Tag Archives: venture capital

Sure, Biotech is Hot. But Are Biotech IPOs a Good Investment?

A Guest Post to Boston Biotech Watch by Christoph Bieri, Managing Partner, Kurmann Partners*

This year will see an unprecedented number of biotech IPOs at a record high investment volume. But  is it wise to invest in them?

We tracked the performance of about 350 biotech and life sciences companies which listed on NASDAQ, NYSE, LSE/AIM and the Swiss Exchange SIX beginning in 2000.  As shown in Figure 1 below, we would divide those fourteen years into four distinct phases:

  • The years 2000 and 2001, which we call the “millennium vintage”
  • The years 2003 to 2007, the “post-millennium”
  • The years 2010 to 2012, the “post-Lehman”
  • The current period, the “13/14 boom”

Figure 1: Funds invested in biotech IPOs, cumulative, Jan. 1, 2000 - Oct. 9, 2014


We then tried to estimate the performance of each newly issued stock. Our model assumed that somebody invested at the IPO and held the shares until today, until the company was bought or until it went out of business. We calculated the gains or losses made under these assumptions, correcting for stock splits where applicable. Grouping the individual performance by the date of IPO in the above phases results in Figure 2:

Figure 2: Performance by vintage of biotech IPOs


You can read the bar graph top to bottom. The top blue bar represents the total of all amounts invested at the IPO. This is followed in light green with the total appreciation (or depreciation) of the share price until today (October, 2014) if the respective company is still listed. In case the company was sold, the next bar (in red or green) shows the profit or loss the initial investors made.  The next red bar reflects the total funds invested in those companies that later went bankrupt. The net of all of these changes is shown above as gain or loss in percentage of the total investments made.

As you can see, the millennium vintage did not perform well at all. In our (simplified) assessment, investors on average took a loss. According to our analysis, the best vintage was those companies that went public in the extremely risk-averse climate post the 2008 Lehman Brothers bankruptcy. As of today, those investments have almost doubled.

We admit that there are many caveats to our analysis. The biggest factor skewing this analysis is what we see as the current valuation inflation, which has had a disproportionate effect on those companies that listed in the post-Lehman phase (hence the big contribution of “share appreciations” to the net gain). Also, those companies which went public post-Lehman had less time to go out of business, so to speak. We may have missed stock splits (reverse or “real”) or some of the other tools which companies resort to when in dire straits. We did not account for cash pay-outs, and secondary offerings, non-dilutive funding or licensing transactions are also not included. But we think we still got a pretty clear picture.

Figure 3 puts the current climate into context. This chart shows IPOs on a time axis. The bubbles indicate the size of the initial offering in millions of US dollars. The y-axis gives the stock appreciation as of today (or until acquisition) on a logarithmic scale. Not surprisingly, the “cloud” of new IPOs of the 13/14 boom are still clustered around the 1x mark on the y-axis since they have not gained or lost much value in this short time. We can also see the diverse fate of the millennium vintage, when a similar IPO boom took place.

The IPO weather forecast: Clouds on the horizon?


Is the current frenzy just the “return to a healthy normal”, as some industry leaders say? Or is it “the folly of year 2000 all over again”, as some others state?  We don’t know.

Biotech always makes for exciting investments, in all shades of the word “exciting”. The combination of money, science and the potential to be part of something really new and important may be satisfying all by itself for some private investors. So there is the fun factor (if you can bear the potential losses). Those who intend to profit will spread their risk broadly and time their investments carefully.

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*Kurmann Partners is an M&A and strategy advisory firm based in Basel, Switzerland, advising globally on mid-market transactions in the Pharma, Biotech and MedTech industries.



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Biotech VCs, Stung by Startup Returns, Elbow into Royalty Financing

By Steve Dickman, CEO, CBT Advisors

Aug. 21, 2013

(Originally published on Xconomy)

The new landscape for venture capital investing does not seem to leave much room for classic company formation. Investor after investor has shut down or moved beyond startups into what seem like greener pastures.

So it should come as no surprise that at least a few VC firms are now expanding into the royalty space, as shown by a deal announced this week. Aisling Capital and Clarus Ventures, two top-tier VC firms, acquired 20 percent of the royalty stream created by sales of ibrutinib, a novel tyrosine kinase inhibitor developed by Pharmacyclics (NASDAQ: PCYC) and partnered with Johnson & Johnson (NYSE: JNJ) for use in B-cell malignancies such as chronic lymphocytic leukemia (CLL).

According to the press release, Aisling and Clarus each invested $48.5 million for matching 10 percent shares of a $485 million royalty-financing deal that Royalty Pharma struck last month with Quest Diagnostics Inc. (NASDAQ: DGX). Ibrutinib recently was designated by FDA as a “breakthrough” therapy. Analysts cited by FierceBiotech expect the drug to hit $5 billion in revenues in a short time, making the royalty stream very valuable. Under a deal structured like this, Aisling and Clarus are essentially wagering that the drug will be a blockbuster, and will provide them much more than $48.5 million in steady royalties over the lifetime of the product’s patent – if they or their limited partners do not choose to take profits first. It would not surprise me to see some of the royalties later bought back at higher prices by Royalty Pharma or acquired by third parties.

There is no doubt in my mind that the choice to invest in royalties had to be explicitly approved by the funds’ limited partners (LPs), either in the fund charter or, more likely, in an ad hoc fashion before this deal was done. I can’t imagine there was much resistance when the Aisling and Clarus general partners described the risk-reward in the ibrutinib deal. The LPs probably asked them to do more of this type of investing, given the product’s high-reward/low-risk profile.

The announcement answered two questions in my mind: first, what will VC funds do now that the returns make it harder to justify raising more money to support traditional models? Second, what will royalty funds do to make money now that they are facing a more efficient (read: barbarously competitive) market for the royalties of approved drugs?

Royalty deals as likely winners

In some ways this deal looks like a one-off: maturing VC funds that need to deploy large amounts of capital setting themselves up for near-term (if more modest) returns in lieu of typical home-run, long-term bets on early-stage biotech. Once they get a few of these out of their system, the VCs will swing back to their true nature as swashbuckling, entrepreneurial investors, right?

I am not so sure. In fact, I would argue that actually the royalty play illustrates the “new normal” in life sciences VC investing: a search for investments with short time horizons; a lack of faith in preclinical or even phase I molecules and the teams developing them; and an irresistible pull to “sure-fire” deals of a more financial nature.[1]

These are the same trends that have led to the rise of the asset-based strategies deployed by life science VC funds like Atlas Venture and Index Ventures. Those strategies build portfolios of assets, rather than management teams, and flexibly deploy those teams in ways that can be changed depending on the success of the molecules.

The trends have also led to a much more active market in secondary positions of VC funds. In secondary investing, funds buy up positions in VC-backed companies. They buy them either from general partners who are exiting the business or choosing not to manage older funds all the way to exit; or from limited partners who prefer up-front cash to hoping for later exits from their illiquid VC investments. Sales in the secondary market of overall private equity investments, including those in venture capital, were reported to hit a record $26 billion in 2012.

Some long-time VCs have told me recently that their firms are promising limited partners to do secondary investing as part of their core business, just as secondary funds such as Omega Funds have branched out into direct investing. Whereas royalty investing is more of a numbers game, secondary investing to me feels like a true hybrid of VC skills (assessing value in early-stage or mid-stage companies and managing portfolios of such investments skillfully) and financial engineering skills (pricing the portfolios well enough to stave off competition and still leave room for an arbitrage).

Late last year, a client approached my firm CBT Advisors and asked us to make a case for investing in life sciences venture capital. The client, a family office with a private equity bent, was preparing to deploy some capital in life sciences and wanted to know what strategy made the most sense for a potential limited partner.

CBT Advisors teamed up with Fred Meyer, another Boston-area consultant, and the team carried out some strategic and financial analysis based on our knowledge of the industry and on the limited available data. The upshot of our work: there are several alternatives, including secondary investments, that can provide what look like better returns than VC (especially when considering the 10-year historical figures) at what looks like considerably less risk.

One of the approaches on our list was royalty investing. We concluded that, strictly from a risk/return perspective, royalty firms were a very attractive way to participate in pharmaceutical finance. Royalty Pharma, in particular, has built a stellar track record investing in the royalties on marketed drugs such as sitagliptin (Januvia), a diabetes drug from Merck that accounted for $5.7 billion in revenue in 2012 and adalimumab (Humira), a treatment from AbbVie for autoimmune diseases that recently hit  $9.3 billion in annual revenue, making it one of the best-selling drugs of all time.

But Royalty is at some risk of becoming a victim of its own success. The fund, which had little competition when it was founded in 1996, has grown to over $10 billion in assets, and it is facing a much more competitive market for royalty streams of approved drugs.

So the announcement of what is, according to VentureWire (paywall), one of Royalty’s first three investments in a not-yet-approved drug was not a total surprise. Today’s press release completes the picture. Royalty Pharma got an assist on the due diligence on ibrutinib from Aisling and Clarus and the VC funds got a piece of the action.

The end of VC? Hardly

Where does this all end? To me, it does not spell the end of VC as we know it. To the contrary. Even those investors (like Aisling and Clarus) making headlines for investing in royalties are still actively looking at direct investments into startups and (especially) later-stage companies. At the end of the day, most venture capitalists like these funds who have made it to 2013 with any dry powder at all are in a position to make the case that early-stage, high-risk investing will continue to play out well for selected investors. The recent wide-open biotech IPO window has certainly bolstered their case.

Part of my argument has to do with both the skill sets and the personal wishes of VCs, who are usually more adept at (and more interested in) the messy reality of picking management teams, intellectual property and assets that will make companies work instead of primarily crunching the numbers. Many VCs would rather find other jobs if all that was left in VC was financial analysis.

But more of it has to do with the returns. When I look at the stellar track records of folks who have recently raised funds (Jean George, Mike Carusi, Jim Broderick, Chris Christofferson and Hank Plain of Lightstone Ventures; Martin Murphy of Syncona), I am encouraged in thinking that royalty investing is just one of many ways that VCs are finding to raise new funds that they hope will make money for investors. First, the ibrutinib deal has to go well, along with others like it that are undoubtedly in the works. At least in this case, the likelihood of ibrutinib becoming a commercial success is high and the timeline is short. If the drug and deal do, in fact, succeed, then the benefits will accrue to the entire ecosystem.

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[1] VentureWire (paywall) quoted Clarus managing director Nick Simon saying that Clarus invests “opportunistically” in royalties and that late last decade, Clarus had obtained a royalty interest in Lexiscan, a medication used in cardiac stress testing, and later sold that interest to Royalty Pharma.

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“Alternatives to VC” panel video (actually very much about VC, especially in Europe) – BioEurope Spring, March 2013

This is not a traditional post but rather a link to a video of a fun panel that I moderated at BioEurope Spring in Barcelona in March, 2013. The discussion touched on several hot issues in funding innovation in life sciences, especially translational research.

Here’s the link: http://www.partnering360.com/insight/showroom/id/0_p9ec32p3

To help you find points of interest, I’m listing some approximate time stamps below.

PANEL DATE: March 11, 2013


With the shortage of classical VC investing and the ongoing boom in early opportunities and strong entrepreneurs, traditional VC is beginning to share the spotlight with alternative models. For therapeutics companies that have already raised some capital or especially those that have products in the clinic, there are some new alternatives to choose from, including option deals, one-product financings from VCs, and pre-IPO royalty-based financing.

Steve Dickman – CEO, CBT Advisors


  • Sinclair Dunlop – Managing Partner, Rock Spring Ventures
  • Joël Jean-Mairet – General Partner, Ysios Capital
  • Kevin Johnson – Partner, Index Ventures
  • Melissa Stevens – Deputy Executive Director, FasterCures


  • 0:00 Panel intro (Steve Dickman)
  • 3:19 FasterCures (Melissa Stevens), channeling non-dilutive foundation cash into therapy development
  • 4:29 Index Ventures (Kevin Johnson) intro and description of pharma-backed fund
  • 4:50 Rock Spring (Sinclair Dunlop) intro – UK VC
  • 5:20 Ysios (Joel Jean-Mairet) intro – Spanish-European VC
  • 7:25 What are the mechanics of asset-based financings? We’ve done 27 of them… (Johnson)
  • 12:15 Ysios (Jean-Mairet) view on asset-based financing “experiment” in molecular diagnostics
  • 14:00 Why Index would love to invest in diagnostics but can’t do it (Johnson)
  • 18:30 How things are better in lean, asset-based companies (Johnson) “Working in a tinpot biotech is more fun” than in an old-fashioned fully integrated company.
  • 19:55 How Rock Spring (Dunlop) does early-stage platforms & products
  • 21:15 Refinancing risk has grown (Jean-Mairet)
  • 22:45 How times have changed in LS VC (Jean-Mairet)
  • 24:15 The key to avoiding “zombie” companies – suicide (Johnson)
  • 25:40 More (interesting!) details on FasterCures and how foundations are changing the investing game (Stevens)
  • 28:48 National MS Society’s “Fast Forward” venture-like group (Stevens)
  • 30:55 CF Foundation and its Vertex and now Pfizer relationships (Stevens)
  • 32:55 American Heart Association (AHA) learning more about venture philanthropy (Stevens)
  • 36:15 Venture philanthropy in Europe (Dunlop)
  • 46:15 Tech transfer report card (Dickman, panel)
  • 57:00 How European & Israeli seed funds are trying to bridge the venture gap (panel)
  • 1:04:00 How to ensure succession in biotech (Johnson, panel)
  • 1:08:00 Why there are not more young entrepreneurs in life sciences (Johnson)
  • 1:15:00 The Andrew Lo “Megafund”: will it fly (Stevens, panel)
  • 1:18:00 Other debt models for supporting translational work (Jean-Mairet)
  • 1:22:00 Cross-border seed-stage investing (Dickman)

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“Quant” VC Correlation Ventures: VC’s New “Dream Date”

Those venture capitalists lucky enough to remain in the drastically smaller pack are constantly cruising for the perfect co-investor. Like the perfect spouse, it’s hard to imagine finding it all in one person:

  • Quick decision. Even if it is a no, I want to hear it quickly.
  • Ready money. If it is yes, please be ready to close very soon.
  • No diligence. If a lead investor has already “kicked the tires” on the deal, don’t you do it too. Trust their diligence. Don’t bother our key customers or partners.
  • No backtalk. We already have plenty of board members and lots of opinions. Be a board observer. Or, better yet, trust us. Don’t come to the board meetings at all.
       When Managing Partner David Coats and his colleagues founded San Diego-based Correlation Ventures, they had sat on the other side of the table – lead investors looking for co-investors. When they went looking for a fund concept, applicable in both life sciences and high-tech VC, that would both be new and would match the needs of the market, they decided to explore how such a “perfect” co-investor could also make money. They deployed heavy-duty predictive analytics on what they claim is one of the most complete databases of venture capital financings and outcomes, including the fifty thousand deals in their database – ninety per cent of VC deals closed since 1987. This information was scrounged the hard way, according to this recent post on the Nature blog site: Correlation forged relationships with Dow Jones and multiple VC firms to access historical non-public data. That way, they were able to find a mathematical model, described below, that should lead to a strong return while still offering all the advantages listed above.

        Fund-raising went surprisingly well, given the current constrained environment. Correlation Ventures blew past its $150 million target and raised $165 million. This amount will be invested over three to four years in up to fifty companies in chunks as small as $250,000 or as large as $4 million over the lifetime of a company. The list of limited partners (LPs), whose identities were not disclosed, reads like a who’s who: endowments, pension funds, family offices and individuals. I chatted with Coats at Convergence Forum in Chatham, MA, in May, 2011 and again at the JP Morgan conference last week. He said that the fund-raising was so successful in part because of the early and enthusiastic support of thirty top-tier venture fund partners who themselves wrote checks. That sort of endorsement opened doors with limited partners.

Correlation had a first closing in 2010 and started investing then. Two of its first thirteen investments are in the healthcare space, one in medical devices and one in therapeutics.

Lies, damn lies and…

So what’s the secret sauce? Statistical analysis. Correlation feeds in data on all the variables, including co-investors, the level of management experience, and, especially outcomes such as internal rate of return and multiple. Correlation then runs multiple regression analyses and identifies those variables that account for the most variance.

Cartoon on regression analysis       Surprisingly, success in individual deals does not correlate all that well with the “top-tier” nature of the VCs involved. “When you look who the winners are in VC,” Coats explained, “the industry is not nearly as concentrated [at the top tier] as some assume.” Coats is defining winners as investors whose deals generate large cash on cash multiples. In actual fact, he said, “The winners are widely dispersed and the distribution is not random. When you actually look at the data, every year there are hundreds of financings generating large multiples. Most, however, are small deals that are not even led by the top sixty VCs.” And in many of these deals, the lead investor winds up looking for a co-investor to fill out a round. That’s where Correlation comes in.

       It expects to push aside funds that might have contended for the open slot but would not make as quick a decision and that would not in any case have been as cost-effective for LPs. This implies that Correlation takes less carried interest and lower fund fees than “active” funds, but the fund understandably chooses not discuss its fees publicly.

The surprising distribution of success poses a dilemma for limited partners, who tend to invest again and again with those funds that have made them money. This is generally a rational hypothesis, Coats agrees, and a disproportionate number of Correlation’s investments are with top-tier firms. In that regard, Coats admits, Correlation is acting like a limited partner, maximizing relationships. However, Coats and his partners decided to broaden their fund diversity and go after the long tail of investors and deals that are not necessarily in the spotlight.

“The big ‘aha,’” he explained, was realizing that “many big [returns] come from financings that are undersubscribed or take a long time to close.” This is due to a pair of what Coats calls “natural inefficiencies.” One inefficiency arises when funds without long track records find good deals and have trouble finding appropriate co-investors. Another occurs in deal selection by funds that may not be seeing the best opportunities. In a conservative time like the past five years, these inefficiencies would seem to have increased as funds become more conservative about who they follow into deals and as there are fewer and fewer “blue-chip” co-investors to choose from.

The beauty of the Correlation model, according to Coats, is that “the top fifty VC firms could shut down and we believe we would still generate strong returns.” There would be enough deal flow and plenty of winners. It certainly is an alternative approach to an otherwise confounding market in which much of the VC muscle now seems to be concentrated at the top.

Piggybacking to success

Won’t this model, if successful, spawn competitors? And will the inevitable rise of additional “quant” VC funds piggybacking on the success of others distort the market in ways that limit or even destroy the yield? Look at what the Moneyball approach did to major league baseball: the team that applied the statistical analysis of player performance, the Oakland Athletics, had an initial advantage despite having less to invest in superstar players. This worked fine until their approach was cloned by virtually every other major league team, returning the Athletics to mediocrity and the league to its previous imbalance of power.

Perfect date image

But will he give me deal flow in the morning?

There will be imitators. In VC, every new fund concept that makes money attracts them. Just look at the proliferation – some would call it an explosion – in royalty-based funds (for example, the new billion-dollar fund raised by Cowen earlier this month). What about the overall impact if copycats generate “clean-room” (reverse-engineered) co-investing models and what if every syndicate starts to have a quant fund as a co-investor? Predictably, Coats had a statistical answer for this. “We have already modeled what we think will happen to the VC industry with our success. Obviously there is greater unpredictability” if and when that happens.

It is too early to say for sure whether the Correlation model – or that of another new fund, Ulu Ventures in Palo Alto, which uses Bayesian analysis to predict the success of internet-enabled consumer and business service companies – will prove successful. After all, plenty of confounding factors not predictable by any model contribute to make investing risky. The risks are especially pronounced when the exit takes several years and the capital needs are as high as they are in life sciences. Holding times for VC-backed healthcare companies are up over five years now, according to this analysis by Silicon Valley Bank.

Some VCs I know see Correlation as a threat, at least to their egos. Others raise the specter of quant-based models such as the notorious Long-Term Capital Management, whose derivatives investing nearly brought down the world financial system in 1998. Please comment, publicly or privately – if there are enough comments, I will post a summary.

To me, their concern seems overblown. The model will work, or it won’t. Either way, Correlation will put more money into the market at a time when it is sorely needed. If the fund succeeds, and I tend to believe that it will, then the impact will be self-limiting. Some VC-backed companies will refuse to take additional money and those that do will not take so much that the market will be warped. One VC summed it up nicely: Correlation’s approach does not have to outperform that top ten or fifteen per cent of VC funds, which will likely keep doing better by actively selecting the best deals. It just has to perform well enough to deliver consistent “bottom of the top quartile” returns to its LPs.

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How Sanofi Could Start Off on the Right Foot in Cambridge

To: Chris Viehbacher, CEO, Sanofi Aventis
From: The Boston Biotech Community
Re: Making the Most of the Impending Merger

Dear Mr. Viehbacher,

In the heat of the discussions regarding an acquisition of Genzyme that now look like they are on track for rapid completion, you may not have had much time to think about exactly what will happen in the aftermath. Sure, you have plans for Genzyme’s products as well as for the teams and facilities involved in producing them. Those products—and their revenue streams—are presumably why you are buying the company.

But don’t forget Genzyme’s excellent R&D….If you downsize Genzyme the severe way that some expect, you might be throwing away enormous potential for future products to benefit human health.

To read the rest of today’s post, visit Xconomy here or copy-paste the link:


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Google Meets Healthcare VC

The Boston Biotech Watch Take on Google’s Healthcare Investing Approach Based on an Interview with Google Ventures’ Krishna Yeshwant

by Steve Dickman, CEO, CBT Advisors

Now that most private-company biotech CEOs have given up on “IPO window reopens” and “VC bidding war,” three of the most galvanizing words for someone raising money these days are “Google might invest.” Fund-raising for the CEO of a young biotech is always a war of attrition and corporate VC funds are the current weapons of choice.

It is one thing for cash-strapped management teams to want Google’s shiny new healthcare venture arm to invest. But should Google Ventures invest? Would it be the right thing for Google and the right thing for the sector if they came into more deals? We recently spoke to Google Ventures’ Cambridge-based healthcare representative Krishna Yeshwant, M.D., and we did some reading up on Google, including plowing through Ken Auletta’s widely reviewed (and bombastically titled) book Googled: The End of the World As We Know It“. Now here’s our take not just on what Google Ventures is doing in healthcare but also what we think they should be doing.

(One caveat is that the bulk of investments that Google Ventures will do in the coming years will not be in the healthcare space. The fund ambitiously intends to invest $100M a year into startups and new ventures, and the vast majority of those dollars will flow into IT-related endeavors. Our focus is on the fund’s life sciences- and healthcare-related activities.)

Google Ventures would seem to fit right into the current dominance of corporate VCs within the universe of VC life sciences dealmaking. On the surface, it’s another cash-flush corporate fund wading into VC as part of a parent-company mandate to move up the food chain and generate insight as well as returns. (As if the “generate returns” part isn’t hard enough by itself!)

We think Google Ventures (GV) actually does not fit the typical corporate VC mold at all and, based on its provenance, we think it has the potential to do amazing work. More about our views in a moment. First, we’ll look at how GV sees itself in the context of the deals they’ve already done. Then we will pull back and imagine what GV could do that might let it rise above and make a true mark on the healthcare investing and on healthcare itself.

Krishna Yeshwant photos

Krishna Yeshwant, photos courtesy Google web site

Aside from cleantech, most deals lately in the life sciences and healthcare space are in therapeutics. By and large, GV does not do those. “We are probably not the investors to go after moving a molecule from Phase 2 to Phase 3,” GV’s Yeshwant said. “We are not ready to have a portfolio of molecules. [Furthermore,] it would be hard for us to invest in a single molecule.”

So what does GV do? So far, platforms, as embodied by GV’s first two healthcare deals: Adimab and iPierian. Although the former is on the East Coast and the latter on the West Coast, these companies have a few things in common. Both are funded by top-tier life science investors (Polaris, SV Life Sciences, Orbimed in Adimab; Highland Capital, Kleiner Perkins, MPM Capital in iPierian). Both are working on groundbreaking platforms and own enormous amounts of potentially valuable IP. Adimab works on antibody therapeutics; iPierian is a novel stem-cell-biology company with a big vision for overhauling the current clinical trials process by offering streamlined testing on ex vivo platforms derived from a patient’s own stem cells. There is more about Adimab’s and iPierian’s approaches in these linked news articles from Xconomy.

The companies differ in some key ways that give us some insight into GV’s parameters: Adimab is run by a charismatic and battle-tested CEO, Tillman Gerngross, who successfully sold his previous company GlycoFi to Merck in 2008 for $400M and thereby provided investors with a return of 9X or better. So in some sense, it’s a “bet on the jockey” play in the crowded space of antibody platforms. By contrast, iPierian is run by an experienced but not-quite-so-high-profile CEO, Michael Venuti, and in fact let go of its previous CEO, John Walker, the month before GV invested.

Tillman Gerngross, Dartmouth engineer extraordinaire

Tillman Gerngross, Dartmouth engineer extraordinaire

“We are clearly attracted to platforms,” said Yeshwant. “We can understand the science, we see the potential {for large exits} based on the early examples that a platform can produce. If there is room for the platform to go beyond what it is doing, we can REALLY get excited about it.”

Avoiding the corporate VC “bump”

In these cases, GV’s preference was not to invest in pure startups but to wait until some experienced investors took the early risk. In one or both of these cases, GV may have “paid up” in order to get into the syndicate. Lest that leave the wrong impression, Yeshwant hastens to explain: “Almost everyone at Google Ventures has started companies and looked at VCs from the other side of the table,” said Yeshwant. “I remember that: when a corporate VC comes in, you look at it as an opportunity to bump your share price. The way we are trying to place Google Ventures is really as an institutional investor. The track record we want to create here is not ‘here comes Google, let’s get a bump on our valuation.’ People LIKE to have us at the table. We are a VC firm that has [access to] a host of programmers and statisticians. We have former programmers on our team who can help our portfolio. Take our user interface experts, for example. This may not be relevant for therapeutics platforms but it might be very relevant for healthcare IT companies. That programmer’s role is to be dropped into some of those companies and create value.”

And yet neither diagnostics nor healthcare IT seem to be on GV’s radar screen yet. Yeshwant: “We are excited about the diagnostics field. We are watching it very closely. [But w]e have yet to find a great investment.” Most life science VCs who have looked at diagnostics would say the same thing – many more have looked than have actually done a deal.

When speaking of healthcare IT, Yeshwant reflects the melancholy wisdom of someone who knows the US healthcare system all too well. Yeshwant is in fact not only an experienced programmer and IT entrepreneur who has founded two companies that were sold to big IT players; he is also a current resident at Harvard Medical School working at Brigham & Women’s Hospital. “The healthcare market still does not really make sense [to us as venture investors]. Working in a hospital, we [as physicians] try our best to do what is right for the patient but the patient is only one of our customers. That distorts what [GV] as a service business [or investor in service businesses] can do. That setup does not let us get into this natural harmony of a company that can really serve the needs of the consumer and succeed because they did a good job by the consumer. As a medical doctor, I want to serve my patients, but it is very difficult to conceive of a great IT company [in this space]. There are so many needs IT can serve that would help patients. But what is the business model that does not involve so many confusing different stakeholders?”

Yeshwant has similar reservations about companies developing electronic medical records (EMRs) despite the inclusion of EMR subsidies in the stimulus and health care reform packages. “Despite a lot of money coming in from the government, it is not clear that the opportunity is really there yet,” he said. “Yes, that government money will drive M&A activity and there are ideas being thrown back and forth. We do not feel compelled yet by the companies we have seen.”

A common theme across all areas in which GV is considering is its very high bar for investing. Indeed, it has been nearly three months since our conversation with Yeshwant and GV has not announced a single new life sciences deal. Although it is inappropriate to draw conclusions from this absence of announcements (a flurry of new deals could be announced next week), the fund’s measured pace reflects the realities of being a VC in 2010 – when a lot fewer new-money deals are closing than in the years between, say, 2003 and 2007 – and the realities of being Google.

When we asked Yeshwant whether Google Ventures would prefer to start companies on its own rather than wait to be shown “doable deals” by the VCs in its network, Yeshwant cited the fund’s need to stay on the right side of its sole limited partner, Google itself: “Especially in healthcare, we are still looking for those [right] companies [for us]. We are looking for the entrepreneurs, the teams that will make those companies great. We are meeting a bunch of entrepreneurs and VC folks. If there is something we can put a good thesis around, then, yes we would be open to starting something, seeding a company and incubating it. We are still a bit early – we’d hate to hastily put something like that together and have it fall apart. That would sour Google proper. So for now we have to have a very high threshhold.”

Reluctance? What reluctance?

Googled book jacketWe think the threshhold does not have to be so high. This is where our recommendation comes in. From reading Ken Auletta’s book

Googled: The End of the World As We Know It, we were reminded of Google’s roots and its winding path to $23 billion in 2009 revenues. The company is an advertising behemoth with now 99% of those revenues coming from ad sales. And the ethos underlying Google’s birth is still true for its many new ventures:

  • We are engineers.
  • We are scientists.
  • We want to change the world.

Auletta’s book shows that Google is all about two mentalities: the engineer on one hand; the consumer-minded marketeer on the other. Sometimes – as when the founders built the first search engine – these are embodied in the same person. More often the roles are played by different people within the company’s leadership. The process works like this: the engineer comes up with an idea about what is technically doable and at the same time inherently elegant; the marketeer relentlessly orients it toward the “real user.” Born of a dynamic tension between these two forces, product after product has emerged from Google (think Google News, Google Earth, Gmail and Google Maps and) More recently, products and technologies have been acquired to take advantage of perceived opportunities (Android, YouTube).

Admittedly, it is hard to see how either mentality – better engineering, better consumer focus – will work in healthcare investing unless and until the healthcare system is reformed to be more responsive to incentives, more consumer-driven and especially more data-driven. The Google fund would seem to be able to apply its overwhelming leverage more efficiently in other fields – mobile computing, location-aware mobile apps, data storage and retrieval, even hardware – at least for now.

At the same time, the apparent hesitation by the GV team to do most healthcare deals and especially to start companies of its own – the “high bar” that Yeshwant was talking about in our interview – strikes us as inconsistent with the basic premise of the fund’s corporate parent. There seems to be a reluctance – if not an all-out refusal — to get too involved in truly risky deals that at the same time could be truly transformative. After all, in the letter that accompanied their 2004 IPO filing, the Google founders themselves wrote that they are looking to “make big investment bets” on technologies that have only a 10% chance of achieving a billion-dollar level of success. To paraphrase the loud, lascivious Sean Parker character in the hit movie “The Social Network,” “You guys think it’s all about making a million dollars?! It’s not. Think billion, baby!”


What we have heard from Yeshwant (echoed in this interview published by Wade Roush of Xconomy back in May, 2010) sounds not much different from what we hear from generic corporate VCs. What we’d love to see instead would look more like this:

  • More attention from the top: You want to change the world, Sergey & Larry? Pay attention to healthcare.
  • More experiments in combining bandwidth with healthcare. The Google project to “wire” a US city with ultrahighspeed broadband capability comes to mind. There have to be HC opportunities in that, perhaps in conjunction with an existing startup or a new one
  • Pioneering programs outside the developed world that, for relatively low initial investments can improve upon technologies initially developed here and roll them out in developing-country markets. Then, when the “boomerang” comes back (see our earlier post on “boomerang” technologies), Google will be thinking ahead about how to make money on these technologies in the developed world.
  • Start more companies! Forget the “high bar” and the “sour taste”. Instead, use your cachet and market power to start companies that might take a while to incubate but that can be truly transformative. This is already the approach of some top-tier US-based pharma company VC funds who have told us that they have grown impatient waiting for VC syndicates to form from the ever-shrinking pool of active VCs, so they’ve begun to dive in and fund the companies they want to see all by themselves.
  • Focus on diagnostics. Yes, Yeshwant said GV has not seen its favorite deal yet. But Yeshwant himself wrote an award-winning business plan for a company, Diagnostics for All, that could provide a valuable prototype. That company, which we highlighted in our blog post on “boomerang” technologies, is working on filter-paper-based diagnostic kits that can be manufactured for pennies. And Google founder Sergei Brin invested in personal genomics company 23andme.com, an investment now owned by Google itself.
  • See our “shopping list” below for specific opportunities

We hope GV does all of these things. Because of its potentially long time horizon and its amazing market power in search and advertising, GV has a huge advantage over traditional VC funds. The exit from most of these businesses will be traditional ones – IPO or, more likely, trade sale – but another potential exit could be the creation of a new business unit for Google.


But not as many as there used to be

Right now, with the convergence of high-powered data collection through genomics and better sensors; better analysis of that data using high-powered computing; and a reorientation of the healthcare system toward prevention, there is no limit to what an active and visionary investor could achieve. To us, the potential for improving actual human health by taking advantage of available data is endless – and Google’s own track record in improving data access makes it an ideal player.

Therefore we’d encourage Google Ventures as follows:

  • Think long-term, not near-term.
  • Think big, not small.
  • Focus more on strategic and societal benefit.
  • Reach for the stars.


  • Personalized medicine
  • Computer-aided medical devices
  • The “human-machine interface” in medical devices
  • Electronic medical records
  • Global health (investments in “boomerang” technologies would be perfect for GV – they will have the time & patience to wait for the boomerang to come back)
  • Analysis of “Big Data” e.g. from patients or payers that could rationalize the US healthcare system or piggyback on the move toward comparative effectiveness

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The Next Feeding Frenzy? VCs Rush Toward diagnostics (!?)

By Steve Dickman, CEO, CBT Advisors

There was a time not long ago when no amount of persuasion could have made most venture capitalists do a diagnostics deal. The reasons abounded: markets were too limited; margins were too low; and the number of potential acquirers too small. So imagine our surprise when the most upbeat session of this year’s c21 investor conference in late May was a panel discussion focused on – you guessed it – molecular diagnostics.

If this is not a feeding frenzy, then at least it seems to be a period of high marketability for private diagnostics companies seeking acquisition exits. Session chair Bill Kreidel of Ferghana Partners described four sell side diagnostics assignments his firm is working on for which multiple bidders had appeared.

What sells? Proprietary content, improvements in speed or sensitivity/specificity, robust datasets, and large markets. Who are the buyers? Clinical labs like Labcorp, naturally, but also instrumentation companies and companies in the imaging business like General Electric that “see diagnostics cannibalizing some of their revenue” and are trying to capture it back, said panelist Dion Madsen of Physic Ventures.

To read the rest of today’s post, visit In Vivo Blog here.

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VC From Both Sides: “Mastering the VC Game” by Jeffrey Bussgang

A Boston Biotech Watch Book Review

By Steve Dickman, CEO, CBT Advisors

Jeffrey Bussgang’s new book Mastering the VC Game: A Venture Capital Insider Reveals How to Get from Start-up to IPO on Your Terms is a welcome contribution to the literature surrounding venture capital and entrepreneurship. Entrepreneurs of all stripes, whether in healthcare or information technology or cleantech, stand to benefit from Bussgang’s highly personal and articulate look at the process of raising venture money.

Part how-to, part memoir and part reportage, Bussgang’s book offers a folksy stroll through the gardens and thickets of the venture funding process. What’s more, Bussgang, a general partner at Boston-based Flybridge Capital Partners adds transparency and rationality to many seemingly impenetrable aspects of it.

This is no small feat. To some entrepreneurs, VCs may sound like politicians and football coaches, using words without saying anything. Many entrepreneurs, especially after their business plans have been turned down a few times, see VCs as masters of the universe who talk in zen koans or SilValSpeak. Worse, they see VCs as vapid schemers afloat on oceans of “other people’s money” who will never understand businesses as well as those who run them.

MasteringTheVC_cover Therefore, the rare VC who, like Bussgang, has actually been a successful entrepreneur may come to enjoy a special place in the entrepreneur’s heart. “He’s been where I am” is the basis for what an entrepreneur hopes is the beginning of a beautiful business relationship. In my experience, this is a reasonable expectation. My VC office became a more fair-minded and understanding place when a seasoned entrepreneur joined the team.

Bussgang writes with passion and conviction about how to build a company as much as he does about how to fund one. He comes to authorship having worked with not one but two highly successful startups – first Open Market and then Upromise. Both had great exits (Bussgang writes that he was a “paper millionaire” by the age of 26) and Upromise is still on the scene, albeit as part of Sallie Mae, which acquired it in 2006. Bussgang had an early role in both, especially in Upromise. When he was there, he writes, he and his colleague nervously pitched to the legendary VC John Doerr of Kleiner Perkins. The company went on to win the investment.

It is Bussgang’s crossover history as well as his knack for reporting on the work of others that allows the book to overcome its largest obvious potential flaw: how can Bussgang consider himself a “master” when as an investor he has apparently had only one or two exits?

jeff_bussgangBussgang succeeds because he is a savvy reporter and scores fresh material from some key people in both life sciences and information technology e.g. LinkedIn’s Reid Hoffman; Constant Contact’s Gail Goodman; Sirtris’ Christoph Westphal; because he is not afraid to address tough issues, such as differences between a CEO and his or her board of directors; and because he displays an infectious ebullience in relating the ups and downs of both entrepreneurship and investing.

The book owes its existence to some extent to blogging; VC-bloggers are an unusual species, now growing in number, and Bussgang joined their ranks early with his blog Seeing Both Sides: VC Perspectives From a Former Enterpreneur. There, he found satisfaction in sharing some of the steps he took to make his companies successful in both of his careers. The book was a natural next step. Readers can expect pithy and readable answers to questions such as:

1). Should I raise angel money or VC money for my fledgling company? (Bussgang’s checklist is very helpful – I’ve put it to use already in my practice).

2). If I decide to take VC money, how do I approach VCs, by cold call or warm introduction? (The question gives away the answer…)

3). Several VCs are interested in my company; what criteria do I use to choose among them? (It’s not always about the money.)

4). What are the keys to getting along with the VCs who have already invested in my company? (One well-known entrepreneur quoted here called VCs “the hire I could never fire.”)

5). How up-front should I be with information about my company that might be damaging to the company should it fall into the wrong hands? (In my own experience, the answer is to err on the side of saying too much. Being too secretive is one of the worst mistakes I have seen entrepreneurs make.)

Book reviewers are notorious for airing their quibbles so here goes, but I hope they are taken not as a criticism but as a call to action for Bussgang and other VC bloggers everywhere:

It’s good that the book contains a “blog roll”; too bad that it does not go on to cite Twitter feeds about VC and entrepreneurship. The book makes no mention of web-based tools for tracking or understanding the VC industry (“TheFunded.com” comes to mind). There is no chapter – or even a quick aside – on how VC is likely to change (or has already changed) in response to the financial crisis of 2007-2008, a topic obsessing more than a few portfolio companies not to mention would-be entrepreneurs.

I don’t want to spoil it by saying too much more (though a 40-page chunk of the book is available free on Bussgang’s web site. What I will say is that, as an avid reader of the literature about VC (for a list of my previous faves, see below), I find Bussgang’s book to be a welcome addition. By both staying away from technical jargon and avoiding the temptation to reduce his advice to over-general sound bites, Bussgang threads the needle and we all benefit.

# # #

Steve Dickman’s favorite books on VC and entrepreneurship
The First $20 Million is Always the Hardest: A Novel by Po Bronson (1995) – Too sad to be funny and too funny to be sad, Bronson’s fictional tale of a 1990s computing startup rings true and should make the reader immediately pick up Bronson’s other books Nudist on the Late Shift and Bombardiers.

StartUp coverStartUp coverStartup: A Silicon Valley Adventure by Jerry Kaplan (1994) – A self-deprecating and illuminating account of Kaplan’s first venture, a Kleiner Perkins-backed “pentop computing” company that never turned a profit. In a New Yorker interview published after the book came out, Kleiner general partner and former company board member John Doerr said, “[The book] should have been called ‘Screw-Up.’”

Done Deals: Venture Capitalists Tell Their Stories by Udayan Gupta (ed.) (2000) – Like Bussgang’s book, this little-known and somewhat out-of-date work delivers real lessons from real VCs in their own words.)

Lerner Venture Capital Casebook coverVenture Capital and Private Equity: A Casebook by Josh Lerner, Felda Hardymon & Ann Leamon – Lerner, an excellent researcher and writer, is “the source” in academia on VC topics. This book is in the “case” format used at Harvard Business School, where Lerner teaches. The top-listed Amazon reviewer called it “perhaps the only book available on the subject matter.” It is more VC-focused than entrepreneur-focused.

eBoys cover
eBoys: The True Story of the Six Tall Men Who Backed eBay, Webvan and Other Billion-dollar Start-ups
by Randall Stross (2000) – An at times informative, at times adulatory look at life inside Benchmark Capital, one of the most financially successful venture funds of the 1995-2000 era. The anecdotes about funding eBay and WebVan are worth the price of the book.

Burn Rate coverBurn Rate: How I Survived the Gold Rush Years on the Internet by Michael Wolff (1998) – A hilarious and witty romp through the bubble-era world of revenue-free Silicon Alley media startups – Wolff, a long-time columnist for New York magazine, names names and the reader benefits.

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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.

# # #

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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Domain Sheds the VC Blues

by Steven Dickman, CEO, CBT Advisors

Looking for a silver lining in the current challenging climate for healthcare VC? Look no further than Domain Associates. Amid the exit drought brought on by the economic crisis, Domain has put together an impressive string of exits. By our count, Domain has had seventeen significant exits – 3x or better, sometimes much better – since 2005. Even after the doors slammed on IPOs in 2007 and the crisis hit in the fall of 2008, the exits have continued with 2009 acquisitions of BiPar (for up to $500 million to Sanofi), Calixa ($403 million to Cubist) and Corthera (up to $620 million to Novartis – see Table 1).

We hasten to add that we don’t know exactly how well Domain did in some of their investments in companies that had IPO “exits” or even if they have sold their shares. The true profitability of venture funds is known only to the funds themselves and some of their investors aka limited partners. For real accuracy, performance comparisons among venture funds should be made for funds raised in the same year (the “vintage funds” approach) and for funds with roughly the same sizes and strategies. Still, after looking at a couple of dozen top funds and were hard pressed to find any with more than five or six decent exits in the 2005-2009 time frame. Aside from Domain, The highest performers we found had seven or eight.

Therefore, Domain’s exit numbers – and, presumably, the returns that result from them – have to be the envy of the firm’s VC peers. That is especially true now, more than a year into the economic crisis. Although pharma and big biotech have been spared, the current tough times have hit VCs hard. The IPO market may come back in 2010 but don’t get your hopes up. Ironwood on February 3 was the first VC-backed biotech company to go public in 2010 and one of a handful of biotherapeutics companies to go public on any exchange since 2007. But that was not a rousing success given the “haircut” in the price ($11.25 not $14-16 per share) and the lower amount raised than planned ($187 million, not $272 million).

Worse for VCs, fund-raising is down and the returns for many if not most funds have been negative for years. The actual numbers are unknown, though Boston Biotech Watch’s parent CBT Advisors got access to some aggregate data in 2008 that was pretty sobering, showing a majority of 232 healthcare funds over twenty-two years returning barely more than their invested capital, data we will share upon request. The reasons for this fund-raising roadblock have much to do with that performance, intensified by the structural issues that have beset many of the funds’ limited partners, an issue Boston Biotech Watch covered in an earlier post.

But despite the most challenging climate in ten years or more for VC fund-raising, Domain capped off their recent run in mid-2009 with the biggest life sciences fund raised that year, the $500 million fund Domain Partners VIII, which closed in August and increased the firm’s lifetime amount raised to $2.7 billion. To the firm’s partners, accustomed from the good times to raising money in weeks, not months, the fund-raising seemed arduous – it began in January, 2009, took seven months and yielded a fund that Domain acknowledged was 28% below its original $700 million target. To the rest of the industry, of course, the fund-raising represented a rare bright spot.

Meeting some Domain partners at the JP Morgan healthcare conference last month, it occurred to us that even here, breathing the rarified air of VC triumph, one can find the roots of the current VC malaise, which is affecting the entire innovation economy. Indeed, connecting the dots through Domain’s exits yields answers to several interesting questions, to wit:

o Why, as long as it can find syndication partners, Domain ought to continue to be successful;
o Why so many other VCs will continue to struggle to the point that some will go out of business;
o And why the most urgent conversations at JP Morgan were not between biotechs and VCs, nor between bankers and VCs, but rather between VCs and big pharma.

First, the Domain success story. Let’s eliminate any doubt that Domain was “just lucky.” Yes, the number of events – in this case exits – is low, too low to consider this analysis a scientific one. But we strongly doubt that we have been fooled by randomness and that Domain’s success is a so-called Black Swan (an unpredictable outlier as described in the book of the same name by Nassim N. Taleb).

We further acknowledge that one of the presumed exits reflects the spectacular turnaround for specialty pharma shop Vanda), whose schizophrenia drug was first rejected by FDA, then approved, and is now on the market). Vanda stock was on a turbocharged roller-coaster (from $5.12 to $0.50 and all the way back up to $14.64 – all within a single year! see Figure 1) and Domain – if it sold shares – likely wound up reaping a large. But Vanda – if it was lucky, and even that is up for debate – is only one of many good exits (see Table 1).

Figure 1: The Vanda (NASDAQ: VNDA) rollercoaster – note logarithmic scale!

In fact, the repeated and apparently pre-programmed success of one particular business model, layered onto an otherwise productive clinical development and medical device strategy, has made an enormous difference in the firm’s returns.

Therapies only please
Unlike some of its life sciences VC peers, Domain does not do tools or health IT or cleantech. It stays tightly focused on building companies and taking judicious clinical trial risk on promising devices or molecules – or, as in the case of Vanda and other less high-flying portfolio companies like Alimera, on promising management teams. Moving these molecules through relevant clinical milestones – especially Phase 2 trials – is a tried-and-true path to success, provided that they are the right molecules and provided the management teams execute well in moving them forward. Domain has done fine – as well as anyone in the industry – at assuming this type of clinical risk and then working hard to minimize that risk through astute management and good trial design.

But this explanation begs one question: where does Domain get the molecules? The answer: mostly from Japan. As has been well documented, Domain is particularly good at finding viable preclinical or early clinical molecules inside Japanese pharma companies, placing them in US-based companies and ushering these molecules – which are usually the most promising candidates in their Japanese originators’ pipelines – through a value inflection point, at which point they can be sold or partnered with US and European pharma companies at big premiums.

Boston Biotech Watch sat down with Eckard Weber, Domain’s resident expert at shaking loose these valuable assets from Japanese companies and shepherding them to their future homes in mostly San Diego-based companies. Weber, who until 1995 was a former university professor at UC Irvine, makes a humble and buttoned-down impression — this despite his having one of the more impressive track records in VC dealmaking the past five years, And in his initial description of how he and Domain do it, he made it sound positively pedestrian, almost trivial: “If there is unmet need with a big market opportunity, [a product] could be worth a lot of money. If you can take the product through Phase 2 for $30-40M, show safety and efficacy for that, it’s a good investment!”

So go to Japan, pick up molecules that local pharma companies have developed and license the rights for the United States and North America. Weber makes it sound so easy! But it isn’t. After all, these companies traditionally out-licensed ONLY to US and European big pharma. VCs needed not apply – until Domain’s deal with Takeda for the antibiotic Ceftaroline, out-licensing of products developed by Japanese pharma for its home market to western VC-backed companies was exceedingly rare. “What was not accepted as a business model until we came on the scene,” Weber said, “was to license the product to offshore VCs – or any VCs.”

For the first deal, Weber recounts, the major Japanese pharma took a very long time because they’d never done an out-licensing to a US VC or even a venture-backed company. That was a cultural shift that took two years. What made them eventually come around was “relationship building,” Weber said, which “is even more important in Japan than in the United States. You have to spend a great deal of time presenting your case. You need to go repeatedly, discuss, negotiate, make a proposal, listen [to their feedback or counterproposal].”

Weber’s efforts bore fruit and the rest is history – a molecule from Shionogi helped Peninsula create a $245 million exit; then a molecule from Takeda made Peninsula spinout Cerexa a $580 million exit; then a molecule from Astellas that helped Cerexa spinout Calixa (where Weber had become interim CEO) be sold in 2009 for over $400 million to Cubist.

Improving the odds
The string of exits has continued for three reasons, none of them dumb luck:

(1) Weber and Domain got results with their early efforts, undoubtedly earning the drugs’ original Japanese owners much higher returns than in traditional pharma-to-pharma licensing deals;

(2) The early results translated into repeat invitations to visit Japanese pharma companies and look in their cupboards. “Eventually,” after some exits, said Weber, “we became a well-known quantity. [Our prior deals] opened a lot of doors. We established a relationship with most of the Japanese pharma companies because we’ve done deals with them and made them want to do more deals. Now we are approached regularly.”

(3) Domain and its syndicate partners knew what to do with the drugs once it had the rights. Borrowing a model from the medical device world, where management teams are often created around assets identified by investors, Domain drew upon its reservoir of accomplished management teams and consultants – including Weber himself – during diligence, company-building and clinical development. “It’s not just a question of finding the products but also creating value in them,” he said. “We spend extensive time evaluating products and their positioning,” Weber said. “There is a great deal of [time and effort spent] developing a clinical and regulatory strategy,” which he characterized as one of Domain’s big value-adds. “Products can fail because of poorly conceived clinical and regulatory strategies.” It’s not that products never fail in Domain’s hands – sometimes they do – but the firm’s work pre- and post-closing of a deal has managed to improve the odds.

Before the window slammed shut

But take the deep dive into Domain’s portfolio further, all the way back to the days when the IPO was still a viable exit, and BBW found a more conventional story. Like many VC firms, Domain was – at least until 2007 – able to shed large chunks of its more speculative investments onto public-markets investors, before the risk of early-stage drug development was taken out. Yes, Domain had several IPO exits in the 2005-2007 time frame. But some of them (Novacea in the prostate cancer space; Northstar Neuroscience in medical devices) did not provide better than modest exits when their shares had to be sold at cost or the companies shut down. In this, Domain’s performance was roughly consistent with the performance of other funds in those years. The chart for Somaxon shows a typical pattern: a strong IPO and post-IPO performance followed by a disappointment in clinical development – in this case in a delay in the approval of an insomnia drug – resulting in a slide in the stock price (see Figure 2).

Figure 2: Somaxon (NASDAQ: SOMX) suffers the wrath of the market

This type of investment – any investment that requires an IPO exit along the way – no longer fits the risk profile of what Domain is doing these days, or many other financial VC firms for that matter. The retail investor is not buying or buying only at a discount, as evidenced by the years-long near-absence of IPOs followed by Ironwood’s haircut. VCs have to expect to remain invested and involved in the companies until they either have been generating years of strong revenues – which is usually too long – or until they get acquired by pharmaceutical companies. And if the exit will be an acquisition anyway, why have the IPO at all?

All of these trends help explain why the 2010 JP Morgan healthcare conference, while it felt much more vigorous than the previous year’s shell-shocked atmosphere, continued to have as its main focus a dialogue that had become prevalent in the 2005-6-7 time frame: pharma-VC discussions. VCs are more dependent on pharma than ever for virtually every phase of their business: exits; deal flow (pharma spin-outs being one of the more “sure-thing” investment vehicles VCs invest in, although most VCs have found these in US and Europe-based pharma and it has been Domain finding them in Japan); reality checks in regard to “what pharma is buying” – what indications, what types of molecules etc.; and fund-raising (pharma companies are often limited partners in VC funds). The days when JP Morgan was a place for VCs to “look at deals” and to kibitz with entrepreneurs seem to be numbered. Many of the VC firms may not be around in a few years to share in the dialogue.

Steady as she goes
Based on the source of many of its most valuable assets, Japanese pharma, Domain can expect to continue its string of successes for years to come. “These [Japan-based pharmaceutical] companies all have R&D. They are replenishing the pipeline,” said Weber. And now, of course, Domain has the inside track.

But for the VC industry as a whole, the outlook is not so promising, at least for the next two or three years. Many VC funds have postponed raising new funds until 2010, which was probably wise given the nasty environment of 2008-2009. But now these funds really need to raise money, and their performance – which if it does not include an Eckard Weber deal or one of the few comparable high-value exits of recent years – will not make it easy.

This rough patch will likely hit Domain too as it searches for the syndication partners it needs to raise $30 million to $40 million per company. It may find itself doing big deals like this with fewer partners who each put in more; optioning rights for other geographies (e.g. Europe) earlier to raise cash for development; or selling the companies to the pharmaceutical industry, painful as it might be, earlier and for less.

Still, Domain’s and Weber’s impressive winning streak stands out against the gloomy backdrop. As long as Weber finds the pursuit of new medications more appealing than golf at Torrey Pines, there is every reason to expect it to continue.

# # #
Disclosure: Domain and the companies mentioned in this piece are not consulting clients of CBT Advisors

Company Location Indication Source of Compounds Acquirer or IPO Year of Acq’n or IPO Price at Acq’n or Value* post-IPO
BiPar SF Bay Oncology In-house Sanofi 2009 ≤$500M
Cabrellis (W) San Diego Oncology Dainippon Sumitomo Pharmion 2006 $94M
Cadence San Diego Acute pain In-licensed IPO 2006 $500M by ‘07
Calixa (W) San Diego Infectious Dis. Astellas Cubist 2009 $403M
Cerexa (W) SF Bay Infectious Dis. Takeda Forest 2006 $580M
Conforma San Diego Oncology In-house Biogen Idec 2006 $250M
Corthera SF Bay Heart failure Connetics Novartis 2009 $620M
GeneOhm San Diego Diagnostics In-house Becton Dickinson 2006 $230M
Intralase Irvine Eye device In-house AMO (Abbott) 2007 $808M
Novacardia (W) San Diego Congestive Heart Failure Kyowa Hakko Kogyo Merck 2007 $350M
Nuvasive San Diego Orthopedics In-house IPO 2004 $500M by ‘07
Orexigen (W) San Diego Obesity In-house drug combination IPO 2007 $400M by ‘08
Peninsula (W) SF Bay Infectious Dis. Shionogi J&J 2005 $245M
SenoRx Irvine Onc. device In-house IPO 2007 $150M by ‘08
Somaxon San Diego Insomnia Reformulation IPO 2005 $300M by ‘06
Volcano San Diego Cardio device In-house IPO 2007 $900M by ‘08
Vanda Rockville, MD Schizophrenia Novartis IPO 2006 $600M by ‘07

Table 1: Domain exits 2005-2009. Eckard Weber deals marked with a “W”.

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