BMS Secures The Keys To Padlock

Posted March 23rd, 2016 in Atlas Venture, Exits IPOs M&As

Today we announced the acquisition of Padlock Therapeutics by BMS for up to $600M in total deal value (here), bringing a bittersweet end to a great startup story and the start of a promising and likely productive portfolio for BMS.

We certainly never anticipated exiting our investment within two years, but Padlock’s trajectory and R&D progress has been staggeringly fast and attracted the interest of multiple suitors late last year. As I describe later, we had a number of attractive strategic options in front of us, but in the end BMS and its commitment to exploring the Padlock’s biology in autoimmunity won the day.

Before sharing a few reflections, here’s the history of the deal. In the summer of 2013, we got excited about the role of peptidyl arginine deiminases (PADs) in driving antigenic citrullination, based on cutting-edge research from The Scripps Research Institute; in particular, research from Paul Thompson (now at UMass) into the biochemistry and structure of PADs, and Kerri Mowen into the biologic relevance of these enzymes. Working with serial entrepreneur Mike Gilman, who had just returned to Atlas from a stint at Biogen, and both Paul and Kerri (as well as their colleagues at Scripps), we co-founded Padlock with the aim of translating these insights into therapies in autoimmunity. padlock_logoThe new startup, pre-funding, joined the backend of our Seed Class of 2013, although the initial investment didn’t happen until the winter of 2014. The seed phase objective was a focused de-risking plan around identifying initial chemical matter of sufficient quality. We syndicated the initial tranche of the Series A with with JJDC and MerckSerono Ventures, and later added Index Ventures (here). Early in 2015, as our lead optimization campaign began moving into full force, we licensed some PAD-related patents and know-how from GSK to help accelerate our efforts, in exchange for some early equity in the startup (here). And a couple months ago, we moved from a purely virtual model into a “hybrid” one, setting up some targeted labs in Cambridge and out in San Diego, a.k.a. “Padlock West” (here).

Fast forward to today, we’re poised to enter formal preclinical development on our lead program and anticipate generating clinical data on the approach in the next couple years, with a portfolio of other PAD programs advancing behind it. We were well on our way to building a great ‘big biology’ company when partnership interest heated up for the company, culminating with BMS’ acquisition today.

As I’ve done in the past, I thought I’d share a few of the inside-baseball perspectives on the company and what made the story special:

  1. It all starts with great science, and thinking differently. Padlock’s scientific approach could be summarized in two short sentences: autoimmune disease is caused by autoantigens, and blocking the creation of those autoantigens will ameliorate the pathology. A much more elegant description of the science around PADs is covered in a blog by Gilman titled “Rekindling the Flame”. Our PAD-focused approach, while tautologically aligned with how we all understand autoimmunity in textbooks, is actually orthogonal to how most current drugs treat the disease: the vast pharmacopeia in autoimmune disease is largely about blocking the inflammatory mediators circulating in the body, rather than blocking the cause of their production in the first place. In other words, instead of blocking the flames, Padlock aims to stop fueling the sparks that cause them. To make the story even more exciting, researchers have discovered that a subset of RA patients with highly erosive disease have PAD-activating auto-antibodies, which leads to massive extracellular citrullination and presumably neoantigen formation, providing the company with a targeted, easy-to-identify patient population. Beyond RA, there are clear applications in Lupus, MS, and many other autoimmune diseases. So the science here is both big and bold, and offers a different angle on treating disease.
  2. Serial industry veterans, all trained in large biopharma, nucleated this small but high-performing team. Co-founder and CEO Mike Gilman is a well-known serial entrepreneur, having led Stromedix previously (a prior Atlas investment), as well as tours of duty at Biogen and Ariad. Around him, Padlock recruited a fantastic team of other skilled R&D execs, like Head of Biology Mariana Nacht (who was previously with Atlas-backed Avila, and prior to that Genzyme) and our St. Louis-commuting CSO Raj Devraj (ex-Pfizer/Pharmacia, as well as several Missouri/Kansas biotechs). In addition, we were fortunate to bring on board a seasoned BD professional, Samantha Truex, as CBO (ex-Biogen, Genzyme), who was instrumental in driving Padlock’s business plan partnership process. This senior group, along the other team members, were central to the strategy and delivery behind Padlock’s short two years as a startup. Interesting to reflect on how talent flows in an ecosystem: this biotech diaspora emanating from Biogen, Genzyme, and Pfizer/Pharmacia all found their way into key leadership roles here, including several serial Atlas-backed entrepreneurs.
  3. In an unusual move, we put all our “R&D execution” eggs in one CRO basket. We had a broad, deep, and productive contract research partnership with Evotec (here). Atlas startups typically work with multiple CRO partners in more of an a la carte fashion, with several different shops covering things like crystallography, chemistry, screening, in vitro profiling, in vivo biology, ADME/PK, etc. With Padlock, we decided to do something different – and signed up for a single, large collaboration with Evotec, where they would cover all of our research needs (beyond the academic SRAs). In fact, we spent over 50% of the Series A funds on resourcing this single collaboration, and had 25–30 FTEs at Evotec that were fully dedicated to Padlock. They were essentially our entire discovery execution team, and Padlock’s scientific leadership (Mike, Raj, Mariana, Paul, Kerri) spent a lot of time either on site or by phone with them guiding and shaping their work. It’s obviously worked well, and Evotec earned an important milestone recently (here). This single-source approach certainly has risks, but it also has the big benefit of consolidating our CRO project management with one partner, and by design made us one of the more meaningful clients for Evotec – so we got the kind of attention we needed. It also simplified the operating model enormously. It’s fair to say this was a first for us at Atlas, and with its success we’ll likely consider it as a possible option for other startups in the future.
  4. Incubating Padlock within Atlas had lots of bidirectional benefits. For 24 of Padlock’s 27 months in existence, they were essentially down the hall from me; not only did we have regular update meetings every week or so, but we also bumped into each other at the proverbial (and literal) coffee machine. The benefits of this went both ways. Atlas got great engagement and input from the Padlock team on broad range of topics, and was able to help advise and engage on R&D or BD issues real-time. Padlock got input (mostly helpful, I think) from their Chairman (me) and my colleagues at Atlas whenever they wanted or needed it at a moment’s notice, and also got input from the broader community of 8+ startups co-located in our space. Furthermore, it was also highly subsidized housing in the ridiculous rent district of Cambridge, with a good deal of office infrastructure that most startups don’t have (like an endless flow of espresso). The “community” model of startup creation is undoubtedly a powerful one, and it’s no wonder many early stage VCs have set up similar models (here). It’s worth noting the last two months have been lonely for us: they recently fledged from our space and moved out to Alewife (where they are subleasing space from another Atlas company, Unum).
  5. Great companies drive lots of strategic optionality. Over the course of the last few quarters, Padlock’s team and board evaluated a broad range of strategic options: raising a Series B to power up the story and eventually go public, do selected partnerships around certain PAD applications, engage in option-to-acquire structures, or secure an outright acquisition of the story. Fair to say we had all of those options on the table in some form or another. In comparing these options, we asked ourselves what was the best way to prosecute and fully fund this platform of PAD biology across a wide-range of applications, in light of issues like future financing risk, compounding dilution to all shareholders, technical probabilities of success, and an uncertain exit path in this market environment. At the very end, we were considering two very different deal structures, both of which could have been great partnerships to advance the portfolio we were developing. And there are always hiccups and surprises when legal teams argue the nuances of different approaches. In the end, Paul Biondi, Carl Decicco, Francis Cuss, and their colleagues stepped up at BMS as both the right partner and the optimal deal structure for the story – bringing their considerable capabilities and resource commitment to autoimmunity.
  6. You often can’t get enough capital to work in your best deals. Padlock has a superb return profile for Atlas, and is the first major exit in our 2013 Fund IX vintage. Just sharing the publicly available numbers: Padlock raised ~$18M since inception, and this deal brings “upfront and near term milestone payments of up to $225 million and potential additional consideration of up to $375 million upon the achievement by Bristol-Myers Squibb of certain development and regulatory events.” So it’s upwards of a 30x+ multiple if it plays through, and a great return upfront and in the near term. For Atlas, we only managed to invest a fraction of the capital we expected to deploy into Padlock; we would have welcomed the opportunity to invest more into a great deal like this one over time, but you have to do what’s best for all the shareholders – and future dilution has big impacts on founders and early investors in particular. The same dynamic happened at CoStim back in 2014 with Novartis. Great winners can run away from you quickly, which is of course a wonderfully high class problem to have.

As a big believer in the role of PADs in autoimmunity, I’m looking forward to cheering BMS on from the sidelines; we all have high hopes that this orthogonal approach to RA, lupus, MS and other disorders will deliver big positive outcomes for patients.

Lastly, and importantly, the spark that set Padlock in motion came from its two wonderful scientific founders, Paul Thompson and Kerri Mowen, as mentioned above.Kerri at Padlock East 3Feb2016 copy With both shock and sadness, we learned last month that Kerri passed away. “Certain people light up a room.  Kerri was one of those people,” as Mike wrote in a moving memoriam a
few weeks ago. She will be greatly missed, and patients will likely benefit from her scientific legacy.

As Mike Gilman casually said to me last week as we locked down the final details, “each deal is a snowflake”, highlighting that every deal is intrinsically different in seemingly slight but often meaningful ways. For so many reasons, Padlock was indeed a snowflake that I’m glad we got a good glimpse at.

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