Monthly Archives: March 2010

By Steve Dickman, CEO, CBT Advisors

It’s only March but, in our view, it’s time to dub Genetix Pharmaceuticals (Note: name changed later on to bluebird bio) of Cambridge, MA, biotech’s “Turnaround Story of the Year.” Genetix announced today that it had raised $35 million in a Series B financing led by Boston’s Third Rock Ventures, former Millennium CEO Mark Levin’s fund. Third Rock Partner Nick Leschly, who is also becoming interim President of Genetix, led the deal for Third Rock, which was joined by one other new investor, Genzyme Ventures, alongside the company’s existing investors.

Not many companies can tell a story as compelling, especially in a field that was once as disfavored as gene therapy. By year’s end, based on our knowledge of the twists and turns of this story (see disclaimer below), we daresay that no one will even rank a close second in the Turnaround Tournament. We will lay out the case for handing the award to Genetix after briefly describing what the company does and what it has accomplished.

Genetix has developed in-house a gene therapy that, for the first time, has been shown in humans to durably alleviate the devastating effects of the hereditary blood disorder beta-thalassemia and, potentially, also the related blood disorder sickle cell disease. The company has also acquired rights to a related gene therapy that can halt the progression of the devastating childhood brain disease adrenoleukodystrophy (ALD for short, also known as Lorenzo’s Oil Disease). Both approaches have been shown in clinical trials to be effective “showing arrested disease progression” according to a company press release. Two ALD patients had their disease progression halted in a study described in the journal Science in November, 2009 (http://www.sciencemag.org/cgi/content/abstract/sci;326/5954/818).

Genetix fits a theme that Leschly said is very important to Third Rock: “the opportunity to develop breakthrough gene therapies for severe disease,” especially genetic disease. He agrees that gene therapy has been down and out for a long time, but he said that “we think things are changing,” based on good clinical data and also on the increasing amount of fresh pharmaceutical industry interest in the sector. It has not been Third Rock’s main practice to invest in companies started by other investors but, Leschly said, “We looked for two years in these areas of rare and genetic diseases and Genetix presented us with the opportunity to make a major difference.” It helped a lot, Leschly said, to have Genzyme, the premier orphan drug developer in the industry and an old gene therapy hand, joining the company as an investor. They bring “great perspective and balance,” Leschly said. A Genzyme executive, Senior Vice President James Geraghty, has been a member of Genetix’ board of directors since 2005.

Toughing it out
As promising as this all sounds, it took patience and persistence on the part of the company’s management, its employees and especially its investors to keep Genetix going long enough to get it to its current state. More than five years have gone by since the last financing by new investors, an eternity in today’s fast-twitch world of quick returns or quick thumbs-down investor decisions. The three venture investors who came in to Genetix in 2004, TVM Capital, Forbion Capital and Easton Capital, could have easily turned against the company and been applauded for their tough-mindedness. Instead, the venture capitalists on the Genetix board, who include two Europe-based medical doctors and a New York-based lawyer, remained steadfast. At the same time, in a move that was pivotal for Genetix’ later success, the company streamlined its activities to focus on its clinical programs, reducing its burn rate to the bare minimum while still pursuing its clinical goals. The management also successfully in-licensed the ALD product to augment the company’s already strong clinical pipeline.

To put the venture investors’ doggedness into perspective, the usual investment cycle for a venture-backed company is two years, three at the outside. Since it can typically take a year or more to raise a venture round, venture-backed CEOs spend nearly all of their time raising money. But in this case, after the first two years, the company’s VCs still had to go back to their partners for fifteen more quarters assuring them that patience would pay off if only more money could be put in. That has got to be some kind of record.

Another fascinating aspect to this investment is the geography. Typically, VCs invest in local companies, where they can best apply their knowledge and experience, and they fund products intended for all markets but especially local markets. In this case, interestingly, a Boston-area investor chose to invest in a Boston-area company, which sounds like a standard formula, except that this particular company has a Paris office and had run both of its clinical trials in France. Furthermore, much of Genetix’ initial market was likely to be in Europe, which has a much higher number of beta-thalassemia patients for reasons of genetics. The gene that confers susceptibility is most widespread in the Mediterranean basin, the Middle East, southern China and in subtropical regions like Thailand.

But these confounding factors can also be seen as advantages. Leschly sees the company as a more international play than a European one, with an upcoming trial in ALD slated to recruit patients in the United States as well as in France. “France is a pioneer in gene therapy,” Leschly said. For example, due to France’s history as a hotbed of gene therapy basic and clinical research, not to mention the French location of both of the company’s key scientific advisors, founder Dr. Philippe Leboulch and Dr. Patrick Aubourg, the company’s French “second home” is a plus. “The future,” with the company headquarters remaining in Cambridge and trials in North America, Europe and possibly beyond, “is global.”

Perhaps the largest obstacle overcome by Genetix has to do with its field: gene therapy, the replacement in the body of “faulty” genes with functioning copies of the same genes. There is something inherently appealing about such a rewriting of the genetic code, awaking visions of overcoming disease by a process similar to debugging a computer program. That is just one of many reasons why venture investors – and reporters, granting agencies and others – fell so hard for gene therapy. And yet the field has not lived up to its promise – indeed, it has in many cases been a major disappointment.

By 2003, when the company’s three investors began to converge on the company prior to the 2004 investment round, gene therapy had fallen so far that it seemed nearly unfinanceable. In our venture capital days, we were told by one wise source in VC that finding co-investors for our deal would turn out to be impossible. “Every fund has at least one investor who has been burned by a gene therapy investment,” this advisor said. “That guy, or gal, whoever it is, will make sure to step and kill this deal.” That is pretty close to what happened. Many investors were shown Genetix and very few of them took more than a cursory look.

Coming full circle
Three key developments have ensured that a gene therapy investment today is merely ‘edgy’ (the way it would be to move into a ‘marginal’ neighborhood, say, expecting it to gentrify) and no longer perceived as ‘clinically insane.’ These include: Genetix’ own clinical success with, apparently, no safety issues; some other positive trial results by venture-backed companies like Ceregene , AMT, and most recently and most lucratively, the publicly traded Transgene, a France-based company that just this past Wednesday, March 10, announced a licensing deal for its gene therapy product in oncology with Novartis for a potential – and staggering – $955 million (admittedly this number is largely payable only upon success in Phase 3 and beyond). The Transgene-Novartis deal is one of the largest deals ever for a gene therapy company and reflects a critical shift on the part of the pharmaceutical industry. The media is beginning to cover the resurgence of gene therapy, for example in the Science article “A Comeback for Gene Therapy.”

Not only has gene therapy come full circle but pharma interest in orphan diseases is at an all-time high. Once considered pariahs in an industry more interested in “blockbuster” drugs, orphan offerings are front and center for several major pharmaceutical companies, including Novartis (with the Transgene deal, GSK (with its recent deal with Prosensa on Duchenne Muscular Dystrophy and Pfizer with its deal with Protalix on Gaucher’s disease. FDA has even begun actively soliciting orphan drug applications from biotech and pharmaceutical companies, holding workshops around the country, the Wall Street Journal reported this week.

Finally, Genetix’ gene therapies are autologous, that is, patient-specific. This treatment modality, a true example of “personalized medicine, has gained strongly in popularity among pharmaceutical companies as the blockbuster window has closed.The relatively high manufacturing costs for a therapy that has to be created one patient at a time are in this case offset by the likely pricing. In the case of Genzyme’s enzyme replacement products, the reimbursements run into the hundreds of thousands of US dollars per year for therapies that must be provided for life. Genetix’ treatments, by contrast, could potentially be effective when delivered only once and might result in a lifelong or at least long-term response.

Obstacle	Factor(s) that changed
Gene therapy out of favor	Clinical data! Safety shown over years
CEO resigned in 2006	New talent hired; rest of team performed strongly; VCs took hands-on role
Market not “blockbuster” enough	Blockbuster opportunities faded; orphan disease and personalized med. came into vogue based among other things on Genzyme’s strong results
Capital drought	Company reduced burn but obtained meaningful clinical data; VCs were committed and persistent
Overcoming new investor’s bias toward founding “own” companies	An “amazing” and “unusual” opportunity with TWO programs showing proof of concept in “humans, not mice, not dogs” says lead investor Leschly

The challenge ahead
Leschly cautioned that the Genetix story is just beginning. “As excited as we are about this financing, we have to remind ourselves that it is early and that there are a lot of hurdles,” he said. The company must prepare for larger trials and for rapidly advancing two therapies for very different diseases at the same time. For Leschly, the “very, very promising results” in the early trials – results which, he pointed out, come with the caveat that they were obtained in small numbers of patients, offer “a basis to build a meaningful presence” in orphan disease therapy. Leschly recognizes that especially in disease states like thalassemia and sickle cell disease, large numbers of patients live in areas outside of reimbursed markets such as North America and Europe. Therefore, it will be important to explore collaborations with disease foundations as well as other non-dilutive financing options to expand the population for whom treatment is financially within reach.

For us, the Genetix financing is an encouraging sign that biotech is returning to its roots. There are two aspects to this: for one, biotech companies like Genentech, Amgen and especially Genzyme were initially created to meet unmet medical need wherever it existed and not only in “blockbuster” markets. For another, the renaissance in gene therapy is well on the way to proving that all the early efforts were not for naught. Like antibodies before it, gene therapy seems to have just needed much more time to mature. And it took stories like GSK becoming an orphan drug-focused company, or Novartis staking a claim on a gene therapy for cancer, to show that Turnaround King Genetix will not be alone if and when it completes its improbable recovery. The real rewards are still to come.

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Disclaimers
When he was a venture investor with TVM Capital in 2003, Steve Dickman, in collaboration with his TVM colleague Dr. Axel Polack, worked together on investing in Genetix before the company was eventually funded by TVM Capital along with ABN AMRO (now called Forbion Capital) and Easton-Hunt (now called Easton Capital) in a 2004 venture round.

CBT Advisors provided fund-raising materials to Genetix during the raising of the Series B round just announced.

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