Financings Of The Fortnight Notices Autumn Coincides With Increase In Option Deals

Plus news on recent financings by MyoKardia, Biogen Idec, Annovation and Wellington Partners.

Financings of the Fortnight couldn’t help notice the odd coincidence of the past two weeks. Just as (American) football season starts, we see a spate of biotech option plays, er, deals. Three, by our count.

Like the option in the National Football League, options-to-acquire in biotech are rare, indeed, because investors shun attempts to limit their upside the way a running back stiff-arms a charging linebacker. Rare, but not completely lacking.

These deals signal a sign of our times: in the right situation, investors will accept a ceiling on their potential returns if it also comes with a potential floor. Here are a few from the past 12 months: Constellation Pharmaceuticals Inc. signed a research partnership with Genentech Inc. in January that gives Genentech a right to acquire the start-up that was initially funded by Third Rock Ventures, Venrock Associates and The Column Group (Also see "Genentech, Constellation Enter Largest Epigenetics Tie-Up Yet" - Pink Sheet, 17 Jan, 2012.).

Third Rock also incubated Warp Drive Bio Inc., built around a genomics “search engine” keyed to screen naturally occurring microbes for medicinal properties, then announced in January a massive Series A round that not only gives co-investor Sanoficertain rights to buy the company if pre-specified milestones are reached, but also allows shareholders to force a sale to Sanofi if different milestones are triggered (Also see "In Warp Drive Deal, VCs Have A Potential Buyer – And Can Force A Sale" - Scrip, 24 Jan, 2012.).

In November 2011, Celgene Corp. took an exclusive three-and-a-half year license to genomic analysis technology from Quanticel Pharmaceuticals Inc., and also bought equity and an option to buy Quanticel outright if it likes what it sees from the biotech’s platform and internal drug-discovery efforts (Also see "Quanticel/Celgene: The Importance Of Linking A Financing And An Exit" - Scrip, 30 Nov, 2011.).

Such options are not the same as earnout-driven deals, a much more common deal structure for private biotech acquisitions (Also see "For Biotech VCs, Anticipation And Adjustments In The Age Of Earn-Outs" - Scrip, 26 Mar, 2012.). Both feature downstream, often significant payments, but there’s a subtle but key difference: Options to buy leave the target company independent until the option is triggered; earnouts are paid out after the target company has been acquired and subsumed.

Yes, this is still Financings of the Fortnight, not Deals of the Week. FOTF is talking options because in the past couple weeks, it has seen three more deals in which the option-to-acquire is part of a Series A financing. In other words, there’s not much waiting around to build the aforementioned floor and ceiling into a start-up’s future; no one is going to spend years and tens of millions of dollars on a company and then limit the upside with an option. But if the founders can build it quickly and cheaply, knowing from the start there's a potential and contractually obligated buyer waiting at the other end of the development path, then capped upside could be better than no upside at all.

Case in point: Selexys Pharmaceuticals Corp. of Oklahoma City raised a $23 million Series A round led by MPM Capital on Sept. 19 but also signed a side deal granting Novartis AG an option to acquire if Selexys’ lead compound, an anti P-selectin antibody, succeeds in a Phase II trial against sickle-cell disease [See Deal]. With the cash infusion, the trial is slated to start next year and finish perhaps in 2015. Several top managers, including President and CEO Scott Rollins, are veterans of the rare-disease firm Alexion Pharmaceuticals Inc.

Vascular Pharmaceuticals announced a $16 million Series A led by Intersouth Partners and, again, MPM Capital on Sept. 11 to advance its preclinical compound against diabetic nephropathy [See Deal]. At the same time, it announced an agreement with Johnson & Johnson’s [Janssen Biotech NV] to grant an option to acquire after Phase II testing of the compound, which has gone through a certain amount of preclinical work at the University of North Carolina’s Chapel Hill School of Medicine [See Deal]. Janssen is paying undisclosed upfront fees and potential milestones for its option rights.

The third example is profiled below in our roundup: the asset financing group carved out of Atlas Venture’s most recent fund has announced its second entity, Annovation Biopharma Inc., a virtual company built around a next-generation anesthetic [See Deal]. One difference between Annovation and the two described above is that the holder of the option-to-acquire is also a Series A investor: The Medicines Co. bought into Annovation’s $8 million round and receives a right to buy the firm if the drug reaches proof-of-concept.

MyoKardia

Third Rock Ventures rolls on with a solo Series A funding of MyoKardia Inc., launched to treat genetic heart diseases, with patients to be identified using a companion diagnostic (Also see "Third Rock Ventures Pumps $38 Million Into New Firm Focused On Genetic Heart Disease" - Pink Sheet, 20 Sep, 2012.). Third Rock has committed $38 million, and partner Charles Homcy will be MyoKardia’s interim CEO.

Homcy said the goal is to develop small-molecule allosteric modulators to treat a percentage of genetic cardiomyopathy patients whose disease is caused by a specific genetic mutation. No novel therapies for two of the main cardiomyopathies have come to market in more than a decade, he added. The firm’s platform derives from the research of several academics who focus on muscle biology and cardiovascular genetics, including James Spudich of Stanford University, Leslie Leinwand of the University of Colorado, Christine Seidman of Harvard Medical School and Jonathan Seidman, also of Harvard Medical School.

The Series A money for MyoKardia comes out of the $426 million second fund Third Rock closed in 2010. Its previous fund of $378 million closed in 2007. Third Rock has announced investments in seven other companies in 2012, most recently joining a syndicate that produced a $60 million Series C for bluebird bio Inc. (Also see "Financings Of The Fortnight: Bluebird Spots Brighter Skies For Gene Therapy Investment" - Pink Sheet, 27 Jul, 2012.). In June, it put up all $40.7 million of an A round for Global Blood Therapeutics Inc. (Also see "Third Rock Pumps $41 Million Into Global Blood Therapeutics" - Pink Sheet, 14 Jun, 2012.).

Biogen Idec

Big biotech Biogen Inc. said Sept. 10 it has sold its royalty rights associated with the lupus drug Benlysta (belimumab) to Canadian private equity firm DRI Capital. Benlysta, brought to market by Human Genome Sciences Inc. in 2011, netted only $50 million in sales that year, a huge disappointment. GlaxoSmithKline PLC bought the company in July 2012 and hopes to improve the drug’s momentum.

Biogen Idec’s royalty stream stems from a European patent claiming a method of treating autoimmune diseases using an antibody to B-lymphocyte stimulator, which Benlysta targets. Biogen Idec licensed HGS and then-partner GSK exclusive rights in 2008. The deal numbers are paltry compared to Biogen Idec’s annual revenues, but it’s part of a slow outflow of holdings since CEO George Scangos took over in mid-2010 and said he would reorganize around Biogen's neurology franchise and shelve oncology.

In late 2010 Biogen Idec said it would sell its San Diego campus – originally the “Idec” half of the company – and in April 2011 the firm announced it would out-license two preclinical kinase inhibitors to Takeda Pharmaceutical Co. Ltd. (Also see "Biogen Begins Its Oncology Sell-Off, Parting With Two Kinase Inhibitors" - Pink Sheet, 5 Apr, 2011.). Coming on board in late 2010, Executive VP of Corporate Development Steven Holtzman said divestment was a high priority: “We’re taking a two-track approach. One is out-licensing; the other is a spin-out,” he said (Also see "Biogen Continues To Plot New Course In Naming Two Key Executives – But Is Independence Part Of The Plan?" - Pink Sheet, 10 Jan, 2011.).

With the Benlysta royalties, DRI is paying Biogen Idec $18.3 million upfront, then undisclosed portions of the royalty stream until September 2014. After that, DRI keeps all royalties but could pay a contingency fee if cumulative royalties to DRI exceed an undisclosed amount.

Annovation Biopharma

The Series A financing for Annovation, established to develop a safer, next-generation anaesthetic, is all about speed – developing an anesthetic agent from which surgical patients can be revived in minutes and creating a corporate structure that will allow a quick, profitable exit for Annovation’s investors (Also see "Series A Financing For Annovation Includes Potential Buyout By TMC" - Pink Sheet, 12 Sep, 2012.). The $8 million A round, which can be extended to $11 million if needed, was led by Atlas Venture Development Corp., a standalone entity established by venture capital firm Atlas Venture in 2010 to create and operate single-asset companies that can be sold off quickly to generate returns for the parent company.

Joining AVDC in funding the round were Partners Innovation Fund (PIF) and The Medicines Co. The participation of TMC, a specialty pharma focused on hospital-based products, is crucial to the deal because TMC also gets an option to buy out Annovation at pre-negotiated terms once the lead drug reaches proof-of-concept. Seed funding for Annovation was provided by AVDC, PIF and Mass Medical Angels.

The product is an anesthetic with a pharmacokinetic profile that would allow patients to be brought to consciousness minutes after their procedures conclude. Based on research by Annovation founder Douglas Raines, a doctor at Massachusetts General Hospital in Boston, it should enter clinical development in the first half of 2013. At the time seed funding was provided, Annovation was working on a pair of next-generation, small molecule drugs for anesthesia, sedation and sleep, called Rapidate and Ventidate.

Wellington Partners

A spot of new fund news cracks this fortnight’s lineup: European venture firm Wellington Partners Venture Capital GMBH announced Sept. 19 the first closing of its new life sciences fund, Wellington Partners IV. The early total is €70 million. It aims to raise €120 million in total, which will be significantly larger than Wellington’s third fund, which raised €78 million, the company said.

Family-owned investment offices were among investors from Europe, the U.S. and the Middle East who contributed to the new venture capital fund. Major investors in the fourth fund included the European Investment Fund (EIF), LfA Foerderbank Bayern and Austria Wirtschaftsservice GmbH. The EIF is also a major partner in another Eurocentric fund announced this year, the $80 million CRT Pioneer Fund it launched in conjunction with Cancer Research Technology Ltd. , the commercial arm of the sprawling charity group Cancer Research UK (Also see "New $80 Million U.K. Asset-Centric Cancer Research Fund Set Up With EU, Charity Funding" - Pink Sheet, 29 Mar, 2012.).

Other European life-science funds to close this year include Edmond de Rothschild Investment Partners’ fourth BioDiscovery Fund and Index Ventures’ asset-centric €150 million fund backed by Johnson & Johnson and GlaxoSmithKline (Also see "Financings Of The Fortnight: Secondary Offerings Up From Pace Set In 2010 And 2011" - Pink Sheet, 13 Jul, 2012.) and (Also see "Backing New Index Fund, GSK, J&J Buy Into Asset-Centric Vision Of Biotech Future" - Pink Sheet, 21 Mar, 2012.). Wellington’s life science team – general partners Rainer Strohmenger, Erich Schlick, Regina Hodits, Harald Keller, Ernst Mannheimer and Rolf Dienst – will invest in companies in the medical devices, diagnostics and biotechnology sectors across Europe.