for the adrenal cancer adrenocortical carcinoma and expects to enter the clinic this year. Frazier recently participated in the IPOs for Portola Pharmaceuticals Inc., in which it had a 5.6% pre-IPO stake, and Chimerix Inc., with a stake under 5%. It also saw acquisitions for its portfolio companies Trident Health and Incline Therapeutics Inc.