Financing Innovation

In February 2012, Celgene made a strategic investment in Boston-based biotech Acetylon Pharmaceuticals, which was developing promising treatments for multiple myeloma and other diseases. The Big Biotech paid $15 million for preferred shares of Acetylon. The investment did not include any technology rights or license option rights. By then, the barely four-year-old startup had already raised $40 million to finance its programs without taking any money from traditional venture capital sources.

G. Steven Burrill

Acetylon was started in 2008 to build out a technology platform for a new class of selective histone deacetylase (HDAC) inhibitors that hold promise for causing tumor cell death without the severe side effects associated with the first class of HDACs on the market. Initial funding came from Marc Cohen, Acetylon's chairman and a trustee at Dana Farber Cancer Institute where the technology was developed. Along with some friends, he put up approximately $400,000 in seed capital to start the company and brought in Walter Ogier, Acetylon's president and CEO, as its only employee to run it.

By July 2009, Acetylon received $7.25 million from a group of angel investors, hired some staff, and advanced its research and development. When its lead drug candidate was ready for human testing, Acetylon turned to the Leukemia and Lymphoma Society, which is providing approximately $6 million in nondilutive, milestone-based, and conditionally repayable funding, representing half of the projected costs of the clinical trial. Acetylon went on to close a $27-million second round of financing from its existing venture philanthropists plus other private investors two months before the Celgene funding.

Acetylon's story is being played out among many life-sciences startups as they look for funding beyond traditional venture capital to angel investors, venture philanthropy, non-profit organizations, and foreign government funds looking for innovative technology to develop for their countries. In some cases, these other entities are filling the void left by venture capitalists that have moved away from early-stage financings.

Companies taking advantage of the different sources of capital led to a 22.8% increase in the total amount raised by privately held life sciences companies globally in 2012 to $12.4 billion compared with the $10.1 billion raised in 2011. Although many decry the lack of funding for early-stage life sciences companies, capital is available.

TOUCHED BY AN ANGEL

One source of capital of increasing importance to early-stage life-sciences companies is angel capital. Jeffrey Sohl, director at the University of New Hampshire's (UNH) Center for Venture Research, notes that since 2007, the venture universe has seen an enormous "culling of the forest" as the number of active venture capitalists has shrunk to approximately 400 from 1200. That, along with the hesitance of the remaining firms to invest in early-stage life-sciences companies, has left a substantial funding gap that is being addressed by syndicates of angel investors. Angel investment in healthcare, biotechnology, and medical devices and equipment startups accounted for 36% of total angel investments in the first half of 2012, according to UNH Center for Venture Research.

Avaxia Biologics secured $6.4 billion from an angel syndicate in a series B financing in December 2012 to fund a first-in-human trial of its oral anti-TNF antibody, AVX-470, to treat ulcerative colitis for which it had just received FDA clearance. The drug is designed to act in the gastrointestinal tract to suppress inflammation and treat inflammatory bowel disease, which includes ulcerative colitis and Crohn's disease. Current anti-TNF antibodies work well but they are injected and suppress the entire immune system, which can lead to serious side effects. Avaxia's funding round was led by existing investor Cherrystone Angels and new investor Golden Seeds, with participation by nine other angel groups, many of whom are new investors attracted by the potential of its platform and its ability to localize treatment.

Angel investors in the US have organizations such as the Angel Capital Association that support their activities. Now, the idea has caught hold in the United Kingdom. Angels for Life Sciences launched in October 2012 as the first national angel network focused on helping raise money for early-stage life-sciences companies.

THE GEOGRAPHY OF VALUE

Another way that companies are accessing capital is by turning to opportunities to secure funding in countries that are trying to build their life-sciences sectors. Life-sciences companies, such as CompanDX, are finding that the value of their technology can vary by geography, and what may have marginal value in a developed market where healthcare providers have many competing choices, may have much greater value in emerging markets with unmet needs that are hungry for new technologies.

In July 2012, CompanDX, a UK diagnostics startup, raised $6.1 million (39.6 million RMB) from the Chinese government and private investors to develop and commercialize its products in China. The investment is nondilutive. Instead of taking an equity stake in the startup, investors will be eligible for a percentage of any revenue from commercialized products sold in China. CompanDX applies proprietary bioinformatics technology to advance personalized medicine. The company said that the Chinese investment would speed up its product development because of the regulatory climate in China and the willingness of major regional science parks there to provide funding for accelerated development for products relevant to the Chinese marketplace.

ON A SOLID FOUNDATION

Funding from disease-focused foundations has become another important source of capital for advancing new therapies for rare diseases and other areas of unmet need as traditional venture capital funds migrate to later-stage investments. This funding is often nondilutive and can help derisk research early in the development process. Notable successes, such as the Cystic Fibrosis Foundation's role in backing development of the cystic fibrosis therapy Kalydeco, approved by FDA in January 2012, have shown the impact such organizations can play in bringing new medicines to market. Although already spending millions of dollars each year to fund work on developing new medicines for neurological conditions and rare diseases, foundations are taking steps to amplify their efforts.

THE WISDOM OF CROWDS

The JOBS Act enables private companies to have as many as 2000 investors and still remain private, opening another avenue for startups to access capital: Crowdfunding. Already popular in tech circles, crowdfunding—using social media to source small amounts of capital from a large pool of investors—has begun to create buzz in the biotech world. Several web portals such as Poliwogg, MedStartr, and ScitechStarter, have already sprung up in the US to enable crowd investments in anticipation of final regulatory rules, and companies have already begun soliciting investments through them. Although companies can only raise up to $1 million a year through crowdsourcing, it is still enough as a source of pre-angel funding.

In an early example of what could be done, startup biotech uBiome launched the world's first crowdsourced effort to map the human microbiome, the trillions of microbes that live in and on the human body, with crowdsourced funding in November 2012. The company, coming out of the University of California's QB3, seeks to put the latest high-throughput metagenomic sequencing technology directly in the hands of people who invest in the company through the crowdsourcing portal Indiegogo. By pledging $79 in support of uBiome on Indiegogo, anyone can have his or her personal microbiome sequenced. Within the first two months, it raised $120,000 from more than 1000 participants, surpassing

its initial goal of $100,000 and 1000 users.

Crowdsourcing has already been used by life-sciences companies in France with some success. Almost 20% of the pre-IPO investment in the French biotech Nanobiotix was raised through the fonds commun de placement dans l'innovation, the French version of crowdsourcing. Nanobiotix raised $18.5 million in an IPO in September 2012. The UK BioIndustry Association is basing its proposal for a Citizens' Innovation Fund on the French model.

CREATIVITY IS ESSENTIAL

There is no single path to financing a company today. Instead, companies need to take a multidimensional approach to thinking about potential funding sources. This pool of funding includes not only government grants, but also tapping into nonprofits, patient advocacy, disease-focused, and philanthropic groups.

Though venture capitalists are moving away from early-stage financing, the reality is that rather than having fewer financing options, entrepreneurial companies have a range of funding alternatives that they can pursue. Regional differences exist in both the availability and cost of capital. The only requisite to fund a company today is creativity. In a world in which we finance one in 100 companies we see, tenacity is a big asset too.

G. Steven Burrill is chief executive officer at Burrill & Company, San Francisco, CA, 415.591.5400, publications@b-c.com