Today, we are excited to announce that we’ve successfully exited Arteaus Therapeutics to Eli Lilly (see announcement here, here). It’s fair to say it’s been a superbly executed example of R&D externalization and a win–win for Lilly and Arteaus.
Before sharing the details of Arteaus, a bit of background on the conceptual model from the venture side. As I’ve blogged about in the past, our portfolio is a mix of drug discovery engines/platforms and more focused product plays around single-assets. Arteaus has been one of the latter, and was the first of our Atlas Venture Development Corp (AVDC) initiatives, which began in the first half of 2010. Although it has morphed into more concept than formal corporation, the essence of this type of deal is simple: enable R&D externalization so that Pharma companies can access project financing, open market feedback, and entrepreneurial R&D leadership outside their internal organizations to advance high potential assets with the right to re-internalize them in the future. These types of deals have a common set of intrinsic characteristics: early development stage assets (Dev Can through Phase 1), a clear development plan with definitive Go / No Go milestones on the way to human proof of concept, and a Pharma partner who is interested in re-acquiring the project in the future.
Further, these deals have several attractive attributes if structured appropriately: (a) a clear path to top decile venture capital returns (historically in venture this is >5x as discussed here); (b) a framework ideally suited to virtual, capital efficiency; (c) a dramatically enhanced velocity of capital (far shorter holding periods); and (d) an uncorrelated asset vis-à-vis the public capital markets and hence provide unique portfolio diversification.
Arteaus fits all those characteristics. Here’s its story.
My partner Jean Francois Formela led the formation of our AVDC initiative and engaged in an active dialogue with Eli Lilly over many years as they evolved to their curent “Capital Funds Portfolio” strategy, as it was recently named. Lilly and Atlas had multiple meetings over the course of several years in 2008-2010 prior to Arteaus about different ways of doing R&D externalization – pools of assets, single programs, the mirror funds concept, etc… We chose to focus with Lilly on the single-asset approach for a variety of reasons, but avoiding selection bias and “company-building” inertia were two of them.
In July 2010, we formally launched AVDC with the hiring of Dave Grayzel, former head of clinical development at Infinity Pharmaceuticals, to spearhead the effort. In August of that year we reviewed a number of interesting Lilly programs, and the anti-CGRP antibody called LY2951742 was one of them. Over the next 11 months, we spent lots of time working with Lilly on the diligence, evaluating different R&D models, honing the clinical development strategy, negotiating a deal, and eventually syndicating the round (OrbiMed joined us as our partners in Arteaus and were great to work with). In July 2011, the first tranche of an $18M Series A round closed (here) to take LY2951742 through a Single–Ascending Dose study in healthy volunteers. The second and third tranches were geared to enable a Multiple Ascending Dose study (and Pharmacodynamic biomarker assessment) and then a 200+ patient Phase 2a PoC study for migraine prevention, respectively.
There were and are at least three exciting attributes to Arteaus:
1. The medical science was and is very compelling. The team quickly recognized that antibody-driven CGRP blockade was a very compelling hypothesis in migraine prophylaxis and LY2951742 offered a great asset to test this in patients. Discovered in 1982, CGRP is widely expressed in the CNS and is a potent cerebrovascular vasodilator, causing vessel relaxation and increased blood flow, and as a mediator of neurogenic inflammation. Several small molecule CGRP receptor antagonists showed definitive clinical efficacy in migraine but those compounds were terminated in development. LY2951742, a humanized mAb binding the CGRP ligand itself (unlike Amgen’s CGRP-receptor mAb), had a strong preclinical package, including PD marker effects with capsaicin-induced dermal blood flow in monkeys, when we in-licensed it. Having taken over the program at IND, Arteaus has now licensed to Lilly a robust clinical data package and completed randomized Phase 2 trial in migraine for an antibody approach to CGRP, ahead of competitors at Labrys, Amgen, and Alder, among others. This gives Lilly the opportunity for a first-in-class therapeutic in migraine prophylaxis.
2. The virtual operating model, with its definitive human proof-of-concept, was very capital efficient and attractive. The LY2951742 development path created by Arteaus was clear and straightforward, with a definitive and financially doable Phase 2 proof-of-concept. We had a Phase 1 PD marker (the same capsaicin-induced dermal blood flow measurement used preclinically) that would derisk the pharmacology before Phase 2 and offer a low cost “kill” point if negative. See this poster for the data showing how compelling it worked in Phase 1. We also focused on powering the Phase 2a for detecting a signal – it was a 200+ two-arm trial geared for a definitive go/no-go (here). Further, a world-class virtual drug development team could (and did) execute this plan without building out the costly trappings of a “bigger company”. In addition to Dave Grayzel, who was the founder and CEO of Arteaus from start to finish, the team was Scott Chappel, Jen Foley, Tom Schuetz, and Steve Sweeney (in alphabetical order) – and they delivered an exceptional program under-budget and on timelines, going from IND to completed Phase 2 in ~2.5 years. Only one of these team members was full time (Steve Sweeney, Head of Clin Dev Operations), as Arteaus was truly a virtual company. Arteaus was also able to “leverage Lilly’s capabilities and experience developing the antibody” as part of this strategic externalization model (press release).
3. Lastly, the financial returns offer top-decile venture economics. As described at the outset, “upon completion of the Phase 2 study Lilly will have the option to continue development of the antibody at pre-negotiated terms including milestones and royalties.” This structure offered us a path to top decile venture returns through a combination of a healthy upfront, future milestones, and royalties. It also has had a very attractive holding period and capital velocity: it has only been ~2.5 years since the first tranche closing of the Series A, and most of the capital came in more recently. This timeline and deal structure provides us with a triple-digit IRR on the upfront alone, and a path to high single-digit cash-on-cash return multiples upon approval.
To our knowledge, Arteaus is the first “built-to-buy” single-asset structure that has been successfully exited in the biotech venture business. While there are many “in progress” across the industry today, Arteaus has now gone full circle. In a timely way, this answers some of the skeptics/critics towards the asset-centric build-to-buy venture model (like the In Vivo blog post here in Sept 2013).
For Atlas, it’s a nice validation of our AVDC approach. Our second AVDC startup, Annovation, is paired up in a somewhat similar way with Medicine’s Company around a novel anesthetic. Dave Grayzel is also running Annovation right now. Nimbus’ 2013 Shire and Monsanto collaborations at the subsidiary level in large part fit this deal profile as well. And we are actively working on several more AVDC-like deals we hope to announce in 2014.
Lastly, it’s a great coup for Lilly and its R&D team at a time when they’ve been getting beaten up by pundits. Arteaus was an early element of their evolving effort around creative R&D externalization models, now called their “Capital Funds Portfolio”, and is the first winner in that group. It’s a great example of Lilly innovating in new ways. Other asset-backed plays from TVM and Healthcare Ventures are in progress, and I’d certainly expect some of those other 8-10 projects to succeed. We look forward to working with Lilly again.
Congrats to Dave, my partner Jean-Francois Formela, and the Arteaus team.