Xconomy

By: Bruce V. Bigelow

The sale of Amira Pharmaceuticals will likely go down as one of the standout life sciences deals of 2011—it certainly ranks as one of the biggest payouts in San Diego, where Amira was founded in 2005.

But what may be more significant than hitting the bell in the strongman game at the biotech carnival is the way Amira approached the deal—and how the buyout has opened the way to an intriguing new business model for life sciences startups.

Luke already has explained how Amira beat the odds when New York’s Bristol-Myers Squibb (NYSE: BMY) agreed in July to pay $325 million in upfront cash, and another $150 million in anticipated milestone payments. It’s unusual these days when a big pharmaceutical writes a check that big for a six-year-old startup whose lead drug candidate has barely completed early stage trials.

Amira also kept some other drug candidates out of the deal. Some went to a new San Diego biotech called Panmira Pharmaceuticals, which is continuing the development work under CEO Hari Kumar, who was previously Amira’s chief business officer. Another important program, which was the focus of a partnership Amira had with GlaxoSmithKline (GSK), was spun into a new standalone company.

In other words, Amira worked to find a good home for every important drug in its pipeline. This doesn’t happen in many buyouts, as the acquiring pharmaceutical company is often interested in one or two drugs in development, and the rest get relegated to the “no more resources” pile.

Since then, Amira co-founder (and San Diego Xconomist) Peppi Prasit has raised the curtain on another life sciences startup, Inception Sciences, which was conceived as a kind of mothership for spinning out new drugs. The idea was to create an incubator-type holding company that would enable Amira’s drug discovery group to hatch new drug development programs. Prasit, Jilly Evans, and John Hutchinson, who were the scientific founders of Amira, would lead the effort to identify new pathways as well as potential drug compounds for these new targets.

Under this new business model, each group of new drug candidates would be organized as a separate development program within different business entities. For venture firms, investing would be like ordering from the à la carte menu, giving investors an equity stake in a specific drug program—without the general and administrative baggage that typically goes with a biotech acquisition. As the drug candidates of each program advance to clinical studies, the business entity could be packaged for sale to big Pharma or retained by Inception Sciences.

The new model is at least partly the result of a push at Menlo Park, CA-based Versant Ventures, to find new ways to start and fund life sciences startups, according to Clare Ozawa, an associate at Versant Ventures who recently joined Inception Sciences as chief business officer.

“We really are an operating company built around a drug-hunting team,” Ozawa says. Before starting Amira, she says Prasit, Evans, and Hutchinson had worked together at Merck on the successful development of montelukast sodium (Singulair), the drug used to treat asthma and seasonal allergies that generates $4 billion a year in revenue.

“They are an exceptional drug discovery group with extraordinary drug-hunting capabilities,” Ozawa says. “They are particularly good at pouncing on biological insights that are important in new disease areas.”

The concept of building a company around a core discovery group goes against the grain for most institutional investors, at least nowadays, according to Panmira’s Kumar. Before Inception Sciences, Kumar says, “No one in their right mind considered a ‘discovery engine’ as a bankable investment.” It would take too much time and money to reach the later stages of development, when a drug’s value becomes better established.

Ozawa says Versant’s Brad Bolzon was willing to help bankroll Inception Sciences, especially after it became clear that Bristol-Myers Squibb would acquire Amira. Because the buyout was so big, Ozawa says investing in Panmira became kind of a freebie—akin to leaving a few chips on the table after claiming your winnings.

Prasit’s team also was widely respected. The same group had been successful in developing new drug compounds at both Amira and Merck, according to Kevin Kinsella of San Diego’s Avalon Ventures. “They’ve had more success developing effective, non-toxic, high PK [pharmacokinetics], nano-molar binding drugs and new chemical entities than I’ve seen anywhere else in 30 years in this business,” says Kinsella, whose firm also invested in Amira.

But the formation of Inception Sciences as a discovery engine is really only part of a more holistic story, according to Kumar. He says Amira began taking a comprehensive approach to spinning out its different drug development programs at least 18 months before the Bristol-Myers Squibb buyout was announced.

When Prasit, Evans, and Hutchinson came together to start Amira in 2005, Kumar says the research group was basically starting from scratch, with “almost no intellectual property.” Within a few years, Amira’s R&D group had identified a number of promising anti-inflammatory compounds with the potential to become new drugs.

The first was a series of small molecule drugs that blocked a signaling pathway called DP2/CRTH2, which increases allergic inflammation when activated. The compounds showed promise as a new treatment for respiratory diseases, such as asthma, chronic obstructive pulmonary disease, and other allergic conditions.

Another group became known as the FLAP compounds because they inhibited 5-Lipoxygenase Activating Protein¬ (FLAP), a signaling process that helps control inflammation. In early 2008, Amira formed a partnership with GlaxoSmithKline (worth as much as $425 million) to develop and commercialize FLAP compounds for treating respiratory and cardiovascular disease.

To Ozawa, the R&D team’s most impressive success came after scientists at Harvard Medical School published a seminal paper in early 2008 that linked LPA-1, a biological signaling process, to idiopathic pulmonary fibrosis (IPF), a rare disease that forms scar-like tissue in the lungs and drastically reduces the ability to breathe. In less than a year, Amira had done preclinical proof-of-concept studies for at least two molecules that blocked receptors in the LPA-1 pathway. By early 2011, Amira had completed early safety and tolerability studies of its lead drug candidate.

“They were extremely effective and fast in taking it to Phase 1,” Ozawa says, “and the results were encouraging enough to entice Bristol-Myers Squibb to acquire the company.”

In the meantime, the company had been wrestling with a dilemma. As Prasit’s team came forward with each new potential drug compound, Kumar says, “We went to the board and said if we do another Big Pharma partnership, we’ll always be caught in this vicious cycle of invent-partner, invent-partner.”

This was the issue that set Amira and its board on the road to a more comprehensive approach. “A theme of discussion that began in the second quarter of 2010 was, ‘What is Amira going to look like five years from now?’” Kumar says. “It became very clear to us that the idea of a pure research and discovery group does not have much of a chance to survive in the real world. We had to find a return for investors.”

The situation “made Peppi think about what would happen to the research group,” Kumar says. “So Peppi said, ‘Let me think about this.’”

In terms of selling Amira, Kumar says, the good news was that Bristol-Myer Squibb wasn’t the only prospective buyer at the table, which gave Amira some negotiating leverage. Even better, Bristol-Myer Squibb was interested only in Amira and its LPA-1 program.

So, as the buyout talks progressed, Amira formed Panmira Pharmaceuticals as a way to continue the development of its two drug candidates from Amira’s DP2/CRTH2 program, as well as a FLAP compound for topical treatment of the eye and a preclinical program known as 5-lipoxygenase (5-LO). Most of the work under the original FLAP agreement was being done at GSK, so Amira formed a separate new company to simply manage that relationship.

To some outsiders, the departure of Prasit, Evans, and Hutchinson from Amira in November, 2010, was something of a shock. But that also was part of the plan, as the group set out to form Inception Sciences. The Bristol-Myers Squibb deal did not affect the formation of Inception, which Kumar describes as “a very proactive decision.”

As for Panmira, Kumar says Amira’s venture investors hold essentially the same proportional shares in Panmira. It hasn’t been necessary to raise any new money, he adds, as funding from the FLAP deal with GSK continues to fuel Panmira’s operations.

Today, Ozawa says Inception Sciences has about 25 employees and operates like a kind of internal contract research organization for two programs that have been seeded by Versant. Inception 1 is focused on drug discovery for neurodegenerative diseases and Inception 2 is hunting for metabolically targeted drugs designed to cut off a tumor’s fuel supply.

Inception 3 will likely be launched in 2012. So far, Ozawa does not see funding as a problem. “I do think one of the advantages for Inception is the track record of creating very important drug compounds in a time frame that is very important to the industry,” she says.