Arix’s first M&A exit: VelosBio to be acquired by Merck for $2.75bn in cash

On 5th November, Merck (NYSE: MRK) announced its intention to acquire our portfolio company, VelosBio, an emerging leader in the antibody drug conjugate (ADC) space targeting a novel tumour antigen, ROR1. Merck will acquire the whole company for $2.75bn, all in cash.

VelosBio’s lead investigational candidate is VLS-101, an ADC targeting ROR1 that is currently being evaluated in a Phase 1 and a Phase 2 clinical trial for the treatment of patients with hematologic malignancies and solid tumours, respectively. In addition, VelosBio is developing a preclinical pipeline of next-generation ADCs and bispecific antibodies targeting ROR1 with the potential to complement VLS-101 by offering alternative methods of tumour cell killing.

The announcement is a landmark for Arix – the first M&A exit from our portfolio of 11 biotech companies. This trade sale is expected to return around $185m (£142m) of cash to our balance sheet, enabling us to accelerate investments in new ground-breaking companies, build larger stakes in existing portfolio companies and deliver attractive returns to our shareholders. The return represents a 12x multiple on our cost in a little over two years of our first investment. This was also the first co-investment with our strategic partner Takeda Ventures and validates the rationale for having close partnerships with Big Pharma companies in our core areas of interest: oncology, rare diseases, immunology and neurology.

Arix first backed VelosBio in October 2018 when we co-led the $58m Series A with Sofinnova Ventures, alongside Pappas Ventures and existing seed investors Takeda Ventures and Decheng Capital. In keeping with all our investments, our thesis was based on three factors:

• Backing the right people

VelosBio was co-founded by serial entrepreneurs and drug developers, CEO Dave Johnson and CMO Langdon Miller. They had previously formed the leadership team at Acerta, a biotech company that was acquired by AstraZeneca for $7bn in 2015, and developed Calquence[1], now an approved drug for indications similar to those being addressed by VelosBio. Dave and Langdon have enormous experience in oncology drug development, bringing novel compounds to the market and realising value for shareholders. They were recently joined by CBO Clayton Knox, also ex-Acerta, and CFO Enoch Kariuki, previously at Synthorx where he led their acquisition by Sanofi for $2.5bn last year.

Backing not just serial entrepreneurs, but serial teams of entrepreneurs, is a familiar theme within the Arix portfolio. As an example, another oncology portfolio team at Artios Pharma worked together before where they had both a successful exit and brought a new cancer drug, Lynparza, to market where it has positively impacted hundreds of thousands of lives.

• First-in-class science with potential for profound therapeutic benefit

VelosBio’s technology comprises an antibody to a novel target (ROR1) expressed on tumour cells but largely silenced on healthy adult cells, conjugated to a cytotoxic compound to kill cancer cells. This target had not been clinically validated when we first invested, and VelosBio’s compound is the first ROR1-targeted ADC to be tested clinically. However, the preclinical data bore the hallmarks of a drug that could work in patients. VelosBio’s strategy was to cleverly manage the multiple layers of risk in the programme by first validating the target in the lowest risk situation. Future iterations of the product will increase the degree of novel aspects and test the drug’s effects in harder to treat solid tumours. By sequentially validating the target in a technically less challenging setting, and then broadening the applications with pipeline products, VelosBio successfully and rapidly discharged many of the risks inherent in early stage drug discovery, while exponentially creating value.

• Timing

When we first invested in VelosBio in 2018, the field of ADCs did not look particularly attractive. After the initial hype and promise of “silver bullet” drugs such as Kadcyla, there had been recent high-profile failures of ADC drugs due to weak efficacy as well as intolerable toxicities in patients. However, our feeling was that after the “trough of disillusionment” in the ADC hype-cycle, the sector had learned from experience what made a safe and effective target and ADC drug, and we felt the field was entering its “slope of enlightenment”.

This turned out to be good timing, and ROR1 had the features of a good ADC target including tumour-specific expression and internalisation kinetics. This was combined with perfect execution by Dave Johnson and his team, getting the lead programme, VLS-101, into the clinic in record time, while the field began to heat up. In March 2019, AstraZeneca licensed a next-generation Her2-targeting ADC from Daiichi Sankyo, paying $1.35bn upfront and $5.6bn in milestones. The drug showed profound efficacy in breast cancer, shrinking tumours in 61% of patients, and enabling FDA approval in December that year. This was followed by a second multibillion-dollar deal between AZ and Daiichi for a second target; the IPO of Swiss company ADC Therapeutics resulting in a $2bn plus market cap company; and most recently the acquisition of ADC company Immunomedics by Gilead in October this year for $21bn.

Backing not just serial entrepreneurs, but serial teams of entrepreneurs, is a familiar theme within the Arix portfolio. As an example, another oncology portfolio team at Artios Pharma worked together before where they had both a successful exit and brought a new cancer drug, Lynparza, to market where it has positively impacted hundreds of thousands of lives.

Jonathan Tobin, PhD, Managing Director at Arix Bioscience

In July this year, VelosBio took the smart decision to raise a $137m Series B from a syndicate of blue-chip life science specialist investors. This gave the company the cash and cap table to develop its products, as well as the option to take the company public on NASDAQ, providing a viable means to stay independent for the long run.

The offer VelosBio has received from Merck is compelling for all its stakeholders. As one of the top forces in oncology drug development globally, Merck makes the perfect partner to maximise the potential benefit of VelosBio’s lead candidate, VLS-101, for the treatment of patients with cancer.

This transaction puts Arix in a strong financial position to provide support and flexible long-term capital to innovative biotech companies and entrepreneurs across the globe. We will continue invest in companies that we believe have the potential to develop important new medicines for patients and deliver superior returns for our shareholders.