Where have all the risk-takers gone?

What follows is one man’s view of the current funding environment in Europe for biotech companies with several years‚ development under the belt, but still some way from commercialising their technologies.

“VCs are only backing biotechs with products on the market, or those with late stage portfolios,” says Neill MacKenzie of Avidex Ltd. “No one is interested in risk any more.”

MacKenzie was speaking after Avidex announced it had abandoned its attempt to raise a new round of VC finance and agreed to be taken over by MediGene AG of Martinsried, Germany. The all-share deal values Avidex at €50 million.

Frustration

Although he says he is happy with the outcome, MacKenzie, the Chief Business Officer and James Noble, the CEO, have clearly had a frustrating and exhausting time trying to ensure the onward development of the company’s novel immune system technology.

Avidex’s failure to attract an new round of VC support in Europe needs to be viewed in the context of having raised £30 million to date, and of the potential of its T-cell receptor technology (TCR), which is laying the foundation for a new generation of immune therapeutics after monoclonal antibodies. Whereas antibodies can only lock onto whole proteins on the surface of cells, Avidex’s monoclonal TCRs can bind to peptide antigens within cells.

Since its formation in 1999, the company has made significant strides in The development of the TCR technology, using it to create constructs that can target tumour specific antigens such as NY-ESO, a well-characterised and public domain antigen that is expressed in many solid tumours. Until now it has not been possible to use NY-ESO as a target for cancer therapy because it is expressed intracellularly and thus beyond the reach of monoclonal antibodies.

Therapeutic payload

TCRs can be used to deliver a therapeutic payload by fusing them to cytokines or superantigens, activating the immune system to destroy tumours in a highly specific way, or to treat autoimmune diseases. They can also be linked to chemotherapeutics, or labelled with radio isotopes, to deliver a toxic payload to the inside of tumour cells.

After drawing a blank with European VCs, MacKenzie spoke to a number of US venture capitalists who were interested in investing. But the quid pro quo was that the Oxford-based company had to set up operations in the US. “Having managed US subsidiaries before that was not the way we wanted to go,” he said.

A counterpart of Avidex, Cambridge, UK-based Domantis Ltd, raised £17 million in its third round of VC funding in December 2005, just before MacKenzie began his fruitless sojourn. Not only was it one of the largest private rounds of the year, but the company pulled off the rare feat of securing an increase in value of 29 per cent.

But Domantis, which is working to commercialise domain antibodies, another successor technology to monoclonal antibodies, has an American CEO, Bob Connelly, and its corporate headquarters are in the US. Other UK companies such as Cyclacel and Oxxon Pharmaccines have moved their headquarters to the US in a bid to ensure financial security also.

So why not IPO?

Several European biotechs have got round VCs‚ reluctance to invest by joining the Alternative Investment Market in London, or other exchanges in mainland Europe where the rules make it possible for companies with no products or no turnover to list.

The size of these offerings is often comparable to a typical VC round with companies walking away with just enough to get them through the next stage of development. They must then hope that they make progress and the market will be receptive when they need to raise more.

This strategy has paid off for Evolutec, another Oxford-based company that is developing immunotherapeutics based on compounds discovered in the saliva of ticks. When they bite, these blood sucking insects secrete proteins that generate a privileged environment that prevents the immune system of their victims from reacting. The company’s lead product is a hayfever treatment.

Evolutec had to scale back its IPO from a hoped-for £7.5 million to £5.1 million in July 2004. But armed with a starry progress report, seven months later it raised £9.5 million in a funding round that was two times oversubscribed.

Although the route to public listing was open, Avidex chose not to take it. “We had the offer of an IPO, either on the main market, or on AIM,” said MacKenzie. “But James and I have both been in public companies before, and we decided it was not appropriate to list a company at Avidex’s stage of development, with a technology platform and one product in clinical development.”

This was presumably a particularly heart-felt reaction on the part of Noble, who as Finance Director of British Biotech plc raised £300 million for what was, in effect, a two (subsequently failed) products company. “We knew we could get a listing, and maybe raise enough to keep going for 18 months or so, but that leaves you looking at your back all the time, rather than getting on and developing the business,” said MacKenzie. “We made a decision that if we hadn’t done anything by the end of the year [2006] we would join AIM, but it wasn’t the preferred option.”

So what’s wrong with partnering?

Other European companies have found financial security in partnering, but MacKenzie said that although the Avidex technology had a good reception, things didn’t happen quickly enough. “Big pharma is just too slow. You need to get through the ranks to CEO level, and they want something meaty; they don’t want to spent time on low value deals.”

And so to merge

The last resort for companies caught in the funding conundrum is to find a merger partner, and MacKenzie said Avidex had plenty of offers from both sides of the Atlantic. “The problem was that both US and European companies that were looking to merge wanted to do so because they were in a weak position.”

MediGene was the exception to this rule. The company started out in gene therapy, but has since become more of speciality pharmaceutical company, in-licensing two products that were in advanced clinical development in North America and getting them through to the market in Europe. It currently has one product on the market, with another under review by the FDA, and is forecasting income of between €20 million and €25 million for the current financial year.

Add to this the fact that MacKenzie met MediGene’s founder and CEO Peter Heinrich when MacKenzie was involved on the formation of its counterpart UK gene therapy company, Oxford Biomedica plc. “I’ve known that bloke since1996, and he’s a survivor,” said MacKenzie.

To seal the deal, Heinrich persuaded Avidex’s existing investors, led by Advent, to put in a further £3 million and secured a bank loan to pay for onward development of Avidex’s technology. Investors in Avidex will own 28 per cent of MediGene’s enlarged share capital, and are subject to a 12-month lock-up.

MacKenzie will retain his current position within MediGene, and says he is looking forward to focusing on the commercialisation of the Avidex technology, rather than trying to raise money. The founder of Avidex and its chief scientific officer Bent Jakobsen is staying also. Noble is leaving the company, but will join MediGene’s supervisory board.

“All the Avidex pipeline and research and all the people are staying, and we are happy with the outcome,” said MacKenzie. “Given the environment, this is a good play right now.”

He added ruefully, “It is extremely difficult to operate in the [financing] market at present.”