What was Bill Gerhart’s recipe for success at San Diego’s Elevation Pharmaceuticals?
Less than four years ago, Gerhart took a glycoyrrolate, a generic drug approved decades ago by the FDA, and set out to reformulate the compound for use with a nebulizer for chronic obstructive pulmonary disease (COPD), which includes emphysema and chronic bronchitis.
Gerhart persuaded San Diego’s renowned serial entrepreneur Cam Garner and pulmonologist Ahmet Tutuncu to join him. Together they raised $44 million in venture capital, formed an 11-member drug-and-device development team—and voila! They got the buyout offer from Marlborough, MA-based Sunovion Pharmaceuticals yesterday that could eventually be worth as much as $430 million.
“It’s a very important product for Sunovion,” Gerhart told me during by phone yesterday. “It could form the cornerstone for their respiratory product line.”
The deal is a testament to capital efficiency and the lean business model for life sciences startups that has been in vogue in recent years. But is this a recipe that others can follow? Or did an unusual combination of factors come together at Elevation that would enable the VCs to double their money immediately—and perhaps eventually realize a nearly 10x return on investment?
As lead investor Brent Ahrens of Canaan Partners told me by yesterday, the $430 million buyout represents a value creation over the 32 months since Canaan led the Series A round (in January, 2011) that amounts to over $430,000 dollars a day.
Yet Ahrens acknowledged that many of the biggest risks had been minimized when he first looked at investing in Elevation almost three years ago. Perhaps most importantly, he said, “The risk profile of the drug was pretty well known.”
Glycopyrrolate, a medication of the muscarinic anticholinergic group, had been around for decades. It was developed by Sosei and the FDA had approved its use in pill form as a treatment for stomach ulcers, and as a preoperative medication for patients under anesthesia to reduce excessive mucous secretions. A syrup also was available to help reduce drooling among patients with cerebral palsy.
The drug is a type of bronchodilator known as a long-acting muscarinic antagonist (LAMA). Novartis licensed the drug in 2005 to develop glycopyrrolate as a dry powder inhaler for COPD. At the time, Gerhart was the CEO of San Diego’s Mpex Pharmaceuticals, a company he founded in 2002 to develop new antibacterial compounds—including an inhaled antibiotic for treating serious respiratory infections. (Aptalis, a private pharmaceutical based in Montreal and Birmingham, AL, acquired Mpex last year.)
Gerhart said he saw an opportunity to develop glycopyrrolate for use with a nebulizer, a device that turns liquid medication into a mist so that it can be breathed directly into the lungs. “Medicines available in a nebulizer are not the current standard of care for COPD,” Gerhart said. “It’s 30-year-old technology.”
In fact, the opportunity that Gerhart saw was to develop both a new formulation of glycopyrrolate—the first LAMA for use with a nebulizer—and a new generation nebulizer device. “It represented a new delivery standard of care,” he said, and the company established exclusive rights for using the drug-and-device combo for treating COPD.
The drug-and-device combination also targets a relatively small segment of COPD patients—less than 10 percent of the estimated 12 million Americans diagnosed with COPD, Gerhart said. Still, he says it’s an important treatment option for the oldest and sickest COPD patients, which also happens to be the fastest-growing segment of the market. “Those pharmaceutical companies that didn’t already have a dry powder inhaler or metered dose inhaler were very interested in our technology,” he said.
Gerhart’s strategy is not unique. San Diego-based Zogenix (NASDAQ: ZGNX), for example, adopted a similar strategy in its development of a the pain-killer sumatriptan with a needle-free delivery device for treating migraines. It’s also worth noting that Elevation chairman Garner also was a co-founder and individual investor at Zogenix.
Still, reformulating a drug that already has FDA approval for use with a new generation medical device is not a strategy that many new life sciences startups can follow.
“The value we created was in seeing the need for this drug in this population (the oldest and sickest COPD patients), and in significantly improving the standard of care for delivery of nebulized medicines,” Gerhart said. Other respiratory drugs also would have to be reformulated for use with Elevation’s nebulizer—which means they also would be eligible for new patents as drug-and-device combos. Gerhart noted that Sunovion has a number of respiratory drugs in its portfolio.
“This is squarely in their sweet spot,” he said, “and it was a key factor in our decision to do the deal.”
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