Russian Investors Bankroll Biotech

Large Russian venture funds are bringing capital to biotechnology companies pinched during the recession’s purse string tightening of venture capital investors. By traditional venture-investing standards, the deals the Russian funds offer can come with some unusual stipulations, especially on technology transfer. But if successful, these alliances could help Russia improve its health care system while helping small biotech firms advance new products.

Russian investors “have been very up-front about their agenda,” says Scott Minick, chief executive officer of Bind Biosciences, a recent beneficiary of Russian investment.

The Russian government wants to diversify the country’s oil- and gas-dependent economy by creating innovative high-tech industry sectors. Russian investors are hedging the risk by investing in technology and products originating outside Russia while still finding ways to fulfill their economic mission.

One agent of change is Rusnano, which was created in March 2011 through reorganization of the state-owned Russian Corporation of Nanotechnologies. Still 100% government owned and focused on nanotechnology, Rusnano has $10 billion to spend. Pharmaceutical-related investments account for about 18% of its portfolio and at least $1.1 billion in funding commitments since the start of 2011.

Last October, Rusnano invested $25 million each in Boston-based Bind and its sister company, Selecta Biosciences, as part of a $94.5 million investing round. Bind and Selecta are using nanoparticle and other technology from Harvard University and Massachusetts Institute of Technology to develop drugs and vaccines, respectively. As part of the deals, both firms are setting up wholly owned subsidiaries for technology, product, and clinical development in Russia.

Rusnano has put another $300 million into London- and Moscow-based Pro Bono Bio, which it set up with Celtic Pharma Holdings in September 2011. In addition to readying launches of nanovesicle-enclosed drug products, the partners plan to build a plant in Russia. Rusnano also has partnered with France’s Magnisense to make diagnostic assays in Russia and has helped Cleveland BioLabs form an oncology subsidiary called Panacela Labs.

Meanwhile, Rusnano has joined venture capital funds led by Celtic and by Burrill & Co. And last month, it set up a $760 million partnership with Domain Associates, a New Jersey-based venture group. The partners will invest jointly in up to 20 emerging companies that Domain identifies, says Brian H. Dovey, a Domain partner. In return, the firms will license intellectual property (IP) and product rights for use in Russia.

Domain offers investing experience and access to firms with products that the Russians hope will modernize their health care system. Rusnano has the money. “Since the economic crisis, we found funding our later-stage companies more difficult,” Dovey says. “It was a congruence of desire—we needed the funding in the late stage and Rusnano wanted to fund the late stage.”

To assist the emerging companies they fund, Domain and Rusnano will set up a single Russian company. The new firm will aggregate projects; handle clinical trials; and manufacture drugs, devices, and diagnostics. Operating under Western quality standards and current Good Manufacturing Practices (cGMP), the firm will “dramatically lower the risk for our companies to enter the market,” Dovey says.

Negotiating complex deals amid legal, language, and cultural differences was time-consuming, according to Dovey and Minick. “The bad news is that it took us almost a year and a half to do this, but that is also the good news because we got to know all the players,” Dovey says.

According to Minick, “the due diligence process is very, very thorough, and you definitely have had the full-body scan when you have gone through it.” A company can learn a lot about itself from the close examination, as well as how to work effectively with a new partner, he says. “We were actually getting a lot of work done through the diligence process.”

A former drug industry executive and venture capitalist, Minick points out that the Russian investors are like a cross between a typical U.S. venture capital firm and a sovereign fund. Sovereign funds use government money and have “a lot of requirements as to how those dollars get invested and scrutiny over making sure things are done appropriately,” he says.

Russia’s international forays are being driven by initiatives at home, including the three-year-old Pharma 2020 program. Among its many goals, the up-to-$6 billion plan aims to boost domestic drug production from 20% of sales today to 50% by 2020, with about 60% of the new total being innovative products. To reduce a reliance on imports, multinational drug firms are constructing local plants.

Small biotech firms haven’t pursued emerging-market opportunities to the same extent as the large pharma companies, and Minick sees serving those markets as “a big part of our value equation going into the future.” Yet when Rusnano indicated that its investment requires companies to commit to the development of Russia’s drug industry, “I wasn’t quite sure what to make of that because I didn’t really know what the opportunities were,” he adds.

“I did a lot of diligence to make sure that our IP would be well protected, the quality of the work we do in Russia would be as good as what we are doing in U.S., and clinical development would be world-class,” Minick says. “My conclusions were that we can operate there at the same level of quality across the board and with the same kind of protections as we could in the U.S.”

Opportunities have included interaction with world-class polymer chemists who can help Bind advance its nanoparticle technology, Minick says. Russia also has a large and well-established clinical trials industry. “The combination of being able to advance both our science and our clinical development is just a really exciting opportunity for a company like us,” he says. “It gives us access to world-class resources that we probably would not have been able to access any other way.”

Compared with the U.S. and Europe, Russia is known for its ability to conduct shorter and lower cost clinical trials. Although the record of Russian clinical trials is not perfect, U.S. and European regulators have accepted data from those trials for product registration. In the end, it is likely that a product can be developed and registered in Russia faster than in the U.S. or Europe.

“We still have to do thorough clinical trials and demonstrate the safety and efficacy of our products, but the regulatory requirements are different,” Minick says. “As a biotech company, being able to get to revenues sooner could replace subsequent financings.”

As far as manufacturing goes, Bind will do some pilot-scale production in Russia, but in the near term it intends to keep clinical manufacturing in the U.S. The company is setting up a 10- to 15-person R&D operation in Russia and is working with local contract research organizations (CROs). Like other firms establishing a foothold in Russia, Bind has been making local contacts.

Bind and Selecta have their operations in the ChemRar High-Tech Center, a private biopharma cluster near Moscow that advances its own and partners’ drug programs and provides R&D services, manufacturing, and venture investing. It also assists emerging companies within a government-supported “Northern” biopharmaceutical cluster around Moscow Institute of Physics & Technology.

ChemRar Ventures, the venture investment arm, has committed about $100 million to fund small Russian biotech companies over the next 10 years, says Nikolay Savchuk, managing director of San Diego-based Torrey Pines Investment (TPI) and a ChemRar board member.

ChemRar Ventures already has a portfolio of 20 Russian biotech companies. Since 2008, TPI has assisted it in finding opportunities, Savchuk says. For example, in 2010, TPI helped ChemRar create a cancer immunotherapy company called NewVac that is based on development and manufacturing technology transferred from Boston-based Agenus.

In December 2010, NewVac became one of the first residents of the Skolkovo Innovation Center near Moscow. Besides operating research and business centers in five scientific areas, Skolkovo is collaborating with MIT to develop a high-tech research university. At the end of 2011, Skolkovo had 87 projects in its biomedical cluster and had awarded $76 million in grants and $49 million in start-up investments.

Among the investors attracted to Skolkovo programs are leading Russian and international venture firms, as well as Rusnano and Russian Venture Co. RVC is a $1 billion government fund that creates smaller funds to jump-start investing in different industrial sectors. With the participation of private capital, it has created funds such as BioFund and InfraFund to build biopharmaceutical services and business infrastructure, respectively.

In 2008, Maxwell Biotech Venture Fund started up with $100 million in total funding from RVC and Maxwell Asset Management, a private Russian financial firm, says Alexey Eliseev, managing director of Maxwell Biotech. The fund is one of the first in Russia committed to life sciences, he says. It has offices in Moscow, Boston, and San Diego.

Because biotech is a new industry for Russia, investment-worthy projects are relatively few, Eliseev says. “From the early days of the fund, we established a model in which we work with companies outside Russia through a combination of straight investment and product development partnerships.” Maxwell Biotech has invested in the U.S. firms Sequella, AtheroNova, and Bionevia Pharmaceuticals and licensed territorial rights for product development and commercialization.

It’s unusual for investors to take a hand in product development, Eliseev acknowledges, but in its partnerships Maxwell Biotech otherwise follows standard international business practices and traditional licensing agreements that include milestone and royalty payments. “In this way, we not only move a product toward registration in Russia, but we also build global value for our partner company,” he says.

To develop products licensed from foreign companies or Russian scientists, Maxwell Biotech has created seven companies in Russia. With names such as OncoMax and NeuroMax, they are organized by therapeutic category. With the German venture group High-Tech Gründerfonds, Maxwell recently invested in Germany’s MYR GmbH and a Russian company called Hepatera to codevelop an MYR hepatitis drug.

Also with ties to Russian initiatives, Palo Alto, Calif.-based Helix Ventures is participating in cross U.S.-Russian investment. Two of its companies—the medical device firm EndoVx and the diabetes company InteKrin Therapeutics—are considering setting up subsidiaries in Russia, Helix General Partner Evgeny Zaytsev says. Helix, like Maxwell, is an accredited venture fund of Skolkovo.

Zaytsev also serves on the RVC advisory council. “You only go to Russia when it makes business sense,” he explains, which includes raising capital, doing more efficient clinical development, and wanting to launch a product on the Russian market. Once there, he believes, having local partners is critical.

“You always face challenges when you are trying to do business in other geographies,” Zaytsev says. “The United States is a very favorable environment for small companies, and for a U.S. company it may be very challenging to do business in Russia because of the different corporate law and different business culture.”

For all that Russia has to offer, the country still lacks some capabilities, investors tell C&EN, but the situation is changing rapidly. cGMP manufacturing exists, but is largely for finished generics. And although clinical development is strong, there are gaps in research services. For instance, few, if any, centers can conduct pharmacology and toxicology work under Good Laboratory Practices.

To create the needed infrastructure, RVC’s BioFund is investing in companies providing lab, information, analytical, and consulting services. InfraFund targets firms offering marketing, financial, legal, IP, and other services. According to RVC, the investments focus on companies whose core activity is to fulfill international requirements prescribed by best laboratory practices and enable recognition of drug research internationally.

Russia is trying to create a system that can eventually nurture homegrown entrepreneurs and emerging companies. Currently, domestic innovative drugs make up only about 1% of the Russian market. “The government is really trying to integrate into the global innovation process and encourage development of a new biotech industry based on global standards,” Zaytsev says.