Third Rock's $325M Shire deal was a big win for early-stage investors

Third Rock Ventures has made quite a few big biotech gambles in recent years. And now we know just how well one of them paid off. In a 10-K filed with the SEC, Shire detailed--for the first time--its $49.3 million upfront payment to acquire Lotus Tissue Repair, which the venture group had a controlling interest in. And Shire added $275 million in milestones, to further sweeten the package.

In the venture world, winning multiples on your investment in a reasonable amount of time is what this game is all about. So how did Third Rock do?

The venture group agreed to invest $26.5 million in a fat A round for the company in mid-2011, but the Form D filed with the SEC on June 30, 2011 noted that the company had received only $2,750,000 of that in seed cash.

A spokesman for Third Rock laid out the math on the deal this way: The venture group owned 73% of Lotus Tissue Repair, with the rest in the hands of the founders. After just 18 months in business, Third Rock was able to exit with a significant amount of cash in hand and a chance to earn a 20x return.

The deal was another sign of just how hot the rare disease field has become. Lotus Repair was in the business of developing a recombinant form of human collagen Type VII as the first and only IV protein replacement therapy for rare cases of Dystrophic Epidermolysis Bullosa. 

But this isn't just about whether a venture group won or lost on a particular deal. Third Rock is one of a handful of venture groups willing to gamble its investors' cash on startup biotechs. Most of the big players have shifted their sights to later-stage investing, looking for a way to gain some multiples in a relatively short period, often in just three or four years. If Lotus Repair's story isn't a fluke, and more startups can find a shorter path to a profitable exit for investors, then more investors would be encouraged to back early-stage work. And that would have a big impact on the industry. -- John Carroll, Editor-in-Chief. Follow me on Twitter and LinkedIn.

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