Contributing Writer

Every round of equity financing dilutes the current shareholders, but five companies in Canaan Partners's portfolio have found a way to raise cash without selling additional shares.

Theraclone Sciences Inc. did it the old fashioned way, establishing a research and discovery collaboration with Pfizer Inc. of New York. The Seattle-based biotech is due up to $632 million in research funding and milestone payments for licensing four drugs discovered with Theraclone's in situ therapeutic antibody rescue (I-STAR) technology. (See BioWorld Today, Jan. 20, 2011.)

Wende Hutton, general partner at Canaan, said that while there was nothing novel about the way Theraclone raised cash, it's exciting nonetheless, "Any company would envy having that kind of support from one of the major pharmas."

The rest of Canaan's portfolio companies that raised money recently did it through grants from the government and a nonprofit. Chimerix Inc., of Durham, N.C, and VaxInnate Inc., of Cranbury, N.J., each got a shot in the arm with grants from the Biomedical Advanced Research and Development Authority to fund work on smallpox and influenza, respectively. Marinus Pharmaceuticals Inc., of New Haven, Conn., received a grant from the Department of Defense to study its lead candidate, ganaxolone, in Fragile X syndrome. Finally, the Bill & Melinda Gates Foundation made a program-related investment in Liquidia Technologies Inc., of Research Triangle Park, N.C. (See BioWorld Today, March 2, 2011.)

Hutton said Canaan hasn't gone out searching for companies that can fund themselves independently, but "it was part of our investment thesis." Chimerix, for instance, already had raised significant dollars from grants prior to Canaan's investment, which gave the venture capital fund the confidence that additional dollars could be raised.

The additional funds from grants help accelerate companies' programs by leaving the cash from venture capital investments for other programs. But Hutton cautioned that the fundamental value of a start-up is still on the commercial side. If a company doesn't have private funding, it "would just be wrapped up by the government or owned by the partner." She characterized grants as "a bit more than the frosting on the cake."

The sweet spot comes when the grant can help broaden the value of the commercial drug. Marinus, for example, will use the DOD grant to help fund a clinical trial testing ganaxolone in patients with Fragile X syndrome, but Marinus already has studied the drug in a Phase II trial as a treatment for epilepsy.

Trius Therapeutics Inc., of San Diego, has used the same strategy, garnering three government contracts, the most advanced of which involves working on novel inhibitors of the bacterial enzyme Gyrase A. The government is interested in the program for potential bioterrorism, but there's also a commercial aspect to the program for treating infections from microbes that are resistant to existing antibiotics.

"For a biotech company, this is a very attractive funding mechanism to complement clinical programs supported by VC funding and to identify the next interesting clinical program while retaining worldwide rights to it," John Schmid, chief financial officer of Trius, told BioWorld Insight.

While obtaining grants has the advantage of not diluting current shareholders and may make companies more attractive to an acquirer, Canaan's Hutton said applying for government grants can be "just as time consuming for senior management as doing a major financing." It may be frosting on the cake, but obtaining grants is no cakewalk.