This month Bayer AG (OTCPK:BAYZF) (OTCPK:BAYRY) made an aggressive move into stem cell therapy. The question is whether the partnership with Versant Ventures will benefit the large biopharma, the venture fund, or a small biotech with a license agreement.
Bayer is a mega-cap pharma worth over $85 billion and in the midst of a mega-merger with Monsanto (NYSE:MON). The stock is extremely beaten down similar to other biopharmas, so opportunities might exist all around, but little known VistaGen Therapeutics (NASDAQ:VTGN) might hold the best way to play the stem cell investment.
Formation Of BlueRock Therapeutics
Back on December 12, Bayer and Versant Ventures launched BlueRock Therapeutics. The new venture will focus on breakthrough treatments based on the latest stem cell technology with an initial focus on cardiovascular and neurological conditions.
Bayer and Versant committed $225 million in a Series A financing providing the company with four years of cash to fund research and development. The new cell therapy firm is clearly well funded and backed by firms capable of expanding investments when and if warranted.
The head of Bayer Life Science Center and BlueRock board member Dr. Axel Bouchon made the following statement about the size of the financing:
The scientists can really focus for four years on bringing this a huge step forward, instead of struggling for financing every other year.
As an interesting note, the fundraising was one of the largest Series A fundings in the last few years. In fact, the average biotech Series A financing was only $21 million back in 2015.
PricewaterhouseCoopers reported that the average early stage fundraising for a firm in any sector during Q3 was below $10 million. The BlueRock funding equated to more than 10% of the total venture investments in biotech last quarter which is the second largest industry behind software.
Bayer and Versant Ventures definitely have high expectations for this firm to invest so much capital upfront without seeing any key milestone data before typically making a second investment. The venture will employ 30 to 40 people in Toronto and up to 80 people worldwide already making it one of the largest startups.
Not surprising for a biotech startup funded with so much capital, BlueRock has an impressive list of partnerships. The company is working with both the McEwen Centre for Regenerative Medicine and University Health Network (UNH) in Toronto and Memorial Sloan Kettering for clinical research and CCRM for the manufacturing platform.
UNH is led by Dr. Gordon Keller who is a world leader in stem cell biology and a BlueRock co-founder. Also, Dr. Michael A. Laflamme is a founding investigator for BlueRock and a cardiac cell therapy pioneer.
Memorial Sloan Kettering is led by 2015 MacArthur Genius Dr. Lorenz Studer and Viviane Tabar. Both are recognized experts in advanced stem cell programs that address neurological diseases.
CCRM has the tech to support robust stem cell production while the basis of the programs is induced pluripotent stem cell (iPSC) intellectual property invented by Nobel Prize winner Dr. Shinya Yamanaka of Kyoto University.
No doubt, BlueRock has the partnerships lined up to make a legitimate attempt at the unmet needs in cardiovascular and neurological diseases.
Limited Financial Impact
The real question is the investment impact of BlueRock on shareholders and potential investors. In the case of Bayer, the large biopharma has a market cap of $85 billion. The big investment in BlueRock is meaningful from a funding standpoint for a startup, but the financial impact to Bayer is years away, if not a decade or more. Even a 10-fold increase in the value of BlueRock to $2.25 billion is still immaterial to Bayer.
As well, Bayer just got shareholder approval for the purchase of Monsanto. The company will pay $66 billion in cash to close the deal. The integration of Monsanto is far more meaningful to the Bayer investment thesis over the next couple of years.
For Versant Ventures, the firm is a leading healthcare investor that has an estimated $1.9 billion under management, making this funding meaningful to those investors. Unfortunately, the general public can't invest in the venture fund.
Forgotten VistaGen Therapeutics
While the formation of BlueRock Therapeutics got all the hoopla, a little biotech granted a sublicense to the new firm. VistaGen Therapeutics agreed to an exclusive sublicense agreement for rights to certain proprietary technologies relating to the production of cardiac stem cells for the treatment of heart disease.
The deal calls for an upfront cash payment of $1.25 million and potential future milestone payments and royalties. A big step for a small biotech to get an immediate license from one of the largest funded biotech startups ever.
Some of the general coverage of the deal didn't overly point out that VistaGen was the technology behind the stem cell technology. The Pharma Letter covered the deal and posted the links to social media including this bit on Twitter. All the headlines focus on BlueRock and the Bayer connection.
As well, EP Vantage wrote on Seeking Alpha about the bet by Bayer and Versant Ventures on stem cells succinctly mentioning the past problems in the sector, but the article didn't cover the VistaGen license agreement.
More To Like At VistaGen
The interesting part of VistaGen is that the clinical-stage biotech isn't a one-trick pony. Besides already having a license deal with one of the largest biotech startups led by two major partners, the company has several Phase 2 studies underway for depression-related disorders.
Source: VistaGen Therapeutics presentation
AV-101 is an orally available drug candidate for the adjunctive treatment of major depressive disorder (MDD) in patients with an inadequate response to standard antidepressants. The drug was shown safe and well-tolerated in two NIH-funded Phase 1 safety studies. Most importantly, no ketamine-like side effects such as sedation, hallucinations or schizophrenia were present while demonstrating robust antidepressant-like activities.
The company expects Phase 2a top-line results for the study in MDD by early 2017. The Phase 2b study in adjunctive treatment of MDD expects to enroll 280 patients in a multi-center, multi-dose, double-blind, placebo-controlled trial in 1H17. The top-line results aren't expected on the more extensive Phase 2b study until 2018.
Normal, Small Biotech Finances
VistaGen has a listed market cap of only around $30 million likely due to the general lack of discussion about the firm in the BlueRock license deal. A deal that allows VistaGen to focus efforts on advancing AV-101 through the Phase 2 clinical tests. As well, the National Institute of Mental Health (NIMH) is funding the current Phase 2a clinical trials that reduces the cash needs of the small biotech.
The company raised gross proceeds of around $10 million earlier this year and ended Q3 with $6.3 million in cash. VistaGen had an operating loss of approximately $3.1 million in the last quarter with expectations that the cash balance would provide the necessary funds for 1H17 due in part to the NIMH funding for the ongoing Phase 2a study. The cash burn from operations is only averaging $1.9 million per quarter, but naturally one would expect an increase as the Phase 2b studies begin next year.
The recent upfront payment though relatively small at $1.25 million, nevertheless, helps with funding for the Phase 2 studies. The key to the whole investment thesis being the relative small size as an advantage to new investors with the company already having a solid license deal.
Realistically though, VistaGen will need more funding typical of any small biotech. The license agreement with Bayer and the ongoing Phase 2 studies will no doubt help with future funding rounds, but no guarantees exist that existing shareholders will see acceptable terms on future equity or debt raises.
Risks Always Present
EP Advantage pointed out that the risks are high in stem cell therapy. The lack of past success makes the initial four-year funding crucial to give researchers enough runway for developing the therapy programs.
The risk to BlueRock itself is significant, but Bayer would hardly feel any failure. The development pipeline might see some holes if such a large investment were to fail to result in promising drug candidates, but the stock wouldn't likely suffer much.
For VistaGen, naturally the risks are high that the small biotech will see any future milestone payments and royalties from BlueRock. The key to an investment being that the company has other routes for financial success. An investor has the potential to benefit from either this license deal or the AV-101 clinical trials already in Phase 2.
The risks are naturally high for any biotech and so much more for a small one. Having technology licensed by Bayer naturally helps reduce that risk, but no guarantees exist in success with either programs.
Despite several promising drug candidates and partners, VistaGen faces biopharmas with deeper pockets and committed financial resources. The risks are always large without significant piles of cash on the balance sheet and FDA approved drugs on the market. Not to mention, the license agreement and the promising initial results for AV-101 are still in the early stages. The rates of approval are still low regardless, and even an FDA approval doesn't guarantee that clinicians will even prescribe the drug.
The key investor takeaway is that the BlueRock Therapeutics startup has huge ramifications for stem cell research and biotech funding. The impact to Bayer is less significant though some aggressive, well-funded investments could definitely payoff long term.
The real opportunity is the impact on VistaGen Therapeutics where the technology surrounding one of the key programs of BlueRock is potentially very material to the success of the stock. As always, any investment in a small biotech is only recommended for a diversified portfolio willing to accept capital loss.
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