Biotech venture firms take a number of different approaches to lowering the risk of an inherently risky business. One of them is known as the option-to-buy deal, when one company agrees to buy another on prearranged terms, after certain milestones are met. And they’re clearly a preferred tool of Cambridge, MA-based Atlas Venture, which just found potential buyers for startups Quartet Medicine and Rodin Therapeutics.
Quartet and Rodin have both signed deals giving a larger company the exclusive right to buy them in the future. Merck (NYSE: MRK) has grabbed an option to buy Quartet, a developer of pain medicines, for an unspecified upfront fee and various payments that, altogether, total $575 million. Biogen (NASDAQ: BIIB), meanwhile, has secured an option to buy Rodin—which is developing treatments for the cognitive impairment associated with diseases like Alzheimer’s—for $485 million in total payments, which also include a fee should Biogen trigger the option. Biogen has also teamed with Atlas to invest $17.3 million in Rodin as well.
Atlas isn’t providing many more specific details regarding the potential payouts, but those dollars likely won’t materialize (if they do) for a few years. Merck will make a decision on Quartet following a mid-stage trial that CEO Kevin Pojasek expects to produce data in 2018 or 2019. Biogen’s trigger for buying Rodin isn’t being made public, but CEO Adam Rosenberg says that the startup, which hasn’t publicly identified a lead drug candidate as of yet, is some two to three years away from its first clinical trial.
These deals don’t always end in buyouts; Novartis, for instance, walked away from a potential acquisition of Proteon Therapeutics (NASDAQ: PRTO) a few years ago. That’s “the potential nightmare scenario in deals like this,” Pojasek says, though not referring to Proteon specifically.
But Atlas has seen these types of agreements end in deals before. Over the past few years, it has seeded Annovation Biopharma and Arteaus Therapeutics with buyers in place (The Medicines Co. and Eli Lilly, respectively) and consummated those deals later on. And last year Biogen picked up an option to buy another Atlas startup, Ataxion, at a predetermined price as well.
These deals have their pros and cons. On the positive side, the paydays come quicker, the potential buyer is already known, interested, and committed, and the startup has a partner’s help to get to the key milestone that would trigger a buyout. Pojasek and Rosenberg both note, for instance, that the hope is that their companies won’t have to raise another financing round and dilute shareholders before they’re sold. Build-to-buy deals are also cheaper to pull off than starting a company, closing several venture rounds, and proceeding towards an IPO.
On the other hand, build-to-buy deals make for smaller venture returns. The upside is capped early on, meaning there won’t be the type of windfall a venture firm could see as a founder and eventual IPO shareholder in a successful biotech.
Atlas isn’t the only venture firm to do deals like this. Versant Ventures is also fond of the approach, and recently sold Quanticel Pharmaceuticals to Celgene (NASDAQ: CELG) a few years after striking an option-to-buy deal. Avalon Ventures is using the concept in a joint venture with GlaxoSmithKline, though it hasn’t actually sold a biotech to the British pharma company as of yet.
Atlas partner Bruce Booth (pictured above) says this is a deliberate strategy meant to diversify the firm’s portfolio. About 25 percent of Atlas’ companies are more tailored for build-to-buy deals, while the remaining majority, like Unum Therapeutics, Surface Oncology and Synlogic, are larger companies meant to go public at some point. Quartet and Rodin were “single program, asset-centric entities by design,” Booth says, and as a result Atlas always had a buyout in mind, rather than an IPO, where “platform stories tend to get more traction.”
Still, Annovation, Arteaus, and Ataxion had buyers in place from the start. Quartet and Rodin didn’t—they each raised Series A rounds first, and found buyers later on. Pojasek says there wasn’t some sort of turning point causing Quartet to shift gears, more that the company was just trying to “find the right partner and the right economics,” and all that fell into place with Merck.
For Rosenberg, it was different. Rodin was already more than two years old when he came onboard as CEO in September, and negotiations for the Biogen deal were already underway. That might seem like a deterrent—Rosenberg in effect knew Rodin could be a short-term gig, if things worked out—but he insists it “was actually a draw.” He doesn’t have to worry about finding financing or a strategic partner, just execute on the plan ahead and get Rodin sold. Some new hires, in fact, are coming aboard this month.
“You need a specific phenotype for that,” he says. “It’s not for everybody.”