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On May 14, when venture capitalists and sovereign wealth funds announced the largest first round venture financing in the history of biotech, $217 million for Denali Therapeutics, my “bubble alarm” went off. On its face, this is exactly the kind of extravagant financing that happens at the peak of a market. It felt a bit like the IPO of DrKoop.com all over again.
But once I got over my initial shock, I realized that the financing, while risky, in fact makes logical sense from several different vantage points. I came up with three reasons – beyond “because it could” – why the company raised so much money.
First the facts: Denali will use what it says are novel approaches to find treatments for heretofore nearly untreatable neurodegenerative diseases such as Alzheimer’s and Parkinson’s. Denali certainly has the pedigree for its ambition to be taken seriously. Co-founder and CEO Ryan Watts was formerly head of neuroscience at Genentech. Alex Schuth, a second co-founder, was the head of BD for neuroscience there. And Marc Tessier-Lavigne, president of Rockefeller University and former head of research at Genentech, is also a co-founder. Tessier-Lavigne gave up a board seat at Pfizer to become chair of Denali.
Not only does it have the team, but it also has very savvy backers. Some of the early technologies that Denali will deploy came to fruition in the Fidelity Biosciences Research Initiative (FBRI), a division of VC investor Fidelity Biosciences. FBRI is focused exclusively on neurodegenerative disease and chooses not-yet-seed-capital-ready projects out of the Fidelity network or out of academia that it funds until they are ready to raise grant support or venture funding. Not surprisingly, Fidelity Biosciences is one of Denali’s founding investors. A second Cambridge investor, Flagship Ventures, was an early investor in Agios and the only VC investor in the first venture round raised by Moderna Therapeutics. Agios and Moderna are two of the hotter companies in biotech. Arch Venture is the third venture participant in the Denali A round in an investment led by Bob Nelsen, whose fund also invested in Agios. Nelsen is key because he was the one who, by my assessment, was responsible for bringing the Alaska Permanent Fund and the Juno founders and investors together, resulting in a then-unprecedented and catalytic $145 million round in January, 2014. Unnamed sovereign wealth funds, mutual funds and private family offices filled out the Denali round.
...it looks like this
Here are my four reasons that this round became so massive:
1. Prior success with a similar strategy. Case in point: Juno. Exactly this financing strategy “worked” with CAR-T-cell focused oncology therapeutics developer Juno. This argument sits particularly deeply with me since I was a major skeptic when I first heard that Nelsen and the Alaska fund had powered into that round. I was concerned that Nelsen, who is undoubtedly a savvy and experienced VC investor, had gone at least one step too far in bringing in an investor, the Alaska fund, that by all appearances was something of a biotech naïf. All that had to happen was for that investment to go sour and, I reasoned, there would be a chill on non-specialist investment in biotech that might take many years to lift. Boy, did that not happen. Juno’s whopping $265 million December, 2014, IPO was a triumph for the private investors, especially those who got into the initial (Series A) financing round. ( It is far too early to tell whether those Juno investors not lucky or well-connected enough to get into that IPO will actually make much money .) In fact, I am told by an authoritative source that Juno’s Series A investors are sitting on a 15-fold gain right now, and the company has not even released much in the way of new data since the IPO. This could all come to a crashing halt should the CAR-T cells not go a long way to fulfilling their massive promise. But if today’s $3.7 billion valuation holds for another few weeks, then for those pre-IPO investors who choose to take some money off the table after their lockup comes off in mid-June, the deal was a sweet one indeed.
2. Prior success at Genentech. Denali builds on a history of success at Genentech, which is arguably the best drug discovery engine ever assembled, especially for oncology. But Denali is not operating in oncology. Similarly, one could easily argue that Denali investors are raising premature hopes in believing that Denali will perform the way Juno has. After all, Juno had some remarkable clinical successes in apparently incurable cancers to boast about. Denali is tackling much tougher clinical challenges in AD and PD with no clinical data at all. Yikes! But if you ask Denali investors, I believe they would say that the comparison is a false one. Instead of looking at the degree of difficulty, one should look at the approach: rigorous, methodical and based on ever-better science. (More about this in reason 4 below). Based on its founders and investors, Denali’s approach will follow in the footsteps of Genentech, the training ground for its founding team. As Flagship Ventures general partner Doug Cole put it on a panel at Convergence Forum the morning of the announcement, the current biotech boom is “not a blip or an aberration. Yes, there have been some external positives like access to capital. But look at companies like Genentech…. The disciplined thinking and execution observed there” has been applied at Flagship’s portfolio company Agios, another recent startup that has quickly hit a multi-billion-dollar valuation, and whose CEO David Schenkein is on Denali’s board of directors. That rigorous approach, Cole said, “is not [based on] luck!”
3. “If there is money on the table…” It has to be said that even a round half of this size would not have materialized were we not living through a time of dramatically better access to capital for biotech companies, as Cole said above. “If there is money on the table, take it,” is by now something of an iron rule for biotech and not just a polite suggestion. So timing does play a role. But now that Denali has the money, the financing gusher could stop flowing tomorrow and the company, as long as it spends wisely, could still execute on its plan for quite a while.
4. It’s the biology, stupid. In tackling diseases like Alzheimer’s and Parkinson’s, Denali will be delving into many different conditions, some genetic, some biochemical, many of which culminate in a similar presentation. This devilish diversity of AD and PD has flummoxed drug developers, who have failed time and again to identify canonical genetic or biochemical approaches that stymie even a fraction of patients’ disease. The industry recently came up with an approach to this diversity: they routinely use a radioactive imaging agent, florbetapir, developed by Avid Radiopharmaceuticals, acquired in 2010 by Eli Lilly. Companies now routinely pay tens of thousands of dollars extra per patient to use PET scans and florbetapir just to determine whether they actually are exhibiting Alzheimer’s disease pathology. (When they do not do so, as was the case in a recent Lilly antibody trial, as many as 25% of patients treated turned out not to have AD at all.) By stratifying patients in this way, drug developers such as Biogen are greatly increasing the likelihood of a novel therapy being effective.
But starting at the tail end of drug discovery like this and working backwards is inefficient , to say the least. By now, things work very differently in, say, oncology, in which drug discovery has recently become a much more genetically targeted exercise. The downside is that the patient populations are smaller. The upside of this more nuanced, genetics-based, “precision medicine” approach is that certain treatments like Gleevec and Xalkori have become vastly more impactful, albeit in smaller populations.
This is the place where I believe Denali will be beginning. According to an Xconomy post, one factor that “Denali will lean on heavily is a better ability to spot patients who are just showing signs of disease or aren’t showing symptoms at all. Denali, like many drug developers, wants to identify the right patients before embarking upon costly clinical trials. As recent failed Alzheimer’s trials have shown, treating people who are deep into the course of disease seems to have no effect.
“‘The earlier we can start a treatment, the more likely we are to change the course of disease,’” Denali board member Stacie Weninger told Xconomy. Watts told Xconomy that Denali will use as many as four drug discovery platforms to “…go after new targets: genes that are implicated in disease (Watts calls them ‘degenogenes’) as well as biological processes that those genes trigger. From ‘the top of the cascade’ to the ‘downstream effectors, we have a clear vision of where we want to go,’” Watts said.
In another timely article published over the weekend in the May 18 issue of the extremely valuable biotech weekly BioCentury (paywall), Watts, Denali’s CEO, elaborated on this point: “‘A major part of our effort will be a translational medicine model,’ He told BioCentury. ‘The concept there is that we’ve been misled by relying on complex animal models in neurodegeneration. We want to prove target engagement — that’s super central. If you look at the failures in this space, very few molecules ever showed evidence of target engagement, and it was unclear why companies used the dose they did. Instead of complex animals, we want to go to the clinic and identify the right patient population. We view these diseases as huge populations that likely are subpopulations driven by certain molecular pathways that can be genetically identified or found via biomarkers. That will be a big part of how we build Denali, and it’s been missing historically from drug development in neurodegeneration.’”
Denali faces some hurdles. For one, the approach that Watts described to BioCentury is a highly labor- and resource-intensive one. It’s almost as if Denali is setting out to find treatments for ten or twenty or even more diseases. The company is of course not yet sure if those treatments will work in the initial subpopulations studied, let alone whether they would work in a broader population as well. Still, judging by the massive (and lucrative) uptake of drugs that treat single-digit percentages of, say, cystic fibrosis patients, there will be equally great demand for drugs that can initially treat only handfuls of Alzheimer’s patients rather than the majority of them.
Using sequencing to identify subpopulations that share a single disease biology, elucidating this disease biology and treating it is a known approach in cancer, as mentioned above, and in some other diseases. Cambridge-based Lysosomal Therapeutics is taking a similar approach in Parkinson’s disease linked to Gaucher’s disease, which has a known genetic basis. As far as I can tell, the two approaches share several key elements: approaching genetically validated targets, studying human disease up front, and enriching clinical populations to minimize disease heterogeneity and maximize response.
But familial Alzheimer’s disease is very rare, comprising only one or two per cent of AD cases. So Denali must be assuming that the disease process has other (somatic?) genetic components and that these genes are similar across individuals who are not carrying a canonical “AD gene” such as ApoE4 in their genome. This hypothesis will have to be proven and Denali seems to be starting from scratch.
Another hurdle is that that to untangle the complex underlying biology of neurodegenerative disease, you need all the tools you can get. So the lack of good animal models for this group of diseases is a major issue. Going straight to humans, especially asymptomatic ones, with therapies that seem to work in cellular assays is very high-risk. In oncology, by contrast, gene-specific animal models aren't bad and the safety bar is lower.
Starting out with an approach that has worked before in a very tough disease area like oncology; applying it in the even tougher area of neurodegeneration; screening patients earlier and tackling smaller patient subpopulations in order to develop effective therapies; and maintaining some breathing room in case one or another of these efforts fails: these factors go far beyond “cheap money” and “a great team” in explaining the almost astonishing amount of capital that found its way into Denali’s financing round. If recent biotech history is any guideline, some promising early clinical results, even in a small subpopulation, an IPO and a multi-billion-dollar valuation may not be far behind.
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Image via line-of-birds: http://line-of-birds.deviantart.com/art/Denali-Silhouette-210895638
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