As Its Investors Reap Returns, venBio Aims for a Bigger Second Fund

Xconomy San Francisco — 

San Francisco life sciences venture firm venBio is making news these days with entrances and exits.

Since its $180 million inaugural fund closed in 2011, two of its portfolio companies have become splashy acquisitions, including one last week. Thanks to those exits, venBio’s investors have more than broken even, and the group is now eyeing a run at a larger second fund up to $300 million, partner and cofounder Corey Goodman (pictured) told Xconomy.

VenBio was also in the news yesterday for an entrance. It brought in Lou Tartaglia, a well-known biotech veteran—one might even say a boldface name in biotech circles—to run Solstice Biologics, one of its portfolio companies that wouldn’t mind a little stability.

San Diego-based Solstice is a bet on a preclinical technology, which makes it an outlier in venBio’s portfolio. The firm prefers to find drugs that are closer to approval, with some clinical experience. Many biotech venture investors have tried to shift their focus in similar fashion, hoping that corporate buyers looking for near-term revenues would snap them up. VenBio started its operations from scratch with that focus, but with a twist. Their main limited partners are also life science companies: the drug firms Amgen (NASDAQ: AMGN) and Baxter International (NYSE: BAX), and PPD (NASDAQ: PPDI), a contract research organization. (Alexandria Real Estate Equities (NYSE: ARE) has also joined as a fourth LP.) If big drug companies are going to be our customers, venBio’s thinking went, why not have them on board and understand what they want—and to ask for their help when planning big clinical trials?

VenBio also took $20 million from its original fundraising to seed a hedge fund, run out of New York. Apart from its financial returns, the fund’s eye on public companies adds an extra layer of intelligence that the general fund managers can share, Goodman said.

It’s a strategy born at a time when VCs didn’t see a bright future in taking biotechs public, and few saw the logic of nurturing promising but unproven science for seven to 10 years. That said, Goodman and his founding colleagues—MPM Capital alumnus Kurt von Emster, former OrbiMed Advisors partner Rob Adelman, and Morgan Stanley veteran Paul Brooke—always said they would leave room for a few early-stage bets, as well, in case good opportunities came along. Solstice is the only one so far, but it’s no classic long-term biotech play. Goodman said the company is structured to begin returning cash to investors in a three-to-six-year time frame. (Tartaglia said his two top priorities as the new CEO are to bring in nondilutive financing and to move Solstice away from being a “purely nucleic acid chemistry and technology company and bring it into the product development realm.”)

VenBio’s first exit came in 2013, when Johnson & Johnson (NYSE: JNJ) bought San Diego-based Aragon Pharmaceuticals and its prostate cancer treatment for $650 million upfront and $350 million more in potential milestone payments. VenBio joined the investor pool late, leading the $50 million Series D round in 2012 while Aragon was embroiled in a patent fight with another prostate cancer developer, Medivation (NASDAQ: MDVN) of San Francisco.

The second exit came last week, when venBio led the sale of San Mateo, CA-based Labrys Biologics to Israeli drug maker Teva Pharmaceutical Industries (NYSE: TEVA), which wanted Labrys’s migraine treatment.

Teva paid $200 million upfront to venBio and its venture syndicate partners Canaan Partners, Sofinnova Ventures, and InterWest Partners, with potentially $625 million more if the drug hits milestones in Teva’s hands. VenBio contributed $8.5 million of Labrys’s $31 million Series A round, plus an “extra kicker” for putting the deal together, Goodman said. An undisclosed cut of the sale goes back to Pfizer, but venBio stands to profit handsomely. (The migraine treatment was one of the monoclonal antibody products Pfizer acquired when it bought Rinat Neuroscience in 2006; Goodman knew about it from his two years at the helm of Pfizer’s biotech center in San Francisco. When Pfizer put the antibody up for auction in 2012, Goodman won the bid.)

“This [Labrys] deal alone won’t return our entire fund, but it could return a large percentage of it,” Goodman said. “With Aragon on top of that, it puts us in positive territory.”

To be specific, venBio’s cut of the Labrys and Aragon upfront payments is more than the fund has drawn down from its investors. Add the near-term milestones from each deal, said Goodman, and it clears the entire $180 million fund, “plus more.”

Around the time venBio closed its first fund, von Emster told a conference crowd that venBio was a creature of its time. “Our model wouldn’t have worked 10 years ago, and it might not work in 10 years,” he said.

The partners are ready to put that to the test. Goodman said venBio is considering a second fund with the same philosophy that “we won’t start companies assuming they’ll have IPOs. We’re assuming M&A.” He estimated the fundraising goal this time would be $250 million to $300 million. “Instead of putting $10 million to $20 million into a given company, we could perhaps go as high as $30 million to $40 million,” Goodman said.

Other than Solstice, VenBio’s remaining portfolio companies hew to its preference for clinical-stage investments with some risk removed. When Aragon was sold, J&J agreed to spin out a second asset, a breast cancer treatment, which attracted a $30 million Series A and became Seragon Pharmaceuticals.

Heart Metabolics, which is domiciled in Ireland, received $20 million in April to run a Phase III trial in hypertrophic cardiomyopathy with an old angina drug. Aurinia Pharmaceuticals was spun out of Canadian firm Aspreva Pharmaceuticals last year to test an immunosuppressant, voclosporin, as a lupus nephritis treatment. Voclosporin had failed to win regulatory approval in Europe for treatment of the eye condition uveitis.

VenBio has taken one hit to date. In 2012 it helped recapitalize Cytos Biotechnology, a struggling public Swiss firm, and aimed to move its Phase 2 asthma treatment forward. Cytos said last month it would wind down operations.