But the projected market was too small for Roche, so the pharma agreed to the spin-out and granted Actelion licenses to two receptor antagonists under development. Roche did not, however, provide any financing for the new firm, leaving that function to heavy-weight VCs Atlas Venture and Sofinnova Partners, which together contributed about $11 million to Actelion's Series A round.

Another group of Swiss researchers -- from Roche and GlaxoSmithKline (GSK) -- joined forces to create Addex Pharmaceuticals SA, a company that's developing therapies for nicotine, alcohol and cocaine dependence as well as other neuropsychiatric conditions. Addex's champion was Francois Conquet, who headed GSK's department of experimental pathology in Lausanne. While there, he led a research effort that produced knockout mice that were unresponsive to cocaine -- a very valuable model for exploring the biochemical basis of dependency. (For a detailed explanation of Conquet's research, see the Signals article, "Taming The Wolves Of Addiction.") But, like most big pharmas, GSK considered the anti-addiction therapy market too small, so Conquet started Addex, bringing together a core team of scientists who had already collaborated in the past. This year, the company raised nearly $10 million in venture funding from Index Ventures, Sofinnova Partners, TVM Techno Venture Management and others.


Champions can be found State-side, too -- like Geert Cauwenbergh, founder of Barrier Therapeutics Inc. Cauwenbergh, who was VP for technology transfer at Johnson & Johnson (J&J) Consumer and Personal Care Products, created a new dermatology company based on technology and products licensed from three J&J affiliates -- Janssen Pharmaceutica Products L.P., Johnson & Johnson Consumer Companies Inc. and Ortho-McNeil Pharmaceutical Inc.

It's a treasure trove, too: Barrier started its young life with three products in or entering Phase III clinical trials -- for fungal infections, diaper dermititis and seborrheic dermatitis. Another six product candidates are in earlier-stage trials in the areas of psoriasis, acne, skin inflammation, allergies and wound healing. Moreover, Barrier also gained exclusive licenses from its parent organizations for a portfolio of pre-clinical products and several classes of molecules relevant to dermatology. In return, the three J&J affiliates received an equity stake in the spin-off about 35 percent, according to VC investor Marc Ostro of TL Ventures.

While Cauwenbergh was the internal champion for Barrier's formation, he certainly wasn't the only player in this complex transaction. Johnson & Johnson Development Corp. (JJDC; J&J's venture capital arm) took a leading role in structuring the transaction (it helped arrange the licensing terms and the transfer of the IP portfolio, for instance) and JPMorgan Partners and TL Ventures led the VC syndicate that financed the deal -- to the tune of $46 million, making it one of the largest first-round financings this year. (ProSkelia, also a big pharma spin-off, raised $59.4 million in July; the following month, Archemix Corp. added an additional $37 million to its Series A round, which was initiated in April 2001, for a grand total of $51.8 million.)

And, of course, J&J played a role, too. "On the corporate side, J&J was reviewing all the R&D projects in its pipeline and prioritizing them by therapeutic area, " explained Ting Pau Oei, a vice president at JJDC. Johnson & Johnson could have sold these assets outright, or licensed them to third parties, but instead decided that "certain, very specific dermatology and skin care projects, in fact, were ideal candidates to be spun out into a more focused and entrepreneurial environment such as a venture-backed start-up," he added.

"Out-licensing these projects to a dedicated and focused specialty dermatology and skin care company will maximize the potential for bringing both new and OTC skin care products to the marketplace. It also allows J&J to focus on other high priority therapeutic areas of R&D. Through the arrangement with Barrier, the Johnson & Johnson affiliate companies can retain certain future rights to license back the products -- plus an equity stake."

Thus, by combining these clinical, preclinical and R&D programs that were already available within J&J, the pharma put together a package that was "very attractive to the VC community," Oei said. And having an in-house venture arm was critical to the plan.

Actually creating the company, and then lining up investors to support it, was not an overnight accomplishment -- especially because J&J "had never done this significant of a spin-out before," he explained. In fact, it took more than a year start-to-finish. "JJDC got involved in the process about one-and-a-half years ago," Oei said. "We had the help of Geert Cauwenbergh, J&J's internal champion… As these products in dermatology were being identified [to form the basis of the spin-off] JJDC was immediately brought in to find the financial support." And not just any VC would do: The size of the basket of opportunities -- the number of products, the mix of early- and late-stage programs -- meant that "Barrier's pre-money valuation was high compared to what VCs are used to seeing," he added.

But Barrier Therapeutics had all the right ingredients: It's a specialty pharma company -- a business model that's in vogue right now -- with a full pipeline. And as we know, venture firms are willing to invest larger sums of money when much of the risk has been taken out of the picture.



That's especially true when those investors are obligated to invest big bucks to begin with. For instance, Barrier's two lead investors have very deep pockets -- JPMorgan Partners currently manages a $31 billion portfolio and TL Ventures has over $1.4 billion under management.

They certainly liked what they saw. "Barrier is only a start-up chronologically, but not in terms of where its products are in development," explained TL Ventures' Ostro. "We ran into the company at the H&Q 2002 conference [in early January], and started looking at it then," he said. (The financing was completed in May.)

Of course, with so many products in the clinic, the VCs were faced with lots of data to pour over as part of their due diligence. Plus, the investors got involved in the process of transferring the intellectual property and know-how from J&J to Barrier and establishing future rights.

For instance, "There is one product with a pre-negotiated option which J&J has the ability to exercise; everything else is under a right of first negotiation," Ostro said. "But if Barrier decides to market a product on its own, it doesn't have to go to J&J to negotiate." And Barrier certainly intends to market most of its products itself, particularly in the U.S.

It was a complicated transaction -- "the first deal we've done like this," Ostro said. And with so much at stake, "We wanted to do a financing that involved enough money to get the company to the point where it can go public, without more dilutive financing or corporate deals," he continued. "$46 million should take Barrier very far down the road."


As should the $59.4 million in start-up funds raised by ProSkelia, which was spun out of Aventis in early July. The financing was provided by Warburg Pincus LLC's $5.3 billion Private Equity VIII fund and its $2.5 billion International Partners fund.

The new company, formerly the big pharma's bone disease unit, inherited all its R&D activities, the associated intellectual property (IP) and bone biologist Roland Baron, who had run the research unit within Aventis and now serves as ProSkelia's CSO. Warburg Pincus, which holds a 58 percent stake in ProSkelia, recruited pharmaceutical executive Philippe Ballero from Tibotec-Virco NV (which was acquired by J&J in April 2002) as the firm's CEO.

"Baron had been trying for a while to persuade Aventis to spin out its bone disease unit," explained Nick Lowcock, managing director in Warburg's London office. Once he succeeded, "Aventis then decided to hire an investment bank to help it find the investors." And Warburg was interested.

The package was appealing -- "it included clinical- as well as early-stage programs. There was a good balance, with three products in the clinic and six pre-clinical. It was all very attractive to us, compared to starting a company from scratch, where it would take six years to get to the point that ProSkelia has reached. "