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SmartCells CEO Reflects on Strategy Leading to $500M Exit with Merck

Xconomy Boston — 

Beverly, MA-based SmartCells has kept a relatively low profile since it was founded seven years ago, quietly working on a potential blockbuster drug for diabetes with technology from MIT. But yesterday the drug giant Merck (NASDAQ:MRK) made headlines with its plans to buy the biotech startup for upfront and potential milestone payments of more than $500 million.

Todd Zion, the co-founder and CEO of SmartCells, talked to Xconomy hours after the big deal was announced, and he reflected on what seems to be the less-traveled path that his startup has taken. It might have made all the difference. (Read on for what the CEO plans to do after his firm has transferred its technology to Merck.)

This deal represents an unusually big payday to the founding team of a biotech startup, because SmartCells never sold any shares in the startup to venture capital firms. It’s also somewhat of a surprise to those of us in the media, because Zion has never tried to generate hype in the press about the potential benefits of its lead drug, a formulation of insulin that could provide greater convenience and control over blood sugar for patients with diabetes.

Rather, SmartCells has raised just $9.8 million in equity investments from angel groups and individuals since the firm got going with a Series A funding round in 2004, Zion said. Its most recent round of financing was a $4.1 million Series D round in June from Boston Harbor Angels, Angel Healthcare Investors, Beacon Street Angels, Cherrystone Angels and members of Common Angels. In fact, the firm has received more money via grants from the National Institutes of Health than it has from private investors, the CEO said.

“We’ve always had a philosophy here that we let our operating plan dictate our financing plan and not the other way around,” Zion says. “It made more sense to us to raise the amount of dollars we needed from these individual investors.”

For one, the startup wanted to avoid raising more money than it needed to enable its team to retain a significant share of ownership in the firm, Zion says. Merck’s upfront payment in the acquisition deal has not been disclosed, and SmartCells’s CEO also declined to say the amount of guaranteed cash in the agreement, yet he said the firm’s 17 employees “have been rewarded very well for their efforts.”

The firm’s conservative fundraising strategy appears to have also benefited its angel backers. Generally speaking, startups typically need to get bought for way more than the amount they have taken from investors to provide handsome returns to shareholders. If SmartCells had raised a ton of cash, Zion said, it would have been much harder to see a lucrative return.

SmartCells began pursuing business development opportunities in earnest about nine months ago, Zion said, and after talking to multiple pharmaceutical companies the startup received a definitive buyout offer from Merck. “We’re on the doorstep of running human clinical studies,” he said, “and at this point it really does make sense to transition [our technology] to a large pharmaceutical company that can provide the type of resources you need to get a potential blockbuster diabetes drug like this through the clinic and onto the market.”

At Merck, the startup’s product candidate provides a strong early-stage prospect for the future of the big drug maker’s diabetes business. The drug giant reported that its top drug for Type 2 diabetes, sitagliptin (Januvia), brought in $1.7 billion during the nine months ending September 30.

SmartCells’s SmartInsulin product candidate is designed to work much differently than Januvia, which is an oral pill from the class of meds known as DPP4 inhibitors. The SmartCells treatment uses a polymer that is designed to release insulin only in the presence of certain glucose levels in the blood-which could be a major improvement for diabetics who struggle to keep their blood sugar levels steady. It has not yet reached human clinical trials, but Zion said that the firm has approval for an initial human study of the product in the European Union.

Merck plans employ a small team of soon-to-be former SmartCells employees to work on a transition of the assets from the startup to the big pharmaceutical firm, according to Zion, who will be part of that transition team. Then it will be up to Merck to lead development of the technology, which 35-year-old Zion has been working on since his days as a doctoral candidate in chemical engineering at MIT. (The startup’s other co-founder is his former MIT advisor, Jackie Ying, who has since left the school to be the executive director of the Institute of Bioengineering and Nanotechnology in Singapore.)

What does the CEO plan to do when his work is done at SmartCells?

“Frankly,” Zion says, “I’ll take a little bit of time off with my family, who has missed their husband and father for a good number of years.”

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5 responses to “SmartCells CEO Reflects on Strategy Leading to $500M Exit with Merck”

  1. James Geshwiler says:

    Congratulations Todd & company! Great benefits for patients seem on the near horizon. Wonderful return for all your angel investors.

  2. Bernat Olle says:

    Congratulations Todd and Tom. Way to put MIT ChemE on the map!

  3. Howard I Benesch, Ph.D. says:

    Congratulations Todd & company! Any chance of doing something similar with glucagon?

  4. donna schindler says:

    We, as parents of Type 1 diabetic children still up at 2:42 am after having contacted Todd Zion and Merck as of September 2011 almost a year after this buyout and No response are wondering in vain, where is SmartInsulin? Glad you have your 500 mil, Todd, and glad you have secured the rights to this wonderful invention that would cut drastically into your profits, Merck, but before I go check my beloved child’s bg with a finger prick of blood from his finger whilst he sleeps, and ascertain if he needs an insulin shot, or juice or God willing, neither, I ask, where is SmartInsulin?