Alta Bets on Resurrected Metabolex

Metabolex Inc. continued its rise from the biotech ashes. Last week, the company announced it has secured $44 million in new venture funding, and is just weeks away from finishing Phase II clinical trials on a lead drug candidate that increases insulin sensitivity among Type II diabetics.

Alta Partners led the deal, which is the third, and final, tranche of a Series B round that was launched in August 2003. The 12-year-old company has raised $75 million since being restructured in January 2003. Metabolex previously had raised $80 million over seven separate funding rounds, including a Series F infusion in February 2000 at a post-money valuation of approximately $140 million. Each of those deals ultimately was collapsed into a single “Series A” round, with existing investors experiencing severe write-downs.

New investors in the Series B include Venrock Associates, Versant Ventures and Novo AS, while return backers Bay City Capital, Birchmere Ventures, KBC Bank & Insurance Group and VantagePoint Venture Partners also participated.

Notably absent was Charter Ventures, which had seeded Metabolex in 1992 and participated in the Series B round’s $27 million first close. Barr Dolan, a general partner with Charter Ventures and former Metabolex chairman, says that the decision should not be misinterpreted as a negative view of Metabolex’s prospects. Instead, he says that there simply isn’t enough money left in the Charter funds that originally invested.

“We still have some ownership, but it would take a pretty big valuation for us to get all our money back,” Dolan says. “But I really still like the company and think they could have a billion-dollar drug.”

The compound to which Dolan refers was first developed and tested in the 1970s by Merck as a device for lowering lipid levels. That didn’t pan out, however, and the pharma giant didn’t pay much attention to a side affect that showed significant blood sugar reductions among diabetic patients. Metabolex picked up on the diabetes angle nearly 20 years later, and began work on MBX-102.

As that work progressed, Metabolex burned cash as if it were an Internet retailer. Most young drug discovery companies partner with an established pharma player for drug development, but Metabolex was unable to do so. Not only did this cause the company to exist in perpetual fund-raising mode, but it also slowed the testing process to a snail’s pace. After seven years, $80 million and an inability to launch Phase II clinical trials, the investors knew something had to be done.

In January 2003, Metabolex hired a new CEO, reduced its headcount by 20% and suspended work on MBX-102. In the meantime, it continued some ancillary partnered research programs with Pfizer and Yamanouchi Pharmaceutical Co. Ltd.

“It was a culmination of a change in philosophy that occurred over a number of years, and the obvious realization that changes needed to be made,” says Mark Bagnail, who joined Metabolex in 2001 and currently serves as its chief business officer. “We had to become both a discovery and development company, whereas we were just founded as a discovery company.”

Work resumed on MBX-102 following the first Series B close last year, and is expected to conclude within the next two months. The orally-administered drug aims to increase insulin sensitivity in the muscle and fat tissue of those suffering from Type II diabetes, but without weight gain, edemas and congestive heart failure, which are symptoms that can accompany already-commercialized “insulin sensitizers” such as Actos (from Taekda) and Avandia (from GlaxoSmithKline). Both of those drugs have over $1 billion in annual sales.

“We did an interim safety study during the Phase II trial, and it interested investors because there was less weight gain with [MBX-102] than with the placebo,” Bagnail explains. “The first group of Series B investors saw the potential for this new team to transform the company, and this newer group has seen execution against that plan, particularly because our new chief medical officer brought this trial in on time and under budget.”

He adds that Metabolex does not expect to raise another round of venture capital funding.