Kineta, Playing for Bunt Singles, Builds a Biotech Company Without VC Bucks

6/6/12Follow @xconomy

One of the best-financed biotech startups in Seattle of the last five years hasn’t raised a dime of traditional venture capital. If Kineta can show it delivers returns without such VC backing, then it could provide an interesting alternative example of how to build a biotech company on a series of bunt singles, instead of one big swing for the fence.

Kineta, through a string of small financing deals, has gathered about $38 million to support its drug R&D programs since its founding in December 2007. About $11 million has come from individual investors, the Iacocca Family Foundation, MPI Research, and a network of about 30 pharmaceutical industry executives, says Bill Cadwallader, the company’s senior vice president of corporate development. The rest of Kineta’s support has come from collaborative grants and contracts the company is splitting with its partners, which include researchers at the University of Washington and UC Irvine.

No one investing with Kineta is betting it will become the next Amgen (NASDAQ: AMGN), worth $50 billion and with 17,000 employees. But as so many biotech companies have tried and failed to build fully integrated companies that discover, develop, manufacture, and market drugs like Amgen, many venture capitalists that traditionally supported such biotech companies have given up. Kineta’s hope is that by carving out one small piece of the value chain—the tricky steps of taking a drug from animal testing through early stage clinical trials—it will find a sustainable niche. By doing that, it hopes to hand off promising new products to fill up the empty pipelines at Big Pharma, and make a modest return for its investors within a relatively short three-year time frame.

That’s vastly different from most venture-backed biotech companies, which often raise hundreds of millions, and work for a decade or more, all in the hope of beating the steep odds and coming up with a billion-dollar molecule.

Kineta's founders. Shawn Iadonato (left) and Chuck Magness (right)

“When we started this company, I was really focused on how to make the investment proposition a lot more sensible, in terms of how long investors can expect to put money to work before they got a return, in terms of the likelihood of getting a good return, and the capital efficiency of it all,” says Kineta CEO Chuck Magness.

Magness, along with co-founder Shawn Iadonato, started Kineta right after they sold their last company, Illumigen Biosciences, to Lexington, MA-based Cubist Pharmaceuticals (NASDAQ: CBST). That deal, like many in biotech, came with a relatively small upfront payment of $9 million, and milestone payments that made it potentially worth as much as $340 million to Illumigen over time if its drug candidates reached certain goals for the acquirer.

Instead of creating their next company with an eye toward another acquisition, Kineta’s founders wondered whether they could they set up a more enduring company. They structured the new entity to operate a bit like an incubator. There would be a small core of experienced R&D people and business development pros who could in-license promising compounds. If they spotted a novel drug that had shown some evidence of effectiveness in animals, then Kineta’s task would be to collaborate with the inventor on running the necessary tests to begin clinical trials, and then carry out the first of three phases of clinical trials normally required for FDA approval. By investing about $10 million over three years, the Kineta team figured, they ought to be able to show a drug is safe and that it gets absorbed and distributed through the body like a good drug should.

Once that work is done, Kineta looks to sell … Next Page »

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  • RoJones

    Illumigen raised $23 million from 2000 to 2007 then sold for $9 million with up to $340 million in total milestone payments. How did that work out? The news reporting seems to drop off after the deal was made in Dec. 2007. Was Illumigens last Cubist payment $9 million?

    To be clear, did these two guys turn $23 million into $9 million? Did that prompt them to create this new business model? A model where efficacy is none of their “business”? 

  • Earl

    This “track record” shows the opposite of what it seems.  The Kineta team’s experience with the pressure by vulture investors led them to deconstruct that Illumigen experience and develop a different model in which they hold control with a passion for attractive equity returns rather than some big elusive, and often short-sighted “pay date”.  Kineta is showing that the new model addresses the failings of the commercial and often conflicted incentives of traditional models for drug development.  Kineta has created a new niche and is proving that their approach is paying off.  It’s a good thing – when smart people reflect on their “lessons learned” and move in a wiser direction.  Kineta is a jewel in a oyster bed of wannabe pearls.

  • Michelle

    “…did these two guys turn $23 million into $9 million?” Would be appropriate for MPI Research to fund them with venture capital then. MPI turned a promise of 3,300 jobs for Michigan into wave over wave of layoffs just six months post jobs announcement.

    Also interesting that MPI hasn’t been able to create enough revenue to retain staff, give consistent pay raises and matching 401k contributions, or renovate leased Pfizer buildings (now donated to WMU), yet they have money for venture capital schemes.