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In VC ‘Hat Trick’ for San Diego’s Avalon, RQx Inks Genentech Deal

Xconomy San Diego — 

RQx Pharmaceuticals, founded in 2010 to commercialize a scientific breakthrough with the potential to create a new class antibiotics, has signed a drug discovery collaboration with Genentech, the Roche subsidiary based in South San Francisco.

Genentech agreed to pay the San Diego startup an up-front payment, the amount of which was not disclosed, along with R&D milestone payments that could eventually total $111 million, according to a statement RQx issued today. The drug discovery startup says it also would be eligible to receive some royalties on sales revenue resulting from the collaboration.

The deal represents a strong endorsement for arylomycin, RQx’s lead drug candidate, and comes just a few months after CEO Court Turner told me he was seeking a strategic partner for the fledgling company. The deal with Genentech “went pretty rapidly after the initial conversation, which I want to say was in late September,” Turner said by telephone yesterday. “It was almost an instant marriage.”

It also marks the third successful life sciences deal in the first six weeks of 2013 for San Diego’s  Avalon Ventures, where Turner is a life sciences venture partner. That’s akin to scoring a hat trick in the first 10 minutes of a soccer game.

Just two weeks ago, Afraxis, another drug discovery startup in Avalon’s portfolio, said it had licensed its entire library of drug compounds to Genentech in a deal that could ultimately be worth as much as $187.5 million. A few weeks before that, BioMarin Pharmaceutical (NASDAQ: BMRN) acquired Avalon-backed Zacharon Pharmaceuticals for $10 million upfront plus potential milestone payments.

RQx Pharmaceuticals, arylomycinTo Avalon partner Jay Lichter, an industry veteran who worked with Turner at RQx, Avalon’s spate of deals is a testament to Avalon’s life sciences investment strategy, which he described as “early stage, high-risk science.” In many cases, Lichter said Avalon is the sole investor because its early stage deals look too much like a “crazy idea” to other venture investors.

Avalon was the sole investor in Zacharon and Afraxis, Lichter said, even though he worked hard to find other VCs to join in those funding deals. Both investments came out of Avalon’s eighth fund, which is better known for making a very successful bet on a social gaming startup called Zynga.

Yet of the seven life sciences investments Avalon made from its eighth fund, Lichter says only one—Incode BioPharmaceutics—was a loss. He described the firm’s investment in ReVision Therapeutics as a “push,” or break-even bet. Avalon has retained its investment stake in three other deals—Otonomy, Carolus Therapeutics, and Avelas Biosciences—and Lichter said he still sees a “big win potential with all three.”

Avalon’s investment in RQx followed a chance encounter in 2010 between Turner and Floyd Romesberg, an associate professor specializing in biological and biophysical chemistry at The Scripps Research Institute. Romesberg’s lab had showed how a mutation in the binding site of an essential enzyme (signal peptidase) provided both Gram-positive and Gram-negative bacteria a defense against arylomycin, a small-molecule antibiotic known for decades.

If only arylomycin could be optimized to bind tightly with signal peptidase, Romesberg said it would be a potent, broad-spectrum antibiotic—effective against even multidrug-resistant pathogens like methicillin-resistant Staphylococcus aureus (MRSA).

When I talked to Turner in November, he said, the RQx scientific team had shown that the binding site was a valid target, and they had added hundreds of arylomycin analogs to the RQx library. Since then, he said RQx “has generated some very promising in vivo data” in studies using mice.

One aspect about the initial investment in 2010 that Turner said he liked was that the two graduate students who had worked on arylomycin in Romesberg’s lab would join the startup. “This is all they did for the previous six years while they were working on their Ph.D.s,” Turner told me.

In today’s statement, RQx says the goal of its partnership with Genentech is “the discovery and development of novel drug compounds for an undisclosed target.” When I asked if the startup has any compounds under development besides arylomycin, Turner said, “RQx has developed multiple series of compounds that will be further interrogated as a result of the deal with Genentech.”