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Third Rock Ventures shows promise with early stage investment strategy

Authored by Karl Simpson – April 2013

When the biotechnology industry’s great and good assemble in Chicago for BIO this week, few there will have had such an illustrious beginning to the year as Mark Levin’s Boston based Third Rock Ventures. The founder and ex-CEO of Millennium Pharmaceuticals is replicating his ability to lead new scientific ventures through his increasingly active venture capital firm.

While many of the biotech investors circling BIO will have actively moved towards later stage investing in recent years in a clear attempt to mitigate risks and bring more certain returns at lower multiples, the Third Rock strategy has been to work in the very early stage investment area, often choosing to use its capital to form companies born our of interesting science where founding teams have been assembled.

In recent weeks, Third Rock Ventures announced the raising of its third fund, capped out at $516m, although it was apparently oversubscribed quite considerably. The limitations of the Third Rock investment model imply that there very active participation in the operational management of the business in the first 12-18 months, means it would need any more of its own venture partners to have overseen more capital than the $516m.

The strategy of putting venture partners in as interim managers of the businesses it invests in is nothing new. However, Levin and his partners Robert Tepper and Kevin Starr, have assembled a stellar line up of venture partners and of Entrepreneurs in Residence (EIR), some of which have really helped drive some early successes for the portfolio.

Bluebird bio is one of those companies which have helped heighten awareness of Third Rock Ventures in the early months of 2013. This company, covered in a previous article by Liftstream, is led by Nick Leschly and recently announced a considerable deal with Celgene, a global biopharmaceuticals company focused on developing new therapies for cancer and inflammatory diseases. The terms of the deal includes an upfront payment but also up to $225m per product in potential option fees linked to milestones. The partnership of these two companies will focus on applying bluebird bio’s gene therapy platform to genetically modify a patient’s own T-cells to target and destroy cancer cells. Bluebird bio also has a similar high profile partnership with rare disease leader Shire Human Genetic Therapies.

Because of Third Rock Ventures model of putting its own partners in as interim-CEOs and interim-CSOs, coupled with its early stage investment strategy, Levin’s approach has been to go it alone in many early investments, rebuffing the syndication approach so often cited in venture financing. However, they have chosen to look to syndicate in later rounds or even possibly in the later tranches of a series-A round. Because of the very active participation of launching the companies, managing early operational aspects, the use of Third Rock capital alone gives the firm a more considerable equity position.

One such example is the recent deal the company done to invest in Jounce Therapeutics. This company has been launched by Third Rock Ventures with a series-A round of $47m and will be initially led by Third Rock partner Cary Pfeffer as interim CEO. Jounce Therapeutics is founded by a team of academics and is focused on cancer immunotherapies, an area gaining a lot of momentum in cancer therapy as we begin to understand more about how the body recognises tumours and other advances in cancer immunotherapies such as the illustrious Provenge from famed Denedron. There has been little detail on how the $47m series A round will be structured, whether it is all up front or will be tranched allowing further investor syndication later.

Cancer metabolism is another area garnering great interest and Agios Pharmaceuticals is another bringing some particular innovations in this area. Agios recently announced a partnership deal with another Third Rock Ventures investment, Foundation Medicine, one of the companies gaining widespread interest across the oncology market. Foundation’s diagnostic platform is genomic assay for solid tumour oncology which analyses DNA to help physicians provide improved targeted therapies. Although Third Rock Ventures was a founding investor, it has been joined by some investing powerhouses like Kleiner Perkins Caufield Byers, in an expanded $56m series B round this February, The Bill Gates Foundation joined other investors, including Google Ventures and Roche. In recent months, Foundation Medicine has attracted collaborations from Ariad, AstraZeneca, Eisai and Clovis Oncology.

Third Rock however is not always involved in founding new ventures and being a prominent early investor. They recently sunk some additional cash into Taris BioMedical, a specialty pharmaceutical company developing therapies for high unmet medical diseases affecting the bladder. On this occasion, they joined a pool of other investors having led a series B round of $18.3m in 2011. This funding of $12.5m will largely go towards funding a second phase II study of Liris, a drug and medical device combination product developed by the company’s founders and MIT investors for interstitial cystitis.

However, it has not all been capital outflows. Earlier this year, Third Rock Ventures harvested some returns for its fund by selling Lotus Tissue Repair to Shire. This company was developing a therapy for a rare disease called dystrophic epidermolysis bullosa (DEB). The deal was done just 18 months after Third Rock Ventures founded the firm with a $26m investment and although the figures of the deal were not publicised, the purchase is estimated to have cost Shire around $50m upfront and a further $275m in milestone payments, which would mean a 20X return for the fund from the 73% share they held in Lotus. This perhaps perfectly illustrates the Third Rock Ventures approach for early stage investment, reduced syndication during incubation and retention of a larger equity holding. The deal is the second of the fund, with a sale of Alnara Pharmaceuticals to Lilly a couple of years back.

Unquestionably, Third Rock Ventures is on the fast track. When other investors are fleeing to the later stages of the development pipeline, Third Rock Ventures has amassed a portfolio of around 30 companies, many of which they have been instrumental in founding with early stage investment. They are using their collective experience of building innovative drug development companies by rolling up their sleeves and proving the interim stewardship to drive the portfolio companies. Having said all this, biotech investing remains a tough business and we’ll wait to see if their bet on platforms and breakthrough early stage research will provide the exit opportunities to bring returns to the fund.


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