Clarus Ventures Adjusts to Unpredictable Biotech World

1/20/12Follow @xconomy

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to Alcon for $589 million, and Taligen Therapeutics was taken over by Alexion Pharmaceuticals for $111 million. Clarus was also the largest shareholder in Aliso Viejo, CA-based Avanir (NASDAQ: AVNR) when that company won FDA approval of its first product, and it held a 13 percent ownership stake in San Diego-based Zogenix (NASDAQ: ZGNX) when it went public last year.

But those last couple deals aren’t screaming home runs—Avanir was worth a little more than $360 million at yesterday’s close, and Zogenix’s value was about $164 million as of yesterday. And one of Clarus’s portfolio companies, Virdante, sold for the bargain price of $4.5 million up front to Momenta Pharmaceuticals a couple of years after it raised $30 million in venture capital.

Still, there are reasons to be optimistic about the year ahead, Galakatos says. Clarus is waiting on pins and needles to see what will happen with New Haven, CT-based Achillion Pharmaceuticals (NASDAQ: ACHN). Clarus owns about 20 percent of Achillion’s shares, according to the most recent proxy statement. That stake could be worth a fortune, because Achillion is one of the few independent hepatitis C drug developers left standing after a Big Pharma bidding frenzy led to the takeovers of Pharmasset ($11 billion) and Inhibitex ($2.5 billion) in the past few months. There’s much scuttlebutt on Wall Street about how Achillion could be the next takeover candidate.

“We currently own a material percentage of Achillion, and it’s a good time to own a material percentage of Achillion,” Galakatos says with a smile.

Beyond that, there are a number of portfolio investments from the past couple of years that are showing promise, but haven’t yet generated liquid returns. Galakatos singled out Seattle-based NanoString Technologies as a company that is developing what could be a serious new technology for cancer diagnosis; Princeton, NJ-based Ophthotech‘s promising drug candidate for macular degeneration; and Mountain View, CA-based Restoration Robotics, which is developing hair transplant technology. “I look forward to maybe benefiting from that one,” Galakatos says.

The overall strategy hasn’t changed much at Clarus in the past few years, although it does try to remain diversified within healthcare to deal with cyclical ups and downs. About three-fourths of the firm’s money gets allocated toward biopharmaceutical R&D, and spread among early, mid, and late-stage development, Galakatos says. The remaining one-fourth goes into medical technologies like devices and diagnostics, he says. Clarus looks to put between $20 million and $70 million into each company, depending on what stage it’s at.

Much of Clarus’ future depends on the behavior of Big Pharma. While pharma has been extremely aggressive in hunting for hepatitis C compounds, it has been gun-shy about other areas like Alzheimer’s, or certain cardiovascular conditions. Even a great drug in a field that’s out of favor could struggle to stir up interest among acquirers, if the clinical development takes too much time and money, Galakatos says.

“Pharma companies are supposed to be long-term focused, but they have to be near-term focused as well,” Galakatos says. “They have huge, very strong balance sheets, but they are P&L (profit/loss) constrained in the near-term.”

For biotech VCs and their startups, it puts more pressure on them to find clever ways to get to a key milestone on a modest amount of capital. And that milestone had better be one that produces a fundamental, not just an incremental, advance for the standard of care. At least if you want someone to buy it. “That is the challenge we face. How do we build not only exciting innovative companies but ones that have a relatively predictable probability of achieving an exit?” Galakatos says.

Do that repeatedly as a biotech VC, and the reward is you get to stay in business. If you don’t, Galakatos says, “investors have other places to put their capital, whether it’s IT, real estate, or something else.”

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  • Krassen Dimitrov

    Well, Nick can certainly blame the lack of IPOs on the financial crisis, but VCs themselves deserve some of the blame for bringing crappy companies with flawed business model to the public market, only to see them crash and burn. Case in point is Complete Genomics ($GNOM), which went public last year with a fee-for-service model that had been proven unworkable in the life science tool market.

    I’ve asked Nick on many occasions to distance himself from the incompetent OVP Venture Partners, and specifically Chad Waite (who is behind the Complete Genomics disaster), however so far he has done nothing but defend and protect him. Now Nick is talking up Nanostring, but let’s see now how easy it will be for a good company to IPO, if it is associated with such losers and scammers. Moreover, let’s see how easy will be for him to raise a new fund if he has proven that he cares more about protecting a fellow VC than protecting the value of the assets of his fund and his investors.