Resolve Nabs $2M For Lupus Drug, First Step on the Road to Returns With No IPO, No M&A

5/17/11Follow @xconomy

Seattle-based Resolve Therapeutics raised its first $2 million to execute on a plan that challenges about 30 years of conventional wisdom of how you make money in biotech. And it took some creative thinking from a couple of New York-based venture firms to pull it together.

The plan, crafted by Resolve CEO Jim Posada, is set up so that the startup can generate returns without ever going public, or getting acquired by a bigger biotech or pharma company. It’s an unusual pitch, since those are the two classic ways biotechs can generate returns. But after hearing Posada’s pitch, a couple of New York firms—New Science Ventures, and Easton Capital—agreed to join the $2 million Series A round, to support early development of Resolve’s new drug candidate for lupus, a chronic inflammatory disease.

“We don’t think there’s a large probability of going public or being acquired,” Posada says. “Our exit will be a licensing transaction. The probability of that happening is quite high.”

In connection with the financing, Somu Subramaniam, the founder and managing partner of New Science Ventures, was added to Resolve’s board, while John Friedman, managing partner of Easton Capital, will be a board observer. Peter Kiener, the CEO of Gaithersburg, MD-based Zyngenia and a former global head of biologics R&D at AstraZeneca’s MedImmune unit, has signed on as chairman of Resolve.

Resolve was first profiled in these pages back in November. Here’s the gist: Posada, a former dealmaker for Eli Lilly (NYSE: LLY) and Lebanon, NH-based GlycoFi, decided to try to advance the development of a new biologic drug for lupus based on research from University of Washington researchers Jeff Ledbetter and Keith Elkon.

Like a lot of companies, Resolve is following the lean and mean “virtual” company model that has become popular in recent years as investors have sought some kind of relief from the long development cycles and huge capital investments that are the bane of biotech. Knowing that a traditional business model wouldn’t fly, Resolve decided to try to raise a total of about $10 million to $15 million to push a single drug candidate through the first part of mid-stage clinical trials over a three year period, and then generate returns through a partnership with a Big Pharma company that seeks to finish the rest of the long, expensive, and risky slog of drug development. Resolve’s investors would make instant returns on any up-front payment from a partner—typically in the $30 million to $50 million ballpark—and could receive upside returns, if the partner hits milestones further along in development, that often exceed $400-$500 million.

Jim Posada

This requires some different structures and lawyering than most biotech investors are used to, Posada says. Instead of being incorporated as a “C” corporation, like most biotech companies that seek to get returns by striking IPOs or getting acquired, Resolve was set up as a limited liability corporation (LLC), which enables the investors to realize their returns directly upon a license transaction being struck, Posada says.

Resolve isn’t the only company thinking about how to generate returns for investors through some other way than the IPO or M&A lottery. San Francisco-based Ablexis, which agreed to license its technology to five drug companies last year, has followed a similar playbook, Posada says.

Some venture capitalists are curious about the new model, but haven’t quite been willing to pull the trigger, Posada says. Others insist on continuing to swing for the fence with an IPO or acquisition. “A lot of VCs have no interest, aren’t able, or want to approach this idea with the old C corp structure, where they take everything from the up-front payment. It took me a year to find firms where the value proposition made sense to both parties.”

Like most anything in life, there are pluses and minuses to the new approach. The founders, and a small team of consultants, are able to retain a larger piece of the equity pie for themselves by avoiding a big eight-figure venture financing. But this also means Resolve has to run on a very tight budget, and it must hit its milestones on time, or else it runs the risk of running out of dough. And the model can only really work in specific types of diseases, where it is possible to create value with a new drug after only $10 million to $15 million of early stage testing, Posada says.

Resolve’s plan is to use this first wad of cash to get going on studies required to submit an FDA application to begin clinical trials. The first clinical trial of Resolve’s lupus drug will be a safety study in healthy volunteers, followed by a mid-stage study at three doses given over six weeks, which will look for the drug’s effect on an interferon biomarker that’s thought to be correlated with relief of lupus symptoms, Posada says.

The validity of the biomarker is critical, because otherwise Resolve would have to run a longer and more expensive trial that would run months or years to show its drug is really working. But since Resolve is building off of work by Genentech and MedImmune, which have validated the biomarker, Posada says it’s possible for his company to strike a lucrative licensing deal with a Big Pharma company if its drug simply shows a promising effect against the biomarker. It would be up to the Big Pharma partner to really prove to the FDA that the biomarker is correlated with a meaningful improvement in symptoms for lupus patients.

If Resolve can carry out this plan, and strike a partnership, it could end up re-writing the templates for how risk gets shared across the long continuum of drug development. Essentially, Big Pharma will have obtained an asset that has passed some important early steps, paid a little bit of money for it, and only start shelling out big bucks if the drug really does live up to its potential in a market worth billions. You can bet that others will be copying this model if Posada is right.

But so far, the majority of investors still haven’t been ready to throw out the old templates, Posada says.

“It’s surprising a lot of folks don’t understand how an LLC is different from a C corp. A lot of people in venture capital think they’ll fund a company and it will get bought. It’s surprising. It’s becoming more and more obvious it’s an antiquated view,” Posada says.

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