Kineta, Playing for Bunt Singles, Builds a Biotech Company Without VC Bucks
One of the best-financed biotech startups in Seattle of the last five years hasn’t raised a dime of traditional venture capital. If Kineta can show it delivers returns without such VC backing, then it could provide an interesting alternative example of how to build a biotech company on a series of bunt singles, instead of one big swing for the fence.
Kineta, through a string of small financing deals, has gathered about $38 million to support its drug R&D programs since its founding in December 2007. About $11 million has come from individual investors, the Iacocca Family Foundation, MPI Research, and a network of about 30 pharmaceutical industry executives, says Bill Cadwallader, the company’s senior vice president of corporate development. The rest of Kineta’s support has come from collaborative grants and contracts the company is splitting with its partners, which include researchers at the University of Washington and UC Irvine.
No one investing with Kineta is betting it will become the next Amgen (NASDAQ: AMGN), worth $50 billion and with 17,000 employees. But as so many biotech companies have tried and failed to build fully integrated companies that discover, develop, manufacture, and market drugs like Amgen, many venture capitalists that traditionally supported such biotech companies have given up. Kineta’s hope is that by carving out one small piece of the value chain—the tricky steps of taking a drug from animal testing through early stage clinical trials—it will find a sustainable niche. By doing that, it hopes to hand off promising new products to fill up the empty pipelines at Big Pharma, and make a modest return for its investors within a relatively short three-year time frame.
That’s vastly different from most venture-backed biotech companies, which often raise hundreds of millions, and work for a decade or more, all in the hope of beating the steep odds and coming up with a billion-dollar molecule.
“When we started this company, I was really focused on how to make the investment proposition a lot more sensible, in terms of how long investors can expect to put money to work before they got a return, in terms of the likelihood of getting a good return, and the capital efficiency of it all,” says Kineta CEO Chuck Magness.
Magness, along with co-founder Shawn Iadonato, started Kineta right after they sold their last company, Illumigen Biosciences, to Lexington, MA-based Cubist Pharmaceuticals (NASDAQ: CBST). That deal, like many in biotech, came with a relatively small upfront payment of $9 million, and milestone payments that made it potentially worth as much as $340 million to Illumigen over time if its drug candidates reached certain goals for the acquirer.
Instead of creating their next company with an eye toward another acquisition, Kineta’s founders wondered whether they could they set up a more enduring company. They structured the new entity to operate a bit like an incubator. There would be a small core of experienced R&D people and business development pros who could in-license promising compounds. If they spotted a novel drug that had shown some evidence of effectiveness in animals, then Kineta’s task would be to collaborate with the inventor on running the necessary tests to begin clinical trials, and then carry out the first of three phases of clinical trials normally required for FDA approval. By investing about $10 million over three years, the Kineta team figured, they ought to be able to show a drug is safe and that it gets absorbed and distributed through the body like a good drug should.
Once that work is done, Kineta looks to sell its drug candidate or license it to a bigger drugmaker that has the money and manpower to take a drug through the expensive and more time-consuming later-stage trials required for FDA approval. Terms for such a licensing deal can vary a lot, but hypothetically, if Kineta can get $25 million upfront, another $300 million in future milestone payments and royalties, then its investors—who put in $10 million or less—could get a decent return, with some left for the parent company’s bank account. The Kineta drug discovery team, instead of going to work for a Big Pharma company, would stay at Kineta and focus on other drug development programs that are further behind. If all goes according to plan, program No. 2 would lead to another licensing deal, and so on.
“The point is for the parent company to be a sustainable, stable entity. Program assets will come and go,” Magness says.
The model, as Magness and Cadwallader describe it, depends largely on in-licensing from academic labs or other sources of new drug candidates that have a novel way of working, that have shown some effectiveness in animals, and need a focused industrial team to gather evidence that they could become real drugs. Academic labs are good at identifying drug targets and basic functions of cells—vital knowledge for drug discovery—but they rarely have the skills to move drugs into early clinical trials. Big Pharma companies often lack the focus and creativity to excel in this world of trials that cost only a few million dollars, because their investors care mostly about what’s coming to the market in the next couple quarters. So that’s where a small company like Kineta seeks to step in.
You could argue the entire biotech industry is set up to fill the gaping holes in Big Pharma’s R&D pipeline, and there have been many companies that have successfully been acquired for that reason. But what makes Kineta a bit unusual is that it is seeking to remain a sustainable drug development organization that only hands off the asset to the acquirer, not the whole company. Others are doing this, too, albeit with different twists. Inception Sciences, an incubator backed by Versant Ventures, is seeking to achieve a similar result, but with venture capital support. And Seattle-based Resolve Therapeutics is also aiming to deliver returns to its investors on the basis of a licensing transaction after completing a Phase I clinical trial—although it has said such a licensing deal would be the end of the company.
Kineta’s drug development programs, at this point, would have to be given a report card grade of “incomplete.” One drug program is for autoimmune diseases, another is for antivirals, and a third program should be ready to be disclosed soon, Cadwallader says. The autoimmune drug is expected to enter clinical trials this summer, and the antiviral program is about six months behind that one, Magness says.
Neither the autoimmune nor the antiviral program has yet gotten to the point where Kineta can cash in with a licensing transaction. But Cadwallader says he’s “very confident” such a deal will happen this year, in line with Kineta’s three-year plan to start delivering returns to its investors. Even if it doesn’t happen exactly on schedule, Kineta isn’t likely to go belly up. Unlike many biotech companies that burn millions of dollars every year, Kineta operates with a small team of about 25 workers at its labs in South Lake Union. Staying that lean enables it to operate close to break-even because of the revenue it gets from federal grants and contracts, Magness says.
The model isn’t an easy one to replicate, Magness says, because it depends on close collaboration with academic researchers and a strong network of individual, private investors. And it isn’t quite as exciting as a more traditional biotech in some ways, because Kineta isn’t designed to gather evidence that any of its drugs are actually effective in people, and make a big difference against disease. That heady stuff—the risk, reward, clout, and jobs creation that can come from it—will be left largely to Kineta’s partners. Magness says he doesn’t consider an IPO an attractive outcome.
If things work out really well, Kineta will do a series of licensing deals, and keep turning the crank by moving drug candidates through early development. Along the way, Kineta’s employees will hopefully stay gainfully employed, and its investors will make decent, regular returns, that could be quite lucrative years down the road if a Kineta partner does turn one of its molecules into a big hit.
Magness says he owes it to his investors, who stuck their necks out in the early days of Kineta, to deliver returns to them, and not plow everything back into the company treasury, like most companies do when they strike Big Pharma partnerships. He doesn’t have visions of running a 500-person company. He just sees a series of small deals adding up to something big over time. “This could provide a multiple on investment, and you don’t have to wait your entire lifetime for it,” Magness says. “And the thing is, the probability of it happening is pretty high.”
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