Good Times Roll on for Biotech VCs As Clarus Bags New $500M Fund

Xconomy Boston — 

Take a poll of most of biotech’s venture capitalists—the ones that survived the financial crash, anyway—and you might find that just about all of them have reloaded with new funds over the past few years. Today, you can add Clarus Ventures to the list.

Clarus—a VC firm with offices in the bi-coastal biotech hotbeds of Cambridge, MA, and South San Francisco, CA—has raised its third fund, a $500 million haul called Clarus Lifesciences III LP that’ll it’ll use to invest in both early and mature drug developers.

Clarus managing director Scott Requadt (pictured above) says that the company will invest $15 million to $50 million in anywhere from 15 to 20 different biotechs over the fund’s roughly three-year life cycle. Those investments will be split evenly between typical venture investments and what Clarus calls “R&D risk-sharing partnerships.” Through these arrangements, a Clarus portfolio company will team up with a pharma company to help develop one or more drugs already in clinical testing, or test already-approved drugs for new indications, Requadt says.

Clarus says the $500 million figure comes in well above its $375 million target, and it is among the higher end of the other recent reloads among biotech VC firms: Cambridge-based Flagship Ventures just closed a $537 million fund in March; Third Rock Ventures bagged a $516 million fund in 2013; Polaris Partners hauled in $450 million for its seventh fund in November; and Atlas Venture snagged $280 million for its ninth fund in April.

These firms and others are benefitting from biotech’s recent renaissance. The financial crisis laid waste to a number of biotech VC firms, but the survivors have thrived. Biotech indexes have outperformed the greater indexes by a sizeable margin, and that bull run over the past few years has been buoyed by a long string of IPOs. That has allowed VCs to rely on more than just deal making and M&A for returns.

“We’ve just had a real wave of innovation in the space,” Requadt says. “That’s what’s driving it.”

Clarus has been able to cash out in a few ways. The firm has sold 10 companies and helped take 11 others public over the past few years, according to Requadt. Some of those recent buyouts include Heptares Therapeutics (acquired by Sosei for $400 million in February), Pearl Therapeutics (AstraZeneca, $560 million up front in 2013), and FerroKin Biosciences (Shire, $100 million up front in 2012). The IPOs include Ophthotech (NASDAQ: OPHT) and NanoString Technologies (NASDAQ: NSTG). Requadt wouldn’t say what types of returns Clarus has gotten from those deals, only noting “the fact that a majority of our investors [from the last fund] came back was a strong vote of confidence in our fund’s returns.”

Some firms are best known for incubating this innovation. In Boston, for instance, Atlas, Flagship, and Third Rock are among those who tend to start their own companies first and foremost. Though Clarus might incubate a project from time to time, Requadt says, it more often jumps in as part of investment syndicates. It recently took part in Redwood City, CA-based Annexon Bioscience’s $34 million Series A, for example.

While about half of Clarus’s new investments will be these typical types of venture deals, the firm does a few things differently, like its R&D partnerships, which took up about 40 percent of its last fund. Requadt says Clarus did nine of these deals with that fund. They often involve Clarus building and staffing a startup specifically designed to help a pharma company develop a drug in its pipeline, and getting milestone payments if the work pans out. Clarus portfolio company SFJ Pharmaceuticals Group, for instance, is working with Pfizer on a pivotal study for the already-approved axitinib (Inlyta) in a new indication. Same goes for Avillion Group, which is helping Pfizer run a Phase 3 study of bosutinib (Bosulif) in a different indication.

The firm also invested about $50 million for rights to single-digit royalties from the sales of the successful blood cancer drug ibrutinib (Imbruvica), an atypical move for a biotech venture firm. (AbbVie recently paid $21 billion to buy Pharmacyclics and the rights to ibrutinib, which is expected to do about $1 billion in sales in the U.S. alone this year). Clarus teamed with Royalty Pharma and Aisling Capital to buy that royalty stream in late 2013, before ibrutinib was approved.

“It’s a little bit of a barbell strategy,” Requadt says of Clarus investing in both early-stage companies and mature programs.

One thing has changed, however: Clarus is veering away from medtech and diagnostics investments. In the past, Clarus has had some success in these areas, backing companies like Tyrx (bought by Medtronic for $160 million) and NanoString, before it went public. But Requadt notes that there’s more home run potential in therapeutics plays right now, which is why Clarus will be placing more bets on drug developers.

“We’re certainly still going to look at opportunities in both [the medtech and diagnostics] spaces, but they’re going to need to meet a hurdle that’s a little bit higher from our perspective,” he says. “The emphasis is a little bit more on things that have an opportunity to be transformative, rather than incremental.”