Calistoga Pharmaceuticals Nabs $40M in Washington’s Biggest Venture Deal of 2010

6/30/10Follow @xconomy

Seattle-based Calistoga Pharmaceuticals has nailed down $40 million in new venture capital, making it the biggest VC deal of the year so far in Washington state (if you don’t count broader private equity deals).

The financing was led by a new investor, New York-based Quogue Capital. The rest of the money came from Calistoga’s existing investors—Alta Partners, Amgen Ventures, Frazier Healthcare Ventures, and Three Arch Partners—as well as one additional new investor, Latterell Venture Partners. Calistoga, founded in 2006, has now raised three venture rounds since its inception worth a combined $91 million.

Calistoga has been building momentum for the past couple years as one of the players emerging in one of the promising niches of cancer research. The company specializes in making drugs that block what’s called the PI3 kinase pathway, which researchers say plays a vital role in controlling critical cell processes like proliferation, migration, and cell survival. When these normal functions get flipped into an overactive mode, it’s a hallmark of cancer cells run amok, or an immune system gone wild so that it attacks healthy tissue.

The company arrived on the national scene at the American Society of Clinical Oncology a year ago, when it showed some surprisingly strong clinical trial results from the first dozen patients in a clinical trial. Since then, Calistoga has been able to confirm its lead drug candidate has strong anti-tumor activity in three different malignancies—slow-growing non-Hodgkin’s lymphoma, mantle cell lymphoma, and chronic lymphocytic leukemia—based on a bigger database of more than 100 patients in a clinical trial. The new round of cash will be used to push Calistoga’s lead compound, CAL-101, through the final stage of clinical trials, and to run tests that prove a related drug can be effective against inflammatory diseases.

Carol Gallagher

Carol Gallagher

“We cure a lot of mice in biotech, and not many patients,” Gallagher says. “We’re really enthusiastic about our opportunity to continue to build value, and hopefully extend patients’ lives.”

The company is certainly not the only one with visions of creating potent new cancer drugs against the PI3K target. GlaxoSmithKline, Novartis, Roche, Exelixis, Oncothyreon, and Intellikine are a few of the other contenders. The key difference, Calistoga says, is that the others make drugs that hit a broad cross-section of PI3K enzymes, while Calistoga zeroes in on a specific subtype of the target, known as the delta isoform that’s found on cells implicated in blood cancers and inflammatory diseases.

Armed with the new $40 million in capital, and the clinical trial data from more than 100 patients, Calistoga is now aggressively planning its next steps. The plan is to have a meeting with the FDA to talk about the design for a pivotal clinical trial program that could build strong enough evidence for CAL-101 to earn FDA approval, Gallagher says. If all goes well, the company will agree with regulators on the number of patients required, and the proper goals of the study, so that the trial can begin in the fourth quarter of 2010, Gallagher says.

Such a trial will be expensive, and Calistoga is still picking up 100 percent of the development costs on its own. The company should have enough money to operate through 2011, although it will take even longer than that to get CAL-101 through the FDA application process and cleared for sale on the U.S. market, Gallagher says. Calistoga’s goal is to get the drug on the market by 2013, she says.

If Calistoga wants to take the drug that far, though, it will need more financing. The company, partly through its new connection to a Wall Street player like Quogue Capital, is starting to lay the groundwork for a future IPO, Gallagher says. Calistoga could also opt to form a partnership with a big drugmaker to finish the most expensive phase of drug development. The company has generated a lot of interest in its programs from prospective partners, although it hasn’t yet signed on the dotted line. By fattening up its balance sheet with more venture capital, Calistoga hopes that it has strengthened its negotiating position, essentially showing Big Pharma companies that it can afford to walk away from the bargaining table if it doesn’t like the terms of a potential deal.

“We want to come to partnership talks from a position of strength,” says CEO Carol Gallagher. “By raising this round, we will continue to have control and be able to advance the program. We have a great team here, and we’ve demonstrated we can generate value.”

Staying independent means Calistoga will need to get a lot of productivity out of its existing team. The company has 21 employees at the moment, and only expects to do some modest hiring, growing to about 29 people by the end of 2010, Gallagher says. She plans to add an executive vice president of R&D with experience in cancer drug development, a chief financial officer, and some more talent in clinical development and regulatory affairs.

If Calistoga is getting dressed up for a sale, it clearly wants this to be a big deal, and not just a one-trick pony story. Earlier this year, the company started a trial of CAL-101 in combination with other cancer drugs, including Roche and Biogen Idec’s rituximab (Rituxan), which could help keep investors interested in the company with fresh data releases while they wait for results from the pivotal CAL-101 program. Calistoga also now has the money to start a mid-stage trial to test whether CAL-263, a different molecule that blocks PI3K, has potential against inflammatory diseases, such as rheumatoid arthritis or asthma, Gallagher says.

The second drug still has a lot to prove, but if it can pass the next trial being designed now, then Calistoga will certainly be worth a lot more than if it were perceived as a single product company. Single product companies, if they are successful, often get acquired by bigger companies. That outcome may be in the cards for Calistoga someday, but Gallagher sounds like she’s not ready to sell anytime soon—at least not with such a promising drug on the horizon.

“We’ve shown we can deliver, and we’ve got a great group of experienced people,” Gallagher says. The company could carry CAL-101 through the FDA application process, and introduce the drug into the marketplace, she says. Calistoga’s lead compound, Gallagher says, “is a rare opportunity.”

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