La Jolla’s Avalon, drug giant funding life-science startups

By Bradley J. Fikes

San Diego Union Tribune

Building on their groundbreaking partnership, Avalon Ventures in La Jolla and the British pharmaceutical giant GlaxoSmithKline announced Monday that they have jointly invested $20 million to launch two San Diego biotech companies.

The funding arrangement is the latest example of how life-science venture funds are pioneering new approaches to raising money for the cash-hungry but potentially lucrative biotech industry.

As major scientific breakthroughs pile up, money remains a bottleneck in commercializing discoveries. With high-tech and Internet companies stealing the investment limelight, those in the life-science sector have had to become creative to find sources of funding. These novel paths can take the form of direct partnerships with drug companies, as Avalon has done, or even governments interested in developing their own biotech sectors.

In the Avalon-GSK deal, Silarus Therapeutics, developer of treatments for anemia, and Thyritope Biosciences, maker of an experimental drug for a thyroid condition called Graves’ Orbitopathy, will each get up to $10 million. They’ll also receive executive management expertise from Avalon, a successful life-science venture fund.

The deal raises the total to three San Diego biotech companies founded as part of the $495 million alliance between Avalon and GSK, first announced in April 2013. The inaugural firm, Sitari Pharmaceuticals, was created in November. It’s working on treatments for celiac disease and other illnesses.

Avalon and GSK said they’re pleased with the progress of their partnership, which is meant to transform the sometimes-contentious relationships between big drug corporations and biotech venture investors.

And because each of the 10 companies to be formed via the collaboration will be located in San Diego, this region’s large life-science economy has a stake in its success.

“These are companies we’re pretty proud of and we’re excited to go forward,” said Lon Cardon, a senior vice president for GSK.

Systematic structure

While the amounts invested are relatively small, the hope is that each startup will create products and technology worthy of big returns. This has been done repeatedly in San Diego, most recently with Seragon Pharmaceuticals, a developer of prostate cancer treatments. Seragon was funded with $30 million last October — not by Avalon or GSK — and sold this summer to Genentech for up to $1.72 billion.

The Avalon-GSK partnership aims to make such a process more systematic. By working with people who have a proven record of achievement, combined with promising scientific research, the alliance wants to demonstrate that these successes don’t have to be one-off stories.

London-based GSK is providing up to $465 million to finance the 10 companies and will have the option to buy any that succeed. Avalon will invest as much as $30 million and supply its management expertise. If GSK declines a purchase option, Avalon is free to form other deals. Since GSK holds equity in all of the companies, a breakthrough medication or other product would benefit it in either case.

Sitari, Silarus and Thyritope are based on technology developed in academia and scouted out by Avalon, which pays close attention to discoveries with strong market potential.

Investment issues

Life-science venture capital firms have had difficulty attracting traditional investors because high-tech sector deals typically return profits more quickly, said Ben Kuo, who tracks venture capital funding for SoCalTech, a Westlake Village firm that monitors investments in Southern California. So drug corporations make sense as partners to fill the gap.

“The big pharma guys know (life-science companies) are an important part of the equation,” Kuo said. “They’re the source of discoveries and innovation in the industry.”

The venture firms are looking even further afield for nontraditional funding.

For example, Domain Associates has formed a $760 million partnership with Rusnano, a venture firm owned by the Russian government. Domain, based in San Diego and Princeton, N.J., is helping Rusnano find pharmaceutical investments and bring technology into Russia to benefit that country’s pharma industry.

The basic problems facing biotechs and big drug companies have long been known: Drug companies have plenty of cash, but have increasingly fallen short in generating new drugs to replace blockbusters coming off patent. Their in-house research teams have been unproductive, so the drug companies have laid off thousands of their own employees. They’re looking to biotech to fill the gap.

Since biotech companies have less money than the big drug corporations, they usually get the worst of it when a partnership goes sour. This can happen because the results don’t live up to expectations, or disagreements arise about responsibilities, or the pharma conglomerate changes direction and decides the relationship is no longer important.

New approach

The Avalon-GSK deal is structured to give both parties what they want, said Avalon partner Jay Lichter, who helped negotiate the partnership. Avalon’s investors seek big profits and quick returns, while GSK wants a pipeline of lucrative new drugs. And the sooner Avalon can cash out on a deal, the better its return on investment.

Lichter praises Cardon at GSK, whom he has known for 20 years, for helping form an alliance that both parties can embrace.

“We’ve been colleagues, we’ve been friends, we’ve been pitching deals on the road,” Lichter said. “You get to know somebody and you get to trust somebody really well after all that effort together, and I think that is the underpinning of this entire collaboration. When we were negotiating the deal, we were trying to find the solution to make the deal work for both of us.”

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