Alios’s Corporate Venture Backers Ride RSV (And Hep C) To Big Payday

Xconomy San Francisco — 

The venture arms of Big Pharma have helped hold up early stage biotech funding the past few years. The acquisition of Alios BioPharma, announced Tuesday, could be the biggest win yet for that group.

Alios, a South San Francisco, CA-based developer of antiviral drugs, went to Janssen Pharmaceuticals, a division of Johnson & Johnson (NYSE: JNJ), for $1.75 billion. That’s 24 times the amount of cash five investors put into the company across two rounds of financing.

Alios has a pipeline of experimental antiviral products, including entries in the ultra-competitive field of hepatitis C. But Janssen highlighted Alios’s lead product, a treatment for respiratory syncytial virus (RSV), as its main motivation for the deal. Alios was founded by Lawrence Blatt (pictured) and other alumni of InterMune—another Bay Area company whose backers eventually earned a rich payout, but only after the company switched focus from antivirals to pulmonary fibrosis.

Blatt and his cofounders eschewed traditional venture and went strictly for corporate-affiliated investors. SR One (of GlaxoSmithKline), Roche Venture Fund, Novartis Ventures, and Novo Ventures were the first backers. (Novo isn’t technically part of Novo Nordisk, but its funds come from the holding company that owns a majority of Novo Nordisk shares.) An undisclosed investor led the $41 million Series B round, which closed earlier this year, so it’s not necessarily a 100 percent corporate syndicate. But it well could be; it would be quite odd for a traditional VC to request anonymity. Alios officials did not respond to questions or a request for an interview in time for publication, and the fifth investor’s identity remains a mystery.

It’s no mystery, however, that biopharma corporate venture has risen to prominence in recent years by helping to fill the early-stage funding gap. According to Silicon Valley Bank, the number of biopharma Series A rounds that included at least one corporate investor jumped to 30 percent in 2012 and 35 percent in 2013, the highest since SVB began tracking the data in 2005, when the figure was just nine percent. One of Alios’s corporate backers, Novartis, has been particularly aggressive. In 2012 it made six Series A investments, all as the lead or co-lead.

“Corporate VC has been the savior of early stage biotech innovation,” Silicon Valley Bank managing director Jon Norris told Xconomy earlier this year. “Without them getting involved early and forming syndicates, biotech could have fallen down like device venture did.”

So why the killer return for Alios? The price tag—all cash, no strings attached—seems exorbitant for a company whose lead product is just in Phase 2, but parents of small children who have contracted RSV might beg to differ.

Adults infected with the virus don’t notice or assume it’s a mild cold, but infants and small children can be hit much harder with lower respiratory complications. It’s the most common cause of bronchiolitis and pneumonia among children in their first year of life in the U.S., with 75,000 to 125,000 hospitalizations, according to the U.S. Centers for Disease Control. (Adults with lung diseases such as cystic fibrosis or asthma are also at higher risk of serious complications.)

The biotech MedImmune, a division of AstraZeneca (NYSE: AZN), produces the pediatric RSV vaccine palivizumab (Synagis), which brings in $1 billion in annual sales.

It remains to be seen how J&J’s motivations for the acquisition extend to hepatitis C. Alios’s most advanced hepatitis C treatment is also in Phase 2, but it has stalled in the hands of Boston-based Vertex Pharmaceuticals ((NASDAQ: VRTX). Vertex licensed it in 2011 and was testing it under the name VX-135 in combination with other HCV treatments.

But the emergence of the Gilead Sciences (NASDAQ: GILD) pill sofosbuvir (Sovaldi), approved late last year, didn’t just re-align the HCV landscape because of its phenomenal cure rate; it knocked Vertex completely out of the HCV business. Vertex announced this April it would end hepatitis C R&D and would look to outlicense VX-135.

That might not be easy. The drug encountered safety problems and clinical roadblocks last year.

Vertex has not yet unloaded its majority rights and has not announced a timeline to do so, said a spokesman. It’s unclear if there was any urgency on Janssen’s part to claim Alios’s minority rights to milestone payments and royalties for VX-135. Janssen representatives could not be reached for comment.

However, Alios also has two preclinical HCV drugs of a type (nucleotide inhibitors) considered important for next-generation therapies that don’t rely on the standard of care interferon, which requires infusions and comes with flu-like side effects. Alios announced on September 15 that one of its nucleotide inhibitors was slated to start a Phase 1 trial in the fourth quarter of 2014.

Those drugs might fit into Janssen’s own HCV portfolio. The firm has newly-approved simeprevir (Olysio), a pill like sofosbuvir, racking up big sales for parent company J&J: $1.2 billion worldwide in the first half of 2014. Gilead is aiming to provide combinations of sofosbuvir and other drugs in its own pipeline; J&J might want to employ the same “in-house” combination strategy with simeprevir.

It’s worth noting that before Vertex waved the white flag in HCV, one of the combinations that Vertex planned to test was VX-135 and simeprevir. Those plans were put on hold by VX-135’s safety problems last year.