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VC Bets on Blood, Immune Deals Signal New Medical Imperatives

Mar 13, 2018

By Brian Gormley – WSJ Pro – March 13, 2018 7:30 a.m. ET In health-care venture capital last year, two upstart markets outpaced a sector that had once captured the bulk of medical-investment dollars.

Investment in treatments for heart disease, once the top category for medical venture capital, stumbled in 2017 as many traditional venture investors shied away from the market, while funding for products in the blood and immune-system sectors sprinted to record highs, according to an analysis of funding across the human body by Dow Jones & Co.’s VentureSource and Private Equity Analyst.

Blood has been the fastest-growing field over the past decade, with last year’s $2.3 billion investment total representing a 396% jump from the annual average during the first half of this decade. The immune system was the second-fastest-growing sector over that same period, rising to more than $3 billion last year, a 263% increase.

The immune system and blood were also the two top industries among the 17 markets surveyed, and immune also became the first sector ever to reach $3 billion in funding. Soaring interest in cancer drove up totals in both markets, with developers of cancer immunotherapies and tumor blood tests raising giant financing rounds.

“We are at the forefront of some amazing science in oncology and immuno-oncology right now,” said Michael Powell, a general partner at Sofinnova Ventures.

Immuno-oncology is driving much of the interest in the immune category. Oncologists historically have attacked cancer with treatments that kill tumor cells directly, such as chemotherapy and drugs that zero in on molecular mechanisms of cancer cells. Immuno-oncology drugs instead get immune cells to go on the attack.

In some cases, the results have been spectacular. Drugs known as checkpoint inhibitors, which remove a hold that tumors place on T cells of the immune system, have led to long-term survival in some patients with melanoma and other cancers. Another new type of cancer immunotherapy, known as CAR-T, turns a patient’s own T cells into more effective cancer fighters. It has been highly effective in certain leukemia and lymphoma patients.

Venture capitalists already are cashing in on investments in developers of these and other cancer immunotherapies. Venture-backed CAR-T developers Kite Pharma Inc. and Juno Therapeutics Inc., for example, went public in 2014, and each was sold recently. Celgene Corp. agreed to acquire Juno for about $9 billion in January, while Gilead Sciences Inc. bought Kite for about $11.9 billion in October. U.S. regulators in 2017 approved the first two CAR-T therapies, Kymriah from Novartis AG and Kite’s lymphoma drug Yescarta.

For all of its promise, immuno-oncology remains limited. Most patients, for example, don’t respond to checkpoint inhibitors. Venture firms therefore have been financing startups seeking to overcome this and other shortcomings and to enable more patients to benefit from immunotherapy.

Take FLX Bio Inc., a 2015 spinout from venture-backed immuno-oncology startup Flexus Biosciences Inc., which Bristol-Myers SquibbCo. acquired in 2015 for up to $1.25 billion in cash and milestones.

Checkpoint inhibitors block the interaction between a protein on the tumor surface and T cells. But there are other factors in the tumor’s immediate surroundings, or microenvironment, that also keep immune cells from eliminating cancers. FLX, which closed a $60 million round in December from GV and other investors, targets some of these other actors.

The South San Francisco, Calif., company’s first drug, which entered clinical trials late last year, could remove one of these other actors. So-called regulatory T cells help rein in the immune system to control inflammation and prevent immune cells from attacking the body’s own tissue. But cancers hijack this protective feature and use regulatory T cells, or Tregs, to promote their own growth by dampening antitumor immune responses.

FLX’s drug blocks a receptor on Tregs to prevent them from infiltrating the tumor. This could be effective on its own, but FLX also plans to test this drug in combination with checkpoint inhibitors to see if it can have added benefit, according to Chief Executive Brian Wong.

Although some drugs release brakes on immune cells, others stimulate them to mount an attack. Investors are funding developers of therapeutic vaccines that trigger the immune system to recognize and destroy tumor cells. Moderna Therapeutics Inc., which recently raised $500 million from Alexandria Venture Investments and others, is developing a variety of cancer immunotherapies, including a vaccine that prompts the immune system to respond to mutations in KRAS genes.

Since KRAS gene mutations are common in cancer, the vaccine could be effective in treating diseases such as lung, pancreatic and colorectal cancer, according to Moderna Chief Financial Officer Lorence Kim.

Immunotherapy isn’t just for cancer. New understanding of the role the immune system plays in disease is leading startups to pursue immune-based treatments for a growing number of conditions. One such startup is Alector LLC, which aims to help the immune system fight neurodegenerative diseases. The company sees parallels in this effort to the immuno-oncology sector.

Just as cancer drug developers historically tried to kill tumor cells directly, neurological drugmakers have targeted specific bad actors thought to drive brain disorders. They include amyloid-beta in Alzheimer’s disease. But this approach hasn’t yielded much success, and Alector argues that it is insufficient.

“If you go after specific proteins, you’re going to get marginal efficacy at best,” said Sabah Oney, Alector’s chief business officer. “The pathological protein is just a small portion of the overall story.”

The reason, he said, is that a healthy immune system can deal with disease proteins in the brain, but one weakened by aging or gene mutations can’t. In the brain, immune cells known as microglia play vital roles in clearing debris, nourishing nerve cells and ensuring there is a healthful number of connections between neurons, according to Dr. Oney.

South San Francisco, Calif.-based Alector is developing agents that empower the body’s innate immune system to treat diseases such as Alzheimer’s and frontotemporal dementia, a condition that occurs because of degeneration in areas of the brain important for decision-making and other functions.

By interfering with the disease process, Alector also aims to give damaged nerve cells a chance to recover. Alector’s investors include GV, OrbiMed Advisors and Polaris Partners.

Researchers also are discovering new ways to contain the immune system to treat diseases. Crestwood, Ky.- based Apellis Pharmaceuticals Inc., which went public in November after raising $112 million from firms such as Epidarex Capital and Vivo Capital, is betting this approach can treat the blinding disease geographic atrophy.

Retinal cells are constantly bombarded with c3 molecules of the immune system that attach to their surface. Cells with sufficient energy clean their surface by internalizing these molecules. Those that lack sufficient energy stop properly cleansing their surfaces. This draws the attention of immune cells that patrol the body and destroy cells in which something is amiss. As a result, retinal cells die, and vision is lost.

Apellis’s first drug latches on to c3 before it can bind to the cell surface. This allows cells with an energy deficit to clean their surfaces and avoid destruction, said Apellis CEO Cedric Francois. The goal is to slow the progression of the disease, which has no approved treatment, according to Dr. Francois.

The immune sector, whose 81 financings last year tied with 2015 for the most on record, is intertwined with the blood category because several immuno-oncology startups are developing blood-cancer treatments. Examples include Forty Seven Inc., which rounded up $75 million in October in a round led by Wellington Management Co.

Forty Seven, based in Menlo Park, Calif., is progressing a drug that blocks a “don’t eat me” signal that cancer cells commandeer to avoid being eaten up by immune cells. The product is in clinical trials for blood cancers and solid tumors.

But most of the $2.3 billion blood funding total—spread across 43 financings, a jump from the $729.6 million raised in 40 rounds in 2016—came from investment in “liquid biopsy” startups progressing cancer blood tests. They include Grail Inc., which amassed $1.21 billion, Guardant Health, which gathered $360 million, and Freenome Inc., which took in $72 million.

By analyzing genetic material shed from tumors into the blood, liquid-biopsy companies aim to enable cancer to be detected and treated earlier. This could lead to more cures. Menlo Park, Calif.-based Grail expects its first product, a screening test for early detection of a type of cancer located near the upper throat and behind the nasal cavity, to be available in Asia this year.

Guardant, of Redwood City, Calif., already sells a liquid biopsy test to aid cancer treatment and is moving into early cancer detection. South San Francisco, Calif.-based Freenome is looking to screen for diseases such as lung, colorectal and prostate cancer.

All three companies analyze circulating tumor DNA found in the blood. But there are other strategies as well. One startup, CellMax Life, also known as CellMax Inc., takes a different approach with its initial cancer screening tests, which are available in Taiwan and other parts of Asia. The company detects circulating tumor cells, or cancer cells that break free of the tumor and enter the blood.

The company’s colorectal cancer screening test is for people who haven’t received a colonoscopy, the gold standard for screening, or a stool screening test. “A lot of people are averse to doing either,” said CEO Atul Sharan.

But a test result indicating that someone may have cancer could provide the nudge that person needs to get a colonoscopy. CellMax’s prostate cancer test is for men who receive inconclusive results through a current screening tool, the PSA test.

By undergoing this new test, CellMax hopes fewer men will unnecessarily undergo a biopsy to confirm the presence of prostate cancer. This year, Sunnyvale, Calif.-based CellMax intends to make both tests available to U.S. consumers, who would gain access to it through their doctors, Mr. Sharan said.

Using a blood draw to improve disease detection is one promising field. Another is using blood cells to cure diseases.

Therapeutics based on blood stem cells, which give rise to other blood cells, could enable new genetic disease therapies. Avrobio Inc., which has collected $86.5 million from Aisling Capital, Atlas Venture and others, aims to cure conditions known as lysosomal storage disorders that occur because of an enzyme deficiency.

The Cambridge, Mass., company’s approach involves harvesting blood stem cells from patients and introducing a gene that causes these cells to produce the needed enzyme. Then the cells are reintroduced back into the patient. This allows the needed enzyme to be delivered throughout the body.

Avrobio hopes a single treatment will cure patients. Today, patients rely on regular drug infusions to compensate for the missing enzyme, said CEO Geoff MacKay.

Another new company, Rubius Therapeutics Inc., is using red blood cells as drugs. The Cambridge, Mass.-based company sees potential to use them to treat illnesses such as cancer and rare diseases. Red blood cells, for example, could be another way to deliver enzymes into patients who have a genetic condition that causes an enzyme deficiency. Rubius, launched by Flagship Pioneering in 2014, raised a $120 million round in June that included Flagship as an investor.

While fortunes have been rising in the blood category, they have been sinking in treatments for heart disease, even though that condition remains the leading cause of death in the U.S. Venture funding peaked for heart investment in 2007, when startups collected $2.15 billion through 114 financing rounds, both record totals. But since then tallies have been far more modest.

Last year, heart investment fell to $663.9 million across 60 rounds, down from $1.52 billion wagered on 56 rounds in 2016, according to VentureSource.

Several factors combined to drag funding down. Much of cardiovascular investment historically has gone into medical devices, such as stents used to prop open heart arteries. But over the past decade, several venture capitalists have exited the medical-device market because of the struggle to deliver returns.

In the U.S., public-market investors are typically only receptive to medical-device companies with significant revenue, often $30 million or more. That excludes a great many startups. By contrast, biotechnology companies have been going public readily since early this decade.

In addition, recent consolidation among the largest medical-technology corporations, including Abbott Laboratories’ purchase of St. Jude Medical last year, and Medtronic PLC’s acquisition of Covidien PLC in 2015, has shrunk the pool of potential startup acquirers.

Moreover, with few device companies going public, there aren’t many emerging corporate acquirers to supplement the buyout activity of the top players. In biotech, a startup often has a universe of 20 to 30 potential buyers, but for a cardiovascular-device company, that number may be as few as three to five, said Gerry Brunk, managing director of Lumira Capital.

“The medical-device sector doesn’t have the universe of up-and-coming midcap companies that biotech does,” Mr. Brunk said.

That isn’t to say interest has faded completely. Although attracting traditional venture capitalists may be more difficult, some entrepreneurs find that other types of investors, including corporations and family offices, are willing to step up. Procyrion Inc., for example, brought an undisclosed strategic investor into a $16 million round it raised recently to develop a heart-failure treatment.

“What we’re seeing in medical devices [is] the deals getting done are often nontraditional venture,” CEO Benjamin Hertzog said.

Corporations have an interest in keeping investment alive in medtech startups. And just as pharmaceutical companies became more reliant on acquisitions as they grew larger and less capable of in-house innovation, top medtech companies also increasingly will turn to buyout deals, Mr. Hertzog predicted.

Procyrion’s market, heart failure, is one that still captures venture and strategic interest because it is a widespread problem with too few good treatments. The condition, in which the heart can’t pump sufficient blood, affects 5.7 million Americans, according to the Centers for Disease Control and Prevention.

Procyrion’s heart pump is for people who are too sick to be treated with medications alone but not sick enough to qualify for a heart transplant or an implant known as a left ventricular assist device, which helps the left ventricle pump blood.

The company’s pump, placed in a catheter-based procedure, moves blood away from the heart and toward the kidneys, which need significant blood to do their job of removing fluid, according to Mr. Hertzog.

Houston-based Procyrion is targeting hospitalized patients who are resistant to diuretics used to reduce excess fluid. The pump would be used for seven days. The goal is to get their kidneys working again so that patients are much healthier when they are discharged, Mr. Hertzog said.

Considering the broad impact of heart disease, cardiovascular treatments will always have a dedicated group of entrepreneurs and investors. But increasingly, venture capitalists and startups are drawn to the rising opportunities in the immune and blood markets.

Research into immune cell functioning is leading to an expanding array of possible points of intervention for drugmakers targeting cancer and a growing number of other diseases. Similarly, startups are uncovering new avenues for treating diseases of blood and bone marrow.

When acquirers spot promising companies in either category, they pounce. In early January, Celgene agreed to buy blood-disease startup Impact Biomedicines Inc. for as much as $7 billion in total payments. So long as those types of deals continue, so will the current investment trends.

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