Vertex Pharmaceuticals has been around the block with biotech hedge funds. These are the people who aim to get rich trading volatile stocks second-to-second, and make big bets, long or short, on whether an experimental drug will work. Now that Vertex has passed some of the riskiest stages of drug development, the company figured it was time for steady, buy-and-hold investors to support the next phase, as it morphs into a commercial player.

That was one of the insights that I gathered yesterday in a conversation with Vertex chief financial officer Ian Smith. He was in a pretty good mood—as you might be too, if you’d just helped your company raise $320 million in a secondary stock offering. The financing is important because it gives Vertex (NASDAQ: VRTX) enough cash to operate until it introduces its lead drug to the market and starts generating positive cash flow, according to analyst Thomas Russo of Robert W. Baird & Co. Especially in the midst of a recession, that’s good news for Vertex’s 1,300 employees in Cambridge, MA, and 200 in San Diego.

But beyond the stability that comes with the dollars, Smith was just as enthused about being able to recruit the type of long-term shareholder he wants backing Vertex for the next five years. Vertex was able to attract these blue-bloods because of growing interest from investors in a pair of drugs that aim to transform the standard of care for patients with hepatitis C and cystic fibrosis. Since these drugs have continued to make important progress, and telaprevir, the hepatitis drug, is thought to be worth at least $2 billion a year in U.S. sales by 2013, Vertex saw an opportunity to invite in new investors who want to hold onto shares throughout that trajectory, not just between now and next Tuesday. To get some insight into the company’s thinking, look at its stock chart from 2007, when shares fell 37 percent, even though the company continued to make progress.

“We as a company have been trying to align our shareholder base with the progress of the company,” Smith says. “These are people who invest for the long haul.”

Smith wouldn’t give all the names yet of the new crew of investors, but this deal went to a small number of investors—three “anchor” funds that took the biggest stakes, two other “high-quality” funds, and a few others, Smith said. What they all have in common is that they like to invest in late-stage biotech companies that have cleared major risky steps, and need to get to the next level. These funds typically backed some of the industry’s bellwethers–Genentech, Gilead Sciences, Biogen Idec, and Celgene—when they reached this stage, Smith says. One of them is San Francisco-based Capital World Investors, although he said he couldn’t yet name the others.

Smith, as well as other Vertex leaders, have been cultivating relationships …Next Page »

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The first thing I noticed when I sat down in the office of biotech investor Rich Aldrich was a shelved paperback copy of Barbarians at the Gate, the book about the legendary leveraged buyout of R.J.R Nabisco. It reminded me that Aldrich is a main character in a somewhat similar book about the biotech industry, The Billion-Dollar Molecule. That book chronicles the formation and innovative strategy of Cambridge, MA-based biotech firm Vertex Pharmaceuticals (NASDAQ:VRTX), where Aldrich served as chief business officer and helped build the firm into a formidable force in the biotech industry. (Vertex has a significant presence in San Diego as well.)

In his office on the 15th floor of downtown Boston’s Prudential Tower, Aldrich looked to be living the dream. He sat back in a chair next to a framed Boston Celtics jersey. (Aldrich is part of the group that purchased the venerable NBA franchise in 2002, and, yes, he has the championship ring from last season to prove it.) Aldrich’s office is in the same suite as RA Capital Management, the biotech hedge fund he founded in 2001 after leaving Vertex, yet he has long turned over day-to-day management of the enterprise to managing member Peter Kolchinsky. (I wrote about Kolchinsky and the growth of RA Capital, which is a stockholder in San Diego-based diagnostics firm Sequenom (NASDAQ:SQNM), earlier this year.)

Aldrich, unlike in the intense days captured in Billion-Dollar Molecule, is no longer tied to one job or one company. He now lends his deal-making expertise to young biotechs; he is chairman of Cambridge startups Concert Pharmaceuticals and Alnara Pharmaceuticals, and serves as a director of several other companies. And Aldrich had front-row seats, as a director of Sirtris Pharmaceuticals, to that Cambridge-based firm’s sale to GlaxoSmithKline for $720 million in May 2008.

I spoke with Aldrich, who’s now 54, about life after Vertex and the state of the biotech industry in Boston and beyond:

Xconomy: Have you ever thought about going back to an operational role at a biotech company?

Aldrich: I have, …Next Page »

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ZymoGenetics is growing up. For the first time, the Seattle-based biotech company has raised capital by borrowing it, instead of following the usual industry playbook—getting it by selling more equity shares to investors.

The latter technique, which creates more supply of available shares and therefore dilutes the value of existing ones, would certainly have raised a ruckus with ZymoGenetics shareholders. The stock (NASDAQ: ZGEN) closed yesterday at $8.42 a share, and has fallen 44 percent from its 52-week high. Another equity sale would’ve likely driven it down more.

“We clearly didn’t want to do that,” said ZymoGenetics president Doug Williams, in an interview. “We feel that Recothrom is going to be a successful product, and because we are a maturing drug company with a marketed product, we can now take on debt as an instrument to fund the company.”

The company said yesterday it agreed to borrow as much as $100 million from Deerfield Management, a leading biotech hedge fund and one of its largest shareholders. It gives ZymoGenetics the flexibility, as Williams puts it, to make strategic withdrawals in $25 million chunks to boost sales of Recothrom, the company’s new drug for surgical bleeding. In exchange, Deerfield gets a 2 percent royalty on sales for every $25 million loan it provides. The company will also have to pay back the borrowed money by June 2013, plus 4.9 percent interest.

ZymoGenetics said earlier this year it would do something to slow the bleeding on its own income statement. The company reported a net loss of $41 million in the first quarter, and had $155 million in cash and investments left at the end of March. To reduce expenses, it cut more than 80 jobs, leaving a payroll of 535 workers. It is also dropping hints about possible partnerships in the works that could bring in new cash.

Without a proven stream of cash flowing in yet from its new product, Deerfield’s bet matters, said Greg Wade, an analyst with Pacific Growth Equities in San Francisco. Recothrom, approved by the FDA in January, still has to pass muster with hospital purchasing committees. That bureaucratic process can take months before the company gets a more specific read on the drug’s sales potential, Williams says. Meanwhile, ZymoGenetics and its partner Bayer have to convince hospitals they should quit using a cheaper competitor, Thrombin-JMI, derived from cow blood and start using the genetically engineered product from ZymoGenetics.

“Deerfield is a highly respected institutional investor, and it speaks to their confidence in ZymoGenetics’ management and product that they’ll put this much money at risk,” says Wade, who owns shares in ZymoGenetics. He added that ZymoGenetics chose the “optimal” way to get capital at a low borrowing cost, while minimizing the dilution of existing shares.

Wade expects Recothrom to generate $23.7 million in sales in 2008, its first year, and $70.9 million in sales next year. That puts Wade in the middle of analyst forecasts for Recothrom sales, which vary from $13 million to $35 million for 2008, said Susan Specht, a company spokeswoman.

It’s still too early to say whether ZymoGenetics can get to the ultimate measure of success for a maturing company: the P-word (profitability). Chief Financial Officer Jim Johnson used the word on a conference call with analysts yesterday, saying it is the company’s goal “in the next few years.” It’s possible that Recothrom sales could push the company into the black, he says, although he didn’t go so far as to predict that one drug alone will do the trick.

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ZymoGenetics (NASDAQ: ZGEN) said today it has received a $100 million funding commitment from Deerfield Management, a biotech hedge fund. The Seattle-based company can draw the money in $25 million increments anytime over the next 18 months, and plans to use it to build its business with Recothrom, a drug for surgical bleeding. Deerfield will get a 2 percent royalty on Recothrom sales for every $25 million request by ZymoGenetics, the company said.

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