More on Warp Drive Bio

I analyzed the Warp Drive Bio (WDB) launch here (Warp Drive launched with a stunning $125M in financing.)

Even better,  BioIT World has more detail on Warp Drive Bio, including an interview with the CEO.

Interesting to see that the 'put' of WDB to Sanofi is actually formally agreed to - hit certain milestones, and Sanofi has to pay a pre-determined price, so there's more risk on Sanofi's part that I assumed was being carried by the VCs.

Either directly or indirectly, this results in reduced risk for Sanofi, the VCs, and WDB company management - a win all-around - pretty smart. Consider:

-WDB & company management doesn't have as much financing risk as most biotech's - they can concentrate on discovery productivity, instead of chasing next round financing.

-VCs get a liquidity put. There's even less downside, as VC's are providing less than 100% of the start-up capital. (Assuming more than the VC's $75M was required to launch.)

-Sanofi gets exclusive (I assume) access to a novel technology platform, gets R&D expenses off of their income statement, and locks in discovery productivity and the cost of acquiring WDB technology at 2012 prices. As long as SNY's R&D agenda is matched by WDB's, and the value of leads does not go down, this is great.


I think most VCs and company executives would LOVE to do this sort of deal, especially at company founding, but pharma's aversion to risk prohibits most deals of this sort. Big Pharma's usual game plan is to wait to see more data, as they would rather trade potential financial upside for reduced product or program risk. Let's hope that this deal represents Big Pharma's willingness to take a little more risk, especially when a company at start-up has such a great pedigree.


Besides the novel Sanofi partnership, WDB has a very traditional lead discovery value proposition  - their expectation is that their technology platform will generate novel lead compounds quicker/better/or more efficiently.

I'm in no positon to evaluate the technology, but from a business strategy perspective, it is another example of over-valuing lead discovery. (That is, if you believe as I do that preclinical leads are over-valued.)

Consider the typical drug discovery & development timeline, as put forth in Nature:

WDB's value proposition affects only the first two years of the timeline (up to lead selection.) Presumably WDB is more efficient (either in time or cost) during the early stage. Let's say they're 25% more efficient in terms of time, which equates to 6 less months of development over 8 years, assuming that the drugs have the same downstream risks of other R&D programs. (i.e. a WDB-sourced lead is just as likely to succeed in Phase II as any other pharma lead.)

The net effect is WDB's entire discovery advantage is in 1/16th of the total effort required to produce a drug, and does not seem to impact the probability of success. Sure, there's financial value in getting a product to market 6 months earlier, but bringing $250M in revenue forward by six months 7.5 years from now is only worth $31M in present value (25% WACC, 30% OPM).

The same $31M in NPV could be generated just by increasing the probability of a programs success by a small amount. (In other words, quality over quantity.)

For this reason, I'm a fan of investing not in more early leads, but rather any IND leads or technologies, especially if I'm a risk-averse pharma.

Thoughts? Reactions?

FDA on biosimilars

Great WSJ article today summarizing the FDA's new rules for biosimilars.

Included in the rules discussion is this list of the top 10 biologics:

While I knew they were big sellers, I hadn't realized that the big 3 RA biologics accounted for $19.5B in annual sales. That's roughly equal to the GDP of the country of Bolivia. Total sales of biologics are greater than the annual economy of New Zealand. Keep in mind, this entire class of drugs did not exist until 1989. (I'm guessing that the first FDA approved recombinant biologic was Amgen's Epo, in 1989.)

As for the newly announced FDA regulations on biosimilars, they strike me as very fair - the regs acknowledge that the biosimilars have a lower regulatory burden than a "novel" (i.e. not biosimilar) drug, yet are not considered a typical generic. As opposed to chemical generics, biosimilars will need significant data to receive FDA approval, and will not be able to be marketed as exact copies. 

Interesting deals......

Two transactions from the last month that intrigued me:

Transgenomic (TBIO) raised $22M from a group of investors. Congrats to TBIO, as they attracted new capital equal to about 40% of their market cap including from a very serious investor (RJ Kirk's Third Security.) This financing allows TBIO to rise above the small cap services/genomics/diagnostics crowd, and lets them focus more on business than on financing. Gaining the imprimatur of RJ Kirk isn't bad either.

(Also an acknowledgement of TBIO's very nice 3-yr stock performance.)

What made me curious about the deal is:

1) the size. While one blogger calls the raise too large relative to their $1M/yr cash burn, I'd expect that TBIO has some really good uses in mind for the fresh capital, perhaps to shop around earlier, younger diagnostics plays to plug assays into their sales channel. My perception is that acedemics are asking for stiff terms to commercialize novel diagnostic IP, bargains can be found among capital starved start-ups.

2) the fact that Kirk/Third Security are injecting equity into TBIO.......to repay the debt owed to Third Security by TBIO. (TBIO owes ~$8M as part of their prior deal to buy Clinical Data/s (i.e. Kirk's) prior PGx assets.

This isn't anything unscrupulous, like, say Elan's early 2000's Enron-esque equity investments to get R&D expense off of their books while pumping their book value. (Wish I could find a link for this.) Instead, it's an interesting way for Kirk to continue to bet on pharmacogenomics while also returning some value on the investment in the short run. (The definition of "short run" is liberally applied here. Kirk's PGx investment interest goes all the way back to the purchase of Genaissance (2004?)) Kirk & team have turned over a tertiary asset from their Forest Labs/Clinical Data deal into an interesting chunk of a publicly traded company. (albeit OTC BB)

One of these days I'll have to dive deeper into Kirk's activity, particularly Intrexon, his synthetic biology company, and affiliates such as Ziopharm and Adeona.....

The other transaction that caught my eye:

Warp Drive Bio founded with $125M in seed financing.

When I first heard of this deal, I was stunned by its' size. I've come down a bit after learning more details, but I still can't rationalize it. (Never mind the realization that the headline science of Warp Drive combines two absolute graveyard priorities: natural products and genomics. That's a conversation for another day)

It looks like only $75M is committed cash financing. My guess is that Sanofi is contributing $50M in research support, less any research assets contributed. The press release suggests that this will cover 5 years of operations. (Let's ignore that business plans & research agendas change over 5 years.)

If you're an early stage VC, you're targeting a 40% annual ROI, but you won't pull the trigger that doesn't look like a potential 10X return. If the VCs behind the deal expect 10X liquidity in 5 years, then they'd target an enterprise value for Warp Drive in 5 years of $1.25B (158% IRR), but be happy with  5.4X (40% IRR on $675M EV in 5yrs.)

These figures are nuts, but I guess that's how Third Rock (not Third Security) does it - they also started Foundation Medicine with an enormous seed round ($34M last year.)

I really hope this isn't the only way that start-ups will get off the ground in the future. By now it is apparent that there's a big gap between start-up requirements and VC interest - VCs really need to deploy large amounts of capital ($5M chunks minimum, likely in syndicate with other firms resulting in rounds of $10-$20M in new capital. Only deploying capital at this level makes their VC models economical, while most early stage discovery companies think in terms of $1M-$5M rounds, otherwise their interests are diluted to nothing.

If Warp Drive is the rule, rather than the exception, only big ticket discovery efforts with star quality SABs and pharma partners at launch will draw financing, meaning that pre-clinical discovery will slow significantly.

My guess is that Warp Drive and Foundation are the exception rather than the rule, and that their VC parents have the 'curse' of too much capital to manage.

Or at least I hope so.

Well done, Genomic Health!

When writing about the proposed acquisition of Illumina by Roche I mentioned that I didn't think a $6B acquisition of a hardware maker was the best strategy for Roche to bring their molecular diagnostics business into the DNA sequencing era. (Instead I recommended large-scale, aggressive partnering to grow the molecular diagnostics business.)

In contrast, one company with what I think is EXACTLY the right strategy to advance their molecular diagnostics business into the sequencing era is Genomic Health.

Genomic Health's existing product (Oncotype DX) is a 21-gene PCR test to predict breast cancer recurrence, and a similar product for colon cancer is late stage development. Both of these tests may someday "graduate" to a sequencing basis, if either NGS becomes more economical, or additional value is seen in collecting genomic data beyond the 21 genes of interest. 

But Genomic Health understands the need to augment or match product innovation with platform innovation.

For $20M (or about .03% of the Illumina acquisition price) Genomic Health will be launching a wholly-owned subsidiary devoted to developing sequencing-based tests. This is brilliant on so many levels:

-GHDX kept the founding/leadership team in place, while allowing them to pursue new, more exciting fields. The continuity of the team will be important here, while the new venture won't have to invest in some of the infrastructure already covered by GHDX (such as CLIA certification)

-$20M - while a good-sized investment in R&D - is a more smart-sized play when compared to other NGS-diagnostic players, like Foundation Medicine, which launched with an "A" round of $34M, without even a product strategy. (~15 months after founding, Foundation has just won CLIA certification. This is not an insignificant accomplishment, but still represents the company just now 'reaching the starting line.' )

-For GHDX, the $20M represents about 18 months of operating cash flow. It's a serious investment into (potentially) cannibalizing their own business. If you're a fan of Clayton Christensen and his "Innovator's Dilemma" line of thinking, you'd praise GHDX for being willing to take this initiative, where other former market leaders have treated their existing markets as sacred and protected.

-GHDX is banking on the idea that though their R&D investment will crimp earnings in the short term, equity value akin to that seen in Foundation medicine is likely to result. To illustrate this, imagine if Foundation's $34M seed round valued the company at $50M (post-money, without anything more than a business plan.) For $20M, GHDX has essentially generated $14M in net equity value ($50M enterprise value less $34M cash), and I'd argue that GHDX's venture is worth more than Foundation without spending a dime yet.)

(in fairness, some finance types would argue that with GHDX having a P/E ratio of 126x, reducing operating profit by $10M/yr costs something like $1.26B in foregone equity value, but 1) GHDX's market cap is only $850M, and 2) GHDX is down only 5% since their press release announcing the sequencing initiative.)

-many other companies in GHDX's position might realize the opportunity that NGS diagnostics represent, but instead decide to survey the field of start-ups and trade equity to acquire such products rather than invest in R&D to dilute earnings. GHDX's approach insures that NGS will be a core competency for product development, while still maintaining the option to spin out the subsidiary at any  time. (Continuing to riff on the GHDX echoing some brilliant business strategists like Christensen, I'd say that this represents GHDX's commitment to a Jim Collins 'built to last' culture."

Kudos to GHDX!

-finally, one curiosity: in the press release announcing the initiative, GHDX only once used the word "genomics." (Besides in their corporate name.) Many millions of dollars have been flushed over the last decade by start-ups pursuing genomic solutions. For this reason, I think GHDX has spun their news away from genomics.

What do you expect for $3B?

Five years ago California chartered CIRM - a state body to facilitate spending $3B on stem cell research over a 10 year period. The money for CIRM came from a CA bond issuance (i.e. a self-tax on Californians) and was intended to fund stem cell research to 1) keep California's bioscience competitive with or ahead of the rest of the world, and 2) fund embryonic stem cell research that the US federal government would not fund due to ethical restrictions.

(As context, at the time of the ballot initiative to fund CIRM, California was worried that South Korea, Singapore, and other locations would be more attractive for stem cell research. Also, my impression was that Cali voters were eager to flip Pres. Bush the bird on anything, particularly when his social policies impacted science.)

I commented a year ago on the return on stem cells investment , and now Nature has a good article summarizing CIRM at the five year (half way) mark (with better figures than my estimates.) Since Nature is tied to the science community (including CIRM researchers) they don't go out and say it directly, but there are few tangible results so far from ~$1.5B in spending. (Presumably some great papers (published in Nature) and some shiny new on-campus labs, but other than that, nothing.)

Ordinarily, I would not fault anyone for not dramatically improving human health in just 5 years (even with $1.5B to spend), but as I pointed out on my personal blog in 2005, the stem cell community has a terrible track record of overselling the benefits of its' efforts.

But the lessons here are less about how regenerative medicine is following the same growth curve of revolutionary new technologies before it, where hype runs ahead of reality, until a crash and subsequent rebirth with success (think gene therapy in the 90's).

The lessons here are instead related to business and economic strategy:

1) even in the case of outstanding science, local funding only produces marginal local benefits. Presumably CIRM proceeds have enabled research that has global benefits (through great papers, worker training, and new research tools and methods.) However, knowledge doesn't stay local. Good papers are read around the world, workers are recruited to other labs in other places, and tools are copied. Everyone should probably thank Californians for funding the research, but unless CIRM can claim a few million more tourists to California because of stem cell research, we probably aren't returning value to the state because of CIRM.

2) anyone touting near-term economic or other gains from long-term basic research is either dumb or dishonest. As the Nature article highlights, CIRM has funded only 1 clinical trial (which aborted), meaning that the impact on human health is still a long term proposition, and that aside from some advances in research tools, little tangible economic value has been created. I think much of the excitement of alternative energy ("Green jobs!") is similarly oversold regarding near-term impact.

3) It is an esoteric concept, but no analysis of CIRM or similar efforts is complete without asking "is/was there a better use of $3B instead of stem cells/CIRM, including just leaving the $$$ in voters' pockets?"

The status quo has strong gravity, so California should be praised for considering a bold move like CIRM (whereas with the exception of a few states that invested their tobacco settlement $$$ in life science research, most states never got beyond talking about making a difference), but the truth is, governments and the general populace are ill-equipped to consider alternatives beyond yes/no.

California is massively in debt ($361B as of Feb 1, 2012), so NOT starting CIRM could have been $3B less debt (which is still a lot of money to me), or a minuscule <1% of the problem, depending on your point of view.

In addition to the idea of just pocketing the $3B (which I would advocate, in retrospect), I'm sure that other interest groups could have contributed other higher-returning ideas for state investment - be it green energy, synthetic biology, infrastructure improvements, or whatever.

4) (personal biases showing here:) bioscience needs to admit that no matter which topic or which spin, if you have to rely on convincing the general public to fund your initiative, you should just stop.

I don't think that the California public has conducted a cost/benefit analysis on CIRM, but they (or the newspapers, or whatever) will do so eventually, and it won't be pretty.

Selling the public isn't the hard part. (I'm thinking of the Simpsons' Marge vs. the Monorail episode as a great illustration of this concept). Instead, delivering on the grand promises is what is difficult, and until research becomes predictable (oxymoron - predictable research is then a technology), science will continually over promise and under deliver, likely proving to be a longer term hindrance than a source of short term funding.

(Perhaps this is observable in today's funding climate for therapeutic development. The bioscience investing base is probably smaller today and in the long term than if reality had kept pace with hype, and not instead burnt a great many investors.)