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Foundation’s IPO Isn’t Bubbly, It’s a Jolt for Genomic Diagnostics

By Steve Dickman, CEO, CBT Advisors

September 25, 2013

(Originally published on Xconomy)

Foundation Medicine, the Cambridge, MA-based cancer diagnostic company, reminded me of the 2000 genomics bubble when it went public this week. The company sold its IPO shares at $18, and the stock almost doubled in its first day of trading, closing at $35.35, a 96% increase in stock price off an already bumped-up IPO price. That gives the company a market value of almost $1 billion.

Frothy, yes, but not quite bubbly

First day froth? Or sustainable value creation?

This impressive rise represents one of two potential outcomes. It could be that either genomics is here to stay as a diagnostic tool and Foundation is a harbinger of this change. Or, this could be the peak of another bubble featuring a money-losing company hyped by scientific leaders but still unproven in the marketplace. In that view, Foundation’s IPO is not just hazardous to the company’s most recent investors. It may be damaging to the whole field of genomics-based healthcare and to biotech stocks in general.

Foundation faces a long road but I am inclined to take the optimistic view. Genome sequencing is a powerful technology that has declined so much in price, so fast, that it has outpaced Moore’s law. The real value in sequencing is not the raw data, which are becoming a commodity, but rather the interpretation of that data for specific patients. In ways I will explain below, Foundation sits just at the nexus of that new data and its own increasingly powerful interpretation engine.

My first take-home from FMI’s monster IPO is, don’t worry so much about the company’s past losses ($22.4 million as of 2012, according to the IPO prospectus). Look instead at the amount of money raised ($106 million on top of $99 million raised since the company was founded in 2009) and consider its practical value: research funding.

When the 2000 genomics “bubble” was inflated, companies such as Incyte, Human Genome Sciences, Celera and Sequenom raised eye-popping amounts of cash at even more eye-popping valuations (one day in February, 2000, Sequenom hit a $4 billion market cap on nearly nonexistent revenue), there was no way for that money to create value in a reasonable time frame. What followed was a decade of retrenchment as one company after another started the arduous process of home-growing its own drugs (Incyte has notably succeeded at this) or shifting to a more sustainable business (such as Sequenom’s prenatal  test for Down syndrome and other chromosomal abnormalities).

The fresh money for Foundation Medicine, plus the inevitable follow-on offerings, will fuel a powerful research platform that is in a position to discover and then apply a number of new insights into how genetics influence patients’ response to cancer therapies. That, in turn, has the chance to improve the success rate for physicians in treating cancer using both marketed and experimental drugs.

My second take-home is that the large fundraising gives the company a greater survivability in the absence (until now) of reimbursement. You don’t have to read the prospectus to know that one of the key risk factors for FMI is the lack of buy-in from payers. As Ben Fidler of Xconomy wrote, “Foundation began selling its diagnostic, known as FoundationOne, at the American Society of Clinical Oncologists in June, 2012. And while demand has been rampant—-some 1,500 physicians in about 25 countries have ordered the test since—FoundationOne isn’t covered by any plan. Rather, coverage is determined on a case-by-case basis, meaning the company is likely going to have to gather meaningful evidence from clinical trials to prove to payers that its test is making a big difference for patients.” Reimbursement is still a hurdle, probably the biggest. Hold a big IPO and voila – funding is there for these trials.

Personally, I am thrilled that Foundation’s approach reflects a strong shift toward using personal genetic tests (in this case whole genome sequencing) to drive medical care. The term “personalized medicine” has been overused for so long as to become a sad cliché. But changing a patient’s treatment based on a genetic test and especially initiating a treatment that would otherwise not have even been considered – that is a watershed. An idea like Foundation’s, in which you scan the genome of an individual patient for variations in more than 200 genes, is a medical reality today that was barely even conceivable five years ago.

Furthermore, Foundation is barely dependent on its test revenues at the moment. The bulk of its revenues (something like 85%, I’ve heard) still come from partnerships with pharmaceutical companies. Its investors, both private and public, may well grant Foundation the time it will need to achieve reimbursement and make a compelling case to enough physicians to drive test adoption and growth.

Critics have correctly observed that there is little evidence for the utility of most of the genes on Foundation’s first panel, FoundationOne. Something like two hundred genes are assayed when barely twenty are known to be drivers of cancer. As I understand it, this is where Foundation’s entrepreneurial strategy comes into play. By aggregating data on the next 180 genes rather than focusing just on the 20 genes of known relevance to cancer patients, Foundation hopes to bring a much greater degree of clarity and utility to cancer therapy, which has traditionally been based on a brutal process of trial-and-error. Many patients (and their physicians) don’t have enough time or scientific insight to go through a series of single-gene diagnostic tests to find out which drug might be best for them. Even if patients demanded this one-at-a-time approach, it is not at all part of current medical practice. For the sake of cancer patients, I hope Foundation Medicine succeeds with its broader approach.

Critics have also observed that Foundation’s business model is predicated on the company being paid $5,000 or more for a test (according to Xconomy, recently out-of-pocket payment by patients or one-off payments from insurers have been running more at the $3,800 level). But the cost of sequencing is very low! Can’t the test be less expensive? Where does all that money go? The answer, to me, is clear: the money goes to research. The model reminds me of crowdsourcing, a funding mechanism that has just become a viable mechanism for funding biotech companies. In Foundation’s case, it is a way to raise money from people who have a real need (cancer patients), provide them with sufficient value (sequences of genes with known implications for cancer therapy) and then increase the incremental value of the test for the next round of patients.

To succeed, this approach has to scale. That is, insights obtained from the first 3,000 patients have to become more valuable for the next 30,000 and so on. There have to be increasing returns or else there will be a backlash at the level of pricing and adoption. In the absence of reimbursement, the only way to make this work is to raise a lot of money (through IPOs, secondary share offerings, pharmaceutical industry partnerships, self-pay from patients, international adoption or whatever) and pour it back into the company. The field of genomics spent several years wandering in the wilderness of “genome-wide association studies” (GWAS) which were supposed to identify canonical mutations that affected large numbers of individuals. That barely turned out to be the case. Now mutation hunters have come to the opposite conclusion: it is individual mutations, perhaps even those with an “n” of just one person, that will matter the most in improving cancer therapy. The company or entity that builds the largest database of these mutations – and applies them in cases where there is an “n” of two or 20 – will become a go-to source for insight into specific patients’ cancers.

There are three dangers here: first, that scaling cannot be achieved quickly enough to justify reimbursement. The tests Foundation is doing are by their very nature outside of the parameters such as sensitivity and specificity that are traditional metrics for payers. So their results have to be so overwhelmingly good that payers change the rules in order to reimburse for the tests. That is likely to happen slowly if it happens at all.

Second, unless great insights arise from the additional genes, Foundation – with no real intellectual property on the content of its assay – will fall prey to commodity entrants offering tests at much lower price points. That is reminiscent of the dynamic I see playing out in non-invasive prenatal testing (NIPT).

Third, what if Foundation succeeds and gains insights from its database (paid for by patients) that lead to a true competitive advantage? Won’t there be a clamor for public release of Foundation’s data, similar to what happened when Myriad Genetics lost its Supreme Court case and no longer had patent coverage over its BRCA1/2 test? It will be interesting to see this play out.

In my view, Foundation’s IPO is a turning point that will only boost the many efforts to make the genome a powerful ally in the fight against cancer. Given the massive drop in sequencing costs and today’s vote of confidence, it will not take too long for similar insights into other diseases to follow.

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Genetix Pharmaceuticals, A Gene Therapy Company (!), Takes Down $35 million in a Compelling Turnaround Story

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).

Nick Leschly, Third Rock Ventures  (Image courtesy Third Rock Ventures)

Nick Leschly, Third Rock Ventures (Image courtesy Third Rock Ventures)

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.

Figure 1: How Genetix’ gene therapy works

Figure 1: How Genetix’ gene therapy works (Graphic courtesy Genetix/CBT Advisors)

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.”

Figure 2: Science published this graphic in 1998 with an article of Steve Dickman

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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