Acquisitions As The Silent Partner In Biotech Liquidity: IPO vs M&A Exit Paths

Posted in Exits IPOs M&As | 2 Comments

With the biotech IPO window still open for business, and valuations of the recent classes of 2013 and 2014 remaining robust, all eyes have been focused on this part of the value chain.  Significant mezzanine pre-IPO rounds are getting done at companies like Intarcia and Juno in preparation for what are likely to be great offerings early in the new year.

IPOs are the apparent prize-winners in the eyes of many.  But what often gets overlooked when talking about biotech exits is the important – and more frequent – role of the M&A exit in driving liquidity in biotech, even in the current marketplace.

We’ve seen some fantastic exits this year on the VC-backed biotech M&A front, just to name a few:

  • Anti-viral play Alios Pharma was acquired by J&J for $1.75B.  This will return 18-20x cash-on-cash multiples to several corporate venture capital firms, or roughly $300M a piece by my guesstimate, including funds like SR One, Roche Ventures and Novartis Ventures, as well as Novo Ventures (here)
  • Seragon’s purchase by Genentech for $725M upfront and $1B in milestones, providing handsome returns for Column, Aisling, venbio, and others (here).  Column likely returned double its entire fund on this deal and sale of its parent, Aragon, to J&J last year.
  • Civitas’ acquisition by Acorda for $525M right before their pending IPO.  Significant returns to a blue chip list of venture and public market crossover investors after raising about $125M in private funding (here)
  • After Arteaus’ CGRP antibody established PoC for the target in migraine and was picked up by Lilly (here), Teva moved quickly to acquire Labrys Biologics for $200M upfront and $625M in development-stage earnouts, even before they generated clinical data.  After only raising $31M in venture equity, this is a big win for venbio, Canaan, InterWest, and Sofinnova (here).
  • Immuno-oncology startup CoStim Pharma’s early stage acquisition by Novartis provided a very nice return to MPM and Atlas earlier this year (here)

These are great deal stories that compare well on the returns with the high-flier IPO stories of Agios, Ultragenyx, Receptos, Epizyme, bluebird, and others.

But it’s hard to argue with the fact that IPOs seem to have more “sex appeal”; these companies retain the possibility – however slim – of becoming the next Gilead. Importantly, we also can track and follow them, their performance can be monitored everyday; newsflow reminds us frequently of these emerging stories and their drug programs, and media outlets help pass along their news with great fanfare.

By comparison, once an M&A deal is done, we rarely if ever read about the company again – despite the success of their products in the buyer’s portfolio.  Pharmasset isn’t mentioned when discussing Sovaldi very much anymore, or Calistoga when referring to Zydelig, or Organon Biosciences when mentioning Merck’s Keytruda.  The loss of a company’s identity in an acquisition makes it easy to quickly forget the importance of M&A in a world that wants and loves to talk about companies and their products.

So that brings me then to the question about venture capital and returns - what’s the relative contribution of M&A and IPO exit paths to liquidity in the biotech world?

There aren’t great sources of data on the exact returns back to VCs and their Limited Partners from individual deals, but I’ve found two datasets that provide some directional context.

First, the relative contribution of M&A and IPOs to “big wins” over time – exits above $250M in value.  Our friends at the data-savvy firm Correlation Ventures (CV) have examined their industry-leading database and come up with some interesting trends.  CV counted the number of deals above the valuation threshold of $250M, measured as either the market capitalization six months following an IPO, to reflect when lockup periods often expire, or the amount paid by an acquirer at the date of the acquisition, plus any realized milestone payments since the acquisition. Their dataset tracks all these metrics. Obviously those aren’t perfect definitions (e.g., VCs often hold for a long time after the lockup expires), but they allow for a directionally useful exploration of the relative contributions of different exit paths.  Using those two definitions, the chart below plots the percentage contribution of M&A and IPOs to these “big” >$250M deals:

Big Exits by IPO or M&A

Second, the NVCA tracks the number of all VC-backed exits in their annual Yearbook – either IPOs or M&As, irrespective of their value.  I thought it would an interesting comparison to Correlation’s data; their data is presented in a similar format below.

All Exits by IPO or M&A

Observations:

  • As both charts highlight, IPOs used to be the only real game in town.  Driving 67% of the exits and over 82% of the >$250M exits in the late 1990s.  This observation certainly holds true for our experience at Atlas: almost all of the big biotech exits of that era were IPOs like Exelixis, ArQule, Morphosys, DeCode, Actelion, etc.  This story, as both an industry and at Atlas, has changed a lot since.
  • By the 2006-2010 period, almost all the exits, upwards of 75% – regardless of size – were M&A driven events.  The recent IPO window in 2013 pushes the data a bit, but not enough to eliminate the dominance of M&A exits: more than 60% of the big >$250M exits in our space in the last few years have been M&A.  My sense is that’s a far higher percentage than widely perceived.
  • The share of big exits vs all exits contributed by either path has converged over time.  In the last 7 years, roughly identical percentages exist in the two charts above, suggesting that the relative contributions of IPOs and M&As at big and small valuations are similar.  This is different than the pre-2000 world, where IPOs were clearly of average higher value based on these data.

I’ve written in the past on subjects related to this topic, so won’t harp on them again but here are a few topics: the likelihood of earnouts getting paid on M&A deals (here), the tradeoffs between IPO-and-exit-later vs M&A today (here), and the liquidity challenge of exiting newly minted public biotech shares into the market after the lockup (here).

The most important message in all this – it’s a healthy dynamic for private biotechs to have both IPO and M&A avenues open to them, with roughly equivalent opportunities for driving top decile returning exits via either route.  This interplay bodes well for the biotech sector.

 

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Cellular Immunotherapy & Unum Therapeutics: Out of Many, One

Posted in Biotech financing, Portfolio news | 2 Comments

More exciting news has emerged from the immuno-oncology field over the past couple weeks from both Penn/Novartis and NCI/Kite.  The former released new CAR-T data, widely heralded as “unprecedented” in its efficacy: in a trial of relapsed, refractory ALL patients, 90% had complete remissions after their infusions (27/30), and 78% were still alive after treatment, including the first ALL patient treated with the therapy over 2 years ago. Further, three patients used CAR-T as a bridge to curative allogenic stem cell transplant while in remission. Additional news came from the NCI/Kite team, who published a Lancet paper this month on their ALL/NHL Phase 1 trial, which also reported strong response rates on the order of 70%+ (here), intriguingly without the prolonged B-cell aplasia seen with other CD19 CAR-Ts.  These new data highlight the truly transformational potential of cellular immunotherapy.

Although the data is new, the field is not – and it’s worth remembering how long breakthroughs take in this business.  The first CAR-T construct was described in a 1989 paper by immunotherapy pioneer Zelig Eshhar in PNAS (here).  Early first-generation constructs (more here), typically featuring a single signaling domain most commonly derived from the CD3z component of the TCR/CD3 complex, were explored with different antigens in different indications, but for most of the next two decades they had very minimal efficacy, and little to no sustained responses. Over that time, more advances were made in terms of signaling complexes and transmembrane chimeras.

The first reports of compelling clinical efficacy were in 2010, nearly 21 years after CAR-T constructs were first described, and Penn’s August 2011 NEJM patient report really catalyzed the field (here). Since that time, other labs have shown great data – like MSK and the NCI – and there’s been an explosion of commercialization interest in the field.

What’s unusual and worth noting about the explosion in the CAR-T space is that it wasn’t the traditional venture community that dove in first – unlike a typical new modality such as RNAi or antibodies, where VC-backed companies have often led the charge (like Atlas’ investments early in Alnylam or  Morphosys, respectively). While many VCs had previously dabbled in cellular immunotherapy for years, nothing had worked well so there was little enthusiasm for the space, and little venture funding flowing into it.

But it was Novartis, one of the largest of the Pharma’s, who boldly moved more quickly and more aggressively into the field than others, jumping into the dual risks of both cell therapy and gene therapy. Mark Fishman and his team at Novartis deserve real credit for opening up the commercial realization of this field. Their significant and landmark deal with the University of Pennsylvania around Carl June’s work (here, here) put the field under the spotlight and established them squarely as the leading large biopharma player in the space. Although it was still a very limited clinical story (e.g., the deal’s press release talks about three patients with responses), this big move into the space triggered a wave of renewed interest in cellular immunotherapy – which has continued to be supported by accumulation of great clinical data.

Several CD19-directed CAR-T constructs had shown early compelling efficacy by the time Novartis had done their deal with Penn – and these other groups (MSK, NCI, Hutchinson, etc) provided great academic partners for venture groups to pour into the field (e.g., Kite Pharma, Juno Therapeutics, etc).

But it is interesting to me that it required both compelling early clinical data and a Big Pharma jumping into such a “risky” field in a major way before the venture community got conviction. In some ways, the major clinical risk – do these constructs work – was eliminated before the venture and investment communities got fully engaged in this modality. The big risks now lay with late stage clinical studies, speed-to-approval, manufacturing and process optimization, marketing and distribution of a process-as-the-product therapeutic regimen – all of which require big capital infusions to wrestle to the ground, and are typically not the risks that venture capitalists fund to overcome. The big Series A and B financings at Juno, the IPO at Kite, the Celgene deal at bluebird – and many others – are a reflection of this significant capital requirement in the CD19 race today.

Atlas was very close to jumping into that race in the months that followed the Penn-Novartis announcement, but we failed to seize the opportunity fast enough for a variety of reasons. However, given the valuations in the field today, I suspect we’ll regret letting that one get away; chalk it up onto our version of the Bessemer “anti-portfolio” – awesome deals that got away.

About a year ago, sensing the CD19 race wasn’t one where we could compete to win as early stage venture investors, we began to shift our focus to “next generation” approaches in the CAR-T space. These include things like suicide switches to turn them off, alternative solid tumor antigen approaches, and allogenic off-the-shelf concepts. All of those are interesting, but the one area that got us really excited was Dario Campana’s work on a “universal” next generation engineered chimera aimed at augmenting the efficacy of antibody therapeutics (here, covered in SciBX here)– which has formed the basis of a new startup called Unum.

Unum Therapeutics

Unum is a new cellular immunotherapy company dedicated to antibody-coupled T-cell receptor (ACTR) therapeutics.  Today Unum announced its Series A financing, co-led by Atlas and Fidelity Biosciences, with participation from Sanofi-Genzyme BioVentures (here). This financing should advance Unum’s lead candidate through initial proof-of-concept clinical studies.

In short, ACTR technology enables genetic-programming of T-cells to attack tumor cells in an antibody-directed manner.  Unum’s ACTR constructs are not restricted to a single antigen or narrow set of tumors, but instead can be universally applied to augment any antibody-directed anti-cancer therapy with a cell-surface antigen.  Hence the name, derived from e pluribus unum – “out of many, one”.

Unum’s ACTR approach leverages the huge portfolio of mAb programs directed against cancer antigens across the industry. This could be the “one CAR construct to optimize them all”. Pharma has been optimizing the mAb arsenal for decades – tuning PK, potency, epitope selection, etc; Unum’s platform doesn’t reinvent those features but leverages them. Furthermore, most cancer-directed mAbs have also been optimized for ADCC effects through CD16 binding – making them ideal pairings for Unum’s technology. Finding the right set of antibody partners for the Unum platform, whether it be approved drugs or development-stage mAbs, is a big focus for the company.

In addition, ACTRs leverage years of experience in CAR-T cells and construct optimization (i.e., 3rd generation protein chimeras), but adds features like dose titration (via administered antibody dosing regimens) and cessation of therapy (by no longer dosing the antibody, these ACTR cells will not be effective). These attributes are very unique among CAR-T stories today. Most CAR-T’s expand in vivo so dose titration in a conventional sense is difficult, and in many cases the engineered T-cells appear to be active “forever” – i.e., the on-going B-cell aplasia seen in most of the CD19 CAR-T clinical studies to date. These unique features of ACTRs should also open up solid tumor targets in particular.

In addition to a compelling scientific and clinical approach, Unum has a superb founding team:

  • As mentioned above, Dario Campana is the company’s Scientific Founder and a real thought leader in the field of cancer cell therapies. At the National University of Singapore (NUS), he developed the ACTR technology that forms the basis for Unum. Before NUS, while at St. Jude Children’s Research Hospital, he created the CD19-CART construct that Carl June took into the clinic and demonstrated such profound activity.
  • Chuck Wilson is Unum’s founder and CEO, and has been both a Pharma BD executive and a serial Atlas-backed entrepreneur. Chuck drove the BD aspects of the landmark Novartis-Penn deal, as head of partnering for research and early development. Before Novartis, Chuck was a founder and biotech executive at Archemix, a prior Atlas portfolio company in the aptamer field. We’ve worked with Chuck for the past thirteen years either as investors or potential collaborators.
  • Lastly, Unum’s Chief Scientific Officer is cancer biologist Seth Ettenberg, who was most recently Cambridge site head for Novartis Oncology Biotherapeutics. Seth has extensive immuno-oncology expertise, leading the scientific aspects of the Novartis-Penn CAR partnership, as well as helping with the acquisition and integration of checkpoint-focused CoStim Pharma.

We expect early patient data in 2015 at Unum. Like most product engines, Unum has been and will continue to be discussing with pharma partners around the opportunity to expand the number of antibody-directed programs we’re exploring. We expect to have advanced those dialogues significantly over the coming months.

It’s exciting to be a part of such a transformational field, and a unique approach within it – looking forward to working with Chuck, Dario, Seth, Michael Gladstone at Atlas, Ben Auspitz from Fidelity, and Bernard Davitian at Sanofi – to help build Unum into a great new immunotherapy story.

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