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In Venture Reinvention, Versant Sees Gains Amid Biotech Boom Times

Xconomy National — 

There’s not much ice in San Francisco, where I grew up, so hockey metaphors often go right over my head. But I can’t resist noting that Versant Ventures, led by a former hockey player, has made big line changes this decade to be able to skate another day, while many of its biotech venture peers have retired their jerseys.

I write frequently about biotech investors, wondering if they’re losing relevance, or examining if they would be better splitting off from their tech-focused colleagues. I’m particularly interested in the handful of firms that find emerging science—risky, far-out stuff—and try to turn it into new therapies.

Versant is one of those firms, and its strategic moves the past couple days, in two of the hottest areas of biotech research, provide examples of a post-recession strategy that in some ways runs counter to its early-stage VC peers. It also seems to be working.

On Monday, Versant, headquartered in San Francisco, sold San Diego-based Quanticel Pharmaceuticals—which uses cutting-edge genomic sequencing of individual cells to analyze tumors—to Celgene (NASDAQ: CELG) for $100 million upfront and potentially $485 million total.

Today, Versant is announcing its gene editing startup CRISPR Therapeutics, which has moved most of its operations from Europe to Cambridge, MA, has attracted new investors and raised nearly $90 million in venture cash total, more than its three rivals combined.

I wrote about Versant’s reinvention last summer when it finally sewed up a new $300 million fund, which took twice as long as biotech VCs typically take to raise new funds. It is the firm’s fifth. The total was significantly smaller than its $500 million fourth fund, and the firm moved forward without four longtime partners—including Camille Samuels, who resurfaced last year at Venrock.

Until this week, there has been little sign that a big part of Versant’s new strategy—building a portfolio with both traditional deals and unorthodox companies with prearranged sales—might be working. Quanticel is the sign that Versant, and perhaps more important, the people providing Versant’s cash, have been looking for. “It’s a great validation of their model,” says Cedric Bisson, a partner at Teralys Capital in Montreal, which funneled $25 million into Versant’s fifth fund. (Teralys is one of several Canadian investors newly on board, another part of Versant’s reinvention.)

By “model,” Bisson means the part of the portfolio Versant calls “build to buy.” Quanticel was Versant’s first attempt when it launched the company in 2011. It was also Celgene’s first option-to-acquire deal, and Celgene senior VP George Golumbeski recalls that there was a certain amount of “holding hands and jumping off the cliff together” at the time.

The idea is to create a small, nimble company, often built around a single drug, with a prearranged buyer. There’s no pretense of building the next Genentech, Amgen (NASDAQ: AMGN), Gilead Sciences (NASDAQ: GILD), or Biogen (NASDAQ: BIIB). Build-to-buy startups are meant to be acquired, often by big drug makers that are eager to gain access to new ideas and technologies. “We like the concept,” says Golumbeski, whose company has since taken more options to acquire other biotech companies. “It allows us to work incredibly closely with the company, investors, and management.”

Many pharma companies have cut research staff en masse the past few years, yet still need to source new products from the outside. Those cuts are what Jason Campagna, a senior VP with The Medicines Company, calls “starving the beast.” “The simple way to solve the problem is through early-stage M&A,” he says. (Campagna led the acquisition in one “build to buy” deal, not with Versant, which he described here for Xconomy.)

At the same time, the Great Recession and its aftermath made biotech venture capital a difficult proposition for pension funds, endowments, and other large money managers looking to put their cash to use. Biotech investments took eight years, ten years, sometimes even more to reap returns, which were often measly. “On the whole, the perception was it was too tough, took too long and [required] too much capital, and returns weren’t there,” says Bisson.

Life science investors who wanted to survive had to get creative.

Bolzon: We build, you buy.

Bolzon: We build, you buy.

“Biotech was out of favor when we started our last fundraising,” says Versant managing director Brad Bolzon, a former top dealmaker at Roche and the architect of Versant’s big shift. “We needed a differentiated business model, and build-to-buy was created largely around that theme.”

Unlike other investors with similar ideas at the time, Bolzon wanted to scoop up programs right out of academia, then hand them off before clinical trials. Potential buyers would be recruited early and get an option to acquire startups down the road at prearranged prices.

Those preset prices are often anathema to VCs who don’t want to put ceilings on potential returns. Like prearranged marriages in a post-liberation society, these prearranged deals might even seem a relic of gloomier times as biotechs go public by the bushel, often giving their private investors a shot at spectacular profits.

“The innovator and venture guys used to be happy to get three to five times return on investment, but not anymore,” says Gwen Melincoff, who ended a long tenure last year as the top dealmaker at the acquisitive drug firm Shire, but not before overseeing a build-to-buy deal with Versant. “The economy and everything has changed.”

To be clear, Versant isn’t entirely committed to build-to-buy; it has plenty of traditional investments. (CRISPR Therapeutics falls into that category, although with a twist, as we’ll see in a moment.)

Quanticel, for a deal with a capped upside, seems to have brought more than modest returns back to Versant. Celgene is paying at least $100 million and could pay nearly $500 million total as Quanticel’s technology and drug programs advance. Versant’s original investment was $10 million; if it invested more, it wasn’t made public. (Bolzon declined to discuss returns.) Celgene says several experimental drugs from Quanticel should enter human trials in early 2016. Golumbeski lauds Versant for being “remarkably flexible” and giving Celgene the chance to “go all-in” with Quanticel, and even test some of Celgene’s in-house compounds with the startup’s technology.

Celgene's Golumbeski

Celgene’s Golumbeski

Several groups have created build-to-buy models or single-asset companies. But no one has dived as deeply into the strategy as Versant. The firm has effectively built a biotech company with as much as 70 staffers split between San Diego, Vancouver, and now Montreal, to generate the build-to-buy companies. It’s called Inception Sciences, and the satellite companies it spins off are Inception 1, 2, 3, and so on, with early backing from Shire, Roche, and Bayer.

Quanticel, its sale announced Monday, is also a build-to-buy, but its formation predated Inception. Versant put in the original equity, and Celgene paid $45 million in 2011 to get intimate with Quanticel’s technology and hold the right to buy the company after three and a half years.

At the time of the deal, Quanticel CEO Steve Kaldor told me, “We hope it ends in an acquisition by Celgene. That’s the design.” It went exactly to plan.

There are five more build-to-buys being nurtured by Inception, and the new site in Montreal will add capacity. “At the beginning I didn’t know how we could do more than a couple of these at a time,” says Bolzon. “But once you build the infrastructure, each one gets easier.”

Bolzon is the former hockey player. He grew up in Guelph, Ontario and played junior hockey, an amateur club level for 16 to 20 year olds that is serious stuff. His dad played junior hockey, too, he says, and once even played an exhibition against Montreal Canadiens legend Maurice “Rocket” Richard.

A bloc of Versant’s backers are now Canadian, like Teralys; it’s not often a venture firm finds a “largely new cast” of LPs, as Bolzon puts it. The firm has other Canadians, or spouses of Canadians, and hockey lovers on staff. Its geographical expansion is strategic. Inception set up R&D centers in Vancouver and Montreal to hire local scientists, some who worked with Inception’s CEO Peppi Prasit at Merck Frosst Canada. And it has opened an incubator in Toronto to capture innovation from that city’s academic researchers. But the Canadian shift has a tinge of patriotism in it, too. Bolzon said he had a good feeling when he first met Prasit, who was wearing a sweatshirt from the Canadian clothing company Roots.

(They also named their Toronto incubator Blueline Bioscience, a hockey reference I completely missed when I first heard it. “Blue Lion Bioscience? What does that mean?” I asked Bolzon.)

Celgene has followed Versant north, kicking in operating cash for Blueline and gaining options to negotiate deals with companies that emerge from the incubator—another source of build-to-buy deals. Blueline’s first company is Northern Biologics, which Versant is backing with a $10 million Series A.

Versant has not only expanded sightlines to Canada and bolstered its European footprint, it has made biopharmaceuticals the main thrust. (It used to be roughly half drugs, half medical devices.)

Build-to-buy startups account for only 20 to 30 percent of the entities in Versant’s total portfolio. The rest of the time, Versant goes more traditional, finding a syndicate of VCs to help move a biotech forward. Even then, however, the fingerprints of the lean times are often evident. One of its “traditional” companies, Flexion Therapeutics (NASDAQ: FLXN), actually started as a creative attempt to crank out pharma-friendly assets before shifting gears.

And today’s spotlight on CRISPR Therapeutics—a startup working in gene editing, one of the most promising and, now, controversial areas of biomedical research—reveals a similar pivot.

Before launch more than a year ago, Versant was thinking CRISPR could add to its build-to-buy ranks. The platform technology would be part of a “mothership” that would spin out products into satellite companies, which in turn, might attract prearranged deals.

One satellite had already been drawn up: a program to fight sickle cell disease called Tracer Hematology, run by Stanford pediatrician and cancer researcher Matthew Porteus. Eighteen months later, however, that model “is gone,” says CRISPR CEO Rodger Novak, who says Tracer has merged back into the CRISPR mothership. “We don’t think there will be a single-asset sale.”

“All the programs are under one roof,” says Versant managing director Tom Woiwode, a Californian who spends most of his time in Versant’s Basel, Switzerland office. “We’re going to build a premier gene editing company. It’s fair to say the IPO markets have had an influence.”

In other words, why break an idea into little pieces when the bigger picture could be worth a billion dollars or more on the open market? Apparently other investors think so, too. CRISPR said today it has topped off its Series A, with New Enterprise Associates, GlaxoSmithKline’s SROne venture arm, and Abingworth joining Versant to add $35 million. It also has raised a $29 million Series B round, led by Celgene, making a total of nearly $90 million into CRISPR so far.
The company is also moving most of its operations to Cambridge, MA, from London, where Woiwode, Novak, and CRISPR-Cas9 pioneer Emmanuelle Charpentier launched it with an exclusive license to Charpentier’s intellectual property. (Two rivals, Editas Medicine and Intellia Therapeutics, are also in Cambridge.)

By bringing on Celgene as a major investor, CRISPR now also has a potential development partner close at hand, although when asked about Celgene’s interest in CRISPR-Cas9 technology, Golumbeski cautions that Celgene has done straight equity deals before simply for “information rights”—the chance to learn more about an emerging field—without ever advancing to a product or licensing arrangement.

In the biopharma world, partnership deals can bring nondilutive cash and push off the need for more investment; or they can be a stamp of approval for a smaller company to entice curious investors and boost its value. (The investment, however, brings Celgene no special rights to the startup’s products or technology, says Novak.)

There’s no guarantee of a partnership or an IPO, of course; there are many reasons a company based on CRISPR-Cas9 gene editing technology could founder. It’s a great research tool, but turning it into human medicine has miles to go, as I explained in February.

Adapting to tough times was a big part of Versant’s build to buy rationale. The IPO trade winds are enticing now for something even as cutting-edge and risky as CRISPR-Cas9, but Bolzon won’t be too seduced. “Three or four years ago, it took a lot more courage to go public,” he says. “Today there’s not as much pressure to do build-to-buy [deals], but could be talking two years from now and be back where we were.” That is, in a situation where investors are once again skating on thin ice.

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2 responses to “In Venture Reinvention, Versant Sees Gains Amid Biotech Boom Times”

  1. MedTech Catalyst says:

    We often do this similar strategy for medical devices and diagnostic technologies. We mitigate the front-end risk of valuable intellectual property to prepare the technologies for commercialization.

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