Tiger Teams, Dropping Subs, and Biotech’s Elusive Second Strikes

Xconomy National — 

Onesie-twosie? Double dipping? The old razzle dazzle? Whatever you call it, it’s a rare feat to sell a biotech company, hold something back to start a new company, then ride that second horse to success.

The team behind Flexus Biosciences is halfway there, as I wrote about last week. They sold a preclinical cancer immunotherapy research program to Bristol-Myers Squibb (NYSE: BMY) for $800 million upfront, but held onto other assets: a cancer drug about to enter the clinic and another research program centered upon a type of immune cell. With all that, the same investors and executives expect to form a new company.

“We wanted to build Flexus for the long term,” said Flexus CEO Terry Rosen. “It never crossed my mind to do this. Retrospectively it might look strategic, but you could hook me up to a lie detector—it was just a set of circumstances.”

As the as-yet-unnamed Flexus sequel cranks up and looks to land the rare one-two punch, Rosen and team can take heart that at least two investors have previously pulled off the trick. The Column Group and Topspin Partners were part of the syndicate that joined San Diego biotech veteran Richard Heyman in successive startups Aragon Pharmaceuticals and Seragon Pharmaceuticals, as my colleague Bruce Bigelow documents here.

Heyman: Buy, spin.

Heyman: Buy, spin.

In 2013 Heyman and his backers sold Aragon and its prostate cancer drug to Johnson & Johnson (NYSE: JNJ) for up to $1 billion but kept a breast cancer program. Seragon, formed around that candidate, was bought by Roche’s Genentech division last year for up to $1.7 billion.

“We made the strategic decision not to partner too early,” says Heyman. “That limits your options.”

Soon after they sat down with J&J to discuss Aragon, it was clear the primary target was the prostate cancer drug. Both sides soon began to talk about a hold-back—what Heyman prefers to call a “buy-spin” scenario—even though “we knew the lawyers would have field day,” he says.

Buyers who don’t mind the headache are obviously important. Heyman credits Tao Fu, the head of M&A at J&J who went on to the same role at Bristol-Myers, shepherding the acquisitions of Flexus and iPierian (I’ll get to that in a moment).

With Aragon, the parties had to simultaneously craft four contracts. “Our heads were spinning, and we had conversations to say ‘Shoot, let’s sell the whole company and just have one contract,'” says Heyman.

With Aragon dissolved and its prostate cancer drug in J&J’s hands, Seragon emerged within a few days with most of Aragon’s employees, its breast cancer program, and a $30 million check from the Aragon syndicate. A board member said right away there would be no intention the second time around to sell Seragon, says Heyman. (Genentech bought it nine months later.)

One call Heyman received in the subsequent months was from Terry Rosen. “He wanted me to walk him through my deal,” says Heyman. “I was happy to do it.”

Another Flexus investor with buy-spin experience is Beth Seidenberg of Kleiner Perkins Caufield & Byers. Seidenberg wasn’t involved in Aragon/Seragon, and she has yet to land that elusive exit-begets-exit. But she has a term to describe small management groups of people like Heyman who are tailor-made for exactly these opportunities: Tiger teams.

Seidenberg: Tigers wanted.

Seidenberg: Tigers wanted.

Her impetus to watch for buy-spin opportunities (she’s not a fan of the term “double dipping”) came from a lost opportunity. She was chairman of Arresto Biosciences, a Redwood City, CA-based biotech that Gilead Sciences (NASDAQ: GILD) bought in 2010 for $225 million plus milestones.

The lead compound, for idiopathic pulmonary fibrosis, was in Phase 1, and Seidenberg says a second program was less than a year behind. “We could get no value for the second program,” she says. “They only valued the company on the first asset.”

But Gilead said it wanted to keep the second asset. Seidenberg and Arresto CEO Peter Van Vlasselaer didn’t push back hard, fearing “we would have blown up the deal if we said we wanted to keep it,” Seidenberg tells me. “Peter and I looked at each other and said, ‘We can’t let this happen again.’”

(Gilead has advanced that lead product, now called simtuzumab, into several Phase 2 trials for liver diseases, IPF, and cancer. It failed to hit its main goal in a pancreatic cancer trial last fall. The second asset is also an antibody, and Gilead has moved it into several clinical trials.)

That experience led Seidenberg and Van Vlasselaer to work together on Armo BioSciences, which has $20 million in funding from Kleiner Perkins and others and a cancer immunotherapy drug in early clinical tests. Instead of risking another Arresto-like development should Armo attract a buyer, they’ve already formed a second vehicle, Acir BioSciences, which Van Vlasselaer’s “tiger team” of about 12 people also runs.

That separation of assets brings up a problem many biotech strategists have wrestled with in recent years: What’s the best way to wring the most value from a single company? “The discussion happens a lot,” says Barbara Kosacz, the head of law firm Cooley’s life science practice. “Some companies know they’ve got apples and bicycles. They like them both but they know the company will get bought for the apples, not the bicycles.”

Kosacz says with more than half the companies she’s helped sell, there has been a discussion whether to spin out part of the assets into a new company. Most of the time, it doesn’t happen, and a big reason is, as happened with Arresto, the sellers don’t want to jeopardize the primary deal.

There’s a ton of work to hold onto one part of a company and sell the other. Even when a buyer is close at hand and agrees in principle to the idea, the process can get bogged down. The buyer’s lawyers will “want to look at the licenses of that spinout and make sure it doesn’t affect anything” the buyer is taking on board, says Kosacz.

There are other considerations: taxes, employment agreements, the split of intellectual property, and more. For a small biotech, juggling negotiations with a buyer and spinning out a new company can be distracting, perhaps daunting, says Delphi Ventures managing partner Deepa Pakianathan. “Small companies with few employees would have to ‘parallel process’ so much,” she says.

Pakianathan: Ilypsa, Relypsa

Pakianathan: One got away, one didn’t.

Pakianathan was part of the syndicate that sold Ilypsa to Amgen in 2007 for $420 million. She and others in that syndicate soon formed Relypsa (NASDAQ: RLYP) from a part of Ilypsa that Amgen didn’t want to keep in house—the lead was a treatment to ease potassium buildup in patients with chronic kidney disease—and eventually took it public in 2013. Delphi owned 7.5 percent before the IPO. (Before Aragon-Seragon and Ilypsa-Relypsa, there was Peninsula Pharmaceuticals, an anti-infective firm bought by J&J in 2005; one of its drugs spun out and became Cerexa, which was snagged by Forest Labs in 2006.)

Unlike other planned spinouts, Relypsa emerged only after Amgen’s acquisition, and with Amgen’s venture group as an investor. Pakianathan says there was no planning before or during the acquisition to do a spin-out.

Like Seidenberg, she has a “one that got away” lament: Delphi was an investor in Proteolix, which was sold to Onyx Pharmaceuticals in 2009 for $276 million upfront, plus $575 million more in milestones that depended in large part on the success of the multiple myeloma drug carfilzomib. (It was indeed successful; Onyx and its subsequent buyer, Amgen, have brought it to market as Kyprolis and recorded $341 million in sales last year.)

But behind carfilzomib was another program, and Pakianathan says Onyx ascribed little value to it. “I wish we’d spun it out,” she says. She declines to say more, but a little digging shows that program to be oprozomib, currently in early clinical trials for hematological cancers. Like carfilzomib, oprozomib is a proteasome inhibitor, but is a pill not an injection.

Cooley’s Kosacz says most spinouts happen “in the face of a real deal,” but she counsels some clients to do it early—or at least drop part of the company into a wholly owned subsidiary (“dropping a sub,” as Kosacz puts it)—before a deal comes along and last minute complications set in.

Kleiner’s Seidenberg and others knew iPierian, a South San Francisco, CA, firm that used cutting-edge stem cell biology for drug discovery, was heading in two very different directions. They sold iPierian and its neurodegeneration program to Bristol-Myers last year for $175 million upfront. But Bristol didn’t get everything. Half a year earlier, iPierian’s autoimmune disease program was spun out under the banner of True North Therapeutics. Seidenberg says Tao Fu of Bristol-Myers made negotiations less stressful. “He got it,” says Seidenberg.

(Asked to comment on the praise for his open-mindedness, Fu responded through a spokesman: “We are flexible in our approach and remain open to numerous structures, as we have done with iPerian and Flexus, depending on what makes sense for each opportunity we evaluate.”)

True North has since raised $22 million from an investor group similar to that of iPierian (including Kleiner Perkins), and its CEO, Nancy Stagliano, was also iPierian’s CEO. Several other staffers made the transition with her. The iPierian/True North split allowed Stagliano and company to steam ahead toward the promise of a double dip, a onesie-twosie, or whatever term you prefer, without having to tear down one entity and build up a new one.

“I want the flexibility to sell one asset and keep a team in place,” says Seidenberg. “When we sold Arresto, it took a year and a half to get the next company up and running. I don’t like that downtime.”