AVEO: An early stage VC perspective

Posted in VC-backed Biotech Returns

I heard AVEO Pharmaceuticals’ CEO Tuan Ha-Ngoc speak at Convergence last month and decided AVEO would be a superb company to profile as a way to highlight the triad we all dream of in biotech venture investing: great science, great companies, great investments.

Founded as GenPath in 2001 by such academic all-stars as Ron DePinho and Lynda Chin of the Dana Farber, it’s mission was to make better cancer drugs by exploiting better animal models of cancer.  Xenograft tumor models were as poorly predictive then as they are now, and they believed inducible cancer models would better reflect the disease.  A well funded platform and pipeline evolved out of this vision.  Today, AVEO (name was changed in 2005) has an interesting multi-kinase inhibitor tivozanib in Phase 3 for renal cell cancer, and their second program is an anti-HGF mAb.  Its very clear that AVEO has all the hallmarks of being about Great Science.

And it’s a Great Company.  Strong management team, impressive staff (150+ employees), super strong board (e..g, Tony Evnin, Ken Bate, Henri Termeer, many other luminaries of biotech).  The investor roster is a solid list of A-grade venture firms: Venrock, Highland, Prospect, MPM, Flagship, Oxford, Bessemer, etc…  And they’ve done lots of corporate partnerships over the years bring in heaps of non-dilutive capital: Merck, Lilly, Schering, OSI Pharma, Biogen all did deals with them related to the platform, and just this week J&J did a deal for anti-RON pathway antibodies.

With its lead program getting closer to an NDA, AVEO is well on its way to possibly becoming a sustainable biotech company: a feat only a rarefied few biotechs ever achieve.

So does a Great Company with Great Science mean it’s been a Great Investment?  Sadly no, at least not for the private venture investors.   Its been a long road with only a very modest return to date.   Including the public offerings, AVEO now raised over $300M in equity capital to date and closed today with a market cap of $680M.  So a little over 2x in aggregate.

Here’s the chart and table that captures the Series A through E rounds and their split-adjusted price per share according to their S1 last year:

The average private investor stock price per share was $8.97 – essentially flat with the IPO offering price and only about 2x to today’s price.  For Series A shares, it is close to a 3.7x multiple today – a reasonable win.  However, since most investors do their part in subsequent rounds of financing, I’d speculate that for most of the Series A and B round venture investors, they are sitting at 2.5x or so.   Better than the 50% of LS deals that lose money, but this is probably not a top quartile deal compared to other LS deals in the 2000s.

Although flat into the IPO, AVEO is now up over 100% and is one of the high fliers of the Class of 2010.  So its been a great deal for the IPO buyers.  But its been a rollercoaster even as a public company.  It dropped down below its 2003 Series B price per share within the first four months of trading, seven years later.  The first real jump in the stock occurred in early Oct 2011 when Merck gave back the anti-HGF program unexpectedly after their acquisition of Schering Plough.  A great example of some positive serendipity.  The stock continued its climb as news of the tivozanib trial results from Phase 2 and the rapid enrollment in Phase 3 occurred.

I hope that for cancer patients and shareholders of AVEO that their star keeps rising with strong clinical data – and that the investors who help provide the risk capital in the early days manage to drive a big return.  These long roads have led to good endings before: Myogen was flat for the first eight years or so before skyrocketing in the public markets on good clinical data to an acquisition by Gilead at least 10x above its venture round prices.  But unfortunately that’s not the most common outcome.

As an early stage VC, I’d certainly like to believe that a biotech worth more than $680M, built over nearly a decade with great science and strong leadership, should be celebrated as a huge winner.  It should be a top decile, 10x+ deal that returns a large chunk of a venture fund.  But the reality is that raising $150M+ privately makes it very hard to get to high multiple exits when the public capital markets aren’t there with some irrational exuberance.  This model of “raise as much as you can, when you can” worked well in the 1980s and 1990s because the public markets were accommodating.   But no longer, even for great companies like AVEO.

The key challenge is the equity capital intensityThe answer is simple: capital efficiency.  We need to create winners with a lot less equity capital.

Trying to figure out the new models that address this issue is both the opportunity and challenge of early stage venture investing today.  We’re experimenting with lots of approaches (asset-centric models, virtual companies, project-financings, leaner platforms), but only time will tell.

What is clear is that finding deals that actually fit the “Great Science, Great Company, Great Investment” triad is very tough to do.

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  • Lauras

    The following tweet from Michael Gilman (Stromedix) sparked
    a flurry of tweets: ”Provocative perspective on $AVEO from @LifeSciVC. A
    great company but a ho-hum investment. Should the rest of us care?”After some thought about my definitions of each component of your triad, I wonder if great science in the biotech industry can be measured by whether the science is:1) protectable (if not it is unlikely to get investment),2) actionable (while not 100%, one could argue that investors will vet this as well) and3) proven (the hardest part because proof is randomized clinical trials that can take decades to understand the true value).I assumed here the biotech industry is therapeutic development.

  • Lauras

    The following tweet from Michael Gilman (Stromedix) sparked
    a flurry of tweets: ”Provocative perspective on $AVEO from @LifeSciVC. A
    great company but a ho-hum investment. Should the rest of us care?”After some thought about my definitions of each component of your triad, I wonder if great science in the biotech industry can be measured by whether the science is:1) protectable (if not it is unlikely to get investment),2) actionable (while not 100%, one could argue that investors will vet this as well) and3) proven (the hardest part because proof is randomized clinical trials that can take decades to understand the true value).I assumed here the biotech industry is therapeutic development.

  • Lauras

    The following tweet from Michael Gilman (Stromedix) sparked
    a flurry of tweets: ”Provocative perspective on $AVEO from @LifeSciVC. A
    great company but a ho-hum investment. Should the rest of us care?”After some thought about my definitions of each component of your triad, I wonder if great science in the biotech industry can be measured by whether the science is:1) protectable (if not it is unlikely to get investment),2) actionable (while not 100%, one could argue that investors will vet this as well) and3) proven (the hardest part because proof is randomized clinical trials that can take decades to understand the true value).I assumed here the biotech industry is therapeutic development.

  • Lauras

    The following tweet from Michael Gilman (Stromedix) sparked
    a flurry of tweets: ”Provocative perspective on $AVEO from @LifeSciVC. A
    great company but a ho-hum investment. Should the rest of us care?”After some thought about my definitions of each component of your triad, I wonder if great science in the biotech industry can be measured by whether the science is:1) protectable (if not it is unlikely to get investment),2) actionable (while not 100%, one could argue that investors will vet this as well) and3) proven (the hardest part because proof is randomized clinical trials that can take decades to understand the true value).I assumed here the biotech industry is therapeutic development.

  • http://twitter.com/exMBB exMBB

    Great post Bruce!!!  While 2.5X real return is nothing to sneeze at.  The risk-adjusted return is probably a quite a bit lower.  Though I am not sure if there is really a good way to quantify that.   I think for public investors, right now is the golden age for biotech investing.