GRAND RAPIDS — Tetra Therapeutics Inc.’s sale to a Japanese pharmaceutical company provides a final pathway toward bringing to market potential new drugs to treat Alzheimer’s disease and a form of autism, as well as generates a handsome return for financial backers.
Investors in a $7.2 million Series A capital round Tetra raised in 2016 got a return of five times their original investment, founder and CEO Mark Gurney said. Participants in an earlier July 2013 debt offering got an ROI that’s close to 13 times their investment, he said.
“We returned a lot of capital to Michigan,” said Gurney, who started Tetra Therapeutics in 2011 and methodically built and led the company down the R&D pathway toward an exit for investors.
“This is a tremendous win for West Michigan, both for our investors and stakeholders,” he said.
Tetra’s merger into Shionogi & Co. Ltd. could ultimately reach a transaction value of $500 million if certain regulatory and sales milestones are met over the years. The deal represents one of the largest exits to date for a startup company formed and nurtured in Michigan and supported by local investors.
The company developed its drug compounds during the last decade with the backing of $27 million in federal grants, including National Institutes of Health funding. Millions more came from several Michigan-based investors. They included Grand Angels and its Ka-Zoo Angels affiliate, Kalamazoo-based Apjohn Group LLC, Muskegon Angels, Traverse City-based Northern Michigan Angels, Ann Arbor SPARK, the Michigan Economic Development Corp.’s Invest Michigan fund, and the Bioscience Research & Commercialization Center at Western Michigan University, plus local high net worth individuals.
‘A great outcome’
The deal was the best exit yet in a drug development company for Grand Rapids-based Grand Angels, which provided Tetra early seed capital and later co-led the Series A round. Grand Angels invested in Tetra through its venture capital funds and member angel investors.
“It’s an excellent validation of our business model and the kinds of companies we want to promote. It’s also a validation of West Michigan in general. This is a success story not only from Grand Angels, but the West Michigan ecosystem,” said Paul D’Amato, managing director of Grand Angels’ venture capital funds.
“It’s a great outcome for everybody,” D’Amato said. “We’re also proud of what we were able to create together. Our goal is to build these companies in West Michigan and this is just an amazing success.”
At the nonprofit Bioscience Research & Commercialization Center at WMU, proceeds from the Tetra deal went back into an investment fund that invests in early-stage life sciences startups across Michigan.
The BRCC, an evergreen fund formed in 2004 with backing from the state and WMU, invested $450,000 in Tetra and received an ROI that was in the “many multiples,” said Executive Director Stephen Haakenson.
“That was one of those exits that an early-stage investment fund counts on, that one out of 10 returns that covers the others. So, it was very successful,” Haakenson said. “This allows us to continue to put further funds out the door.”
Don Parfet, founder and general partner at Apjohn Group, credits Gurney for having the scientific background and business acumen to create, lead and build the company. Gurney based Tetra’s headquarters in Grand Rapids and his lab in Kalamazoo at the WMed Innovation Center, and “was able to attract great talent at both locations,” Parfet wrote in an email to MiBiz.
Apjohn Group formed a special purpose investment company, Apjohn TDP LLC, that co-led the Series A financing round for Tetra.
“This company has achieved very significant milestones and holds significant promise in treating cognitive disorders within any number of neurological conditions, including Alzheimer’s Disease, Traumatic Brain Injury and Fragile X,” Parfet said. “We have been very pleased by Shionogi’s interest and commitment to Tetra and the outstanding opportunity this next development phase represents for medicine.”
Tetra Therapeutics closed in late May on a merger with Shionogi & Co. Further financial details of the deal were undisclosed.
Under the deal, Shionogi & Co. acquired Tetra’s portfolio of drug compounds for treating Alzheimer’s disease, Fragile X syndrome and other brain disorders associated with cognitive or memory conditions. Tetra became a wholly owned subsidiary of Shionogi, which obtained global rights to all of Tetra’s drug compounds, including one known as BPN14770 for Alzheimer’s.
Shionogi intends to maintain Tetra’s operations in West Michigan, although production of the new drugs — if and when they come to market in the years ahead — likely would occur in Japan, Gurney said.
“Shionogi wants to keep our team intact,” said Gurney, who continues as CEO at Tetra under Shionogi’s ownership. “They understand the depth of our experience and our ability to execute with minimal resources, and they are interested in continuing that.”
‘Another success story’
Although Tetra still has a “a fair bit of clinical development to do” to get to market, Shionogi “wouldn’t have made the deal that they did if they didn’t see some promise for outcome,” said Steve Rapundalo, the president and CEO of Ann Arbor-based MichBio, a bio-industry association.
The deal “was another success story for us in Michigan in the bio-pharma world” that could bring further attention to the state’s industry from both pharmaceutical companies and capital investors, as well as serve as an example to promote the state as a Midwest biotech hub, Rapundalo said.
“It’s a testament that our bio-pharma universe is doing quite well,” he said. “Success breeds success. If we can make this visible and promote those successes, the more they hear about it, wherever they’re located, hopefully that will bring more attention and interest and money to the others that are following in the tracks of a Tetra.”
The deal further shows that in Michigan, “we’ve got the experience and the manpower here to move science such as this along,” and that the “brain power is here and the abilities are here” to form and build a successful pharma startup, Haakenson said.
“You don’t have to go to the coasts to find the individuals to support businesses such as this,” he said.
The merger agreement follows Shionogi & Co.’s prior $35 million strategic investment in late 2018 in Tetra Therapeutics, which is presently conducting separate Phase 2 clinical trials in the U.S. The trial for Alzheimer’s was completed in January, just prior to the COVID-19 pandemic spreading into the U.S. By that time, Tetra was already analyzing data from the trial and “in advanced businesses discussions” with Shionogi, which in March made another equity investment beyond the 2018 deal.
Shionogi then decided to make a full acquisition of Tetra, Gurney said.
“Tetra’s deep level of drug discovery know-how in the CNS area will help us to solve for the cognitive disorders our aging population is facing, and we believe we are well-positioned to bring BPN14770 to patients in need,” Isao Teshirogi, president and CEO of Shionogi & Co., said in a statement.
Tetra has a few patients remaining in the Phase 2 trial for Fragile X, Gurney said, adding that the trial has been delayed by the pandemic. He wants to begin Phase 3 clinicals trials for both drugs in 2021.
The Phase 3 trials could lead to the filing of applications to the U.S. Food and Drug Administration for approval to bring the drugs to market. The Fragile X drug could come to market within three years, and the Alzheimer’s drug in four to five years, Gurney said.
Pivot from IPO
As Tetra progressed in developing the drug compounds, work began toward an initial public offering. The company made presentations at investor “roadshows” in October and November 2019 in New York City, he said. The company was getting “very strong interest in Alzheimer’s and in Tetra,” Gurney said.
“In the end, the merger path provides a better outcome to our investors and stakeholders than pursuing the IPO,” he said, citing added difficulty because of the COVID-19 pandemic. “At this point in time, no one’s doing an IPO. It’s very, very difficult to execute an IPO now.”
Tetra’s progress to this point “gives us some kind of successful guideline of what works for startup companies, especially with drug development,” a sector that is “unique from other industries,” Haakenson said.
“It takes time and it takes patience to invest in a company such as this. The product’s still not in the commercial market and we hope to see it go there and make it with Shionogi taking the reins of the assets,” he said.
Asked for advice for other bio-pharma startups, Gurney said: “Keep with it. Don’t give up.”
“Create a network and rely on your network to build your company,” he said.