Its First Drug in Clinic, Kineta Keeps Raising Cash from Odd Sources

Xconomy Seattle — 

Seattle biotech company Kineta keeps adding to its fundraising pool in unexpected ways. The firm announced Thursday it has raised the first part of a $10 million round [corrected 6/5/14, 4:55 pm] from a group of companies that also happen to be its drug development partners.

Kineta has leaned on nontraditional investors and other funding sources since its 2007 founding. “I wouldn’t say we’ve deliberately steered clear of VCs,” said Kineta president and CEO Chuck Mangess. “It just hasn’t made sense for either side.”

The new cash actually goes into a separate entity, KPI Therapeutics, that will invest in drugs Kineta discovers and help shepherd them through clinical development. It all sounds rather complicated, but it’s part of a new biotech landscape that many other investors, entrepreneurs and scientists have been exploring for years. “We’ve been at a bottleneck for 20 or 30 years in terms of productivity,” said Mangess (pictured above, right). “We need creative solutions. Some may work better than others.”

Last year the company tapped a group of oil investors. Before that, it was auto industry icon Lee Iacocca’s family foundation, because of its lead drug’s promise in Type 1 diabetes. (That disease no longer seems to be the focus, however.)

In March, Kineta was chosen to be the first investment on the new crowdfunding site AngelMD, which allows only wealthy physicians to join its investment ranks. AngelMD representatives deferred questions to Kineta, which declined to say how much it raised on the site.

The new cash comes in large part from MPI Research of Mattawan, MI, and other CROs (clinical research organizations), which are companies that perform outsourced pharmaceutical clinical testing and other services, usually for predetermined fees. They’ll be doing that work for Kineta, too, starting with its first drug to reach the clinic, dubbed SHK-186, which has completed a Phase 1 safety study in healthy volunteers and will now move into psoriasis and psoriatic arthritis patients, Mangess said.

The drug blocks the flow of potassium into immune cells known as effector memory T cells, usually important early responders to an infection, but they go haywire in autoimmune disease. If these cells can’t take in potassium, they enter senescence—in essence, they grow “old” and fail to replicate. Mangess calls this mechanism—blocking the Kv1.3 potassium channel, specifically—a “surgical strike that blocks offending T cells without suppressing the entire immune system.”

As several biotech groups have done in recent years, Kineta is pursuing an asset-centric strategy of drug development. The idea is that each new drug, whether brought in from an outside source or developed in-house, can be cleaved off into its own corporate vehicle and then sold to bigger drug companies with less red tape. In Kineta’s case, they’ll be called Kineta One, Kineta Two, and so forth.

Once sold, the cash flows into the pockets of investors with fewer taxes to pay, not back into more R&D as it would in a traditional biotech company. (For example, Atlas Venture has done this with Arteaus Therapeutics.)

“Some VCs appreciate what we’re doing, and some have tried the asset-centric model on their own, whether it’s worked or not,” said Mangess, who previously cofounded Illumigen Biosciences, which was acquired by Cubist Pharmaceuticals in 2007 for $9 million upfront.

Generally the asset-centric approach also means staying virtual, with a small group of managers overseeing a network of outsourced chemistry, biology, clinical and regulatory work. Kineta isn’t getting quite that lean. With 32 people and counting, the firm has its own lab in Seattle that works on early versions of compounds brought in from academic labs to improve their pharmacokinetics and toxicology, crucial steps before regulators allow a drug to be tested in humans in clinical trials.

The investors in that lab work—call it Kineta proper—are also indirect investors in KPI, but if they really want to reap rewards when the drug programs Kineta One, Two and beyond are sold, it behooves them to be direct investors in those vehicles. That’s what the CROs have done.

Typically CROs are the worker bees of the drug industry, charging fees but not taking equity in the drugs they help test. Their participation as investors has been neither commonplace nor, in a couple of high-profile instances, particularly successful—such as when Quintiles Transnational shared with Eli Lilly and private equity firm TPG-Axon the financial risk of two Lilly’s late-stage Alzheimer’s treatments, both of which crashed in Phase III.

In the case of Kineta and its side entity KPI, the bet is that everyone involved in ShK-186 (aka Kineta One) and subsequent projects can find a buyer after Phase 1. After that, clinical trials get a lot more expensive, and the lean-and-mean model starts to break down.

Sometimes that can be a deal killer, but sometimes a team can pivot: Flexion Therapeutics, for example. It was founded last decade to do fast asset-centric development work but realized the big drug companies weren’t so hungry to buy proof-of-concept assets that had finished Phase 2 testing. So it raised more money to take one of its compounds, for osteoarthritis, all the way to approval. It hasn’t gotten there yet, but it went public earlier this year, giving it access to cash it could never tap as a private company.

Despite the slowdown in biotech debuts as spring turns to summer, an IPO isn’t out of the question as KPI looks for more funding beyond the initial $10 million to move more clinical programs forward. “We’re structured as an opportunity for a pipeline of programs,” said Mangess. “We never figured the window would stay closed forever.”