For anyone wondering about the value that can be added by entrepreneurs and venture capitalists to the drug discovery and development process, look no further than Stromedix. This venture-backed company in Cambridge, MA, was acquired today by Biogen Idec for $75 million up-front and up to $487.5 million based on the achievement of certain development and approval milestones. The driver for the acquisition is a monoclonal antibody known as STX-100, about to enter Phase 2 in the tough indication of idiopathic pulmonary fibrosis (IPF), a nearly always fatal disease characterized by lung scarring. STX-100 is one of several early entrants in the race to apply modern biologic therapies to fibrosis and its challenging biology. [Disclaimer: Stromedix has been a CBT Advisors client.]
Now let’s consider the value-add. First the return. As of early 2011, Stromedix had raised $29.4 million plus at least an additional $5M in debt financing in September, 2011, most of which has likely not been drawn down. (Stromedix investor Bruce Booth of Atlas Venture states in his blog post that the total cash in, including the debt facility, was $38 million). That makes the up-front price worth about 2X to the Stromedix investment syndicate, which includes NLV Partners, Bessemer Venture Partners, Red Abbey Venture Partners, and Frazier Healthcare Ventures as well as Atlas Venture. Considering that most of this capital did not flow in until the 2008 Series B round, that’s not a bad internal rate of return for the investors. If STX-100 hits any milestones at all, that return will rise, of course, possibly to an impressive 5X or even, in the unlikely event that all milestones are achieved, 19X. For the venture investors, the combination of certainty of the initial exit and possible upside later—with no more board meetings to attend!—makes this deal a sweet one.
But the deal becomes even more impressive—and instructive—when one considers that the asset STX-100, which comprises essentially the full value of Stromedix, was in-licensed from Biogen Idec back in 2007 for a price that I’ve heard was less than $5 million and perhaps even less than $2 million up front. This would fit with the company’s financing history. Before the 2008 $25 million Series B round, less than $5 million had been raised, some of which went to pay salaries, rent, and development costs. So not much of this could have paid for the asset. One assumes that Biogen Idec had some milestones and royalties coming to it from the initial licensing deal and that these were negotiated away as part of the sale transaction. But the fact remains: Biogen Idec gave up the asset for a very low price and is buying it back for a much higher one. Why?
A little of the mystery disappears when one considers the old adage, “You can never stick the same foot in the same river twice.” When Biogen Idec let go of STX-100, a different team was in place. Stromedix CEO Michael Gilman, who is now returning to Biogen Idec, had resigned his post as head of research following a big layoff. The group that is buying it (and him) back in 2012 is completely different. The company has a new CEO, George Scangos, a new head of research, Doug Williams, an even bigger pile of cash and a hunger for new therapies that have achieved some degree of clinical safety and early validation.
What Gilman and his team did in the intervening years was to thoroughly “de-risk” the STX-100 asset and to spend years tackling the big challenge of obtaining FDA clearance for trials. In particular, they have gotten the molecule through Phase 1, albeit in a related fibrosis indication in the kidney, and they developed biomarkers that will “inform upcoming clinical trials” and “increase the likelihood of bringing a much-needed therapy to patients,” according to today’s press release.
How to “inform” the clinical trials was the toughest nut to crack. As Gilman said in a very good February, 2011, interview, “The technical problem we faced is really a business problem that asks how we can measure anything meaningful in a short-term clinical trial for a long-term fibrotic disease,” he said. In the Phase II trial, he said then, Stromedix will use bronchoalveolar lavage to flush out cells and analyze them to see if the mechanism is working.
Now, in Biogen Idec’s eyes, the remaining risks are good ones. There is huge upside (two hundred thousand patients in the United States and Europe, no FDA-approved therapy). The indication area is ready to be tackled with biologics. And it fits the rest of the company’s portfolio. To quote the press release again, “‘Fibrotic organ failure, and in particular IPF, is a terrible disease with a high mortality rate, and there are no effective treatments at this time,’ said Douglas E. Williams, EVP, R&D of Biogen Idec. ‘We believe STX-100 has the potential to be a best-in-class therapy and it is an excellent strategic fit with our focus on highly differentiated programs with the potential to make a real difference for patients. The Phase 2 program complements our scientific expertise and advances our research and development efforts in immunology.'”
What made STX-100 so challenging—and why it apparently did not have a champion in the aftermath of Gilman’s departure—is that the antibody, which targets the cell-surface molecule alphaVbeta6 or av6, faced potential regulatory challenges because its mechanism of action, namely the blocking of TGF-beta production, might have unintended consequences. One imagines there may have been company or FDA concerns primarily about on-target effects (down-regulating TGF-beta in vital pathways unrelated to fibrosis) rather than about off-target effects in the event that the antibody was not 100 percent specific. Stromedix investor Booth writes that STX-100 also raised other concerns at FDA regarding its potential to serve as an unwanted immunostimulant. And since fibrosis was a disease that had barely been addressed with small molecules, let alone with antibodies or other biologics, there was not much of a reference database of patient responses to go on.
Thus the decision by Biogen Idec to let STX-100 go was both a rational one—the indication looked too hard, the regulatory path was too uncertain—and an irrational one—no one has ever done this before, there are no clear mile markers … too scary!
One cannot say enough to honor the determination and risk-taking of Gilman and his venture backers, primarily Atlas Venture. Even before launching the company, Atlas gave Gilman access to the firm’s deal flow. They provided office space to let him search for assets. And they put up the initial capital so that Stromedix could acquire STX-100. From their point of view, the risks were tractable and even welcome. How else, unless there was great uncertainty about some aspects of the molecule’s path, could you get it for such a low price?! Most importantly, they, and eventually other investors, trusted Gilman and they believed that he and his team—some of whom, notably project leader Shelia Violette, he hired away from Biogen Idec after they had worked there on STX-100—could take the necessary steps to get the molecule into trials and let it prove its value. There was plenty of risk but it was all in areas in which Atlas and Gilman believed that the team could add value.
It is hard to tell what the greater irony is about this happy outcome: Either that molecule-hungry pharma and biotech companies are again and again rewarding exactly the sort of risk-taking that is under attack in the current downsizing of the VC industry by its limited partners. Or that the molecule and Gilman, its champion, have found their way back to the company that once spurned them.
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