Seattle-based Kineta, the company developing drugs against autoimmune diseases, said today it has formed an alliance with MPI Research. Terms of the deal weren’t disclosed, but Kineta will get support for animal studies that will enable it to start clinical trials in 2010, the company said. Kineta also received the second year of funding under a grant from the National Institutes of Health to advance its antiviral research program. We profiled Kineta and its unusual strategy back in July when it acquired drug candidates for multiple sclerosis and other autoimmune disorders.

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Most Seattleites would probably list Bill Gates, Paul Allen, Howard Schultz, and Jeff Bezos when asked to name local entrepreneurs who built not just successful companies but entirely new industries. But they’d be forgetting Steve Gillis.

Gillis would have to be considered something like the Fifth Beatle in a group like that—you can walk into his office today without being babysat by PR handlers—but he is one of the pioneers of the biotechnology industry both in Seattle and nationally.

For those who don’t know, Gillis was a charismatic 28-year-old immunologist when he left a faculty post at the Fred Hutchinson Cancer Research Center to start Immunex in 1981. He and co-founder Christopher Henney rode the early wave of investor enthusiasm for genetically engineered drugs to an IPO, recruited top scientific talent from around the world to Seattle, and persevered through some dark days to create a breakthrough drug for autoimmune diseases that generates more than $7 billion a year in worldwide sales for biotech giants Amgen and Wyeth.

Talk to any scientist who worked at Immunex in the early days, and they’ll tell you they adored Gillis, the inspirational scientist with an irreverent brand of humor. Legend has it he used to dare scientists to dream big, and instead of bashing them for running a failed experiment, he’d honor goof-ups with the “Pons & Fleischmann award for achievement in dubious science,” named after the guys who once claimed to discover cold fusion.

Gillis didn’t have as much success in his second career act from 1994 to 2005, as the founder and CEO at Seattle-based Corixa. But when GlaxoSmithKline bought that company for a little more than $300 million, he took a new direction in his career, joining one of the most active life sciences venture firms in Seattle, Arch Venture Partners.

This role at Arch allows Gillis, now 56, to put his fingers in a lot more pots. He serves on the boards of six life sciences companies in Seattle: Accelerator, Trubion Pharmaceuticals (NASDAQ: TRBN), VLST, Theraclone Sciences, Qwell Pharmaceuticals, and VentiRx. He also serves on the board of two other Arch companies in Massachusetts—Brighton, MA-based Surface Logix and Cambridge, MA-based Variation Biotechnologies.

This new perspective as a venture capitalist provides Gillis an opportunity to be even more influential in the community, says one of his protégés from the Immunex days, ZymoGenetics CEO Doug Williams. “He can be enormously helpful to the local biotech scene at Arch, and in fact I think if you look at the companies he’s involved with locally, you’d have to conclude that he already is. Steve is one of those rare people with an equal dose of talent in science and the business of biotech. He’s pretty much done and seen it all, and for him to be able to convey that to many companies instead of just one is of great benefit to the local scene,” Williams says.

I sat down with Gillis a few days ago to talk about life as a venture capitalist, how the biotech investing model has changed, and Seattle’s strengths and weaknesses. Here are the highlights of the conversation.

Xconomy: Can you bring us back to your thought process when you came to Arch? It was the summer of 2005, you had a long run at Corixa, and could have done a lot of different things. Why did you decide to become a venture capitalist?

Steve Gillis: After whatever it was, 14 years at Immunex and 11 at Corixa, that was 25 years of being involved in operations of a public company. I didn’t want to jump back into doing that. I needed some sort of break. Because sometimes running public companies isn’t a lot of fun. A lot of what you do is …Next Page »

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Seattle might never have gotten its newest biotech research center if not for a historic corporate blunder from 30 years ago, according to Lars Rebien Sorensen, the CEO of Novo Nordisk.

Novo, the Danish drugmaker that is the world’s biggest producer of insulin for treating diabetes, was approached then by a small biotech company from California that thought it could help Novo come up with a better way to treat diabetes. This little company had an idea for making genetically engineered copies of the human insulin protein, which would be more effective, and less likely to provoke an immune system reaction in patients than the standard insulins of the day, which were derived from animals. Novo was satisfied with what it had, and politely said no thanks, according to Sorensen.

That little company was South San Francisco-based Genentech. It went on to form a partnership with Eli Lilly to make genetically engineered human insulin in the early 1980s, which soon made animal-derived insulin completely obsolete, and directly threatened Novo’s core business. Novo Nordisk was forced to play catch up, and it found a little biotech partner from the 1980s in Seattle—ZymoGenetics—that helped it create a human form of insulin that was able to become a dominant player.

Sorensen told this little parable this morning at the grand opening of Novo Nordisk’s brand new research center in Seattle’s South Lake Union neighborhood. This event drew a lot of the who’s who in Seattle biotech, and Sorensen told this little parable to make a point. Novo doesn’t want to be that short-sighted again, and while it’s prospering with its treatment for the global diabetes epidemic, it wants to spend some of that money planting seeds for the future opportunities in biotech that it doesn’t want to miss.

Lars Rebien Sorensen

After considering what it knows from its years of partnership with ZymoGenetics, and watching Immunex create a breakthrough for rheumatoid arthritis that now generates $7 billion a year in sales, Novo has reached two conclusions: Autoimmune diseases are said to affect one out of every 12 Americans, and represent a big unrealized opportunity for the future of pharmaceuticals. Seattle is one of the best places to tap into scientific know-how that has a shot to create the next generation of medicines for those patients, Sorensen said.

“We do not want to make the same mistake again,” Sorensen said this morning at the grand opening.

Novo is putting its money where its mouth is, investing while others are cutting in the recession. It proudly showed off its facility at this morning’s event. The research center at the corner of Mercer and Fairview Avenue North, is led by former ZymoGenetics scientist Don Foster. It currently employs 35 people, and is expected to grow to 60 people by the end of 2010.

The company definitely wants to make inroads with the local VIPs in Seattle. Mayor Greg Nickels showed up to deliver some welcoming remarks, and some big names from local biotech were there to mingle—VLST’s Marty Simonetti and Paul Carter, ZymoGenetics chairman Bruce Carter, Seattle Biomedical Research Institute president Ken Stuart, and Washington Biotechnology & Biomedical Association president Chris Rivera. They were there to mix with some very well-dressed Danish business executives, including Sorensen and Novo’s chief scientific officer Mads Krogsgaard Thomsen.

Foster—who looked just like a classic American scientist a little uncomfortable in a suit, speaking in front of an audience—actually delivered a pretty forceful case for why he’s excited about the opportunity to create new drugs with Novo. He railed against the trend in the industry toward creating “me-too” products that attempt to make money by piggybacking on truly groundbreaking discoveries like Immunex’s etanercept (Enbrel), but that don’t really add much benefit for patients. Novo, he says, is going to stick its neck out and collaborate with innovative biotechs like VLST that can help it discover promising new avenues for therapy, and then put its corporate horsepower in manufacturing back in Denmark to work.

“I can remember saying to my wife a year ago that I wanted to find a place with the will, the resources, the fortitude, and the patience to come up with new biologic therapies,” Foster told the audience. “We will not be a me-too company. We will make a difference.”

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ZymoGenetics (NASDAQ: ZGEN), the Seattle-based biotech company, said today in a regulatory filing that the atacicept drug it developed and licensed to Merck KGaA has failed to reach its goal of controlling rheumatoid arthritis in a pair of mid-stage clinical trials. The study confirmed the biological effect of atacicept, and researchers saw no unexpected side effects. Studies are still ongoing of atacicept for two other autoimmune diseases—lupus and multiple sclerosis, the company said.

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Intellikine has the kind of story you rarely see in 2009. Few biotech companies can rustle up $28 million in venture capital in this year of the Great Recession, especially when they don’t have a single drug candidate in human clinical trials. Either investors are having a bout of 1999-style insanity, or the company has something really intriguing under the hood.

That’s what I wanted to find out last week when I had a chance to talk in some depth with Troy Wilson, the CEO and co-founder of La Jolla, CA-based Intellikine. We broke the story in early July that Intellikine had collected the first part of a big round of venture capital, which could total as much as $51 million. The syndicate included Novartis Bioventures, Biogen Idec, FinTech Global Capital, US Venture Partners, as well as previous investors Sofinnova Ventures, Abingworth Management, and CMEA Ventures.

Intellikine, founded in September 2007, is best known for developing drugs to block what’s known as the PI3 kinase pathway, which controls critical cell processes like proliferation, migration, and cell survival. This has become one of the pharmaceutical industry’s hot targets, as researchers have shown the pathway is involved in both cancer and autoimmune diseases. Since these conditions affect millions of people, the field has attracted lots of competitors, many of whom are ahead of Intellikine in development. The list of rivals includes GlaxoSmithKline, Novartis, and Roche, as well as smaller players like South San Francisco-based Exelixis and Seattle-based Calistoga Pharmaceuticals.

So what makes Intellikine special enough to grab this much investment in a downturn? A lot of it has to do with the startup’s own investment in basic biology to characterize the four different variants of the PI3 kinase pathway, combined with a prolific chemistry team that has created 1,500 different drug candidates to block those targets, Wilson says. That’s in contrast to other companies that may be further down the drug-development path, but have picked one or two horses to bet on, which may or may not have the best attributes for a drug, he says.

“We may not be first in class, but we want to be best in class,” Wilson says. “We wanted to look at every possible kind of inhibitor.” Keeping the options open for now is important, he adds, because, “We’re still learning about these targets.”

Intellikine CEO Troy Wilson

Much of what Intellikine is learning about PI3 kinase biology grows out of science from the lab of Kevan Shokat at the University of California, San Francisco. Shokat, a Howard Hughes Medical Institute investigator, is known for developing chemical techniques to better characterize the individual roles of kinases and the signals they send to cells. Intellikine combined that knowledge with Wilson’s business savvy (he’s a co-founder and former chief business officer of San Diego-based Ambrx) and technical expertise from a pair of scientists at the Genomics Institute of the Novartis Research Foundation in San Diego—Pingda Ren and Yi Liu. Zachary Knight, now a fellow at Rockefeller University, was a fifth co-founder, and remains an adviser to the company.

The company’s first couple of years have been focused on building up a library of small-molecule drug candidates that are potent, selectively hit certain targets, and have good drug-like properties such as being soluble in the bloodstream, Wilson says. These compounds have been made to hit …Next Page »

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Avila Therapeutics, the Waltham, MA-based developer of drugs that create stronger bonds with protein targets on cells, said today it has raised $30 million in a Series B round of venture capital to drive its treatments into human clinical trials.

The Novartis Option Fund, a new investor, led the financing, and was followed by Avila’s existing backers: Abingworth, Advent Venture Partners, Atlas Venture, and Polaris Venture Partners. In a separate statement, Avila said Novartis Option Fund reached an agreement to co-develop Avila’s drugs for as much as $200 million in upfront and future milestone payments.

The startup, which Xconomy first profiled back in December, says its niche in is developing drugs that form covalent bonds with molecular targets on cells, instead of the usual ionic or van der Waal bonds. Those types of bonds are dynamic, meaning the drug can bounce on and off the target. Covalent bonds, on the other hand, provide a tighter, more stable connection between the drug and the target on cells, so they completely inhibit the biological function the drug is supposed to stop, Avila has said. The company hopes this technology, which it calls “Avilomics,” can be applied to many different drugs.

Avila says it has generated some proof for its concept in animal models. One of its experimental drugs is designed to block an enzyme used by the hepatitis C virus, and the other is made to block a protein called Btk, which scientists say is involved with autoimmune diseases and cancers. The new financing will be used to move Avila’s first program into clinical trials, while also advancing the Avilomics drug discovery approach, the company said.

Harry Skinner of the Novartis Option Fund is joining the Avila board in connection with the deal, Avila said in a statement. “Avila’s innovations and proprietary know-how make it possible to intelligently pursue covalent drugs, a broad product class that has been underutilized to date,” Skinner said in a statement.

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This week biotech, both locally and nationally, showed some real swagger in its step. Human Genome Sciences turned into a rocket ship, Medarex made investors a fortune, and Onyx Pharmaceuticals surprised the street with positive news against breast cancer. You can bet this rising tide will lift other boats as investors prowl around for the next beaten-down biotech that might blossom.

—Seattle-based ZymoGenetics (NASDAQ: ZGEN) picked up some solid momentum this week after its longtime competitor, Rockville, MD-based Human Genome Sciences, shocked the world with a big success in a clinical trial for lupus, a common autoimmune disease. The HGS drug is made to hit a protein target called BLyS, which is the same target that ZymoGenetics and its partner Merck/Serono are pursuing. Zymo shares climbed 20 percent in the wake of its rival’s good fortune.

—Dendreon isn’t saying anything officially about its plans for manufacturing enough of its prostate cancer drug, Provenge, although it’s safe to say the Seattle-based company (NASDAQ: DNDN) is going to look to the southeastern U.S. for a second factory to support its existing one in Morris Plains, NJ. This move will be made to put this logistically tricky drug closer to where most of the prostate cancer patients in America live.

—Cell Therapeutics, in good times and bad, always finds a way to raise money. Yesterday, the Seattle-based biotech company (NASDAQ: CTIC), which has raised $1.3 billion in its 18-year history, said it has started an underwritten offering of 29.3 million shares, plus warrants. This ought to pull in at least $40 million—just as the company has a couple months of cash left, and needs more to stay afloat while it awaits an FDA decision on whether to approve its pixantrone drug for non-Hodgkin’s lymphoma.

—Bothell, WA-based OncoGenex Pharmaceuticals (NASDAQ: OGXI) has big plans to move into the final stage of clinical trials with its experimental prostate cancer drug, and this week it raised a little bit of money to buy some time. The company, which has octupled since February, is seizing the momentum to raise $9.5 million through a stock sale.

—Away from the prying eyes of public company investors, venture capitalists are still writing some of their very biggest checks to companies in life sciences and medical devices. The top 10 deals from Washington state in the second quarter showed Pathway Medical Technologies, NanoString Technologies, and Calistoga Pharmaceuticals at the top of the heap.

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ZymoGenetics watched in obscurity from the sidelines yesterday as one of its main competitors rocked the biotech world. Yet Zymo cheered every minute like this was a gift from heaven.

Say what? The big news came before markets opened yesterday when Rockville, MD-based Human Genome Sciences (NASDAQ: HGSI)—once an overhyped darling of the genome bubble of 2000—saw its stock quadruple on record trading volume when it reported the first major clinical trial success with a new drug for lupus. If this result can be confimed in a second study, HGS will have the first new drug in more than four decades for this inflammatory disease that affects an estimated 1.5 million to 2 million people in the U.S.

The reason the news also boosted Seattle-based ZymoGenetics (NASDAQ: ZGEN) is because the rivals share a research focus. HGS just produced the first convincing proof that doctors can successfully treat lupus by blocking a specific inflammatory protein known as BLyS (pronounced bliss). ZymoGenetics scientist Jane Gross, whom I profiled for the The Seattle Times in 2004, staked a claim in the 1990s to excess production of this particular protein and a number of diseases in which the immune system goes haywire and starts attacking healthy tissue. By 2001, ZymoGenetics had formed a deal with Merck Serono to develop a genetically engineered protein drug, called atacicept (uh-tack-ee-cept) that would interfere with BlyS as well as another inflammatory protein called APRIL, which Human Genome Sciences’ drug isn’t designed to block.

Many investors have forgotten ZymoGenetics’ connection to atacicept and its BLyS target because the Seattle biotech handed over majority ownership of the drug candidate to Merck Serono last September when it started running low on cash. But Zymo still has plenty of skin in the game. Even though it quit paying for the development costs, Zymo was able to retain a royalty rate in the “mid-to-high teens” (as a percentage of sales) if Merck Serono can turn atacicept into a marketed product.

That’s why when Human Genome Sciences roared, ZymoGenetics let out a healthy whoop as its shares soared 20 percent yesterday to close at $5.22.

“We still have an upside stake in that drug, without having to pay a nickel more to develop it,” says ZymoGenetics CEO Doug Williams. “Our view is that we actually have a better mousetrap. Some people forgot, but the smart money is recognizing it.”

Before getting too carried away and bidding up ZymoGenetics stock to the moon, …Next Page »

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Seattle biotech is quieting down these days, so it’s a good time for your local life sciences correspondent to step away on vacation. See you back here on July 20.

—EndoGastric Solutions, the medical device firm based in Redmond, WA, and Redwood City, CA, raised $7.5 million from investors. The company makes devices to combat heartburn and obesity. It was originally incubated at Scout Medical Technologies in Kirkland, WA, and has previously raised $79 million from investors including MPM Capital and Advanced Technology Ventures.

—The writing has been on the wall for months at Seattle-based Targeted Genetics (NASDAQ: TGEN), and this week the company may have pulled an important last-ditch maneuver to avoid bankruptcy, or at least hold on a while longer. By paying a $500,000 termination fee, Targeted Genetics escaped a $12 million lease obligation on a manufacturing facility in Bothell, WA, that Targeted Genetics never occupied. This could clean up the balance sheet enough, the company hopes, to entice a partner or other investor to provide capital to keep the doors open beyond August.

—Amgen (NASDAQ: AMGN), the world’s largest biotechnology company, said its lead experimental drug, denosumab, reached all its goals in a clinical trial of more than 2,000 women with breast cancer. The Amgen drug, which is also vying for FDA approval as an osteoporosis treatment, has been studied for more than a decade as a cancer drug at Amgen’s Seattle research center, as I described in a feature in October. So this result has been a long time coming. Detailed results will be presented later at a medical meeting, Amgen said.

—I profiled Kineta, a Seattle-based biotech company formed by a team that worked together at Seattle-based Illumigen before that company was sold to Lexington, MA-based Cubist Pharmaceuticals (NASDAQ: CBST) in October 2007. Team members don’t want to create the next fully integrated biotech company, like Amgen, but instead want to zero in on one delicate spot in the drug development process they know well—early-stage clinical trials.

—Seattle-based Theraclone Sciences received some good news this week when the International AIDS Vaccine Initiative agreed to continue funding a program to develop antibodies that might have broad potential for HIV vaccines and drugs. Terms weren’t disclosed.

—Qliance Medical Management, a Seattle-based company that won’t accept insurance for primary care medical services and instead relies on patients paying a monthly membership fee for such services, raised $4 million from Second Avenue Partners, New Atlantic Ventures, and Clear Fir Partners. Qliance is aiming high, attempting to help form closer connections between patients and doctors by eliminating the insurance middleman, at a time when power players in Washington, DC, are talking about potentially sweeping reforms in how healthcare gets delivered in America.

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Seattle-based Kineta doesn’t want to grow up to be the next Amgen. It has seen plenty of biotech companies go up in flames when they try to do everything from drug discovery to development, and manufacturing to marketing. Instead, the company sees opportunity in carving out one piece of that product development continuum, doing it well, and hopefully making some money.

Sound odd? It’s all part of an unusual business plan at Kineta, a company formed last year by CEO Charles Magness and chief scientist Shawn Iadonato, who worked together at Seattle-based Illumigen before that company was sold to Lexington, MA-based Cubist Pharmaceuticals. I sat down with them last week at their new offices in Seattle’s South Lake Union neighborhood to hear about the company strategy and its initial case-study—drug candidates it acquired for autoimmune diseases like multiple sclerosis and Type 1 diabetes.

The company was founded on the basic idea that there is a great supply of drug candidates in the biotech and pharmaceutical industries in the preclinical (animal testing) phase, but little demand for those products until someone generates evidence they work in human trials, Iadonato says. On the other end of the spectrum, there’s great demand from patients for new therapies, but a slim supply of really promising drugs in the late stages of development to meet the demand. The Kineta group, through work at Illumigen and other companies, showed they were skilled at taking relatively untested drugs through the late preclinical and early-stage clinical trials—steps that often trip up larger companies, and take a lot longer than they think.

So the Kineta concept is to cast about for promising drug candidates in animal tests, acquire licenses for pretty modest terms, run them through early-stage clinical trials on a strict budget of time and money, and then form a partnership with a bigger drugmaker who has the money and manpower to run bigger trials needed to win FDA approval for a new drug. If all goes as planned, Kineta will collect the usual upfront payments on these deals, milestones from success in later development, and royalties on product sales if they ever become marketed products. And they’ll repeat the cycle many times over. Essentially, they plan to do a couple of essential drug development steps well, and let other people try to be the next Amgen or Genentech.

“A lot of biotechs are built on ill-defined timelines, and ill-defined amounts of investment, …Next Page »

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Lots of news from the world of cancer research came out over the weekend at the American Society of Clinical Oncology meeting in Orlando, FL. There was a lot of impressive data coming out of Northwest companies (although most of it is still quite preliminary), so here’s a quick recap to catch up. The conference, which drew 30,000 cancer specialists, continues today and tomorrow.

—OncoGenex Pharmaceuticals. The Bothell, WA-based biotech company was heralded by a Rodman & Renshaw analyst as one of ASCO’s “sleeper hits” heading into the meeting, so a lot of inquiring minds flocked to its presentation. The company reported that its drug, OGX-011, in combination with standard docetaxel chemotherapy, was able to help men with terminal prostate cancer live a median of 6.9 months longer than if they got docetaxel alone.

Framed a little differently, this drug lowered the risk of death during the study by 39 percent. This is known as the hazard ratio, an important statistical measure of a drug’s benefit. For comparison, Seattle-based Dendreon showed its much-heralded prostate cancer drug, sipuleucel-T (Provenge), was able to lower the risk of dying by 22.5 percent when using this statistical measurement.

Of course, the OncoGenex result needs to be taken with a grain of salt because the trial only had 82 patients. OncoGenex will need money and clinical development manpower from a partner to really confirm this result is real in pivotal clinical trials. CEO Scott Cormack has been so busy trying to get those stars to align for the company that he told me before the conference, “I might fall over.” (He was exaggerating a little for dramatic effect, but he did sound a bit tired on the phone.)

—Billionaire Paul Allen doesn’t get much attention for his biotech investing, but one company he helped get started in 2005, Brisbane, CA-based BiPar Sciences, dropped a “bombshell” at ASCO. The company showed that when its drug is combined with chemotherapy, it was able to shrink tumors, slow down their spread, and help people live longer, without adding any new side effects. This was seen in a 116-patient clinical trial of women with an aggressive form of breast cancer known as the “triple negative” variety.

The data was compelling enough to earn a coveted plenary presentation in front of thousands of doctors at ASCO, and prompted Paris-based Sanofi-Aventis to pay $500 million to buy the company last month. That payday was enough to earn Allen a windfall proft of an estimated $100 million, after he invested just $13 million over the past four years.

This result is so impressive that Powel Brown, a cancer prevention researcher at the Baylor College of Medicine told Bloomberg News that BiPar’s drug and another in its class represent “the biggest story in breast cancer, by far, and it’s going to be a huge bombshell.” The result is so positive, he predicted the drug would be FDA approved in a year or two.

—Seattle Genetics offered some more evidence, albeit quite preliminary, that suggests it may have a powerful new drug for Hodgkin’s disease and …Next Page »

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Taligen Therapeutics, the Cambridge, MA-based developer of drugs for inflammatory diseases, has raised $26 million out of a $65 million financing round, according to a regulatory filing.

The investors in the company weren’t named in the document, although Nick Galakatos of Clarus Ventures, Ed Hurwitz of Alta Partners, and Timothy Mills of Sanderling Ventures are listed as directors. All three firms are listed on Taligen’s website as previous investors. CEO Abbie Celniker didn’t respond immediately to an e-mail request for comment.

Celniker held senior R&D posts at Genentech, Wyeth, Millennium Pharmaceuticals, and Novartis before she came to Taligen last summer. The company, as she explained to me in an interview last August, is developing drugs for inflammatory diseases that work in a new way, by controlling the “alternative complement pathway”-a part of the immune system that helps initiate and amplify inflammation. The approach is different than that of other protein drugs that work further “downstream” in the chain of inflammatory events, like Amgen’s arthritis drug etanercept (Enbrel) or Biogen Idec and Elan’s multiple sclerosis and Crohn’s disease treatment, natalizumab (Tysabri), she says. Intervening earlier in the complicated cascade of events, the reasoning goes, could better control inflammation.

Taligen was founded in 2004 by Woodruff Emlen and Michael Holers, professors at the University of Colorado. Taligen moved its corporate headquarters from Aurora, CO, to Cambridge last July when Celniker joined the company.

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Seattle-based Calistoga Pharmaceuticals has raised $30 million in a second round of venture capital to support its growing pipeline of drugs for cancer and inflammatory diseases. The venture financing is the second-biggest of the year in the Seattle life sciences cluster, behind the $40 million raised in March by Kirkland, WA-based Pathway Medical Technologies.

Calistoga got the vote of confidence from the same people who invested in its $21 million Series A round two years ago—Frazier Healthcare Ventures, Alta Partners, Three Arch Partners, and Amgen Ventures.

The company has been able to defy the gravity of the downturn because it is hitting its drug development milestones ahead of schedule, and it is pursuing one of the hottest targets in cancer biology of the moment. It’s called the PI3 kinase pathway, which controls 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 growing out of control as well as an immune system going haywire and attacking healthy tissue.

Calistoga was born in 2006 when it licensed technology from Bothell, WA-based Icos to develop drugs that hit this target. The company is up against some formidable competition in this cancer category, with GlaxoSmithKline, Novartis, Roche, and Exelixis, to name a few. Yet Calistoga claims to be different because its drugs are aimed to hit more specific types of PI3 kinase, including one known as the delta isoform. This means Calistoga’s drug may have a better profile for blood cancers that express this variety of the PI3 kinase, and it may have milder side effects that would make this drug useful for chronic conditions like inflammatory diseases, says CEO Carol Gallagher.

“This will give us some wind in our sails as we advance these programs,” Gallagher says. “It’s great in a difficult financing environment to get a signal from our investors that they have confidence.”

The financing enables Calistoga to keep building up a pipeline of experimental drugs, so that a year from now it expects to have three different drugs in clinical trials. The new financing means Calistoga has enough cash to operate through 2010, although Gallagher wouldn’t be more specific because the cash burn rate will depend on how fast it decides to push drugs through clinical trials. Calistoga, which has 22 employees, is planning to conserve this capital carefully from the start—it doesn’t plan …Next Page »

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ZymoGenetics, the largest independent biotech company in Washington, said today it is cutting one-third of its workforce to conserve cash.

The Seattle biotech company (NASDAQ: ZGEN) said today it is eliminating 161 jobs, or 32 percent, of its staff, which will leave it with about 350 employees. The company said it is cutting costs broadly by getting rid of its cancer drug research capability, cutting manufacturing of drugs for clinical trials, and some product development and some support functions that it will now outsourced, said spokeswoman Susan Specht. The company will continue to concentrate resources on research and development of immunology drugs, a “core strength.”

“Given the financial markets, we had to make the cuts,” Specht says. “We don’t want to be dependent on the financial markets anymore.”

The moves are “better for shareholders,” but sad for the employees, she added.

ZymoGenetics will continue to invest in the sales and marketing of its lone marketed product, recombinant thrombin (Recothrom) for surgical bleeding. That drug got off to a slow start last year with just $8.8 million in sales in first-year sales, and it is forecasted to generate $25 million to $35 million this year. ZymoGenetics also hopes to bring in more money by forming partnerships with larger drugmakers, like the deal it struck in January potentially worth $1.1 billion with Bristol-Myers Squibb, to co-develop pegylated interferon lambda against hepatitis C.

The company hopes to form a partnership to co-develop one cancer drug it has in clinical trials, IL-21, in the second half of this year, or the first half of 2010, Specht says.

The company expects to save $11 million this year because of the cutbacks, and about $30 million annually in future years, Specht says.

ZymoGenetics has reversed its fortunes a bit this year with the signing of the partnership with Bristol-Myers Squibb, but the company’s stock is still down 60 percent from where it was a year ago, at a share price of $3.63, making it extremely difficult to raise new equity capital from investors. The company, which spun off from Novo Nordisk as an independent company in 2000, has never been profitable.

As I reported last month in this analysis of the cash balances of Seattle biotech companies, ZymoGenetics had $89.9 million in the bank by the beginning of the year, and entered the year expecting to spend $115 million to $125 million on R&D. The Bristol deal is supposed to bring in $200 million total for ZymoGenetics in 2009 to help pay the bills, but that wasn’t enough of a cushion for future years. CEO Doug Williams suggested in his presentation last month at Invest Northwest that cost cuts could be on the way.

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One of the things we believe at Xconomy is that innovation happens in geographic clusters, especially when people can easily interact across multiple disciplines. I got a sense of how one of those important interactions is starting to blossom in pockets of a massive construction zone otherwise known as Seattle’s South Lake Union.

Smack in the middle of the neighborhood on Westlake Avenue is VLST, a classic startup that, like most biotechs, needs cash and outside validation of its ideas. About a five-minute walk away on Fairview Avenue North is a budding research center for Denmark’s Novo Nordisk. It’s the classic Big Pharma company, loaded with dough, but in need of innovative product ideas to keep its shareholders happy. To hear VLST CEO Martin Simonetti tell the story, the proximity and familiarity of these two companies makes all the difference between success and failure in their partnership.

“It’s not like we show up four times a year in Copenhagen and say ‘here you go, here’s our stuff,’ and then leave,” Simonetti says. “We lay the groundwork with regular communications, so there are no surprises. The partnership is really off to a great start.”

When I stopped by VLST’s offices a few weeks ago, Simonetti still looked like a guy who was counting his blessings. He was thankful to have secured the Novo partnership in December. It brought in $12 million to his company immediately, paid the salaries for 12 of his 40 employees, and gave him enough cash to keep VLST operating at least through the end of 2010. This was a coup for any small biotech, but especially one like VLST that doesn’t have any drugs of its own advancing yet through clinical trials. That’s where the most value is created in the eyes of venture capitalists.

The value at VLST is largely being assigned to its “platform,” which is biotech-lingo for a special technology that represents the opportunity to create a lot of potential new drugs. The company’s core idea is that it can learn something from the insidious tricks viruses use to infect people. More specifically, the company studies proteins that viruses secrete (known as “virulence factors”) that help tamp down an inflammatory immune defense reaction that might otherwise kill them. Tamping down the immune system is a huge deal if you’re one of the estimated 14 million to 24 million people in the U.S. with diseases in which the immune system flips into overdrive, like rheumatoid arthritis, multiple sclerosis, and Type 1 diabetes. VLST hopes to identify these viral proteins, and uncover how they interact with other proteins, which might lead to genetically engineered drugs.

The folks at Novo Nordisk’s new Seattle research center, which is planning to expand to house 80 people, are now starting to sort through some of VLST’s basic biology to see what might provide the basis for good drug targets. Site head Don Foster made plain to me in this January feature that Novo sees autoimmune disease as one of the biggest opportunities in pharmaceuticals. That, and Seattle’s historically strong immunology talent pool, are the big reasons Novo has placed this multi-million dollar bet in South Lake Union.

Scientists frequently make the short walk between these two companies to keep each other informed. When they feel like meeting on neutral ground in a laid-back atmosphere, they gather at Uptown Espresso on Westlake and Republican, Simonetti says.

It could take years for these interactions to bear fruit. But at least for the next couple years, it means VLST can stay in the game long enough to show the venture capitalists what kind of progress they can make. If they succeed, it might create a little more demand to fill up all that office space under construction in the neighborhood.

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Trubion Pharmaceuticals (NASDAQ: TRBN), said today it has started a clinical trial of a drug for lupus, an autoimmune disease. The drug, SBI-087, is made to hit a target called CD20, that’s currently blocked by Genentech and Biogen Idec’s rituximab (Rituxan) for patients with a different form of autoimmune disease, rheumatoid arthritis. The Trubion drug-which is also being tested for rheumatoid arthritis—is being developed in partnership with Madison, NJ-based Wyeth.

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Rituxan, the hit lymphoma drug from Genentech and Biogen Idec, has failed in yet another bid to expand into treating other diseases. The drug fell short of reaching the main goal in a final-stage study of 144 patients with lupus nephritis, an inflammatory disease of the kidneys.

The study, called Lunar, showed that patients who got a combination of immune-suppressing drugs in addition to rituximab (Rituxan) didn’t do significantly better those who got a placebo, Genentech said today in a statement. No new or unexpected safety issues popped up, the company said.

The two life sciences companies first formed a partnership to co-develop, and co-market the drug back in 1995, when rituximab’s developer, San Diego-based Idec Pharmaceuticals, was low on cash and needed help from Genentech to finish clinical trials for non-Hodgkin’s lymphoma. Genentech is based in South San Francisco, CA, and operates a manufacturing facility in Oceanside, CA, about 35 miles north of San Diego. Biogen Idec, based in Cambridge, MA, merged with Idec in 2003 and still retains a presence in the region.

Rituxan, approved in 1997 by the FDA as the world’s first targeted antibody drug for cancer, won an additional approval from U.S. regulators in 2006 for rheumatoid arthritis. The drug is designed to block excess B-cells of the immune system, which are culprits in non-Hodgkin’s lymphoma, as well as autoimmune diseases. After showing positive early signs in clinical trials, the drug failed last year in the final phases of development for multiple sclerosis, lupus that circulates throughout the body, and now lupus of the kidneys. The drug is a major revenue driver for both Genentech and Biogen Idec—it generated $2.6 billion in U.S. sales in 2008.

Genentech and Biogen Idec plan to continue to hunt for treatments of lupus nephritis based on findings from the study. “We plan to analyze the full set of data from this study and share the findings at an upcoming scientific meeting,” said Evan Beckman, Biogen’s senior vice president of immunology R&D, in a statement.

An estimated 1.5 million to 2 million people in the United States have lupus, a disease in which the immune system goes haywire and starts attacking healthy tissue like it would a virus. About one-third are estimated to have the form that attacks the kidneys, Genentech and Biogen said.

The failure of rituximab is just the latest in a string of setbacks for lupus treatments. An experimental drug called Riquent from La Jolla Pharmaceutical failed last month in a study of 730 patients with lupus nephritis.

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Most of the headlines in the RNA interference world go to Cambridge, MA-based Alnylam Pharmaceuticals (NASDAQ: ALNY). While that company says it has amassed enough intellectual property—and cash—to dominate this emerging field of gene-silencing technologies for years, they aren’t the only game in town. One intriguing upstart of the RNAi field is a privately held company in Watertown, MA called Dicerna Pharmaceuticals.

Xconomy first covered the Dicerna story when it started in November 2007, and the company first hit my radar screen in July, when it raised $8.4 million to cap off a first-round financing of $21.4 million. It got the cash from Abingworth, Oxford Bioscience Partners, and Skyline Ventures. These people aren’t dabblers—Doug Fambrough of Oxford is a molecular biologist who invested in Sirna Therapeutics before that company was sold for $1.1 billion to Merck in 2006, and Steve Hoffman of Skyline was a fellow Sirna investor who also bet early on Alnylam. So I figured it was worth hearing more from Dicerna CEO Jim Jenson a couple weeks ago at the JP Morgan Healthcare Conference in San Francisco.

The idea behind RNAi-based drug development is to shut down disease at its roots, by using specially engineered RNA molecules to shut down production of specific disease-causing proteins. Dicerna was founded on the belief that there’s more than one way to achieve this; the company says it is working on a “second doorway” of RNA interference, by designing drugs that are a little longer than so-called small interfering RNA molecules being developed by Alnylam and others. The Dicerna method may have the added advantage of being more potent—meaning they can be given in lower doses, and could be cheaper to manufacture—and they may last longer in the body, meaning they could be given in fewer shots. Plus, they have a feature that will allow RNAi drugs to be bound together with other compounds like antibody fragments or peptides that could give them extra kick, say, against cancer cells.

All of this work is still being done in animals, so there’s no proof this works in people. But even with that limited evidence, and a grim investing climate, Jenson said he saw no shortage of interest among potential pharmaceutical partners at the JP Morgan meeting.

“It’s the real deal, the next game changer in drug development,” Jenson says. “Stay tuned, there is a very strong interest in our programs. Many people see the importance of this.”

Most small interfering RNA drugs tend to be 21 nucleotides, or chemical letters, long. The Dicerna drugs are a little longer, 27 nucleotides. This enables …Next Page »

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The great fear in biotech, one Boston-based executive told me a couple weeks ago, is that the markets have turned so dark that fundamentals no longer matter. The idea is that a company could show its drug really works, but the stock still won’t fly. At least one company in our neck of the woods, Seattle Genetics, showed this week that things aren’t that grim—not yet, anyway.

—Seattle Genetics, the Bothell, WA-based developer of cancer drugs, raised $55.8 million through a stock offering, which could swell to $67.3 million if shareholders agree to allow Baker Brothers Life Sciences to buy a bunch more shares at the same price. The company (NASDAQ: SGEN) is riding high after it released stellar results last month for patients with Hodgkin’s disease.

—Trubion Pharmaceuticals, a Seattle-based biotech company (NASDAQ: TRBN), got a headache this week when news broke that Pfizer bid $68 million to acquire Madison, NJ-based Wyeth this week. This could affect Trubion in a big way, because it has a partnership for its lead drug in development, TRU-015 for rheumatoid arthritis, with Wyeth. The takeover also narrows down the pool of potential dealmakers and acquirers for other little biotechs shopping around their wares.

—We at Xconomy broke the story about how MDRNA is running low on cash and taking drastic steps to slow down the burn. The Bothell, WA-based developer of RNA interference drugs (NASDAQ: MRNA), has asked executives to work for no pay, and frozen employee salaries at a flat $1,250 for the final two weeks of January, according to a source close to the situation.

—Novo Nordisk lost interest in the cancer drug business, so Seattle-based ZymoGenetics (NASDAQ: ZGEN) found a way to get back the full rights from Novo to a cancer drug candidate without forking over any upfront cash. We’ll know by mid-year whether this was a shrewd move, when data comes out showing whether the IL-21 drug treatment holds promise for kidney cancer and metastatic melanoma.

—Speaking of Novo Nordisk, the Danish company that is the world’s largest maker of insulin for diabetics, I profiled the company’s serious move to establish an inflammation research shop in Seattle. The new operation is hiring 80 local workers by 2010, and hopes to scoop up some of the world’s top immunology talent.

—Kirkland, WA-based Cardiac Dimensions is one of the many medical device companies in town that not a whole lot of people know, but is actually doing very interesting stuff. I got the inside scoop of what to expect this year from CEO Rick Stewart.

—The Infectious Disease Research Institute, the Seattle-based nonprofit research center devoted to diseases of the developing world, struck a deal with a partner in Brazil that hopes to develop a marketable vaccine for leishmaniasis. This disease affects about a half-million people worldwide each year, and kills one in 10, so this would be quite a feat if IDRI and Instituto Butantan in Sao Paolo can create an effective vaccine.

—Omeros continues to defy the gravity of the financial markets. The privately-held drug developer in Seattle raised $3.1 million in equity and grants from The Stanley Medical Research Institute to continue developing a drug candidate for schizophrenia. It’s the second dose of cash the company grabbed this month, after getting $465,000 from the Michael J. Fox Foundation for Parkinson’s Research.

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ZymoGenetics has gotten back full commercial rights to its lead cancer drug in development. The Seattle-based biotech company (NASDAQ: ZGEN) is announcing today it is buying back the commercial rights from Denmark-based Novo Nordisk to the IL-21 cancer drug candidate in territories outside North America, which could free up ZymoGenetics to sign a global partnership if clinical trials pan out.

Zymo is doing the deal, without having to fork over any upfront cash. Instead, it agreed to pay an undisclosed future milestone payment, plus some royalties on sales outside North America. Novo, the world’s largest maker of insulin treatment for diabetes, has decided to get out of the cancer drug development business to pursue what it considers are greener pastures in treating autoimmune and inflammatory diseases. ZymoGenetics will now seek to find a new partner interested in a broader, global partnership to develop the treatment, the company said.

The IL-21 drug candidate has shown an ability to stimulate the immune system’s killer T cells and natural killer cells that shrink tumors in animals. It is currently being tested in mid-stage clinical trials of people with kidney cancer and metastatic melanoma. Any positive finding would help ZymoGenetics, which is coming off a brutal 2008: its recombinant thrombin drug for surgical bleeding fell short of sales goals, its lead drug in development failed in a clinical trial, and it ran thin on cash. This month, the company has bounced back a bit after it signed a partnership with Bristol-Myers Squibb potentially worth as much as $1.1 billion to co-develop a hepatitis C drug.

Evidence to support that IL-21 is effective in cancer patients is still thin at best. In October, ZymoGenetics reported a glimpse of data from 18 patients whose disease had relapsed after prior therapy. The study looked at patients who took IL-21 in combination with Bayer and Onyx Pharmaceuticals’ sorafenib (Nexavar), and found that three of the people (17 percent) had their tumors shrink by at least one-fourth. Data from the mid stage kidney cancer trial is expected in the first half of 2009, and the melanoma trial should generate results mid-year, said company spokesman Michael Fitzpatrick, in an email.

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