In February, Polaris Venture Partners in Boston led a $25-million Series A round investment in Acceleron Pharma, a first-year startup developing drugs to treat musculoskeletal and metabolic disorders. Co-investors included Advanced Technology Ventures, Flagship Ventures and Venrock Associates.
Polaris principal Amir Nashat says Acceleron possesses what most in the industry seem to be seeking these days in an early stage investment – a platform company that can prepare a series of products for market.
Nashat expects the early stage company, which is located close by in Cambridge, Mass., to crank out a steady supply of approved drugs.
“It’s good to have many ideas under one umbrella and many products from one company,” says Nashat. “If one idea fails to reach market-and as many as nine out of 10 do-then the company doesn’t fail and the investment isn’t lost.”
Investing in a company with two, three, four and more products is nothing new in the life sciences industry. It’s always been a way of lessening the risks involved.
However, what is new is that the strategy appears to be gaining steam as investors who were burned in the dot-com boom and bust are looking for a stable industry to invest in.
New York-based Eyetech Pharmaceuticals serves as a model of the kind of platform company Nashat and some of his fellow venture investors now champion.
Eyetech develops multiple therapeutics to treat the retina and other diseases in the back of the eye. It raised $168 million in funding before it launched a $136 million IPO in January. In the aftermarket, Eyetech (Nasdaq: EYET) has been one of the better performing venture-backed companies lately. In early September, the company was trading at around $34 a share, more than 60% greater than its $21 a share offering price.
Nicola Campbell, a partner at Sofinnova Ventures in San Francisco, says the advantages of platform companies – those with multiple products in development – are part of a running debate among venture capitalists.
“There’s been a healthy debate for some time,” says Campbell. “Is it better to invest in five individual companies with five separate products, or is it better to invest in one company with five products? We’ve done a bit of both,” she says.
Campbell looks for companies that are developing products with the potential for multiple uses, as well as companies with multiple products in development. “That’s why you are getting broad diversity in a company – to lessen the risk,” she says.
And companies with more than one product in development tend to have higher valuations that those with a single product, she adds. After all, if the product fails, the company does not become worthless overnight.
Sofinnova portfolio companies featuring multiple drugs in development include the privately held Prestwick Pharmaceuticals in Washington, D.C., and Saegis Pharmaceuticals in Half Moon Bay, Calif., as well as South San Francisco-based Threshold Pharmaceuticals, which is in registration for a public offering.
Anupam Dalal, a principal at Flagship Ventures in Cambridge, Mass., says investors look more favorably on platform companies because of the potential, as well as the decreased risk.
Dalal notes his firm’s investment in startup Compound Therapeutics Inc. in Waltham, Mass., which is developing a series of protein therapeutic drugs.
Last year, the startup received a $12 million first round investment from Flagship, Atlas Venture and Polaris.
Investors are looking at investment deals that can generate non-equity dollars by “spitting out something of value over a long period of time,” he says.
As these companies mature, Dalal says they become platforms that can fire out potential clinical candidates quickly and with marginal costs, some of which the company will own and some of which it will sell to generate cash to pump back into the lab.
Having the ability to generate cash is an important consideration, he says, since it lessens the total amount of investment needed to get a product ready for market and improves the ability of the company to survive.
Jean-Francois Formela, senior partner and life sciences industry specialist at Atlas Venture in Boston, which specializes in early stage investments, admits that like his competitors, he’s looking for more than the “one-hit wonder.”
“We prefer a portfolio of products rather than a single drug,” Formela says. “We’re not interested in some guy showing up with the rights to one molecule he’s bought at some university, saying I have bought this drug and it’s the best thing since sliced bread.’ We’re looking for an integrated series of products.”
Flagship’s Dalal points out that it often takes tens of millions of dollars through many rounds of investing to push a product through the various developing and testing phases required by the FDA. It takes even longer for companies that develop marketable products to go public, so that investors can realize a return on their capital.
The ability to develop products that can be licensed or sold help increases the return to investors, and in much less time.
“If we can do that repeatedly, we can generate an interesting return,” Dalal says.
“We look for approaches where it’s possible to leverage certain assets or knowledge across multiple product opportunities, diversifying the risk,” says Daphne Zohar, founder and general manager of Boston-based PureTech Ventures. “There are also time and cost advantages.”
PureTech has launched or help launch eight early stage companies, including Nanopharma in the Boston area, which is modifying anti-cancer compounds developed at Massachusetts General Hospital. The early stage company hopes the modifications will make them more effective in terms of treating various forms of cancer.
Still, for Zohar, the decision comes back to the science and technology behind the company.
“Our decision to invest is driven by novelty of the approach, coupled with the ability to address a significant unmet medical need,” Zohar says.
Dan Janney, managing director of San Francisco-based Alta Partners, focuses on life sciences investments for his firm. “There’s no question that the preference is to invest in companies with multiple fundamental technologies,” Janney says.
“The chances of the company succeeding are greater because they have more than one shot at becoming profitable.” He emphasizes that the interest in these companies isn’t really new. It’s been a proven approach in the venture industry, especially when companies are creating new methods for administering the drugs they are developing.
Just recently, in September, MAP Pharmaceuticals raised a $30 million Series B from Pequot Ventures, Bay City Capital, Skyline Ventures and the Perseus-Soros Biopharmaceutical Fund. MAP’s lead product candidate is scheduled to enter Phase II clinical trials in the fall for its drug that treats pediatric asthma. Meanwhile, the Mountain View, Calif.-based company is also developing a next-generation inhaler. MAP’s portfolio includes drug candidates to treat not just asthma, but also diseases of the central nervous system, lung disorders and migraines. Making the company even more valuable, from an investor perspective, is that MAP is seeking corporate partnerships to further expand the application of its drugs.
“The breadth and novelty of MAP Pharmaceuticals’ respiratory portfolio are the key reasons we invested in them,” says Patrick Enright, general partner from Pequot.
Whatever the approach – making a deal with a single company with a single drug in development or investing in many companies with many drugs in development – the industry is a tough place to make money.
Nine out of 10 drugs made from “small molecules” or medical compounds made from chemicals fail the FDA’s Phase I trials. And, four out of five drugs made from therapeutic proteins, often times naturally found in the body, fail the same trials.
“Making drugs is a tough business,” says Anupam Dalal. “The odds are against you.”