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Clear Route to Phase Iib REPRINT FROM MARCH 24, 2008 BioCentury ® THE BERNSTEIN REPORT ON BIOBUSINESS Article Reprint Page 1 of 9 Ebb & Flow Focus Clear route to Phase IIb By Mike Ward investment with the potential to follow on up to a total of $30- Senior Editor $40 million per company.” Although big series A rounds have become increasingly Indeed, the average size of the 10 most recent rounds Phase4 commonplace, the recent deal for Albireo AB, expected to Ventures has participated in is a touch over $50 million. This is reach $40 million, reflects business as usual for Nomura more than two and a half times the average biotech venture Phase4 Ventures. The London firm has taken an aggres- round over the same period. sive approach to investing its parent’s money in biotech, Phase4 has participated in three series A rounds in the past characterized by large financing rounds geared to providing three years in which the syndicates committed a total of $162 a clear route to Phase IIb data, underpinned by international million to the three companies. syndication. The firm focuses primarily on investment in clinical stage Phase4’s story is one of increasing scale, with rounds companies and as a result has a portfolio that is heavily biased mounting in size from 1999 until the VC toward the U.S. Over 75% of the compa- hit its stride in 2004. Since then, the firm nies Phase4 invests in are in Phase I or has usually taken the lead in $1.3 billion “You need to bring enough II, with an average holding time of about worth of venture rounds. five years. “We were doing big rounds before it cash to get to the key value “We decided from the get-go to was really fashionable to do so,” Managing inflection points. No matter focus on clinical-stage product stories, Director Denise Pollard-Knight told which was contrarian at the time, as it BioCentury. “Since 2004, we haven’t done how early you start, you was just ahead of the genomics bub- any less than $15 million in a first-time have to be able to see your ble,” Pollard-Knight said. She said the investment, and most have been $20-$25 VC believed product assets were more million.” way to that milestone.” tangible and easier to evaluate from a In 1999, when Japanese bank Nomura fundamental perspective. Group created the VC to make biotech — Phase4’s One thing the deals have in common investments off the parent’s the balance Denise Pollard-Knight is that “they fit into a mold of not only sheet, rounds were much more modest. having a lead program that we can see “Early on, we had to show that we could compete with the achieving clinical proof of concept reasonably quickly and so peer group and give the bank confidence that we would be able driving the initial valuation, but they also have other clinical to return cash earlier,” Pollard-Knight said. “We had to deliver or preclinical compounds and the capacity to generate a exits to Nomura from both an IRR and a return on capital pipeline,” Pollard-Knight said. perspective.” “You need to bring enough cash to get to the key value Even then, the scale was larger. In 1999, Phase4 participated inflection points,” she added. “No matter how early you in five rounds where the syndicates averaged just under $20 start, you have to be able to see your way to that milestone.” million, at a time when the average deal for all VCs was just As a consequence, most of the firm’s portfolio companies under $10 million. Nevertheless, only one of Phase4’s transac- are in or have completed Phase II/IIb, and several of its tions was among that year’s 20 biggest venture financings. companies are now in Phase III. In 2000, the average size of a round involving Phase4 had More importantly, the VC has made money for Nomura crept up to $29 million, and by 2001, it was topping $31 million. Group, its sole backer. Since 1999, Phase4 has participated in 39 In that year, the average venture round globally was just under venture financings for 29 companies, exited nine of the compa- $15 million, and four of Phase4’s 10 financings were among the nies it has backed, including six through M&A, and partially industry’s top 20 biotech venture deals. exited four more (see “Nomura’s Investments”). “In the early days, we used to make initial investments of In 2004, the bank established Phase4 Ventures as a subsid- about $5-$10 million, as we were still proving ourselves at iary. At that point, Nomura grouped the 1999-2004 portfolio Nomura,” said Pollard-Knight. “These days, in terms of our into a fund-like structure, “so now we essentially have two core strategy, we tend to put in $15-$20 million as an initial See next page BioCentury, THE BERNSTEIN REPORT ON BIOBUSINESS REPRINT FROM MARCH 24, 2008 PAGE 2 OF 9 Ebb & Flow Focus, already had, we were able to get good through Phase III trials in myelodysplastic from previous page proof-of-concept data in HBV,” Pollard- syndromes (MDS), although the data Knight said. “After that the company needed to be pulled together. funds,” said Pollard-Knight. “From out- went out and raised a much bigger Pharmion also was finalizing a deal to side, these two funds look like a single round. It was a transformed company.” in-license European rights to Celgene evergreen fund, even though we have According to Pollard-Knight, Phase4 Corp.’s Thalomid thalidomide for refrac- different buckets internally and have been learned a number of lessons from the tory multiple myeloma (MM) and erythema able, where appropriate, to do crossover Idenix deal, including the need to kill nodosum leprosum (ENL). investments from the second fund into failing compounds early and have a “The key products that they’d in-li- companies in the first fund.” back-up that is IND-ready. For the com- censed had lots of potential. We were The firm continues to build a portfolio pany to do that, it would need more backing the management on executing the covering the spectrum from classical drug money. regulatory strategy and building a com- discovery/development biotechs, through Nomura participated in the $44 mil- mercial infrastructure. The CEO, Pat specialty pharma companies to pharma lion series C round in 2001, bringing Mahaffy, had been at NeXstar and had spinouts. the total amount of money Idenix had demonstrated a capability of building a raised to $70 million. commercial team,” said Pollard-Knight. Idenix tried and failed to raise up to “We saw it as a very late-stage product Early lessons $115 million in an IPO in 2002. play.” Phase4’s approach has evolved as the In March 2003, when the IPO window NexStar Pharmaceuticals Inc., which result of lessons learned from the early was closed and M&A seemed unlikely, was an anti-infectious disease company deals. One was the 1999 investment in Idenix sold a 51% stake to Novartis for with two marketed products and a pipe- Idenix Pharmaceuticals Inc., which $255 million in cash plus up to $357 line, had been acquired by Gilead Sci- was then an antivirals play called Novir- million in milestones. That deal, which ences Inc. for $550 million in stock. io Pharmaceuticals Inc. emerged from licensing discussions, put a Phase4 participated again in the 2002 The firm participated in a relatively $500 million to $1.2 billion value on the $40 million series C round. In total, modest $12.5 million B round based on biotech, depending on the milestone pay- Pharmion raised $129 million in three the company’s NV-01, a nucleoside an- ments. venture rounds. alog reverse transcriptase inhibitor that Idenix then raised $64.4 million in an With Pharmion, Phase4 got an IPO had potential against HIV. The company IPO in July 2004 through the sale of 4.6 within three years after the initial invest- also had antiviral discovery capabili- million shares at $14 that valued the ment. ties. company at $668.9 million. The company priced its offering at $14 Initially, Phase4 had not anticipated Nomura still holds a small position in in November 2003, raising $84 million that Idenix would require much money Idenix. and valuing the company at $335 million. to get to Phase II data. “The money was Even better, “within a month of the lockup supposed to get NV-01 to the end of coming off, the team got Vidaza through Phase II proof of concept, but we had to Banking on management the FDA.” stop the program just over six months In the case of Idenix, it was manage- FDA approved Vidaza to treat MDS in after we invested due to problems with ment’s ability to execute a course correc- May 2004. The shares rose by $10.96 PK,” said Pollard-Knight. tion that saved the company. Another of (40%) to $38.56 in the week after the Idenix’s management, led by CEO the VC’s best investments was based from approval. Jean-Pierre Sommadossi, killed off the the start on the potential of the manage- Phase4 has exited the stock. In March, NV-01 program and used the cash to ment team to execute the business plan, Pharmion was acquired by Celgene for move forward a nucleoside analog, which coupled with the promise associated with $2.9 billion. later became Tyzeka telbivudine (Sebi- its two lead programs. vo in EU), that had shown some preclin- Phase4 led a $65 million series B round ical promise in HBV, as well as NM 283, in Pharmion Corp.
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