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With $550M Fund, Deerfield Management Tackles Early Stage Biotech

Xconomy New York — 

Developing lab research into the foundations of a profitable biotech company has always been a high-risk, high-reward business.

Deerfield Management, a New York-based healthcare investor with more than $5 billion under management and two decades of experience, has created a new $550 million fund that targets early stage science from academic medical centers and hospitals. The fund is specifically focused on innovative treatments for genetic disorders, cancer, and orphan diseases.

The mapping of the human genome has made financing seed and Series A rounds far less difficult and risky, says Deerfield president and managing partner James Flynn. Advancements in science such as biomarkers help researchers save time and costs, he says.

“Understanding our biology, and the ability to target drugs to that biology, has created a real window of opportunity to make advances,” Flynn says. “The sort of sad thing is that funding for early stage research has gone down.”

The Deerfield Healthcare Innovations Fund, the firm’s fourth private fund, may invest anywhere from $500,000 to $50 million in each company (the latter figure being the potential total the firm might invest over multiple rounds), Flynn says. It also may make later-stage investments from its $1.6 billion Private Design Fund III, which the firm announced last year, he says.

The fund currently has a 12-year life cycle, and investors include New York-Presbyterian Hospital, Memorial Sloan Kettering, Seattle Children’s Hospital, the Robert Wood Johnson Foundation, Princeton University, and Northwestern University. Deerfield is talking with Memorial Sloan Kettering and a dozen or so other medical research organizations about developing formal relationships, though it hasn’t created any related to the new fund yet, Flynn says.

“We are very interested in funding their research,” he says. “We think there’s a real opportunity to work with these institutions and push what they’re looking at forward.”

Deerfield expects to found new companies out of the science it invests in at research institutions, Flynn says

One focus of the Innovations Fund may be gene therapy or gene editing investments, Flynn says. Deerfield has already had some clear wins in the space, having invested in Spark Therapeutics’ $72.8 million Series B in May 2014. The Philadelphia-based company, which has treatments in development for rare eye diseases and hemophilia, raised $161 million in an initial public offering in January.

Deerfield also invested in Juno Therapeutics earlier this year, after the Seattle biotech raised $265 million in an IPO at the end of 2014. While Deerfield certainly does crossover investing, that’s not the intention of the new Innovations Fund, Flynn says.

About half of the fund will focus on biotech investments, with the remainder split between healthcare information technology and medical device investments, Flynn says.

One unique aspect of the Healthcare Innovations Fund, Flynn says, is that some profits that would normally go to Deerfield Management are being sent instead to the Deerfield Partnership Foundation, a nonprofit that attempts to improve healthcare services for underserved children and fund healthcare research. After the fund’s LPs receive a three-times multiple of investment, 25 percent of any further profits will be given to the foundation, Flynn says. Typically, those would go to Deerfield Management.