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Tiger Teams, Dropping Subs, and Biotech’s Elusive Second Strikes

Xconomy National — 

Onesie-twosie? Double dipping? The old razzle dazzle? Whatever you call it, it’s a rare feat to sell a biotech company, hold something back to start a new company, then ride that second horse to success.

The team behind Flexus Biosciences is halfway there, as I wrote about last week. They sold a preclinical cancer immunotherapy research program to Bristol-Myers Squibb (NYSE: BMY) for $800 million upfront, but held onto other assets: a cancer drug about to enter the clinic and another research program centered upon a type of immune cell. With all that, the same investors and executives expect to form a new company.

“We wanted to build Flexus for the long term,” said Flexus CEO Terry Rosen. “It never crossed my mind to do this. Retrospectively it might look strategic, but you could hook me up to a lie detector—it was just a set of circumstances.”

As the as-yet-unnamed Flexus sequel cranks up and looks to land the rare one-two punch, Rosen and team can take heart that at least two investors have previously pulled off the trick. The Column Group and Topspin Partners were part of the syndicate that joined San Diego biotech veteran Richard Heyman in successive startups Aragon Pharmaceuticals and Seragon Pharmaceuticals, as my colleague Bruce Bigelow documents here.

Heyman: Buy, spin.

Heyman: Buy, spin.

In 2013 Heyman and his backers sold Aragon and its prostate cancer drug to Johnson & Johnson (NYSE: JNJ) for up to $1 billion but kept a breast cancer program. Seragon, formed around that candidate, was bought by Roche’s Genentech division last year for up to $1.7 billion.

“We made the strategic decision not to partner too early,” says Heyman. “That limits your options.”

Soon after they sat down with J&J to discuss Aragon, it was clear the primary target was the prostate cancer drug. Both sides soon began to talk about a hold-back—what Heyman prefers to call a “buy-spin” scenario—even though “we knew the lawyers would have field day,” he says.

Buyers who don’t mind the headache are obviously important. Heyman credits Tao Fu, the head of M&A at J&J who went on to the same role at Bristol-Myers, shepherding the acquisitions of Flexus and iPierian (I’ll get to that in a moment).

With Aragon, the parties had to simultaneously craft four contracts. “Our heads were spinning, and we had conversations to say ‘Shoot, let’s sell the whole company and just have one contract,'” says Heyman.

With Aragon dissolved and its prostate cancer drug in J&J’s hands, Seragon emerged within a few days with most of Aragon’s employees, its breast cancer program, and a $30 million check from the Aragon syndicate. A board member said right away there would be no intention the second time around to sell Seragon, says Heyman. (Genentech bought it nine months later.)

One call Heyman received in the subsequent months was from Terry Rosen. “He wanted me to walk him through my deal,” says Heyman. “I was happy to do it.”

Another Flexus investor with buy-spin experience is Beth Seidenberg of Kleiner Perkins Caufield & Byers. Seidenberg wasn’t involved in Aragon/Seragon, and she has yet to land that elusive exit-begets-exit. But she has a term to describe small management groups of people like Heyman who are tailor-made for exactly these opportunities: Tiger teams.

Seidenberg: Tigers wanted.

Seidenberg: Tigers wanted.

Her impetus to watch for buy-spin opportunities (she’s not a fan of the term “double dipping”) came from a lost opportunity. She was chairman of Arresto Biosciences, a Redwood City, CA-based biotech that Gilead Sciences (NASDAQ: GILD) bought in 2010 for $225 million plus milestones.

The lead compound, for idiopathic pulmonary fibrosis, was in Phase 1, and Seidenberg says a second program was less than a year behind. “We could get no value for the second program,” she says. “They only valued the company on the first asset.”

But Gilead said it wanted to keep the second asset. Seidenberg and Arresto CEO Peter Van Vlasselaer didn’t push back hard, fearing “we would have blown up … Next Page »

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