Avalon jumpstarts first biotech in $500M GlaxoSmithKline portfolio deal

Jay Lichter, managing director of Avalon Ventures

Avalon Ventures is kick-starting the first biotech enterprise in its half-billion dollar portfolio deal with GlaxoSmithKline ($GSK), launching a startup named Sitari Pharmaceuticals which will pursue research work out of Stanford University with an eye to developing a new drug for celiac disease.

The San Diego-based venture group and its partners at GSK are funding Sitari with $10 million in cash and research support, with the R&D assist coming from the pharma giant. The biotech will have the funds to do the discovery and early preclinical work needed to see if they have a drug that can be taken into the clinic, at which point GSK has an option to buy out the asset and add it to its pipeline. And the venture group plans to quickly clone the entrepreneurial effort with a team in place to handle multiple projects, keeping costs in check, explains Avalon Managing Director Jay Lichter.

"It's not a forever thing," says Lichter, a seasoned venture entrepreneur with a number of startups and deals to his credit. The beauty about this deal is that his exposure is capped at $3 million per project, with the incubator team operating under one roof. GlaxoSmithKline provides up to $7 million in R&D support and in-kind services and then will have an option to buy Sitari and the biotechs to follow for about $9 million to $12 million each with around $40 million in milestones.

Several venture groups have started their own portfolio operations similar to this, gathering projects under one management team and optioning rights to pharma companies, but Lichter is understandably fond of his model. The upside for Avalon is a potential 14x-or-so payoff with a possible solid return in a short period of time--provided the group picks the right academic projects for the portfolio. And he's set a pace for Avalon to launch about one of these startups per quarter. For GlaxoSmithKline, it's a low-cost way to seed a pipeline of new therapies, cherry-picking the most promising ones for its own dedicated teams of investigators. The pharma company has committed up to $465 million in seed cash, research support and scheduled milestones to the pipeline program. And Avalon will use up to $30 million from its latest venture fund.

For the maiden journey, Lichter has picked a new approach to treating celiac disease, a severe food allergy in which the body violently rejects gluten. While it's fairly easy to avoid gluten when you're eating at home, he notes, any time someone with celiac disease eats out they're exposing themselves to the threat of a reaction. Their target is a protein called Transglutaminase 2 (or TG2), which plays a key role in the body's inflammatory response. And their drug will work as an inhibitor, probably as an oral therapy that can be taken once a day.

Sitari was founded on intellectual property in-licensed from the laboratory of Chaitan Kholsa, professor of chemical engineering, chemistry and biology at Stanford University and a scientific founder of Sitari.

"Our collaboration with Avalon Ventures is off to a great start, and we are impressed with the quality of opportunities and the speed with which we have been able to create the first new company using this unconventional collaborative approach," said Pearl Huang, global head of discovery partnerships with academia at GSK. "We look forward to a productive collaboration with Avalon as we continue to launch exciting new companies to transform today's cutting-edge discoveries into promising clinical candidates that may enhance GSK's already robust pipeline."

- here's the release

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