12:00 AM
 | 
Dec 14, 2009
 |  BioCentury  |  Finance

Ebb & Flow

Investors in oncology company Gloucester Pharmaceuticals Inc. are looking at a 3.5X-6.5X return on an acquisition by Celgene Corp. (NASDAQ:

CELG), making it a model for how to execute in-licensing and keep costs under control.

Since its inception in 2003, Gloucester has raised a little more than $100 million from a core syndicate including Apple Tree Partners; ProQuest Investments; Prospect Venture Partners; and Rho Ventures. Celgene will acquire the company for $340 million in cash and up to $300 million in milestones.

FDA approved Gloucester's Istodax romidepsin in November to treat cutaneous T cell lymphoma (CTCL). The launch of the histone deacetylase (HDAC) inhibitor is expected next quarter. The company is running another pivotal trial in peripheral T cell lymphoma (PTCL), which is expected to report data next year.

Gloucester co-founder and investor Martin Vogelbaum of Rho Ventures said the syndicate chose to fund all the way to approval in CTCL, rather than partner along the way.

"We did this with 10-15 employees. Given our low overhead, the money was only going to clinical costs," said Vogelbaum. "We were able to do this better, cheaper and faster than big pharma or medium-sized biotech."

Gloucester in-licensed Istodax in 2004 from Fujisawa Pharmaceutical Co. Ltd. prior to its merger with Yamanouchi Pharmaceutical Co. Ltd. to form Astellas Pharma Inc. (Tokyo:4503).

"We were in the right place at the right time, Fujisawa needed to get it off the balance sheet before the merger announcement," said Vogelbaum.

He credited the National Cancer Institutefor getting the compound off to a good start: "NCI was very instrumental in our understanding of how good a drug this was."

When it was in-licensed, Istodax (formerly FK228 depsipeptide) was in Phase II testing for CTCL and PTCL by NCI under a Cooperative Research and Development Agreement (CRADA) with Fujisawa. Gloucester announced final Phase II data from that trial at the American Society of Hematology (ASH) conference last week(see B19).

In October, Allos Therapeutics Inc. (NASDAQ:ALTH) launched a competing product, Folotyn pralatrexate, to treat relapsed or refractory PTCL. Last week, Allos shares were off $0.76 (11%) to 5.86.

Step up for 5AM

Early-stage VC firm 5AM Ventures closed a third fund at $200 million, an unusual feat in this market given that the new fund is larger than the firm's $150 million second fund from 2006.

Managing Partner Andy Schwab chalked up the firm's appeal for LPs to two elements: a focused story and solid exits from its first $65 million fund with a 2002 vintage year.

"I think we've got a very focused strategy - a smaller firm that does fewer deals. That was a good story rather than big firms that do lots of different things," Schwab told Ebb & Flow. "We think it's possible for LPs to make venture type returns with smaller funds - a few big winners can really drive the numbers for us."

5AM has had five exits from its first fund. The biggest contributor was the sale of Ilypsa Inc. to Amgen Inc. (NASDAQ:AMGN) for $420 million in 2007. About $44 million was invested in Ilypsa, which according to Schwab will provide a 7X return. The payback could have been higher, as R&D tool play Symyx Technologies Inc. (NASDAQ:SMMX), which spun out Ilypsa in 2003, had retained a stake.

The firm made 13 investments from the first fund and 12 from its second, which has yet to see an exit.

Schwab expects 5AM will make 12-15 investments from the third fund, with seed funding representing a fifth to a third of the investments. The firm will try to put more money to work in each deal so it can have a higher ownership stake.

Schwab said 5AM will continue to put about two-thirds of its fund into drug development and the remainder into medical devices, diagnostics, reagents, tools, and materials plays. Of the drug development funds, he estimated at least a third would go to platform companies, with another third for spinouts from established companies.

The firm has already made two investments from the new fund: an $8 million A round in neurology company Envoy Therapeutics Inc. and an undisclosed seed investment.

Schwab characterized the LPs as a broad mix including endowments, family offices, foundations, fund-of-funds and pension funds, with about one-quarter coming in as new investors.

French dipping

Veteran French VCs Alain Maoire and Thierry...

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