Omeros Nabs $25M from Paul Allen, State Life Sciences Fund to Pursue Elusive Drug Targets

10/25/10Follow @xconomy

Seattle-based Omeros has raked in $25 million for its drug discovery technology from a couple of unusual suspects—billionaire Paul Allen and Washington state’s Life Sciences Discovery Fund.

Omeros (NASDAQ: OMER) is collecting $20 million from Allen’s investment operation, Vulcan Capital, along with a $5 million grant from the state fund that aspires to spur more commercialization of biotech ideas in Washington. In an unusual deal structure, both Vulcan and the state agency will have skin in the game with Omeros. Vulcan and the Life Sciences Discovery Fund will be eligible for a percentage of the future profits from partnerships Omeros signs, and they will stand to collect royalties on product sales if the technology paves the way for new drugs against targets on cells known as G-protein coupled receptors (GPCRs).

The deal provides an important new shot of cash for Omeros, which doesn’t have any moneymaking products on the market and didn’t raise as much capital for its drug development programs as it had hoped to in its IPO last year. The new financing will help Omeros push forward with its quest to identify ways to develop treatments that bind with more than 100 GPCR protein targets that have previously been considered “undruggable.”

An estimated 30 to 40 percent of all existing prescription drugs today are made to hit the more accessible forms of these targets, including big brand name therapies for allergies, pain, and mental illness. Merck’s loratadine (Claritin), Bristol-Myers Squibb’s aripiprazole (Abilify), and Purdue Pharma’s oxycodone (Oxycontin) are a few of the drugs that work this way. As anyone following the pharma business knows, companies are desperately looking for new blockbusters like that to replace the revenues they will lose in coming years as patents expire and cheap generic copies emerge.

By investing $25 million in the Omeros discovery technology, Vulcan and the Life Sciences Discovery Fund are essentially taking a piece of the action in a local company that thinks it has found a way to feed the pharma industry and satisfy its hunger for innovative new medicines.

“We see the Omeros GPCR technology as a major disruptive opportunity,” says Steve Hall, the managing director of Vulcan Capital. “Paul Allen is not a short term investor. We see potential to yield new innovation and returns over multiple decades.”

Steve Hall

Steve Hall

Terms of the deal are unusual. Vulcan and the Life Sciences Discovery Fund will be eligible to get a “mid-teens” percentage of proceeds from any partnership income Omeros generates up to $1.5 billion. If Omeros generates $1.5 billion in cumulative proceeds from its GPCR program, Vulcan and the state agency will get a 1 percent slice of the subsequent revenue. Vulcan and the state agency will also get royalties on any products generated by the Omeros program. Vulcan is also getting warrants to buy shares in Omeros over the next five years at exercise prices of $20, $30, and $40 a share.

Investors may choke on their morning coffee today when they see those high warrant prices. Omeros, at Friday’s closing stock price, traded at just $7.30.

This is also clearly an unusual step for a state agency, but it’s not hard to see the underlying rationale. Washington state’s Life Sciences Discovery Fund has been whacked by 40 percent budget cuts by state lawmakers once before during the economic downturn. If Omeros can make a number of GPCRs “druggable,” and entice Big Pharma companies to pay big bucks for the rights to develop drugs against them, then the state agency—even without taking an ownership stake in a company—could pull in a potentially sizable revenue stream to insulate itself from the whims of budget-slashing politicians bracing for re-election.

Lee Huntsman, the executive director of the Life Sciences Discovery Fund, was out of the country and unavailable for comment over the weekend. But he said in a statement that the Omeros program “provides a unique opportunity to create new life sciences jobs within Washington State focused on improving health care.”

Omeros has been working on these targets for a long time, and it isn’t the first company (San Diego-based Arena Pharmaceuticals comes to mind) that claimed it could “unlock” the previously inaccessible GPCRs. These are complex spaghetti-like protein receptors that weave in and out of the surface of cells. San Diego-based Receptos is one example of a company founded just to help drug developers get more vivid images of the 3-D structures of these molecules, so they can do a better job developing drugs against them.

Many such GPCRs are considered undruggable because scientists haven’t been able to identify a naturally occurring or synthetic molecule, called a ligand, that binds with the receptor.

There are thought to be 363 total GPCR targets not related to sensory neurons, and 240 of those have known ligand binders, Omeros said. That means there are still about 120 of these targets that have no known ligand, so they are essentially undruggable. Omeros’s task will be to make them accessible to new drug candidates.

Vulcan first got interested in this problem more than five years ago, when it invested in a Seattle startup called Nura, which was tackling neurological disorders. That company ended up being sold to Omeros, and continued to advance its efforts to unlock the previously inaccessible GPCR targets. Omeros took a big step forward in that effort when it obtained rights to a screening technology from Toronto-based PatoBios.

Omeros said earlier this year that it had unlocked three previously undruggable GPCR targets. Vulcan leaned on a group of independent consultants, and some of its neuroscientists at the Allen Institute for Brain Science in Seattle, to help determine how meaningful this advance was, and what implications it might have for the future of drug development. After getting that feedback from experts, Hall says, Vulcan made its decision to invest.

Omeros plans to use some of the new cash to pay PatoBios the $10.8 million it owes for rights to intellectual property needed to pursue the GPCR discovery program. Omeros CEO Greg Demopulos said the new investment will enable the company to accelerate its discovery program, but didn’t provide a timeline on how many “orphan” GPCRs he thinks the team can unlock, or how long it will take.

The GPCR discovery program is still at the earliest of early stages in drug development, so there’s no way anyone can guarantee what will come from this. Once a GPCR target is “unlocked” as Omeros likes to say, then medicinal chemists have to go through the long, arduous process of synthesizing molecules to turn on or turn off the target, and separate the best candidates from the losers. Then come animal trials, and the always risky business of clinical trials required before the FDA will clear a drug for sale in the U.S.

Vulcan and the state, however, don’t have to wait for Omeros and its partners to clear all those hurdles to see some returns. If Omeros can satisfy Big Pharma companies that it has successfully figured out how to make drug candidates against these targets, then Omeros will be in position to strike lucrative deals with those Big Pharma companies to grant them development rights to the targets. So Vulcan and the state agency could start generating cash from these targets long before they ever prove their true value as new pharmaceuticals.

Omeros is planning to webcast a conference call at 4 pm Eastern/1 pm Pacific today to talk about the investment and the discovery program in greater detail. I’ll listen in and provide an update if there’s much more to say.

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