Investors and inventors are getting more creative at generating faster returns from biotechs, which can burn billions of dollars in development costs before going to market.
Case in point: Nearly 200 angel investors—including several former oil traders from Glencore Ltd.—have invested in Seattle-based Kineta, a biotech firm that is offering the option to invest in a drug rather than the company.
The firm, which specializes in early stage research, has built a model around offering investors a chance to see a return in three to five years instead of the typical 10 to 20 years. The idea is to license each drug discovery at an early stage to a larger pharmaceutical company that can pursue further patient studies, FDA approvals and commercialization efforts. The goal is for investors to get their principal back with a three- to five-fold return, plus future royalties.
“It doesn't have to take forever to develop a drug,” says CEO Charles Magness, whose team sold its last biotech firm, Illumingen Biosciences, for $340 million, contingent on the company reaching certain production milestones. “It doesn't have to cost $1.5 billion.”
The venture capital model does not work for drug development, Magness says. The biotech R&D model, he says, typically consists of seven developmental stages phase of 10 to 15 years before a drug is approved. Investors generally hope to exit with a profit during clinical trials, via either an initial public offering or acquisition.
But the drug discovery stage is so risky, he says, that it should be financed by grants. And it does not make sense for investors to pay for the infrastructure for an entire company at an early stage.
“[The biotech R&D model] is expensive, unproductive and risky,” he says.
Unlike many biotech companies, Kineta has eschewed venture capital. Instead, it has financed its R&D from a variety of sources: philanthropists like the Iacocca Family Foundation, Small Business Innovation Research (SBIR) grants from the National Institutes of Health, and angel investors. Unlike most government grants, SBIR grants (which can range from $100,000 to $1 million) target applications research versus basic research.
Angel funds are plowed into separate LLCs for each drug. Kineta, with 28 full-time employees, has three such LLCs as subsidiaries. One of them, Kineta One LLC, owns a compound called ShK-186—a treatment for autoimmune diseases such as multiple sclerosis (MS), lupus and psoriasis rheumatoid arthritis. It is also showing promise for reducing metabolism.
“This is not a generic me-too drug,” Magness says, comparing it to interferon, a drug for which there are three different formulas that have been on the market to treat MS for 15 years—all with what he calls “tremendous” side effects. “The mechanism by which [ShK-186] works is specific and limits side effects,” he says. “I am very confident that it is better than anything else on the market.”
Kineta acquired the exclusive license to the synthetic compound from the University of California Irvine with the intention of developing it commercially. During the last few years, it has raised $10 million for lab testing, developing a shelf-stable formula, manufacturing work and animal toxicology testing.
It has completed clinical trials on 32 healthy humans to test it for safety. After testing multiple doses of the drug on both healthy and unhealthy people, the company will be ready to license the drug to a pharmaceutical company. Magness says he's already in licensing discussions.
Unlike the traditional venture capital model, however, investors were not brought in until well past the discovery stage, in the middle of the pre-clinical stage. The plan is for an exit at the end of phase I trials, a period of time that is projected to max out at 30 to 48 months. (Although the company expects to spend $10 million on each of the drugs it develops, it does not raise all the funds at once.)
The advantage to this approach, Magness says, is that it's more efficient and reduces risks for investors, as well as for pharmaceutical companies. Kineta's employees divide their time among Kineta's three LLCs. Investors, in the meantime, do not have to wait for a drug to be a success—and can earn a handsome return even if a drug ultimately never makes it to market.
