Officials Say Fuji’s Purchase of Kalon Boosts Texas’s Biotech Profile

Xconomy Texas — 

A Texas A&M University spinoff has been acquired by Fujifilm Diosynth Biotechnologies, a transaction that helps to secure Texas’s role as an innovation hub for the testing and manufacturing of vaccines for pandemics, as well as cancer drugs.

Terms were not disclosed for the deal involving College Station, TX-based Kalon, which was spun out of A&M as a private company in 2011. Through its 49 percent stake–a stake that will increase to full ownership pending certain milestones—Fujifilm Diosynth will be able to expand its scientific and manufacturing capabilities into viral and cell-culture-based vaccines. Fujifilm Diosynth is a North Carolina-based contract development and manufacturing organization of Fujifilm Holdings, the Japanese conglomerate based in Tokyo. Terms were not disclosed.

The announcement capped off a busy week last week for biotech companies in Texas. On Thursday, Houston-based Bellicum Pharmaceuticals, which is developing a cancer immunotherapy that uses a patient’s own T cells to kill cancer cells, made its public debut in a $140 million initial public offering on the Nasdaq.

Kalon, which will now be known as Fujifilm Diosynth Biotechnology Texas, was created following an investment of $50 million by Texas—including a grant from the state’s Emerging Technology Fund—to build a National Center for Therapeutics Manufacturing at A&M. A year later, the university landed one of three federal contracts awarded by the U.S. Department of Health and Human Services’s Biomedical Advanced Research and Development Authority, or BARDA, to develop and make drugs and vaccines to combat pandemic diseases and bioterror threats. Kalon is the contract manufacturer on that project. Kalon is also working with the University of Texas M.D. Anderson Cancer Center to develop treatments for multiple myeloma.

Initially, A&M had thought to hire a company to manage operations at the manufacturing center, but instead university officials decided to launch their own company for that purpose. “We formed Kalon to operate the facility, and in three to five years, seek an exit if the company is successful,” says Andrew Strong, Kalon’s CEO.

“This is probably the most successful university spinout that didn’t involve IP,” he added.

Kalon currently employs a little more than 100 people; Strong says he expects the company to double in personnel over the next 18 months.

Strong, however, will not be part of Kalon’s future growth. An Aggie civil engineering graduate and a corporate lawyer both in private practice and at the Texas A&M System, he is headed back to his old firm, Pillsbury Winthrop Shaw Pittman, where he will lead life sciences commercialization efforts from his office in Houston.

Here is an edited transcript of our conversation:

Xconomy: Tell me about the origins of the company and the reason why it was formed.

Andrew Strong: About 10 years ago, the A&M system wanted to start to build a life sciences initiative. We understood this would not be a huge discovery engine, as in drug discovery. That’s the expertise of other institutions. What A&M does very well is engineering, chemistry, biochemistry, veterinary medicine, agriculture. The commercialization of technology historically had been distributed among the various universities in the system. In the mid-2000s, this was combined under a central tech transfer office under the A&M system umbrella.

I came to the system in ’09. We decided to do biomanufacturing differently using flexible manufacturing facilities. That was a perfect fit for us, right in our sweet spot. The [Texas Emerging Technology Fund] provided a grant to the A&M system to build the next-gen biomanufacturing facilities, the mobile clean rooms that we now have.

We had a building that was under construction, no contracts, a great idea. Some would say, are you crazy, but we knew from our research and from talking to pharmaceutical businesses—major pharma was cutting R&D—that a critical facility for vaccines to therapeutics that had the ability to change from one project to next … was what we needed.

X: How did the deal with Fujifilm come together? Who came to whom? What sealed the deal?

A.S.: We defined success as, like you would with a mall or a shopping center, having anchor tenants that can help support the operation of the [facility]. If we can get one of the following three anchor tenants—a major academic medical center client, a federal contractor, or a major pharmaceutical company—that was success. The first thing we got was M.D Anderson as a major client in January of 2012 when we started working on myeloma vaccine. In June of 2012, A&M secured a contract with Barda, a $285 million contract and Kalon would be the prime subcontractor for the majority of the work along with GlaxoSmithKline. Several months later we were selected by GSK, as the U.S.-based development and commercialization partner for its next-gen cell-based influenza vaccine.

We had our three anchor tenants. I used to say it was like a dog chasing a bus. Well, the dog caught the bus–now we need to make sure we hire all the right people and get the systems in place so we can execute. I knew at that point 18 months ago, we wanted to look for a partner that can come in and be strategic in nature. We had lots of execution needs, but not so much money, as in venture capital or debt financing. We really wanted to find an operating partner that understood the [contract manufacturing] business.

Now that we’re up and running, it’s time for [Kalon] to be able to have a more significant corporate partner to help it grow. Part of the challenge that under state ownership, we can’t get a loan from the state, from the owners. You can’t get a guarantee; you cant get easy access to capital to grow and take on new projects. We need to have a corporate backed partner to provide money to the company.

I went to Bio2013 in Chicago, and there was strong interest from CEOs there. Ten came for meetings and site tours. Last fall, we had narrowed it down to three. In January, we entered into a term sheet with Fujifilm and in the past 10 months we’ve been in due diligence and contract negotiations.

X: What is next for you? Do you see yourself remaining involved in the biotech area in any way?

A.S.: The past couple of years, there has been a Texas biotech explosion, a significant amount of activity in this arena. When I was looking for counsel—in the legal sense as well as for the business—I realized that there’s not much out there in terms of services to really help a company from formation: getting through debt financing and venture capital financing. I’m going to go back to my law firm, Pillsbury, and lead the life sciences practice and build it in Texas. It’s very exciting to me; I have lots of ideas about what I think we can do to help build the companies here in Houston.

X: It seems that efforts are really gaining momentum here in recent months, with the Texas Medical Center, its new accelerator, and J-Labs, an incubator program run by pharmaceutical giant Johnson & Johson to boost biotechs innovating in therapies, drug development, or diagnostics.

A.S.: In Houston, we have some really incredible minds. [But] we don’t have the critical mass of people [to support commercialization.] I would love to do seminars: anatomy of building a company, legal and finance issues.

X: Tell me about A&M’s biotech ventures and the other international names it works with. What does this acquisition say about the Houston area’s expertise in biotech?

A.S.: I am biased but I think it’s huge. It’s somewhat similar to when Novartis moved to Boston and it really changed Boston for the future in biotech. Two major companies [Fujifilm and GSK] that are putting major dollars into biotech in Texas is a very significant event. The only challenge that we have in Texas—we have incredible biotech clusters—is that we need to makes sure that we are working together to build the greater good, instead of fighting each other for business.