Alliance Deal of the Year Nominee: Versant/Roche/Inception 3

It's time for the IN VIVO Blog's Fifth Annual Deal of the Year! competition. Once again we're presenting awards in three categories to highlight the most interesting and creative deal making of the year. The categories are M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply a half dozen nominations in each category throughout December, and you, the voting public, will decide the winners, voting early and often once we've announced all the nominees. Strap yourselves in, it's The Race for the Roger™.

We’re nominating Inception 3 not because it will star someone other than Leo DiCaprio, who never signed on to do sequels, but because it’s a biotech deal that opens a window into an intriguing new hybrid model of company creation.

Don't vote for Leo...

Let’s back up a bit. When Bristol-Myers Squibb bought Amira Pharmaceuticals in 2011 for $325 million upfront, the core scientific team at Amira decided to stay in the drug-hunting business – a lucrative business for them, indeed.

...vote for Peppi.

 Amira chief scientist Peppi Prasit’s team not only shepherded its idiopathic pulmonary fibrosis drug into Phase II, but while previously at Merck, the group discovered two commercial hits: arthritis drug Vioxx (rofecoxib), now withdrawn, and asthma treatment Singulair (montelukast). With the help of Versant Ventures, they created Inception Sciences, a mothership that would poke around conferences and tap into academic connections to find intriguing projects or targets. The idea is to bring those projects in-house, into Inception’s labs, create individual daughter companies around each project, and work them into pre-clinical shape with enough original R&D to hold composition of matter patents. “Everything up to GLP toxicology, we do in-house,” says chief business officer Clare Ozawa.

Those daughter companies are a well-known asset-financing concept: with each product housed within its own company, the ultimate goal of a clean trade sale to a biopharma is more easily attained.  The discovery engine remains independent. But Inception has also created a feedback mechanism that it hopes will keep the mothership’s engine running. It has no products, nor does it hold equity in the daughter companies. Instead, it is the contractual service provider for the daughters, with about 30 full-time staffers doing chemistry, biology, business development and more.

Inception 3 is the first publicly disclosed test of the system. Instead of drug hunting first and finding a partner or buyer later, Inception found a hunting partner in Roche, which wanted to go after hearing loss but didn’t have the internal capabilities or resources to devote to this very new therapeutic area -- new, at least, for drugs. In turn they formed Inception 3 based on technology from Stanford University. Versant provided equity funding, and Roche has added funding that gives it an option to acquire Inception 3 upon filing of its first IND. Ozawa declined to give a development timeline. The partners will be looking for small molecule therapies to address sensorineural hearing loss, which is all too common, permanent, and afflicting more and more people in the age of the iPod.

None of the dollar amounts were disclosed, but in July Inception 3 filed notice of raising a little more than $1 million of an anticipated $10 million offering. Ten million was also the target offering of Inception 1 and Inception 2, which are built around neurology and oncology programs. Each has raised $5 million, according to SEC filings. Versant to date has been the only shareholder, and it funds them from its general fund, not from cash set aside for Inception projects, says Ozawa, who was a Versant associate before joining Inception: “Each daughter has to stand alone and make sense to Versant, just like any other start-up.”

If the concept takes off and Roche proves a reliable fiancé, Inception could find more gentlemen callers on its doorstep.