News Article

Biotech Battle Scars
Date: Sep 14, 2007
Source: Forbes

Featured firm in this article: Millennium Pharmaceuticals Inc of Cambridge, MA

A group of executives who were big players in biotech’s answer to the e-commerce bubble are making a return Friday, announcing that they have raised $378 million for a new venture capital fund.

The fund will be called Third Rock Ventures (because Earth is the third rock from the sun). Its partners include Mark Levin, Kevin Starr and Bob Tepper, who were respectively the chief executive, chief financial officer and chief scientist at Millennium Pharmaceuticals during the company’s heyday as a hot genetics start-up through the launch of its cancer drug, Velcade, for multiple myeloma. Other partners include Anne-Mari Paster, previously CFO of MPM Capital, a venture capital firm, and Nick Leschly, a biotech executive.

Some investors lost their shirts on Millennium. In 2000, hype about the sequencing of the human genome pushed shares in Millennium--along with peers like Human Genome Sciences and Incyte --to mind-numbing highs. That November, Millennium’s stock market value peaked at $17 billion, four times what it is today.

But Millennium did deliver great returns--at least 15-fold--to the companies that invested in its venture round. Levin founded Millennium in 1993 with a biotech brain trust including Eric Lander of MIT and Daniel Cohen, head of France’s gene-hunting effort, when he was a principal at venture firm Mayfield Capital. The idea was to sell databases of gene information to Big Pharma. He started out as the new company’s interim chief executive. A year later, Millennium inked a collaboration worth $70 million with Roche; after that, Levin took over as full-time CEO.

Millennium went public in 1996 and the stock immediately popped 50%, reviving a moribund biotech IPO market. By 1998, the company had signed partnerships totaling $1 billion in value with drug giants including Eli Lilly , Roche and Bayer . Scientific publications on genes linked to obesity and other ailments continued to juice the stock price. As Craig Venter’s Celera Genomics caught fire, Millennium looked like a more business-focused venture, with a clearer plan to profit.

But Millennium’s gene databases have not yielded a single marketed drug, either for Millennium or any of the partners who ponied up big bucks. The first to enter clinical trials, for obesity, failed. Millennium did launch medicines that it got from acquisitions funded by its lucrative deals. One of those, Velcade for multiple myeloma, is now the only drug Millennium sells and is expected to generate sales and royalties of $400 million this year.

“If you’re fortunate enough to build a great company in many cases there’s a lull and then you take off again,” says Levin. Millennium, he thinks, will be a great investment again. Right now, the company can still boast that it is the biggest-cap biotech founded in the past 15 years. (It currently has a market capitalization of $3.8 billion.) And the same strategy that made Millennium a success--build a company not around a drug, but around an exciting technology that could create multiple medicines.

That strategy has worked for Levin more than once. Before Millennium, he helped found Tularik (bought by Amgen in 2004 for $1.3 billion in 2004), Cell Genesys (worth $260 million) and Abgenix (a Cell Genesys spin-off, bought by Amgen in 2005 for $2.5 billion).

Starr, the former Millennium CFO, has been pursuing a similar strategy, too, helping recently to get Alnylam, a young biotech exploring an entirely new way of making drugs using a technology called RNA interference, off the ground. Alnylam sports a $1 billion market cap and is headed by a Millennium alumnus, John Maraganore.

“We’ve been involved in over $6 billion in pharmaceutical alliances, 500 collaborations with pharma and a dozen spinouts,” says Starr, who was the Millennium CFO until 2003. “We haven’t done all of it right. With those battle scars in what has worked and what hasn’t, we can make a bigger difference than a single CEO with a checkbook and a scientific idea.”

Part of the new venture fund’s approach will be to closely manage start-ups. Other VCs are backing dozens of companies a year, but Third Rock will only look at a few biotechs, each getting a few tens of millions of dollars. At that rate, it will take the fund several years to invest all the money that it has.

Another strategy: Third Rock won’t raise $50 million or $100 million worth of venture capital for a single biotech before bringing the company to the public markets, private equity or selling out to a larger drug maker. These deals are just too dilutive. Better to follow the Millennium example and start generating revenue through partnerships early.

When Millennium went public in 1996, an initial public offering was the main way biotechs went public. But now 70% of biotechs get sold before they IPO. Still, Levin says, over the past few decades the opportunity to take profits in biotech has remained steady. In rare cases big drug firms have pledged upward of $100 million for drugs that haven’t even entered human trials. And takeouts are becoming more and more common. Merck , for instance, has bolstered its pipeline with a slew of privately held biotechs like GlyCoFi and Aton Pharma.

And that’s even before private equity enters the market. Recently, Lexicon Pharmaceuticals , one of Millennium’s peers from the genome boom, raised $550 million from private equity investors, about what a company used to expect from a public offering. “The important thing,” says Levin, “is all these companies we’ve worked on have been successful.”