Surgery’ Breathes New Life into Biotech –

Time has left its marks on many biotech companies: failed clinical trials, unproductive strategic collaborations, depleted capital, discredited science and more. Some canny venture capitalists, however, can still see the beauty within and are taking out their scalpels for a bit of reconstructive surgery.

How extreme are the makeovers? They vary from minor nips and tucks (such as in-licensing a new, late-stage compound) to major procedures (mergers, for example). In either case, the infusion of new capital is usually contingent on the company’s cooperation. According to Douglas M. Fambrough, a principal of Oxford Bioscience Partners, “Getting buy-in is a pre-deal problem. If buy-in doesn’t happen, the deal doesn’t happen.”

Fambrough offers Sirna Therapeutics Inc. as one example of an investor-driven makeover of a middle-aged biotech company. The company was founded in 1992 as Ribozyme Pharmaceuticals Inc. Although it had focused for more than a decade on developing ribozyme-based drug products, Ribozyme recognized the potential of RNA interference. In September 2003, the company licensed seminal intellectual property in the area of short interfering RNA from the University of Massachusetts.

If The Makeover Fits…

Although Ribozyme’s interest in RNAi was new, it built on the company’s core competencies in nucleic acid technologies. To be successful, the makeover has to fit the company-in other words, there must be a logical connection between the chapters of the company’s history that will result in a credible story. In this case, the venture investors told the company to focus exclusively on RNA interference. “We said that was the only program we were willing to fund. They would need to get rid of the rest,” Fambrough recalls.

He says that it was important to the investors to give the company a new face. Ribozyme was renamed “Sirna Therapeutics.” It changed its Nasdaq trading symbol to RNAI. These external changes would have been less important to a privately held company, according to Fambrough, but they were crucial to a publicly traded one.

In its new incarnation, Sirna raised $53 million from VCs and existing shareholders in 2003. In 2004, it entered a collaboration with Eli Lilly, jointly investigating the applicability of Sirna’s proprietary siRNA to Lilly oncology targets. Since then, the company has continued in its process of reinvention. It announced in December 2004 its proposed acquisition of Skinetics Biosciences Inc. As the dermatology division of Sirna, Skinetics will apply RNA interference technology to permanent hair removal, an estimated $8.3 billion world market.

Why would venture capitalists choose to make over a middle-aged biotech company rather than invest in a startup? “In the best-case scenario, you get the benefit of startup economics, but otherwise, everything you’d want is already there: a mature company with assets, management, experience,” Fambrough says.

Of course, the venture investor faces more work with a makeover than with a true startup. There is a lot more due diligence required, to say the least. And Fambrough cautions that the makeover situation does involve a company that, in one way or another, has failed at its initial mission. “You get the bad with the good. You have to sort out what to keep from what to get rid of. Part of that you learn up front, and part you learn in the first year or two. With Sirna, we did a wholesale reorganization of the management structure. The leaders of the troops have to believe that the new direction is the right one for the company.”

Transforming The Platform Company

Perhaps the most significant force driving repositioning has been the movement of the biotechnology industry away from platform technologies and toward specific therapeutics. For many biopharmaceutical companies, major new investment recently has been conditioned on movement from a platform to a product focus. These makeovers are more akin to nips and tucks than they are to radical surgery; the company’s structure and identity remain intact. But these are transformational decisions nonetheless.

New Haven, Conn.-based Sopherion Therapeutics, Inc. boasts a widely applicable drug lead discovery platform. Last fall, TL Ventures led a group of venture capital firms-including, among others, the Sprout Group and Seaflower Ventures-to invest $47 million in Sopherion. Investors earmarked the funds for Sopherion’s in-licensing of the North American rights to Myocet, a therapy for metastatic breast cancer already approved in Europe and Canada. Sopherion will still continue validation of its own drug lead discovery platform. However, with Myocet poised at the brink of market entry in this hemisphere, Sopherion’s primary concern is likely to be its imported product, not its home-grown platform.

Another example is Avalon Pharmaceuticals, founded in 1999. The cornerstone of Avalon’s scientific edifice has been its AvalonRx drug discovery platform, which helped the company raise $70 million in venture capital in 2002. This year Avalon announced a deal with Vertex Pharmaceuticals, granting Avalon rights to develop and commercialize Vertex’s VX-944 compound for oncology indications, in return for up to $73 million in license fees and milestone payments. Avalon’s existing platform technologies will support VX-944 development efforts, as will the company’s experience in cancer drug discovery. The change in Avalon’s strategic focus to an in-licensed compound, however, represents a bold shift for the company.

M&A as a Makeover Tool

Fambrough points out that it is the role of venture investors to attempt to recognize trends in technology early and to position their companies to lead in those areas. Sometimes it takes an outsider to see how acquisition of new technology could save an ailing company or improve a thriving one. Frequently, the institutional investors, who can spot redeeming synergies between portfolio companies, will play matchmaker. Perhaps a company has seen the lead compound in its pipeline fail clinical trials, but it still has attractive intellectual property. Or perhaps a company has developed a promising therapeutic, but the proprietary drug delivery technology of another company would increase that promise.

Lynx Therapeutics Inc. is a publicly-traded company with attractive intellectual property. Its Massively Parallel Sequencing System consists of proprietary instrumentation and software that are used to analyze millions of DNA molecules in parallel. This technology enables genome structure characterization at high levels of resolution. Lynx also has an experienced commercial instrument development team, instrument design in its third generation and service capability for in-house instrument testing.

Lynx’s shareholders recently voted to approve a combination with Solexa Inc. Solexa’s leading-edge nucleic acid chemistry, engineered enzymes and surface chemistry have made it attractive to the venture capital community. Recently, Solexa raised $14 million from Abingworth Management, Amadeus Capital Partners, Oxford Bioscience Partners and Schroder Ventures Life Sciences. According to the Lynx proxy statement, combining the complementary strengths of these two companies could significantly accelerate the development and commercialization of their technology.

The combination involves a 2-for-1 reverse stock split. Solexa’s shareholders will trade their stock for approximately 80% of the resulting company’s equity. The exchange of Solexa’s privately held securities for publicly traded Lynx shares would also provide Solexa’s institutional shareholders with some potential liquidity, once lockup periods expire and the securities regulations permit.

Business combinations have become the ultimate makeover tool for the biotech company that, on its own, might find it nearly impossible to attract additional capital. These shotgun weddings may not initially have the support of all stakeholders. But according to Fambrough, “Time is on the side of the combination. The waiting process helps bring people around. There’s nothing like your stock dropping to almost nothing to convert people to a new way of thinking. It’s easy to become convinced that something isn’t working if you utterly fail to raise money around it.”

Eileen Smith Ewing is a partner in the Boston office of the international law firm of Kirkpatrick & Lockhart Nicholson Graham LLP. She leads K&LNG’s Life Sciences Group.