Avalon Debuts Three More Tiny Biotechs In Risk-Share Deal With GSK

We fly, you buy. That’s been the formula for the Avalon Ventures-GlaxoSmithKline biotech collaboration, with Avalon scouting for ideas around the country and GSK bankrolling them into startups that it can ultimately acquire.

Avalon announced three more tiny startups today to bring the total so far to six. Today’s debuts are Adrenergics, going after treatments for people with hard-to-treat forms of cardiomyopathy, a heart condition; Calporta, exploring a new approach to treat Niemann-Pick C disease and other so-called lysosomal storage diseases; and CadheRx, developing antibody drugs to treat cancer.

Avalon, based in San Diego, has indeed hit the road in its scouting role. The startups unveiled today stem from labs at Stony Brook University, on New York’s Long Island, and the University of Michigan. Others announced previously were spun out of the University of California, Los Angeles, Stanford University, and the University of California, Santa Barbara.

About two years ago Avalon and GSK unveiled their unusual arrangement. Avalon would tap into academia and other early-stage sources of biomedical innovation to come up with new company ideas. GSK would provide the bulk of the operating cash for up to 10 startups—up to $465 million. Avalon would contribute a much smaller slice, up to $30 million. For its money, GSK gets the option to acquire the companies as each one nominates a drug to move forward as its main product.

That trigger takes place well before a drug is tested in humans, but it still occurs still three or four years after Avalon forms a company, says Jay Lichter, the Avalon managing director in charge of the collaboration. Because the first batch of companies—Silarus Therapeutics, Thyritope Biosciences, and Sitari Pharmaceuticals—only debuted in the past eighteen months, he says, “We’ve got nothing to report other than we’re pleased with the progress” of those startups.

GSK Damien McDevitt, Avalon Ventures Jay Lichter

Avalon’s Jay Lichter (right) and GSK’s Damien McDevitt

These aren’t companies in the traditional sense. All are housed at Avalon’s COI Pharmaceuticals, an incubator of sorts in San Diego for its portfolio companies. COI’s 40-plus employees share duties among the resident startups. Lichter, for example, is the CEO of all six startups under the GSK umbrella.

In giving GSK options to acquire the startups, Avalon is hedging against the massive risk early stage biotechs and their investors face. Those risks might feel less intense in prolonged bull runs like the one biotech has enjoyed for two years. But longtime investors in the space—Avalon is in its third decade, working on its tenth fund—know the froth can recede at any moment.

Other venture groups have also created custom collaborations with Big Pharma as part of their investment strategy. As I wrote in April, Versant Ventures has created a network infrastructure of in-house labs and incubators—one in San Diego, three in Canada—to do so-called “build to buy” deals.

Versant just received the first big win from its strategy, with Celgene’s $100 million purchase of Quanticel Pharmaceuticals in April. Avalon has yet to see returns from its GSK collaborations and likely won’t for another year or two, but that’s not stopping the firm from raising its eleventh fund. Lichter says Avalon hopes to close the fund this year.

Avalon also invests in high tech. Its current fund, which closed in 2012 with $200 million committed, is split about 50-50 between high tech and life sciences. Half the life science pot is allocated to the GSK partnership.

Alex Lash is Xconomy's National Biotech Editor. He is based in San Francisco. Follow @alexlash

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