Wednesday, June 22, 2011

Life sciences-focused angel investors can be a fit for the right biotech

By Kyle Alspach

Startups in the biotechnology space have a well-deserved reputation for being needy — for large amounts of money and development time, that is.

Angel investors, on the other hand, typically don’t have a lot of money to pass out or much more of an appetite for long development times than other investors.

Yet, according to local angel investors, angel involvement can be a great match for biotech under the right circumstances, and indeed can sometimes be the main source of funding for the startups.

So long as the goal isn’t to build a huge company, that is.

“What makes biotech angel investing a minefield is that you know you’re going to need to spend a large fortune, and the angel investors don’t even have a small fortune,” said Richard Anders, founder and executive director of Mass Medical Angels, a Boston area angel investor group.

As a result, with the ideal angel biotech model, “you’re not trying to build a full-scale pharmaceutical company, you’re trying to create something with big value so that pharmaceutical companies will buy it,” Anders said. “You’re not going to go public, you’re going to sell to someone. So you want to operate as leanly and cheaply as possible, and add enough value so someone will buy it.”

A recent case in point: SmartCells Inc., a diabetes drug developer based in Beverly that was acquired by Merck & Co. Inc. of New Jersey for $500 million (a price that included undisclosed upfront payments along with payments for hitting milestones.)

The only private investment in SmartCells prior to the December 2010 acquisition was $10 million in angel money, said Boris Batchvarov, managing director of Boston Harbor Angels, an angel group that led the first round of funding for SmartCells.

Groups including Angel Healthcare Investors of Newton and Beacon Angels of Boston also contributed, and SmartCells received $10 million in research funding from the federal government for the company’s once-daily insulin treatment, called SmartInsulin.

Founded in 2003, the company never grew beyond four to five people (split between management and research) and remained very focused on the development of one product, Batchvarov said.

“They built the company with an exit in mind,” he said — a feat that was aided by a close relationship with angel investors from the very beginning.

Ultimately, SmartCells was able to be acquired prior to the start of clinical trials on SmartInsulin, which also helped keep the funding requirements to a minimum, Batchvarov noted.

Batchvarov acknowledged that the SmartCells case is not very typical, but said it could still serve as a model for an increasing number of startups going forward, with venture capital all-but-unattainable for a growing number of firms.

“We have the luxury now of seeing a lot of people” looking for funding, said Anders, whose group typically makes investments of between $250,000 and $3 million in a round.

Anders says the ideal angel biotech investment is in what would better be described as a project, rather than a company. “You don’t have a lot of employees, outsource a lot, try to use fairly short money to prove a hypothesis that will add a lot of value,” he said. “You pick off a couple important but relatively inexpensive unknowns, and then prove those … You run the whole thing as a project.”

At ONCoPEP Inc. of North Andover, CEO Doris Peterkin (Related story, page 4) says running a project is exactly how her company (which consists of her as the sole employee) defines its approach.

OncoPep’s product is a vaccine to treat an early stage of the blood cancer multiple myeloma, which was developed by three Dana-Farber Cancer Institute researchers. The goal is to bring the vaccine to clinical trial and ultimately “find a partner to take it to commercialization,” Peterkin said.

“It’s a perfect fit for angel investing,” she said, saying that she expected to close on a $4.5 million Series A round for the company “any day now.”

The round doesn’t include participation from Mass Medical Angels or any other organized group, but instead comes from a number of independent angel investors who know each other, Peterkin said. The investors have an interest in cancer vaccines, and specifically in work coming out of Dana-Farber, she said.

“We’re really focused on getting this product through clinical, and getting to bigger and better things as quickly and cheaply as we can,” Peterkin said. “So we don’t necessarily need tens of millions of dollars in investment.”