Perceptive And Xontogeny’s Second VC Fund Brings In $515m

The strategy for both funds is to back companies with a preclinical drug candidate that can be advanced through clinical proof-of-concept with a mid-sized series A round. 

Source: Alamy

Perceptive and Xontogeny have tripled the amount of venture capital they have under management

Perceptive Advisors and Xontogeny LLC thought their first $210m venture capital fund, known as Perceptive Xontogeny Venture Fund I (PXV Fund I), was differentiated from other VC funds, but the niche the investors sought to fill had even more demand from high-quality start-ups than anticipated. That’s one reason why, just 18 months later, they closed the $515m Perceptive Xontogeny Venture Fund II (PXV Fund II) on 12 May with more than two times the capital they raised in the first fund.

Xontogeny CEO and chairman Chris Garabedian told Scrip that “I was pleasantly surprised with the number of companies that wanted to work with us.” The former Sarepta Therapeutics, Inc. CEO said early-stage companies have been attracted to the PXV funds’ focus on mid-sized venture capital rounds as well as the access they gain to biopharmaceutical industry veterans with decades of experience in drug development. “I think we engage them in a very different way, almost like collaborative drug developers rather than simply writing a check,” he said.

Garabedian conceived of Xontogeny in 2016 and launched the accelerator with $15m from Perceptive Advisors in mid-2017 to support Boston start-ups in need of both seed funding and advice for steering very early drug candidates through preclinical development. His 12-person team is staffed with additional biopharma veterans and researchers. (Also see "Finance Watch: Two More US Biopharma IPOs And Two New European VC Funds" - Scrip, 20 May, 2017.)

By the end of 2019, Perceptive and Xontogeny launched PXV Fund I to provide series A venture capital rounds for companies moving past the seed stage to help start-ups take their lead drug candidates from late preclinical all the way through to proof-of-concept data in humans. Both PXV funds invest in opportunities seeded by Xontogeny as well as companies with initial backing from other investors.

The same team that advises and manages companies for the Xontogeny portfolio oversees the investments receiving series A or B venture capital from the PXV funds. The last company to receive financing from the first fund was Juno Diagnostics, which announced its $25m series A round on 12 May. The PXV funds’ life sciences focus includes biopharma firms as well as medical device, diagnostic, health technology, digital therapeutics, artificial intelligence and machine learning start-ups.

Fund I Invested Faster Than Expected

Garabedian said Perceptive and Xontogeny raised a new larger fund sooner than expected for multiple reasons, including that the money from PXV Fund I was invested faster than anticipated. He said the first fund saw interest from more companies than expected and it wrote bigger checks per financing than initially planned. PXV Fund I also didn’t have capacity to participate in series B rounds.

“A lot of the companies that we negotiated those series A rounds with … we thought that they would want to just get funded through the IND-enabling work and through a Phase I safety, dosing and PK study,” Garabedian said. “But we found that if we could just invest an additional $10m or $15m in these same companies, and they were willing to take that extra capital, that we could actually manage the company through a clinical proof-of-concept instead of just up to or on the cusp of a clinical proof-of-concept.”

PXV Fund II will invest $20m-$40m per series A round as the sole investor or as the lead investor in a syndicate and it will invest in some series B opportunities.

Limited partners in PXV Fund II were on board with Perceptive and Xontogeny’s plans. The partners initially sought $350m for their second VC fund but generated enough interest from investors to raise more than $1bn, according to Garabedian. Even so, in the interest of not diluting the capital invested by its existing and new backers, and with the intention of making “right-sized” investments in early-stage companies, he said, PXV Fund II closed at $515m. The fund closed about four months after the fundraising process began versus the full year it took to raise PXV Fund I.

Right-Sized Versus Outsized Investments

The strategy for the PXV funds aligns with Xontogeny’s mission of supporting companies with smaller financings to get lead product candidates to key inflection points with small seed investments. Garabedian founded Xontogeny to fill that niche in the venture capital market at a time when VC firms increasingly were putting their money into $100m-plus series A and B rounds to back ambitious technology platforms even before they identified drug candidates.

“What I felt was happening was we were losing the old-fashioned way of supporting an early founding team and working with them on smart deployment of capital before you raise more money,” he said. “And if you are doing company creation and you're not having to deal with an entrepreneur or founders of a company, then you don't have to worry about diluting the founders. But if you're starting a biotech and you want to hold as much equity as possible, you don't want to take a $100m series A.”

Xontogeny set out to be “a venture investor of choice among early founding teams, entrepreneurs, scientific founders, where we can create a win-win, where they can hold more equity because we're not forcing an $80m or $100m series A round,” Garabedian said. There is a place for large rounds, he noted, when companies have to prove out a novel technology platform, but big investments in platform companies has created a gap in the VC market.

“I love watching it, and I think it's good that this much money is going to fund new technologies for our industry, but I'd far rather be a spectator than taking those big capital exposure risks,” he said. “I feel really good and comfortable with our strategy that's kind of middle market and more right-sized to get clinical data. Because if you can generate clinical data on a $30m to $50m investment, if you get it right, you will make good returns for your investors. If you want to deploy $300m in a company, and you want to turn that into $3bn of value, that is a lot harder and it's taking a lot more risk.”

Venture capital funding for biopharma companies reached a new record of more than $27bn in 2020, propelled by VC mega-rounds of $100m or more. The trend continues in 2021 with biopharma companies raising the most money ever in a single quarter – $10.5bn in the first quarter. (Also see "Finance Watch: Biotech Venture Capital Had Its Biggest Quarter Ever" - Scrip, 28 Apr, 2021.)

Garabedian said investor interest has been increasing over the past decade as exits via mergers and acquisitions as well as initial public offerings have given venture capital investors increasing returns, leading them to raise new and larger funds. The PXV Fund investors, in particular, were encouraged by Perceptive’s track record during 20 years of investing in biopharma, largely through its hedge fund and crossover investments in pre-IPO venture capital rounds.

Xontogeny Seeds, Perceptive Joins As Series A Partner

For Perceptive, investing in Xontogeny and in the PXV funds gives the firm access to earlier stage investments than it has had in the past and an opportunity to be more closely involved in shaping companies’ strategies.

“They liked the model that we have [at Xontogeny], which is a very active management of these investments,” Garabedian said.

Xontogeny has seeded more than 10 companies since the accelerator’s inception in 2016. Alongside the PXV Fund II announcement, Xontogeny announced that it has added five companies to its portfolio:

• Nephraegis Therapeutics with a lead program for a next-generation epoxyeicosatraenoic acid (EET) analog in development for acute kidney injury following surgical procedures, such as heart valve replacement, abdominal surgery and liver transplant;

• NephroDI Therapeutics, which has a novel AMPK activator in development for nephrogenic diabetes insipidus;

• Peroxitech, a company developing a novel PRDX6 inhibitory peptide-2 (PIP-2) product for acute lung injury;

• Shifa Biomedical with an oral small molecule inhibitor of PCSK9 in development for the lowering of LDL cholesterol; and

• Tellus Therapeutics, which is developing an oxysterol derivative synthesized from cholesterol in human breast milk to prevent and treat white matter brain injury in pre-term babies.

“One of the attractions of these companies to come to us for the seed funding and incubation is that if everything works out well, then we are ready to pull down that series A from the PXV Fund II that we just closed,” Garabedian said. “The nice thing about it is that I have an investment committee for every investment we make from the venture fund and we use the same process before we decide to do a seed investment, so we're vetting these companies not only at the seed investment but then we go back to vet them again to make sure that they are truly ready for that series A round.”

Landos Biopharma, Inc., a company that was incubated by Xontogeny and later funded by PXV Fund I, completed an IPO in February at $16 per share; its stock price closed at $10.11 on 12 May. (Also see "Finance Watch: Ten IPOs In Three Days Raise $1.9bn" - Scrip, 8 Feb, 2021.)

Another Xontogeny company funded by PXV Fund I, Quellis Biosciences Inc., was acquired by Catabasis Pharmaceuticals, Inc. under an agreement announced at the end of January and the combined firm will focus on the development of Quellis’s drug candidate for hereditary angioedema. (Also see "Deal Watch: Genentech Gets Access To X-Chem’s DNA-Encoded Library Technology" - Scrip, 4 Feb, 2021.)