Ikaria Backers Buy INO, Create Model for Self-Funding Discovery

Ikaria's private-equity funded acquisition of INO Therapeutics will allow the company to self-fund its continuing discovery programs while acting as a magnet for additional external commercial or clinical stage projects.

Basic biotech models don’t often change quickly or significantly. Science certainly moves forward, backwards, and sideways, and ideas fall in and out of favor; the platform-to-product continuum gets traversed by entrepreneurs and VCs once every three or four years, for example. But the central dogma of discovery, VC-backing, pharma validation and exit has held relatively firm for two decades; the question has mostly remained about where in that model a company begins corporate life, and less about the model itself.

Only every now and then do these models get a jolt—call it biotech’s version of punctuated equilibrium. And Ikaria Inc., the two-year old start-up focused on the science of metabolic control and flexibility in critical care applications, has just evolved rather quickly. While the transformation occurred under unique circumstances—the trick behind all evolution—the premise could provide a template for similarly structured deals in the future.

Ikaria has taken the first, most substantial—and, its backers say, the hardest—step in establishing itself as a fully integrated player in critical care, from discovery through commercial, with the acquisition of INO Therapeutics LLC , a subsidiary of the German industrial conglomerate The Linde Group. [See Deal] INO, an expert in gaseous drugs and the marketer of the pulmonary vasodilator INOmax (nitric oxide for inhalation), will add to Ikaria’s R&D activities more than $160 million in current annual revenue. Ikaria Holdings, as the firm will now be known, can therefore eschew sharing the upside from its own products through deals and self-fund its own discovery operations without further dilution, while at the same time acting as a magnet for additional external commercial or clinical stage projects.

Transformation doesn’t come cheap, but according to Ikaria board member and Venrock Associates managing general partner Bryan Roberts, building investor interest in the deal was not an obstacle. What was difficult, he says, was the multi-party nature of the transaction. The acquisition is valued at $670 million and is being financed through a combination of debt and equity by private equity and venture capital backers led by new investor New Mountain Capital and existing VCs ARCH Venture Partners, Venrock Associates, 5AM Ventures, and Black Point Group. The Linde Group, which has owned INO since 2001, will receive €380 million (about $500 million) and maintain a 17% stake in the combined firm.

INO hit Ikaria’s radar screen back in 2005, when the smaller company was initially focused on clinical applications of hydrogen sulfide gas. The bigger-faster-better notion, as he describes it, has always been a part of the Ikaria strategy, says Roberts. "We thought that the founding premise would attract enough interest to build Ikaria other than in the traditional venture-backed start up manner."

The company has since its 2005 foundation been developing technology based on research out of the Fred Hutchinson Cancer Research Center that triggers a natural hibernation-like mechanism that drastically lowers cells’ metabolism. Lower metabolism means less consumption of oxygen and potentially a longer window of time to sustain blood-deprived tissues. This could minimize tissue damage in cardiac surgery, strokes, heart attacks and organ transplantation. (See "Ikaria Inc.," START-UP, June 2005 (Also see "Ikaria Inc." - Scrip, 1 Jun, 2005.).)

A traditional Series B was on the radar screen, says newly appointed chairman and CEO of Ikaria David Shaw, who in addition to being a director of Ikaria had also been a venture partner with both Venrock and New Mountain and thus a bridge between the two traditionally different structures employed by venture investors and private equity. But ultimately the decision was made to focus more generally on critical care than on the specifics of the hibernation space, Shaw says, a move that dramatically improves the business’s viability. Bringing private equity money on board to secure INO made sense. "INO was a classic PE play," Shaw points out, though New Mountain had to gauge its appetite for limiting the company’s cash flow by adding Ikaria’s R&D spend, which he describes as "north of $40 million."

New Mountain bought in, no doubt swayed by the fact that Ikaria should manage to maintain significant profits anyway, while managing an end-around pharmaceutical partners to keep hold of all the value within its own pipeline. "From a product development perspective we won’t be driven by financial needs," says Roberts. "We’re likely to keep our products and bring more products in," he says. Shaw sums up Ikaria’s ambitions: "we have an outstanding commercial platform, a great pipeline, and a long list of business development targets."

Expect Ikaria to therefore spend considerable time on buy-side business development. But it has already filled in the gaps between Ikaria’s early stage hibernation science platform and INOmax, which is the only nitric oxide approved in the US for the treatment of persistent pulmonary hypertension in newborns. INO has ongoing late-stage trials of nitric oxide and other therapeutic gasses in a variety of critical care applications, and Ikaria’s platform has begun bearing fruit as well. The biotech has moved beyond hydrogen sulfide gas, with non-gaseous and non-hydrogen sulfide compounds in the mix and its first candidate slated to enter the clinic later in 2007.

Ikaria’s new model has already gathered some steam; the company hasn’t had to demonstrate success to get people thinking about a next time. "Within the private equity and venture capital worlds I live in, the firms involved in this deal are already thinking about other prospects that could employ this model," says Shaw. And surely there will be new variations on the theme; even as Big Pharma and other in-licensers increasingly pay over the odds for early stage compounds—and thus, potentially, provide dilution-free discovery funding—VCs and executives are often eager to avoid sharing any upside from their top prospects. It has been attempted before.

Jazz Pharmaceuticals Inc.’s bet on drug delivery was accompanied by a monster $250 million Series B led by Kohlberg Kravis Roberts & Co. back in 2004. [See Deal] (See "Jazz Pharmaceuticals: The Concept Bet, at a Whole New Level," START-UP, April 2004 (Also see "Jazz Pharmaceuticals: The Concept Bet, at a Whole New Level" - Scrip, 1 Apr, 2004.).) But in general the problem for VCs who want to work with big private equity rounds is dilution: the PE round may come in at a modest premium to the VC round—as it did with Jazz, for example—but the round is so large that the VCs end up with relatively little ownership in the company.

Funds for the Ikaria/INO transaction were raised at a significant step-up, so along with their PE-round investment, Ikaria’s VCs have maintained a major, though undisclosed stake. Of approximately $300 million in equity capital raised, New Mountain has contributed more than $200 million, while ARCH and Venrock have chipped in $25 million apiece to lead the VC syndicate—no doubt record-sized checks all around, but ARCH and Venrock have maintained a strong position in Ikaria. Credit Suisse has arranged the debt financing that comprises the balance of the total transaction.

--Christopher Morrison