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Avalon, GSK Launch Their Eighth Startup

Avalon Ventures LLC is launching an additional startup out of its venture capital incubator in La Jolla. The firm, called PDI Therapeutics Inc., is jointly backed by British drugmaker GlaxoSmithKline plc and San Diego’s Avalon as part of an ongoing partnership.

The new firm will attempt to develop novel stand-alone or combination therapies that enlist the body’s immune system to fight cancer.

The launch of PDI Therapeutics is the latest in a three-year-old joint venture between GSK and Avalon to sprout 10 biotechs in San Diego by the end of this year. The companies originally committed $495 million to the goal but recently expanded the collaboration. Last year, Avalon partner Jay Lichter said there is now no limit to the number of startups Avalon and GSK will jointly develop.

PDI Therapeutics is the eighth startup to emerge from the deal, and all are housed at Avalon’s “community of innovation” called COI Pharmaceuticals Inc. Here, the companies share resources such as lab equipment and office space, much like an incubator. Avalon will also provide PDI Therapeutics with executive leadership and operations management, based on the terms of the Avalon-GSK collaboration established in April 2013.

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Avalon originally pledged $30 million to the effort ($3 million upfront per startup), while GSK agreed to invest $7 million for each startup. Altogether, GSK committed as much as $465 million for seed funding, R&D support, and milestone payments.

The revisions to the partnership — made last November — enable Avalon to earn as much as $50 million in potential milestone payments for each company that brings a new drug to market. Avalon’s potential milestone earn-outs were $40 million under the original terms.

Funding and Support

As with the other companies founded under the collaboration between Avalon and GSK, PDI Therapeutics will receive up to $10 million in Series A financing and R&D support from Avalon and GSK.

GSK has the option to acquire each of the companies when a clinical candidate is identified. However, if GSK does not elect to exercise this option, Avalon will retain its ownership in the company and the company will be free to enter into other strategic transactions.

Avalon-GSK previously launched Sitari Pharma, Silarus Therapeutics, Thyritope Biosciences, Adrenergics, CadheRx Therapeutics, Calporta Therapeutics, and Iron Horse Therapeutics.

None of the eight startups have reached an exit yet, so the overall return-on-investment of the Avalon-GSK portfolio remains unknown. However, Avalon announced that the first two companies formed under the collaboration — Sitari Pharmaceuticals Inc. and Silarus Therapeutics Inc. — have both identified a clear path to potential drugs, thus meeting their first milestones. Financial terms of the milestones have not been disclosed.

“The accomplishment of these first milestones by the entrepreneurial team at COI Pharmaceuticals, Sitari and Silarus shows the potential of our collaboration with Avalon Ventures,” said Damien McDevitt, vice president, business development head of R&D West Coast satellite at GSK. “We look forward to further scientific advancements from this collaboration as well as formation of additional companies with innovative technologies that can address unmet medical needs.”

Outsourcing Innovation

The Avalon-GSK alliance is indicative of the sea change occurring in Big Pharma, which is contracting across the board and generally looking to outsource innovation to smaller startups.

The partnership is unusual in that it allows a large pharmaceutical company to get in on drug development at the ground level. Big Pharma typically waits until small, venture-funded companies have reached certain developmental milestones before entering collaboration agreements to fund further research.

But this deal is consistent with the pharmaceutical industry’s attempt to try to change the medicine innovation process. As larger companies downsize and outsource more and more of their research processes, they turn to smaller companies and academics to provide innovation.

“GSK’s trying to find better ways to access and partner with academia,” GSK’s Lon Cardon said at the time of the collaboration launch. “What we’ve found is that Big Pharma’s not always the best vehicle to forge those collaborations. With this plan, the discovery process doesn’t become a Big Pharma, slow bureaucratic approach but a VC biotech approach — we’re trying to play to both funding models’ strengths.”

The aim, he said, is to combine Avalon’s approach of investing in early-stage life science innovations with GSK’s expertise and resources in drug discovery and development.

In the three years since its launch, the environment for early-stage biotech has become a little less friendly. Public markets are volatile, valuations are low, and there’s a resulting disinterest in becoming a target for acquisition. The creation of new startups through the Avalon-GSK collaboration appears to have slowed. The duo announced one startup launch in 2013, two in 2014, four in 2015, and only one so far this year (PDI Therapeutics).

It will be interesting to see how the collaboration pans out.

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