Pathways and platforms are great but true exits come around product portfolios, says Robert Millman, a founder and the chief executive for CoStim Pharmaceuticals, which was snapped up by Novartis just 10 months after the company’s first funding round.
On Tuesday, September 23, 2014 at BioPharm America™ in Boston, Millman will join a panel discussing the inside story for one of the most stunning and inspiring pharma-biotech deals. Fellow panelists and key partners include Roger Kitterman from Partners Healthcare Innovation Fund, CoStim co-founder Arlene Sharpe from the Harvard Medical School, and Seth Ettenberg, who leads Oncology Biologics at the Novartis Institutes for Biomedical Research.
Managing Director at MPM Capital in Boston, Millman spoke with partneringNEWS ahead of the event to set a background for the panel discussion and to provide his perspectives on the deal.
Robert Millman, Managing Director at MPM Capital
partneringNEWS (pN): It seems you no sooner started the company than you were announcing an acquisition. What happened?
Robert Millman (RM): The company was funded when we closed our Series A on March 29, a Good Friday, which was my birthday, so I consider it a Great Friday. We sold 10 months later on Valentine’s Day.
What we developed was very much needed in certain pharma pipelines. Handing off our products to Novartis, one of the premiere leaders in oncology, was a really great thing to do. I view it as taking some really gifted children and putting them in the Montessori school. The group has been fully integrated now into Novartis mainline research. The lab space we had built up and occupied is now back on the sublet market.
pN: You never had a chance to put up a website. . .
RM: Which proves that the people who say biotech companies need a brand and a splashy website in order to drive business isn’t necessarily true. It wasn’t the case for us. We were so focused on moving a large number of programs into preclinical development.
pN: How far did you get into preclinicals? What stage was the evidence at?
RM: We can’t really go into the details of that. But I can tell you that CoStim was built on two things. First the idea that it was not too late for PD-1 therapy [programmed cell death-1]. Even though there are leaders in the space, we had an eloquent IP story that provided a freedom to operate in that zone. And then we built on the idea oncology was going to be moving toward combo-combo therapies, therefore a monotherapy approach with a single agent was not the path to take. Instead we wanted an ability to pair PD-1 with other agents. Novartis announced this approach was very important in their consideration as they want to combine it with their CAR [chimeric antigen receptor] technology. We found several other agents that we believed were either best-in-class or equal to the first-in-class and brought them into the company.
pN: Does the CoStim deal still leave room in the PD-1 space for other opportunities?
RM: I think that every pharma needs to have a base for immunotherapy agents, and PD-1 ends up being the base therapy. If you want to control pricing features in your own combinations, you either have to do a deal with Bristol-Myers Squibb or with Merck for cost-revenue sharing. Or you will need your own base if you are not going to be able to buy their monotherapy and add your therapy costs on top of that. Having your own base becomes very important from a pricing point of view. PD-1 alone without a biomarker is not the right strategy. This is where we were going to differentiate, with a very robust biomarker platform where we had a way, even though it requires restricting the patient population, to drive efficacy way above the market leaders. In a USD 10 billion oncology market, even 10% of the population is still a blockbuster.
pN: How would you place this success in the context of other deals?
RM: I don’t think there has ever been any deal announced where the total returns for the VCs were subject to short term capital gains. The calculated internal rate of return is magnitudes above anything we have ever seen, in part because of the short-term nature of the investment, but also because of the multiple that was realized. There was this great moment at the Board meeting when we decided to take the Novartis offer. Everyone had lawyers calling in to discuss how we could structure the deal to try to avoid short-term capital gains. Roger Kitterman [Managing Partner, Partners Healthcare Innovation Fund] was sitting there with a big smile on his face. He said, “We don’t pay taxes.” Partners is a nonprofit.
I want to say that Partners was crucial to the whole process. I can’t thank Roger Kitterman enough. He came in early with MPM with the first bridge funding to take us to a stage where we could complete all of our transactions and get wet biology up and running. I also would thank the people with the Harvard group and the people at Dana Farber. Each license was critical for the company. No one agent would have driven the value because it was a package we had put together. Everyone had a role.
pN: It all sounds so easy now that you’re done. Where were the challenges?
RM: The biggest hurdle I faced was convincing my partners that novelty, novelty, novelty is not always the thing that is needed. That having completely validated targets and not being too far behind on the clinical development path does not make the program a non-starter. It was a big hurdle internally as well, to argue that best-in-class will come when you combine two agents in clinical trials. Five years ago, that was heresy. We benefited at CoStim in that shortly after we started, draft guidelines came out that indicated this was the direction the agency [FDA] was going to go.
Another challenge was the huge personal component of social engineering in bringing expert advisers together and not letting any one of them think they are the only person in the deal and that their agent will be dominant. Even further, for them to understand that their agent will be part of a package. This is not an insignificant task. Any individual group at any point could have gone rogue and said they would do a monotherapy program around their agent. On the institutional side, you always need faculty to be eager to be working with your company. Then you can work with the academic institutes, which still have their guidelines and determine what they need to find the right value. That can be at times difficult to navigate, but working with good partners we were able to get through that.
pN: How did the deal finally take shape?
RM: There is a model where people create a deal on the front end so that the exit is already there when you start the company. CoStim was not that way. The exit actually opened up the weekend before the Board meeting in December . We had several parties engaged in advanced licensing discussions at that point when this stalking horse came out of left field with a deep knowledge of what we had and were doing so that they didn’t need to go into a huge due diligence process. They threw down a purchase offer.
When we informed the other parties that we were now moving toward a purchase, several came back to the table with offers. It became a bidding war in real time at that Board meeting. The Board decided the best place to put our agents would be at Novartis. I cannot share anything on the financials or how milestone payouts will be realized. I can say that there are lot of nuances when you do a biotech deal where you look to reduce the possibility that a party may not be active in getting your program to milestone triggers. Where Novartis came out on top was its commitment to oncology, its commitment that a partnered program with our agents would flow into their pipeline.
pN: At BioPharm America in September, what can people learn coming to the session on “The story of CoStim Pharmaceuticals?”
RM: What people will hear from us is the various pressure points we had to get through in order to make this successful, any one of which could have been a complete roadblock to that success. With all the levers that you have to be willing to work, it requires great flexibility. Just as an example, and there are many others, a pharma company went to one of our faculty saying they wanted to license an agent. If that faculty partner had an entrepreneurial spirit, he would have immediately tried to figure what was in it for him. This is where VCs play a really critical role, in providing equity incentives to founders such that success is paid back to them, as opposed to milestones and royalties paid to the institution.
pN: What other lessons you can share with business development people based on your experience with CoStim Pharma?
RM: Right now there is an incredible competition for good ideas. We are all science wanks, so the right science pitch is going to get the interest. But the way you get in the door is through your founders and your advisers. Unfortunately we are creatures of pedigree. One of the reasons CoStim was able to get pharma’s interest is that we had some of the leaders in immunotherapy discovery. And this team becomes really critical. I used to downplay that. I used to think if you invest in quality science everything follows, but my experience taught me to place as much, if not more, credence on the team. You can’t bet on everything being successful. It will be the team that will make a success.
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