idea to ipo and beyond - lessons learned ucsf mar 2011

8/6/2019 Idea to IPO and Beyond - Lessons Learned UCSF Mar 2011

1/19

Idea to IPO and BeyondIdea to IPO and Beyond

Lessons LearnedLessons Learned

Ralph (Chris) ChristoffersenRalph (Chris) Christoffersen

Morgenthaler VenturesMorgenthaler Ventures

UCSF, March 7, 2011UCSF, March 7, 2011


2/19

I May Not Have Made Every PossibleI May Not Have Made Every Possible

MistakeMistake But it Certainly Seems like itBut it Certainly Seems like it Academic for 17 years

Professor of Chemistry (U of Kansas) Did molecular quantum mechanics for a living

Administration

Provost (Kansas); President (Colorado State University)

Large Pharma for 10 years Upjohn Company

Started biotech group VP Worldwide Discovery Research

SmithKline Beecham Sr VP Research; member of Development Committee

Biotech CEO Ribozyme Pharmaceuticals (10 years)

Venture Capitalist Morgenthaler Ventures (9+ years)


3/19

It May Look Easy But Dont BeIt May Look Easy But Dont Be

FooledFooledCommon Belief:

The hardest part of starting a company is creating theconcept and doing key experiments for initial patent filings

Truth:Its an important part, but there are hundreds of ways tomess up (not always under your control), including:

Financing

Staffing mistakes Intellectual property VC meddling Founder meddling Board of Directors meddling FDA

Lack of corporate partner

Corporate partner meddling Choice of initial product/clinical indication Choice of development pathway Lack of liquidity opportunities


4/19

How To Tell If Your Idea Is WorthHow To Tell If Your Idea Is Worth

Forming a CompanyForming a CompanyAsk whether the technology platform will:

Produce multiple products

Single product companies are too risky

Represent a true paradigm shift if successful i.e., change the way medicine is practiced

Note: Bias above toward innovation businessmodel vs. other valid approaches including:

Faster/Better/Cheaper (e.g., next-gen products) Roll Up Model Late stage


5/19

Raising Money Should be EasyRaising Money Should be Easy

(All VCs are the same)(All VCs are the same)Raising money:

1. Is never easy2. Always takes longer than expected

Forming syndicates can be quite tricky VCs have different interests, approaches and focus

Approximately 130 VCs with $150B under management

53 Early stage investors

13 Later stage 68 Various stages

Be sure VCs in the syndicate have deep pockets Half of current VCs could be lost in current shakeout


6/19

Raising Money Should be EasyRaising Money Should be Easy

(All VCs are the same)(All VCs are the same) -- 22

Choose VCs with significant operating experience

All those mistakes can be helpful Mentoring is an important value-added benefit

VCs have distinctive personalities; call other CEOs


7/19

Why Is It So Tough to Hire GoodWhy Is It So Tough to Hire Good

People?People?CEOs can make or break a company - the problem isfinding the right one

Ideally want serial entrepreneur who has successfully

built/sold a biotech company Very few around; burn out issue

Risk profile is tough to match with experienced candidates Corporate execs frequently have good experience but lack risk

tolerance and need significant support structure underneath Not uncommon to have a start-up CEO with good science

credentials replaced later by CEO with more market experience

Founders typically make lousy CEOs

Great science credentials with little/no business experience

More often are most useful as Chair of the SAB


8/19

Is Curing Cancer Always theIs Curing Cancer Always the

Best Product Focus?Best Product Focus?Assuming the scientific platform has multiple productpotential, the ideal initial product portfolio has:

More than one product

Lead product is chosen by speed to Proof of Concept(Phase IIa clinical result), NOT size of market

Remember IRR your investors will

Corporate partner will develop large market products Lead product should have one or more good biochemical markers Should achieve POC within 5 years of company formation

Must keep a balance between developing lead product(s) andfurther development of the platform


9/19

Can VC Conflicts Be Avoided?Can VC Conflicts Be Avoided?

No, but they can be managed if they are known inadvance. Some examples:

Founders and company management should begin withthe realization that VCs require exits: Conflicts between building the company & investor exits

Planning for VC exits from the beginning (e.g., following POC)

This is separate from long term company building

VCs are NOT uninterested in company building

Cash is King CEOs should generally raise moneywhenever it is available to keep the doors open; Balanced with everyones desire to minimize dilution and VC

desire to be capital efficient


10/19

When Do You Raise a Series B?When Do You Raise a Series B?

Whenever you can!

Generally it will take $40M+ to get to POC

Dont worry about Down Rounds You will take heat from your board, but Cash is King

The end valuation is all that really counts

Financing mechanism currently being used by some VCs(including Morgenthaler) Single Series A/B round of $30-40M, tranched against Milestones

Hard to find syndicate partners but,

Minimizes financing risk for company

Puts premium on execution, and avoids Series B down rounds

and dilution (helps both management and VCs)


11/19

Why Not Finance Everything withWhy Not Finance Everything with

Corporate Partnerships?Corporate Partnerships? Corporate partnering can be very helpful in

achieving financing goals:

Especially helpful if non-dilutive financing can be achieved(e.g., non-equity support of product development costs).

Best done with leverage (i.e., partner needs thetechnology/products; multiple partners are interested)

Be careful to avoid control issues

Essential to keep some assets unpartnered toattract buyers


12/19

Dont Be Afraid to Change DirectionsDont Be Afraid to Change Directions

Many examples of companies whose success wasunrelated to their initial technology/products Cant predict science/medicine

Need to keep a prepared mind

However, a change in focus may increase (not decrease) risk

Will discuss several case studies: Ribozyme Pharmaceuticals

Catalyst Avidia

Replidyne

ICOS


13/19

RibozymeRibozyme TherapeuticsTherapeutics

Founded in 1992, on the Nobel Prize discovery by Tom Cech that RNAcould be catalytic and was not simply a passive messenger

A-level VCs: Venrock, Morgenthaler, CW Group, Advent

Developed major technology platform advances RNA is unstable in serum (half-life less than a few seconds); RPI

discoveries provided chemical modifications with stability for days

Therapeutic programs in cancer and infectious disease initiated,including corporate collaborations with Chiron and Lilly.

Tox issues in monkeys caused cessation of clinical studies andbelief that the platform would fail

Discovery of siRNA provided entirely new application for RNA

Work on stabilizing RNA was essential and owned by RPI.

Company (then called SIRNA) was purchased by Merck for $1.2B


14/19

CatalystCatalyst

Formed based on technology that allowed development ofnew classes of therapeutics called Alterases (Proteases w/altered target sites or potency)

The initial product portfolio consisted of products to treat complement-basedinflammation, anti-angiogenesis using VEGFr inhibition and IBD using anatural protease.

Portfolio review as part of the Series B (led by Morgenthaler),determined that different products using altered proteases

against coagulation targets provided a much shorter path toPOC with crisp clinical endpoints and biochemical markers.

The resulting product portfolio contains three lead products(Factor VIIb, Factor IX and Factor X), representing billion

dollar market potential and likely short term M&A opportunities


15/19

AvidiaAvidia

New technology for productions of libraries oftherapetic molecules (Avimers)

Diversity, selectivity and potency equivalent or better thanantibodies but with completely different structural motifs.

Portfolio review as part of the Series B to determineif a more rapid path to POC could be obtained.

Resulted in choice of Crohns disease using CRP proteinas a marker, saving over a year of time compared tocancer targets that had been top priority previously.

It also created interested from Amgen, who

purchased the company within a year for $450M.


16/19

ReplidyneReplidyne

Replidyne is a company that fell victim to a badchoice of strategy and regulatory change

Technology for new antibiotics based on newknowledge about MOA of bacterial DNA replication

Initial products were on track for IND filing

A business development opportunity arose that

resulted in-licensing a late stage antibiotic with 9Phase III studies already completed

Based on conversations with the FDA, the companyprepared and filed an NDA for multiple indications, and the

entire company became focused on that product


17/19

ReplidyneReplidyne (continued)(continued)

FDA summarily rejected all claims

In spite of their earlier agreements in writing, they(because of Congressional pressure) changed the rules

and the company would have to redo all their clinical trialsusing placebo controlled protocols

Devastated the company

Sold and returned $.10 for every $1.00 invested

Moral of the story (from a VC perspective) Company lost its way by leaving a multiple product

strategy that could have minimized risk by staying underthe radar of the FDA into a strategy that bet on both a

single product and the FDA being reasonable


18/19

ICOSICOS

Founded in 1989, focused on inflammatory diseases

12 different drugs in clinical trials for different diseases

PDE5 inhibitor (tadalafil) that was being developed fortreatment of hypertension changed the company

Due to the success of another PDE5 inhibitor (Viagra Pfizer), company rapidly refocused and received

FDA approval in Dec 2003 to market Cialis.

Lilly bought ICOS for $2.3B cash

Cialis sells in excess of $1B/year. The company never

successfully developed any other products


19/19

Is It Worth It?Is It Worth It?

If your answer is Yes to the following questions, youmay be destined to start a biotech company:

Have you invented a technology which, if successfully developed, will

change the way medicine is practiced? Is the intellectual property coverage as broad as the technology and

already filed?

Have you identified a successful serial entrepreneur to run the company?

Are you prepared to put up with the frustrations of dealing with investors,

company politics, regulatory agencies, Board of Directors, corporatepartners?

Are you ready to accept the market assessment of the value of yourtechnology?

Is this the most important thing in your professional life?

Are you prepared to take risks and perhaps fail?

idea to ipo and beyond - lessons learned ucsf mar 2011

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