Corey Goodman of venBio: Building an Inside Periscope on Biotech Acquisitions

Xconomy San Francisco — 

Veteran neuroscientist Corey Goodman says young life science entrepreneurs who want to launch startups often ask him for advice. Those aspiring biotechnology leaders might be surprised by what they hear from Goodman—a former Stanford and UC Berkeley professor who went on to become co-founder and CEO of two public biotechnology companies, Exelixis (NASDAQ: EXEL) and Renovis.

“My advice is going to be, ‘Don’t do what I did,’ ” Goodman says. “That worked then—it won’t work now.”

The changing realities of biotechnology financing inspired Goodman to co-found a new San Francisco venture capital firm, venBio, which steers fledgling companies clear of the strategies that prevailed in the booming biotechnology period of the 1990s and early 2000s.

No longer can biotechnology entrepreneurs form a company around great science and count on the kind of payoff that Goodman reaped from his shares in Exelixis of South San Francisco. Those stock holdings paid for Goodman’s ranch near Tomales Bay in Marin County, where he now takes work breaks to admire a pair of eagle-like ferruginous hawks that hunt his winter fields.

When Exelixis was founded in 1994, biotechnology companies could aim for an initial public offering that might allow the founders and their venture firm backers to clean up, even before the companies brought new drugs to market.

“A lot of companies got created with the thinking, ‘If you build it they will come,’ ” Goodman says. But the flush times receded as the financial returns from many companies fell short, he says. A shakeout among life sciences venture firms followed, as IPO exits became fewer and leaner. These days, startups and their investors should be setting their sights on an acquisition by a larger pharmaceutical or biotechnology company, not an IPO, Goodman says. And to do that, they have to figure out what those larger companies want.

Goodman had scored an insider’s view of decision-making at the largest drug company in the world in late 2007, when Pfizer (NYSE: PFE) tapped him to create a major in-house R&D unit to revitalize its pipeline. Under Goodman’s leadership, Pfizer’s Biotherapeutics and Bioinnovation Center was to buy up promising assets like Rinat, a South San Francisco company that Pfizer had already acquired.

But Pfizer later canceled its plan to build the bioinnovation center at Mission Bay in San Francisco as a sizeable entity within the drug company. Pfizer, facing an imminent plunge in revenues as patents expired for Lipitor and other drugs, decided in early 2009 to shore up its earnings by purchasing Wyeth. That brought Pfizer a leading biologic drug, etanercept (Enbrel), and Wyeth’s own pipeline of biopharmaceutical candidates.

Still, Goodman stayed at Pfizer for nearly two years, watching the huge drug company navigate the changing industry environment and evaluate its pipeline options. After he left in mid-2009, he and his three venBio co-founders devised a venture firm model they thought could help them capture an insider’s view of big-company acquisition strategies while maintaining the independence to back the startups they judged best. They kicked off fundraising for their first fund in September 2010.

VenBio sought capital from major life sciences companies that were not only looking to make good corporate investments, but would also be willing to tell venBio what types of young companies they’d be interested in buying, Goodman says. Their participation as limited partners in venBio would not only be financial, but strategic—because they might eventually purchase a company that venBio had nurtured. Goodman says venBio is pioneering a new venture model that may improve financial returns.

“I’m a scientist,” he says. “This is an experiment.”

VenBio raised its first fund of $180 million from Thousand Oaks, CA biotechnology giant Amgen; Baxter International, a Deerfield, IL, medical products company with a major biotherapeutics division; and the global contract research organization PPD (Pharmaceutical Product Development, LLC) of Wilmington, NC. Another $20 million came from undisclosed limited partners.

Along with their cash, Goodman says, the three major venBio investors also contribute their expertise in areas such as conducting due diligence reviews and evaluating clinical trial plans. It’s “an intimate relationship” that involves weekly contact between venBio executives and their three major funding sources, Goodman says. Amgen, Baxter and PPD also help shape the strategies of growing companies that receive venBio funding.

VenBio announced its first four portfolio investments in 2012 and early this year. Three of them met a basic criterion of most life sciences businesses acquiring smaller companies these days: buyers want their acquisition targets to have a product in clinical trials, or close to it, Goodman says. In March, VenBio led a syndicate that recapitalized the publicly traded Swiss company Cytos Biotechnology (SIC: CYTN), which collected about $40 million in equity and debt to develop its immunotherapy drug platform and conduct a Phase IIb trial of its experimental drug CYT003 for allergic asthma.

In October, venBio led a $50 million Series D financing for Aragon Pharmaceuticals of San Diego, which had recently announced results of a Phase II trial of its drug candidate ARN-509 in prostate cancer. Aragon’s drug platform targets hormone-driven cancers, which include breast cancer.

VenBio led the $31 million Series A round announced Jan. 3 for Labrys, a company Goodman founded to outlicense an antibody drug candidate for chronic migraine headaches, RN-307, from Pfizer. Goodman said he had supervised work on the drug, developed by Rinat, while he was at Pfizer, and jumped at the chance to take it over. Labrys plans to start a Phase II trial of RN-307 this year.

VenBio’s latest investment, announced Jan. 4, was “the odd one out,” Goodman says. Solstice Biologics is an early-stage company with a platform technology designed to realize the therapeutic potential of experimental drugs that regulate gene expression. Solstice is developing methods to allow these microRNA and RNAi drugs to pass through cell membranes. VenBio led a syndicate that contributed $18 million in Series A financing.

Goodman says the portfolio companies will benefit from the combined experience of Amgen (NASDAQ: AMGN), Baxter, and PPD, in addition to the guidance of venBio’s veteran executive team. Goodman’s co-founders are Kurt von Emster, a former partner at MPM Capital and a veteran biotechnology investment fund manager; Paul Brooke, a former MPM Capital advisor and board member of the MPM BioEquities Fund; and Robert Adelman, a former private equity partner at OrbiMed Advisors.

To help young companies look attractive to potential buyers, venBio makes sure their clinical trial designs are sound, Goodman says.

“A lot of biotechs do a trial that’s underpowered,’’ he says.

VenBio may do another three to four deals a year. “If we keep the proper reserves, we’ll be fully invested within four years,” Goodman says. VenBio has committed about $40 to $50 million of its fund so far.

Each of the companies funded by venBio will have high visibility with at least two potential acquirers—Amgen and Baxter—which will also have had input into their development.

The two companies may have a bit of a leg up if they want to buy one of the portfolio firms, because they’ll have formed their own relationships with the startups’ management teams, Goodman says. But venBio’s investors will have no special option or first right of refusal on acquisitions or licensing, he says.

VenBio’s co-founders decided not to create a so-called “option fund’’ backed by a single drug company with built-in rights to purchase the portfolio businesses. Goodman says he believes that the best startups wouldn’t sign on with venBio if they knew they could only negotiate with a limited number of potential buyers.

In fact, venBio goes outside the circle of its three major investors to gauge industry interest in a potential portfolio company before the venture firm makes a decision to back it, Goodman says. When venBio was evaluating the prospects for Labrys, Goodman asked as many as 10 outside companies how they’d view the startup as an acquisition target if it developed good Phase II data. This practice is also followed by other venture capital firms that go in on investments with venBio, Goodman says.

Those surveys not only familiarize big pharmaceutical and biotechnology companies with the young companies, but may also reveal particular concerns that an entrepreneurial scientist or a venture firm partner didn’t foresee.

For example, the path to FDA approval might be thorny for the first therapy created with a new technology, Goodman says. Some types of clinical trials might be hard to carry out, or a drug company may know that health insurance companies could deny reimbursement for a certain new treatment. Getting that buyer’s perspective early could help avoid doomed investments, Goodman says.

“The VC firms doing well and raising money are the ones that have been thinking with that perspective,” Goodman says. Among the venture firms that VenBio has teamed up with on investments are Aisling Capital, Abingworth, Aeris Capital AG, Canaan Partners, InterWest Partners, and Sofinnova Ventures.

VenBio’s sleek offices, in a modern Owens Street building sheathed in turquoise glass, are just a short walk across UCSF’s Mission Bay campus from the building where Pfizer had once planned to install Goodman as the head of a unit that would bolster its pipeline with new acquisitions. His new role as a venture collaborator with drug companies seems to replicate aspects of that job, but with a bit more autonomy.

“If it’s hard to do it from the inside because you can get bogged down in the bureaucracy, why not try to do it from the outside, and work with them from the outside?” Goodman says.