Embracing Early-Stage Platform Opportunities at Polaris Ventures

In an interview with START-UP, Polaris Ventures managing partner Terry McGuire discusses recent investment opportunities and his firm's approach to platform technologies in the life sciences. Topics covered include: diagnostics, community diseases, next-generation biologics, and fund diversification.

Polaris Ventures managing partner Terry McGuire discusses recent investment opportunities and his firm’s approach to platform technologies in the life sciences.

Christopher Morrison

Terry McGuire, Jon Flint and Steve Arnold founded Polaris Ventures in 1996 to invest in early-stage information technology and life sciences businesses. The venture firm has raised more than $3 billion since inception and recently began investing its most recent fund, which closed on $1 billion in August 2006. START-UP talked to managing partner Terry McGuire about opportunities in life sciences technology plays, hot therapeutic areas for venture investing, and why biologics platforms will remain interesting to VCs and pharma alike. McGuire maintains that a diversified fund—Polaris has always been two thirds IT and one third life sciences, and within life sciences roughly 40% biotech, 40% medtech and 20% other investments—can hedge risk while taking interesting bets on these early-stage technologies. The firm’s investments include Momenta Pharmaceuticals Inc., GlycoFi (acquired in May 2006 for $400 million by Merck & Co. Inc. [See Deal]), Alnylam Pharmaceuticals Inc. , deCode genetics Inc. , Aspect Medical Systems Inc. , Advanced Inhalation Research (acquired back in 1999 for about $100 million by Alkermes Inc. [See Deal]), MicroChips Inc. , Remon Medical Technologies Ltd. , Sirtris Pharmaceuticals Inc. and Acceleron Pharma Inc. , among others.

Q: $1 billion is quite a bit of money. How can you remain focused on early-stage investment opportunities, and how does the size of your fund drive the kinds of investments you pursue?

Actually we do more seed deals today than we’ve ever done. Our position is that even though we seed companies with relatively very small amounts of capital, through the life of those companies they could easily take $25 million, particularly in our investments in the biotech sector.

We get them going with seed money and through the process we put our shoulders to the grindstone to help our seed companies. Often times we’ve seeded companies right out of our offices. It’s a commitment of time and not just capital, and along the way we’re prepared to continually back those companies. Our average initial investment is roughly $1-2 million, but it could be as high as $60 million or as little as $100,000 depending on the stage of the company.

Q: Does getting in at the seed stage imply greater risk, particularly for technology-based companies?

When we seed companies there are plenty of questions to be answered. Who’s going to run this company, how’s it going to be built and who’s going to be there on a day to day basis? Building that team, sometimes from scratch, is part of the challenge but also part of the opportunity. Some of my favorite entrepreneurs are those incredibly strong academics like MIT’s Bob Langer and Phil Sharp, George Whitesides and David Edwards at Harvard, Paul Schimmel at Scripps, and people of that ilk, who come out of a fantastic academic heritage and yet clearly know how to build great businesses. As a successful larger fund we can help attract the entrepreneurs and senior management teams that are looking to be part of the next great idea. A good example is our venture partner Alan Crane. He had a huge impact on Momenta as the CEO. Part of the reason he was intrigued to leave Millennium Pharmaceuticals and take on that opportunity was the compelling science coming out of Langer’s lab and Ram Sasisekharan’s lab. On top of that he became a venture partner at Polaris. As a larger firm we can begin to mitigate some of those risks associated with very early-stage technologies. Those risks are still there, but with high quality science and our experience behind us those are bets we’re prepared to take. In addition to Momenta we’ve seeded companies like AIR, GlycoFi, and Alnylam. We have partnered with Bob Langer on thirteen companies that have come out of his lab at MIT. For example MicroChips was started here in our offices.

Q: With pharmaceutical acquisition of next-generation biologics platforms in full swing, where do you see the opportunities for starting new companies? Won’t many of them have missed the boat by the time they’re mature enough to register to potential acquirers?

We’re mindful of pharma appetites but we’re less concerned about them at the earliest stages—the seed and first round stages. But we’re still making investments in that whole wave of biologics platforms, whether it’s proteins, peptides, monoclonals, or other technologies. As an example, GlycoFi was a great deal for us. To look at powerful early platform science we need to be ahead of the curve. (See "The Large Molecule Future," IN VIVO, June 2006 (Also see "The Large Molecule Future" - In Vivo, 1 Jun, 2006.).)

As we did our due diligence on GlycoFi, which was looking at glycosylation of proteins, a number of pharmaceutical companies that we talked to said, ‘well I know that’s important technology but a lot of others have attempted to solve that problem in the past, it’s really hard to do and I’m not sure you’re going to be successful.’ That didn’t stop us from making the investment and we ultimately proved that the technology worked, created several early corporate collaborations, and then Merck came along and paid an attractive price for what we think is a hell of an asset.

You could argue that if pharma is already active in a space then maybe it’s a little late for us to start another company in the area. I don’t know too many people who say, ‘hey last week I was visiting Merck or Pfizer and they stated an interest in XYZ, so I’m going to look to start a company in that area.’ My guess is that the companies that will draw pharma’s interest were already started three or four years earlier. So we use a more fundamental approach to company formation. If we believe that we can build a valuable platform and if we think can get paid for it, then we trust that a partner will come along and support it through alliances. We also trust in the likelihood that these companies will become attractive for either an IPO or acquisition.

Now, even though pharmaceutical companies are interested in biologics today, we will continue looking at companies in that broad, next-generation biologics space, because there will be additional biologics platforms in the future. Me-too companies will have a hard time, yet truly innovative technologies will still command the attention of pharma. There are still tens of billions of dollars of biological therapeutics sold each year and those sales are growing dramatically. There’s a problem set there that will continually evolve and venture capitalists have the possibility of investing in those companies that will solve many of those problems—either by bringing therapies to the market that couldn’t have been brought before, or by delivering therapies that otherwise mightn’t have been deliverable. There are a lot of ways to take advantage of the trend toward biologics and what we’re looking for is the fundamental platform idea—it may have plenty of risk attached to it on day one, but if successful it could transform the way drugs are developed. We’re certainly not the only ones looking hard at the space but we think it’s going to continue to be an important place to play. Companies like Acceleron Pharma and Adnexus Therapeutics [Adnexus Therapeutics Inc. ] are great examples of our recent biologics investments.

Q: You mentioned delivery of biologics as an opportunity. What are some of the compelling technological advances in drug delivery?

Like a lot of ideas, drug delivery got very popular for a while and fell back to earth again. But there has been a resurgence in interest in the field, and only some of it is focused on life-cycle management for older drugs. Newer technologies focus on payloads that need to be protected, like biologics for example. And we have a series of companies that are taking advantage of that. These companies aren’t looking at how you take an old product and reformulate it so you can extend the patent life or make it incrementally better, but rather how to take a product that could never be delivered before and find new ways to make delivery safer and more accurate. Making therapeutics safer and more accurate is the theme. A good example is Tempo Pharmaceuticals [Tempo Pharmaceuticals Inc.], an encore company combining the talents of Ram Sasisekharan of MIT and Alan Crane, the founders of Momenta.

Still another area we like is the area of smart devices or silicon medicine. Companies like MicroChips out of MIT and Remon Medical Technologies in Israel are using smart devices to deliver therapeutics. You can call it silicon medicine or the wireless body or whatever, but essentially these are devices with built-in intelligence and multiple modes of treatment and diagnosis on board. (See "Drug Delivery’s Product Risk and Reward," START-UP, October 2004 (Also see "Drug Delivery's Product Risk and Reward" - Scrip, 1 Oct, 2004.) and "Remote Patient Monitoring: The Markets Near and Far," START-UP, April 2006 (Also see "Remote Patient Monitoring: The Markets Near and Far" - Medtech Insight, 1 Apr, 2006.).)

Q: Infectious diseases in general and vaccine technologies in particular are enjoying a renaissance of their own. Do you see many platform opportunities in that area?

Clearly the whole area of community diseases like flu and its more threatening cousins have attracted a lot of interest. We’ve looked at a variety of vaccine plays and have made investments in companies like Pulmatrix [Pulmatrix Inc.] out of Harvard and MIT, which is looking at how diseases are communicated rapidly within communities, and Genocea [Genocea Biosciences], which is also broadly focused on vaccines, although both companies have been quiet about their specific technologies.

Q: Are opportunities like pandemic flu hamstrung at the early funding stages because the buyers of the fruits of these technologies tend to be governments?

It’s important to note that when we look at companies in this space we’re not just looking at those once-in-a-lifetime events like avian flu, for example. We’re looking at companies that are generally going to have technologies that are applicable in the healthcare system for things that are as exotic as avian flu and as common as the common cold. That can mean government sponsorship products in the extreme case or generally reimbursement-based products, or for that matter it could be products that are paid for by the consumer out of his own pocket. There are a growing number of healthcare technologies whose costs are picked up by the consumers themselves.

When we look at a business model in this space we’re looking at all those possibilities, and the technologies we’ll invest in can’t be based on just one horrific potential event like an avian flu pandemic, it has to be more broadly applicable than that. With that said, clearly a potential pandemic sparks research in those areas—a little bit like the space program did in the 1960’s; we think there will be great things that come from this research. Yet it’s difficult to have a business model solely based on government spending—whether it’s within healthcare or not. Still, we are mindful of that the non-dilutive sources of funding, such as government grants, are certainly worth pursuing.

The way the world looks at community diseases has also evolved. There’s seems to be less of a concern now about having a single-buyer for those types of technologies. It wasn’t that long ago that people looked at the broad community disease space, and anti-infectives in general, as uninteresting. And in the past the dominant customer in the vaccine space was government supported entities. However, there may be a moment of change at hand. That’s really what we’re looking at. And even if these opportunities are riskier than traditional biotech platform plays, our diversified strategy allows us to take that risk without betting the farm. We can have a vaccine company or two in a portfolio of 60 companies, and we can be a little more aggressive in the bets we take than a more focused fund. Our approach allows us to wander into new and risky areas knowing that we’re not only taking technical risk, but business model risk. But if there’s a fundamental benefit from the science and a potential business model to commercialize that technology then we’ll take that bet. It’s one of the reasons why we seed companies. Technical risk is always a concern with seed companies. So are business model and the building of a team. Yet we can explore that question when we’re a billion dollar fund and we’re making $100,000 investments at the seed stage. (See "Pandemic Preparedness," START-UP, March 2006 (Also see "Pandemic Preparedness" - Scrip, 1 Mar, 2006.).)

Q: Like vaccines, diagnostics have seemed to spark more VC interest than in the past. Why?

In the past, diagnostics has been a hard place for venture capital to produce strong returns, with a few exceptions. So, the venture capital mindset has tended to back away from it.

I believe that there’s a series of events coming along today that could change that perception—most significantly a set of therapeutics in development that are going to benefit from fairly accurate diagnostic technologies for monitoring those therapies. Whether they relate specifically to cancer therapies or more broadly to personalized medicines, we know that therapeutics themselves are becoming more accurate and targeted. Better, faster and cheaper diagnostics will be required to indicate which therapeutic to use, and how the patient should be monitored.

We’ve just started looking at some of these areas. Again, at Polaris we tend to prefer platform companies. T2 [T2 Biosystems Inc.] is one such company with founders out of MIT and Mass General, still in relative stealth mode, and it’s looking at a broad platform of diagnostics opportunities. Pharma’s willingness to accept tools that are going to make their therapeutic shots on goal more accurate is ultimately going to help them. When I’ve gone to visit with various pharmaceutical companies in the past several years they’ve often talked about biomarkers. It’s important when running a clinical trial or even preclinical trials to produce as much information as possible that demonstrates that the drug is working. So development companies are exploring biomarkers that tell them whether they think a drug can work and if it is approved, in which populations or patients it can work. (See "Molecular Diagnostics—From Tools to Tests," IN VIVO, May 2006 (Also see "Molecular Diagnostics--From Tools to Tests" - In Vivo, 1 May, 2006.).)