Deal of the month: Eurogene: Eurogene keeps the pipeline flowing – A specialist in therapeutics for circulatory system-related d

In early May, Nomura International was the lead investor in a GBP15 million (EURO24.3 million) second-round funding for Eurogene, a London-based company combining vascular gene science and endothelial molecular biology to develop therapeutic products for vascular and circulatory system-related diseases.

The funding was the second largest venture round ever raised for a UK biotech firm, ranking next to the GBP22.5 million (EURO36.5 million) raised for Therexsys in 1996. Other principal investors included Techno Venture Management IV of Germany; AIM-listed investment trust Mountcashel plc; Finnish investors including BioFund, Concordia and Sampo Insurance Co; and the Merlin Fund LP, Eurogene’s original backer. Apax Partners & Co Capital – now about to change its name to Altium Capital – was lead manager for the fund raising, with D. Carnegie AB working as sub-manager for Apax in Finland.

Eurogene was formed in 1997 by Professor John Martin and Stephen Barker of University College London (UCL), Professor Seppo Yl-Herttuala of the Al Virtanen Institute at the University of Kuopio, UCL Cruciform and Merlin Ventures, which provided some GBP250,000 (EURO405,700) initial seed funding. The company was based around science originally supported by the European Commission’s Biomed II funding. The Merlin Fund injected GBP3 million (EURO4.8 million) of equity funding into Eurogene in February of the following year.

Merlin Ventures played an active role in the formation of Eurogene, and was, with Professor Martin, later instrumental in bringing in CEO Dr Nigel Parker, formerly European vice president, research and ethical business development at Teva Pharmaceuticals. A PhD scientist in his own right, Dr Parker also had the international pharmaceutical management and financial skills to immediately put in place a business planning process and build an executive management team. He recruited a highly experienced CFO, Martyn Williams, and chairman Dennis Turner, a team with vast experience of the healthcare and pharmaceutical services sectors who had worked together in the past with a successful track record of founding and building PMSI and Walsh International.

The original intellectual property around which the company was founded related to the discovery that Vascular Endothelial Growth Factor (VEGF), a gene that promotes the growth of new blood vessels within the foetus but until recently was believed to play no useful role in adults, actually enhances or maintains a cytoprotective mechanism in the endothelium (the layer of cells that lines the blood vessels), maintaining the blood vessels in good condition.

The company developed a mechanism for delivering therapy from the outside of a blood vessel inwards, rather than the other way about, leading to a potential new antihyperplasive therapy. Eurogene has a patent on the use of all VEGF receptor agonists for this use. The gene therapy is delivered by means of Eurogene’s patented biodegradable reservoir, made of collagen, which potentially can deliver any therapeutic agent to any tubular structure: the company’s patents also mention, inter alia, fallopian tubes, the gall bladder and the ureter. The main thrust of current development, however, is concentrated on applications in haemodialysis.

VEGF, however, may prove to be the key to the largest market in pharmaceutical history.

Arteriosclerosis, causing heart attack or stroke, is the commonest cause of death throughout the developed world: narrowing of the arteries begins in men in their 30s and in women following the menopause, slowly progressing until a potentially fatal clot occurs. Eurogene’s development programme in this field is currently very early stage but ultimately aims at delivering a VEGF-related small molecule in tablet form to switch on’ the body’s arterial protective system. This application for VEGF is mentioned in the company’s patents and is, as Apax Capital’s Stephen Parker says, a potential goldmine’.

Eurogene’s second line of research, initiated by Professor Yl-Herttuala, who has just been awarded the European Society of Clinical Investigation’s Prize for Excellence in Clinical Research for his work in cardiovascular gene therapy, relates to a novel gene construct known as Scavidin.

Eurogene is using this gene construct as the basis for a drug targeting system to localise the effect of intravenous agents. When Scavidin is applied at the site where treatment is required, it expresses a unique receptor. The other part of Scavidin is a tag which is attached onto a therapeutic agent to be injected into the bloodstream. As the agent circulates throughout the body, the receptor grabs the tag on the therapeutic molecule, concentrating the drug at the treatment site. It is therefore possible to reduce the concentration of a therapeutic agent given to a patient while still obtaining the desired effect. This delivery system has potential applications in a wide range of therapeutic areas, perhaps the most obvious of which is cancer. The concentrations of cytotoxins used in conventional chemotherapy produce distressing and debilitating side effects; the benefits of a deliver system enabling lower concentrations of cytotoxins to be used effectively are self-evident. The Scavidin delivery system is currently at the final proof of principle stage in animals. Eurogene expects to develop an extensive family of therapeutics based around the Scavidin technology platform.

In addition to Eurogene’s two totally proprietary and innovative technologies based around VEGF and Scavidin, the company is researching new uses for existing products. It is currently working on agents that affect the ability of cells to utilise oxygen, to develop therapies to treat metabolic function disorders like the muscle wasting occurring in AIDS and cancer patients. Professor Martin says the company also believes the agents will have applications for the treatment or limitation of neurological damage immediately following stroke.

With such an extensive portfolio in various stages of development, Eurogene clearly needed to raise substantial additional capital to progress its pre-clinical development and clinical trials programmes. Supporting the current programmes, the company also has exclusive rights to intellectual property in its cardiovascular field from more than 120 scientists at UCL and some 30 at the Finnish end. During 1999, the company made initial presentations to a number of potential investors, including Nomura International.

Peter Keen of Merlin Ventures, a director of Eurogene, first introduced Dr Stephen Parker of Apax Partners & Co Capital to Eurogene after Easter 1999. Keen described Eurogene’s progress to date and the need for large-scale fund raising to carry the company through to the next stage of its development. Merlin felt that, for a fund raising of the scale envisaged, Eurogene would be well advised to use an outside adviser, and Peter Keen arranged for the company to meet Stephen Parker and, following internal and external due diligence and work on the business plan, Eurogene and Apax Capital began fund raising in earnest in September of last year.

“At that point, we weren’t entirely sure whether Eurogene might end up with, say, three new backers putting in GBP5 million apiece, or the more usual broad array of smaller participants”, says Stephen Parker. It was to be the latter.

Nomura International has been an active investor in the biotechnology sector for the past few years.

The appointment of Dr Denise Pollard-Knight, who joined Nomura from Rothschilds in 1999, underlined Nomura’s intention of intensifying its activities in the biotechnology sector.

The consortium that was finally arrived at was particularly satisfactory from two viewpoints, Parker observes: the calibre of the participants first and foremost, but also the fact that the geographic origins of the new capital, drawn from the UK, Germany and Finland neatly reflects the history of the company (Eurogene’s earliest origins derived from EU funding to laboratories in the UK, Finland and Germany, and the UK and Finnish elements later came together to form Eurogene.)

Stephen Parker declines to comment in detail on the respective contributions of the consortium members, but confirms that the UK participants form the largest investor group, followed by the Finnish investors and TVM Techno Venture Management.

Dr Yrj Wichmann of D. Carnegie worked with Apax Capital on fund raising in Finland. Stephen Parker describes Finnish enthusiasm for Eurogene as particularly gratifying “because, historically, when it comes to backing biotech ventures, the Finns have tended to look after their own and, although Eurogene has a substantial Finnish component, it is a UK company”. Peter Keen of Merlin also expresses great satisfaction with the composition of the second-round consortium.

Eurogene and its backers hope that the second-round funding should – depending on progress during the next six months – carry the company through until the pivotal results of the VEGF and muscle wasting trials have been obtained and Scavidin reaches advanced Phase I clinical trials in humans.

In all, the new funds raised represent around two-thirds of Eurogene’s equity, based on the company’s post-money valuation of circa GBP26 million (EURO42.2 million). Eurogene and Apax elected to raise the second round of funding via the issue of preference shares, leaving Merlin and the founders, including UCL, as the holders of ordinary shares.

The Merlin Fund, Eurogene’s largest single shareholder, now holds just under 27 per cent of Eurogene on an undiluted basis, and the investment, one of eight in the Merlin Fund portfolio, accounts for more than 10 per cent of the vehicle. Lead second-round investor Nomura International holds “significantly more than 10 per cent” of Eurogene, director and deal leader Dr Denise Pollard-Knight confirms.

The Eurogene investment was a deal slightly out of Nomura International’s usual mould, as Dr Pollard-Knight explains. For one thing, it was the banks first investment in a UK private company for more than a year partly because, at least before the US bubble, Nomura found US valuations – and the range of opportunities among maturer companies – more attractive than its UK or European deal flow. For another, Nomura tends not to participate in first major funding rounds, although its sister company JAFCO does undertake earlier-stage investments: “We see ourselves as a second-to-fourth-round’ investor”, Dr Pollard-Knight explains, “although we will go in slightly earlier if something is particularly interesting”. Evidently, Eurogene was just that.

The first element that attracted Nomura to Eurogene, Dr Pollard-Knight says, was the strength of the commercial management team – a CEO, CFO and chairman who had worked together successfully before and who bring huge experience to the company – together with a clinical development director of the calibre of Dr Alan Boyd. The Eurogene business model also had a strong appeal for Nomura, whose experience is that the more successful companies in the biotech sector have tended either to retain rights or to continue with direct product sales: Eurogene is looking to retain the rights of its leading product candidates and is therefore positioned to benefit from retaining gross margins, although it might out-licence or seek partners to develop certain products in specific territories. Meanwhile, the strong flow of IP rights to which Eurogene has access, combined with its broad platform approach counterbalanced any reservations Nomura normally has about companies with a product portfolio at an early stage of clinical development.

“Eurogene is a good fit within the biotech portfolio in terms of stage of development as well as clinical focus,” adds Dr Pollard-Knight. Nomura, which has backed companies such as Weston Medical and Sequenom, also has a holding in another gene therapy venture, Introgen Therapeutics of the US, whose primary focus is oncology, and has backed companies developing antibodies and antibiotics and antivirals.

Nomura had been in contact with Eurogene and was seriously interested in the company even before Apax Capital was mandated to raise the second round funding, Dr Pollard-Knight reports. “Having negotiated a valuation, we liked the deal enough to take the lead role in the funding”, she says. Looking to the future, Dr Pollard-Knight predicts that Eurogene could potentially go to the public market in as little as 18 months’ time. If that is the case, then the company may not need to undertake another private placement prior to the IPO. Either way, however, Nomura International is taking the long view. “Even if public markets are not receptive, we look to provide continuing support to our portfolio companies as long as they are building fundamental value”, Dr Pollard-Knight confirms.

That Stephen Parker undertook the Eurogene fund raising is itself a considerable tribute to the company, since, he admits, he “had been avoiding fund raisings for at least a year”. So, what was special about Eurogene? “I liked the company immensely for two reasons. There is no doubt that they are right at the cutting edge in their field, and it is a field with massive potential. While most medical development have a large potential market, Eurogene could end up with a prophylactic pill for arterio-sclerosis, which is a factor in 50 per cent or more of male deaths – so, potentially, they are sitting on an absolute goldmine”.

The second reason is none other than the venture capitalist’s favourite mantra of management, management and management’. “Eurogene’s management, as well as its founding scientists, is absolutely stellar,” says Parker. “Their [Dr Parker’s and Martyn Williams’s] strengths are not that they are wonderful presenters’ but that they have dirt under their fingernails – they have grown and IPOed companies before and that, in the biotech sector in particular, is something that it is impossible to put a price on. Their experience shone through”. Parker adds that from the start the CEOs set about building a competent management team and finding the right people as they were needed, citing as evidence the recent appointment of development director Dr Alan Boyd. Dr Boyd, the former global head of medical research at Zeneca, naturally had more than a few job offers to choose from: that he opted to go with Eurogene also says a great deal about the calibre of the company.

The principal reason that Eurogene was able to raise such significant funding, as Dr Nigel Parker explains, is the breadth of its activities, with leads entering clinical development: “Eurogene breaks the old biotech company model of one science line, one application.” Because management has a multiple focus across a range of therapies, the costs of developing each individual application can be lower than in a conventional model’ biotech company.

Eurogene’s product pipeline shows a breadth and depth virtually unprecedented for a such a young biotech company. The VEGF therapy for haemodialysis applications is the product that if furthest advanced, followed by a therapy for muscle wasting and the Scavidin platform.

Eurogene is also working on the synthesis of VEGF-R agonists and antagonists, the latter with anti-angiogenic properties – i.e., which block the production of blood vessels. Plate assays have already demonstrated the ability of these agents to stop the formation of new blood vessels almost completely. Therapeutics based on these agents would have applications in oncology and a wide variety of other clinical areas. Within its IP pipeline, Eurogene has also identified around 50 new genes with potential applications in cardiovascular therapeutics and, at press time, was in the process of submitting a further raft of patent applications relating to recent discoveries.

Dr Nigel Parker says that the breadth of Eurogene’s pipeline, covering a broad spread of therapy classes and diseases, together with its depth – ranging from one product due to enter Phase II clinical trials by the end of the year to a broad range of opportunities in the immediate post-discovery stage – render Eurogene a spread-risk proposition for investors in the context of the intrinsically high-risk biotech sector compared with a one-shot’ model company.

There are, typically, two major bottlenecks for companies operating in the drug discovery field. Firstly, explains Professor Martin, it can be problematic bringing the right chemists together with the biologists working on the development of therapeutic agents. The second stumbling block, Professor Martin says, is getting the compounds into the patient.

Eurogene is able largely to circumvent these problems because, while the company’s primary strength is in biology, it also boasts outstanding in-house expertise in chemistry, while its two founding scientists are practising clinicians. Furthermore, the company’s connections with UCL and the National Gene Therapy Centre in Finland mean that, if Eurogene encounters a technical problem, it is quickly able to access additional expertise at short notice.

The company has a ten-year agreement with UCL giving it first rights over any intellectual property in its field of vascular biology – which leaves room for significant expansion of Eurogene’s product pipeline during the remaining seven years for which the agreement will run.

This agreement means, Dr Parker explains, that Eurogene “does not have to spend tens of millions on discovery”, since it is able to screen ideas post-discovery. As a result, whereas a conventional standalone biotech company might averagely invest $150 million (EURO155 million) to discover and bring a drug to clinical trials, it could cost Eurogene as little as $10 million

(EURO11 million) to $15 million (EURO16.5 million) to take a new therapy to the same stage. Many university spin-outs operate on a similar model: what primarily differentiates Eurogene is the degree of expertise that it is able to leverage in the field of vascular gene biology.

Meanwhile, as a founder of Eurogene, UCL is still a significant shareholder and, when the company’s products are brought successfully to market, will derive an income from Eurogene. This, Professor Martin points out, could be an important model for UK university funding in the future, another aspect of the company structure of which the entire Eurogene management team is clearly proud.

The first key to success for any biotech company is, of course, an excellent primary research base: in the case of Eurogene, the combination of its founders and the company’s connections with UCL, the University of Kuopio (recently designated the Finnish National Gene Therapy Centre) give it an unparalleled ability to leverage expertise in the fields of vascular gene science and endothelial molecular biology. However, in the immensely costly and high-risk drug development market, even a temporary setback on the development or licensing of a product can have a disastrous impact on a company’s commercial position, particularly if it has most of its eggs in one basket. Eurogene, with its broad platform approach, extensive intellectual property rights and impressive product pipeline, is well positioned to weather such potential setbacks and the outlook for the company looks bright. And Eurogene also has to date secured a total of GBP18 million (EURO29 million) plus of venture backing from investors who believe that the combination of world-leading science and an outstanding management team will create a biotech star of the future.