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Friday, September 26, 2008
Biotechs face uphill funding battle from disease-focused foundations
By Stephen DeSantis
Flash Slideshow: Mass High Tech All-Stars Thought Leadership Roundtable
More and more life sciences companies find themselves intrigued by the idea of receiving investments from patient advocacy or disease foundations. But few startups understand the realities of how those organizations dole out awards — and how intricately structured those deals can be.
Whereas philanthropy organizations once supported academic research only, many are now looking to industry for cures. While the number of such financing deals are increasing, biotechs beware: They are not for the faint of heart, say experts.
The logic is sound enough: Foundations seeking cures to debilitating diseases such as cystic fibrosis, muscular dystrophy and Parkinson’s disease want to fund promising research in the private sector.
For biotechs, such deals offer faster access to patients, and the money represents non-equity cash to keep the company’s R&D engine running. With venture capital firms investing less money into early-stage companies, disease foundation partnerships appear attractive.
To the dismay of many biotechs, however, the awards process is more akin to the due diligence performed in an acquisition than to receiving free grant money. To the credit of the foundations, they are not in the business of giving away money. They vet both the company and its research as any investor would.
Bay State firms like Epix Pharmaceuticals Inc.,
FoldRx Pharmaceuticals Inc. and Vertex Pharmaceuticals Inc. had to be open to scientific advice and be willing to endure a highly vigilant partner, when they were chosen by various disease foundations as funding recipients. In fact, executives at those firms treated their deals more like licensing agreements or strategic partnerships. It’s not a bad comparison — many awards given by foundations include royalty agreements, milestone clauses and other contractual obligations.
Elkan Gamzu, CEO of Epix, said many companies are surprised at how tough such deals can be.
“They are very methodical and rigorous in the scientific questions that they ask, and appropriately so, I believe. They want to know all the risks involved in the research and what our plan is for dealing with them,” said Gamzu.
Gamzu said foundations look closely at the financial stability of the company, as well, and they ask questions as any investor would do.
“We certainly can’t be putting money into a project without thorough due diligence and comprehensive agreements; it’s a model that works for our goals,” said Bob Beall, CEO of the Cystic Fibrosis Foundation (CFF). CFF leads the pack in venture philanthropy by a disease foundation.
“Epix is a great example of a company we work well with and has a great platform. But there is always a question there because most of these companies don’t have revenue,” Beall said.
Foundations are also concerned that as a biotech matures the particular program the organizations are supporting will no longer be the biotech’s top priority, said Mark Trusheim, president of life sciences consultancy Co-Bio Consulting LLC.
What are known as “diligence clauses” give foundations the rights to a biotech’s funded compound, allowing the philanthropic organization the option to “pull it back” to ensure its development, Trusheim said. Such clauses can be intimidating to biotech entrepreneurs, and many investors are scared off by them.
“VCs want to make sure the company keeps moving forward and works on whichever projects make the most economic sense,” Trusheim said.
In their most recent agreement, the CFF challenged Epix (Nasdaq: EPIX) to come up with a 3-D model of a very specific protein that leads to the disease. “They interacted directly with our scientists. When we sent them our materials at the end of the milestone period, it was not a foregone conclusion ... that they would just accept it,” Gamzu said.
Many patient groups like the CFF, the Muscular Dystrophy Association (MDA) and the Michael J. Fox Foundation for Parkinson’s Research use an army of external experts to assess the research material and results data that is regularly required from companies.
Epix renewed its partnership in September, receiving an additional payment of $500,000. In total, Epix has been awarded $4.5 million from the CFF. According to Epix, their agreement has been expanded and Epix could eventually receive up to $50 million. In its case, Epix retains the rights to any products discovered through the partnership, and the CFF is entitled to royalties when that product is sold.
Last year, Cambridge biotech FoldRx announced a five-year, $22 million deal with the CFF. The project calls for FoldRx to use its high-throughput screening technology to detect new compounds that could improve the function of proteins associated with cystic fibrosis.
The foundation has also invested a total of $80 million in Vertex’s promising cystic fibrosis drug, VX-770. The awards allowed Vertex (Nasdaq: VRTX) to take the drug into late-stage clinical trials by collaborating closely with the foundation on its development.
Not all firms who receive funding are as cash-strapped as others. Collaborating with disease foundations also offers companies a way into the patient community. In September, Repligen Corp. was given a $1 million award from the MDA and a $125,000 grant from the Friedreich’s Ataxia Research Foundation. The Waltham-based biotech had $20 million in revenue during its fiscal 2008 and reported $8 million in profit in its most recent quarter.
“We are in a strong financial position, but we sought it out to establish alliances with these patient advocacy groups. And we are always looking for ways to maximize the resources that we have,” said Laura Whitehouse, Repligen’s vice president of market development.
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