Gates Foundation Makes First Equity Investment in a Biotech Startup, Liquidia Technologies

3/8/11Follow @xconomy

Global health innovators have a rich new venture capitalist to turn to—the Bill & Melinda Gates Foundation.

The Seattle-based nonprofit, the world’s largest philanthropy with $36.4 billion in assets, made its first direct equity investment in a for-profit biotech company last week when it pumped $10 million into Research Triangle Park, NC-based Liquidia Technologies. While the foundation has made grants to companies for years, and has linked its support to specific programs with clear global health goals, this is the first time the foundation has structured a deal to take equity ownership, and have board-level oversight of a startup’s work, much like a venture capital firm.

It took more than a year to sort through the technical, financial and legal issues before the Gates Foundation was comfortable enough to make the Liquidia investment a reality. But it could provide a template for a new financing approach, which seeks to balance the focus and discipline of a venture investment with the nonprofit mission of fostering global health innovation, says Doug Holtzman, a deputy director on the infectious diseases team at the Gates Foundation.

“This was not a decision made with the snap of a finger,” Holtzman says. “We explained our charitable intent, as a slightly different kind of investor in the company. We don’t want to interfere with their ability to make money, but we do have an expectation they’ll make this technology available for (global health) product development.”

The Gates Foundation has been thinking about new ways to structure its support for innovation in global health for quite some time. Tachi Yamada, the executive director of global health at the foundation, has spoken about how venture capitalists and biotech entrepreneurs haven’t done enough to support the cause.

The foundation’s interest in Liquidia emerged about a year ago when Holtzman saw the company’s chief medical officer, Frank Malinoski, at a meeting of the President’s Council of Advisors on Science and Technology. Holtzman—a scientist with experience working at biotechs like Icos, Millennium Pharmaceuticals, and Microbia (now Ironwood Pharmaceuticals)—says he was intrigued by what Malinoski had to say about Liquidia’s potential for new vaccine development.

Doug Holtzman

The Gates Foundation certainly isn’t the first group to see potential in Liquidia’s work. The company already had significant venture backing, including a $25 million Series C venture round last April from Canaan Partners, Pappas Ventures, Morningside Venture Investments, New Enterprise Associates, PPD, and Firelake Capital.

Liquidia has attracted the interest in a technology for creating specific 3-D shaped particles that can be made to look like an invading virus does to the human immune system. Getting the proper shape is critically important, because it could coax the immune system to mount a defense against a particular invader. Even more importantly, Liquidia’s technique can be used to make these precise shapes, make them consistently, and do it in a scalable fashion, Holtzman says. Those are essential factors any company must figure out to make a successful new vaccine that can pass muster with regulatory bodies like the FDA. Unlike some nanotechnologies of the past, Liquidia has “exquisite control over the manufacturing process,” Holtzman says. “There’s tremendous promise here.”

Given Liquidia’s control over the nanoparticle shape and production, there are lots of different potential applications here for making vaccines for rich and poor countries. The foundation could have treated the company like a regular grant recipient, in which it could provide a specific amount of cash to support a distinct program—like, say, a flu vaccine—for a set amount of time.

Instead, the foundation wanted to provide more a more flexible, less-restricted form of financing to support a wider variety of applications of the Liquidia technology, Holtzman says. But Liquidia isn’t starting from scratch in the global health field. Before the Gates Foundation equity investment, Liquidia was moving ahead with a seasonal flu vaccine candidate—which could have an impact in fighting a global flu pandemic, Holtzman says. The company also has a collaborative agreement with the PATH Malaria Vaccine Initiative.

This new equity investment is set up a bit different than the usual venture deal. The Gates Foundation is taking a board seat in connection with its investment, although it will be through a board observer, Holtzman says. The observer won’t have a vote on the board, but will stay engaged through attending board meetings, and offering input, he says.

The agreement between the foundation includes language on specific programs the foundation wants the company to work on, for which there is no market. The foundation has said there is potential for Liquidia to receive further follow-on grant support, but there’s no obligation, Holtzman says.

The foundation, Holtzman says, also has the ability to “disengage” from Liquidia if it is unhappy with the direction of the program—like if the company decided to start making nanotech bullets instead of vaccines, Holtzman says. That would obviously be a pretty unhappy prospect for both the foundation and the company, and could have ramifications for whether the foundation seeks to build on this model or not. Investors in Liquidia had some “pointed questions,” Holtzman says, about how the foundation could withdraw from the company, how the global technology access provisions work, and what the foundation really wanted to accomplish. For now, anyway, Holtzman sounded optimistic the foundation won’t have to exercise its right to walk away.

“We’re very excited about this. It’s not going to replace grant-based support, we’re a grant-based organization,” Holtzman says. “But this is another tool we can use to provide resources to companies of specific interest, who have platform technologies with a wide variety of applications, where we can provide flexible support, and maintain deep engagement.”

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