The Cure: Third Rock Ventures’ Groundbreaking Idea
If Brett Kopelan runs a finger along the arm of his five-year-old daughter, Rafi, he’ll risk ripping off a layer of her skin. If he cradles her face in his hands, a section of her cheek might peel away like tissue paper. Every day, Kopelan and his wife must carefully wrap every inch of Rafi, from her toes to her chin, in bandages and gauze. At bath time, it takes nearly an hour to unwrap her and wash her blisters to prevent infection. “It’s hard to torture your child on a daily basis in order to keep her safe,” Kopelan says. “That’s really what you’re doing when you’re bathing.”
Rafi is one of the 25 to 30 million Americans living with rare genetic disorders. She was born with dystrophic epidermolysis bullosa, or DEB, which leaves her skin almost as fragile as a butterfly’s wing. Pediatricians call it the “worst disease you’ve never heard of.” There are only a few hundred of these “butterfly children” in the United States, and only a few thousand worldwide.
The National Organization of Rare Disorders (NORD) tracks more than 7,300 of these illnesses, which are defined by the USDA as existing in fewer than 200,000 Americans. This year marks the 30th anniversary of the Orphan Drug Act, which sought to give pharmaceutical companies a financial incentive to develop treatments for these patients. But today, most of the rarest “ultra-orphan” diseases, like DEB, still have no treatment options at all. In fact, despite the rapid expansion of our understanding of the genome, only 270 of all rare disorders, less than 4 percent, have therapies of some kind. What’s more, in the wake of the economic crash, it’s become even harder to get a new lifesaving drug out of the laboratory and onto the market, as funding for early-stage research has plummeted.
As the executive director of the Dystrophic Epidermolysis Bullosa Research Association of America (DEBRA), Kopelan keeps close tabs on the drug industry. Federal research grants have vanished, he says, and pharmaceutical companies have slashed their research and development budgets. Meanwhile, venture capital firms, which had helped to foot the bill for early-stage research for decades, have largely pulled back their investments. Taking the risk on a drug for Rafi just doesn’t promise returns as high as, say, investing in the next Pinterest.
So Kopelan was shocked to learn that a Boston venture capital firm, Third Rock Ventures, had decided to commit $26 million to a Cambridge pharmaceutical startup, Lotus Tissue Repair, which was conducting promising research that could help manufacture the proteins that Kopelan’s daughter is missing. In animal studies, they were able to create protein-based therapies that would help the skin rapidly heal.
And Lotus Tissue Repair’s work isn’t the only orphan-disease research Third Rock is funding. Its partners have been exploring opportunities in the areas that drug companies have increasingly feared to tread. If Third Rock’s business model works, it could help get America’s research pipeline back up and running. And in the process, it’s making Boston one of the hottest sites in the world for startups working on therapies for rare disorders.
Just 18 months after Lotus Tissue Repair launched, Kopelan was thrilled when the pharmaceutical giant Shire made an offer to acquire the company after seeing promise in its DEB treatments, even before they’d been tested in human patients. This past January, Shire snapped up Lotus Tissue Repair for $49.3 million, with a promise to pay out an additional $275 million if Lotus Tissue Repair can hit certain safety and development milestones. Hitting those marks could equate to a 20-fold payout for Third Rock, and a tremendous windfall for patients with “ultra-orphan” disorders like DEB. “Third Rock gave a lot of hope to the DEB community that something was on the horizon,” Kopelan says. But for Third Rock, it was something more: proof that their bets might pay off.
BACK IN 2006, three pharmaceutical executives from Boston were eyeballing their hands at a blackjack table in Las Vegas and bemoaning their current state of affairs. The economic downturn had left their industry in tatters. These card players were executives, but they were also scientists, and they questioned what the crash might mean for patients. Who would want to keep betting on big ideas?
“People weren’t investing in discovery as much,” says Mark Levin, who at the time had recently left his role as CEO of the Cambridge cancer-drug-making powerhouse Millennium Pharmaceuticals. He says they were deep into their blackjack game when the thought struck: “If venture isn’t investing in early stage, and Big Pharma isn’t investing in early stage, there’s going to be a big hole there.”
Levin and his colleagues began to map out a plan to fill that hole. If they could identify the most promising research in rare genetic disorders and other cutting-edge therapies, and be the first to fund it, they could create companies around that research. With their combined experience in the biotech industry, they’d be able to usher those companies through the gauntlet of costly early-stage trials, and perhaps even through the “valley of death,” the industry term for the period of late-stage clinical trials, when money often becomes scarce and ideas are left to wither. They decided to start a venture firm that would focus exclusively on funding healthcare companies in the earliest gestational phases, and opened their first fund in 2007 (they swiped their company name from the defunct sitcom 3rd Rock from the Sun).
Over the past six years, Third Rock has raised more than $1.3 billion in capital, pulling in investors such as Google and Bill Gates. In all, the firm has launched or invested in 31 companies, 21 of which are based in Boston. In many ways, Third Rock exemplifies a renaissance in biotech within the city. “Boston has become the center of the universe in terms of bio-innovation,” says Kenneth Kaitin, director of the Tufts Center for the Study of Drug Development. “It’s actually, in a way, a return to the early 1990s, when the biotech community was really taking off.”
Today those in Boston’s biotech and life sciences industries look back at the years leading up to the early aughts the same way Internet titans remember the 1990s: with wistful longing. Between 1998 and 2007, research labs at universities and small biotech firms across the country were responsible for half of the scientifically innovative drugs approved in the U.S. At the same time, pharmaceutical companies were funding massive labs, and the FDA was approving between 40 and 50 new drugs a year. “You would literally walk into a meeting with scientists from a particular company, and they might have 20 research labs around the world,” Levin says. “And they would not know each other, even though they would be working on the same overall project. They’d be introducing themselves. It was going like gangbusters from a return standpoint for shareholders. Their revenues were growing 15 or 20 percent a year.”
But over the past two decades the cost of research and development rose exponentially, shooting up from $10 billion in 1992 to $50 billion in 2012. By the early 2000s pharmaceutical companies needed to produce between three and 10 new products a year in order to grow and make new investments. Over that same time period, the FDA approval process became more stringent, and as a result, the number of drugs approved dropped by half. Today, for every 5,000 compounds identified in the preclinical stages, only about five will be approved by the FDA. The Tufts Center for the Study of Drug Development estimates that it now costs more than $1.3 billion to develop a new drug.
“The [financial] risk of drug development is enormous, and a very small number of products succeed,” Kaitin says. “Big Pharma companies like Pfizer and GlaxoSmithKline can no longer take a product all the way from the laboratory to the market.”
Those odds have also made venture capital firms leery of investing in life sciences, says Emily Mendell, of the National Venture Capital Association (NVCA). “This area of investment has been much more challenging as the process to move a drug or device has become very difficult, opaque, and very costly.”
The numbers bear this out. Back in 2007, venture capitalists fronted a total of $9.5 billion for life sciences companies, while in 2012 they spent only $6.7 billion, according to a MoneyTree Report from PricewaterhouseCoopers and the NVCA. And a lot of that funding went to well-established companies, not startups. Six years ago, venture firms pushed $1.85 billion into first-time life sciences investments, while last year they paid out only $681,000. The pipeline to groundbreaking early-stage research has slowed to a trickle, Mendell says. Last year a Wall Street Journal article pronounced: “Biotechnology firms are coming around to a harsh reality: The gravy days are over.”
A 2013 report from the NVCA was even more foreboding, and might make parents like Kopelan shudder: “America’s medical innovation ecosystem is at risk,” it stated, noting that venture capitalists’ fears have led them to back out of investments in biotech and reduce their concentration in critical disease areas like rare genetic disorders. “As a result, early-stage investment in promising new medical technologies is now difficult to find, particularly for the most innovative technologies.”
The report also noted that as funding dries up, many companies are launching in Europe and Asia instead: “[T]he resulting shift will delay the availability of life-saving and life-sustaining treatments for Americans, decrease the number of jobs generated by this important sector, and threaten America’s global leadership in medical innovation.”
That’s where venture firms like Third Rock come in. “Congress and government invest a lot in research, but so many of our discoveries can’t move out of the laboratory or out of academic medical centers,” says Anna Barker, the director of the Transformative Healthcare Networks at Arizona State University, and the former deputy director of the National Cancer Institute. “We just don’t have the wherewithal to translate that finding or discovery into something that can become a new product. This is the premise on which Third Rock was built. Third Rock is trying to be the missing piece.”
MARK LEVIN IS A FAST-TALKING, earnest guy whose mouth seems to barely keep up with his mind. At Third Rock’s office one morning a few months ago, he was dressed like a dad heading to his kid’s soccer practice: cargo shorts, a plaid short-sleeved button-down, and rainbow Asics. A few minutes into our conversation, we were joined by another partner, Alexis Borisy, who wore a wide leather-brimmed hat, a denim shirt, and jeans with a polar-bear patch at the knee. Levin had printed out a two-inch stack of PowerPoint slides, and as we talked he laid them out on the table like a dealer passing out cards.
Levin and Borisy explained Third Rock’s “group genius” approach to thinking about science. In the past six years they’ve pulled together some of Boston’s most prominent scientists, doctors, entrepreneurs, and technologists as partners, with the intention of harvesting the biggest new ideas in biotechnology—from genome sequencing and epigenetics to powerful new imaging technologies that can see inside organs in real time. They then launch companies around those ideas, pulling in the same scientists as key advisers while they put their own partners in the role of CEO, CFO, or chief medical officer. In the land of healthcare VC, success means one of two things: being acquired by a larger pharmaceutical company, as was the case with Lotus Tissue Repair, or going public.
The partners say they spend their days visiting the labs of National Academy of Sciences award winners and Nobel laureates, vetting the science behind the research and the treatment’s viability in the market. Only if the research is truly unique—they use words like “extraordinary,” “spectacular,” and “disruptive”—will they decide to fund it and tap one of their own to take on a leadership role as the company begins its launch. Borisy, for example, currently heads three companies. He’s chairman of the board at Warp Drive Bio, which is building a “genomic search engine” to identify drugs hidden in microbes; chairman of the board at Foundation Medicine, whose personalized cancer test scans a patient’s genes to identify targeted therapies; and interim CEO at Blueprint Medicines, which is building new treatments for molecular aberrations that cause cancer.
Borisy explained that unlike an Internet startup, which can be launched quickly on a million-dollar “shoestring” budget, a biotech company needs a lot more time—and cash. “We’ll spend $500,000 or a million or a couple million” just on testing and research before a company’s launch, he said. With Lotus Tissue Repair, Third Rock’s venture partner Philip Reilly, who is one of the country’s foremost experts on genetic disorders, found a researcher working with a group of golden retrievers outside of Lyon, France, that exhibited spontaneous symptoms of DEB, and then worked with him to create a trial of Lotus Tissue Repair’s drug. Reilly also asked Lotus Tissue Repair’s founding CEO, Mark de Souza, to travel to more than 25 countries to identify patients with DEB. After talking with doctors all over the world, de Souza helped Brett Kopelan’s DEBRA foundation build a registry of more than 3,000 patients with the disorder, far more than the number they anticipated.
“In the world of rare diseases, actual patient counts really matter,” Reilly says. Because the cost of therapy is so high for patients with rare genetic disorders—Rafi’s bandages alone cost Kopelan tens of thousands of dollars a month—drug companies can get high prices for their treatments once they’re approved, and also know that a patient will likely depend on those treatments for a lifetime. These “ultra-orphan” drugs are increasingly being fast-tracked for consideration by the FDA, which means less time and investment is needed on the part of a startup. “We tripled the prevalence estimates of the disease,” Reilly says, “and that was a huge factor in Shire’s acquisition.”
“When you’re ready to make the decision to put in the money to launch the company with $30 to $50 million, you have the science planned and you’ve asked some key questions,” Borisy says. “At Third Rock, we look for ideas and science so compelling that people are willing to invest, and we can see the path through. We will go in there in a big way with large-scale resources to make something happen.”
That confidence—some might call it bravado—has led Big Pharma to come a-courting. Now, instead of spending billions to develop drugs that may not ever advance to human trials, the huge pharmaceutical companies are partnering with, or in many cases acquiring, small startups like Lotus Tissue Repair. What’s more, the industry is beginning to once again see the promise of dollar signs in treatments for rare genetic disorders. “It wasn’t long ago that the large pharmaceutical companies wouldn’t go near these products,” Kaitin says. “Now they’re all saying, ‘We have to be in this space.’”
Right now local venture firms such as Flagship Ventures, Atlas Venture, and Polaris Partners are also using Third Rock’s model, incubating startups and creating partnerships with drug companies to develop promising new treatments. And that’s made Boston the “hub of rare diseases,” says the National Organization of Rare Disorders’ president and CEO, Peter Saltonstall, who just relocated the nonprofit’s headquarters to the area to be closer to the action.
But ASU’s Anna Barker notes that no one is taking on as much risk or getting in quite as early as Third Rock. Even early on, the size and success of its fund—industry journals have described it as being in the “shock-and-awe range”—has drawn accolades.
“Thank God for Third Rock,” says Stephen Kraus, a partner at Bessemer Venture Partners and the president of the New England Venture Capital Association, which named Third Rock its Healthcare VC of the Year this spring. “They are making bold, big bets on truly innovative science and technology platforms…. Other than the NIH and academic institutions, there would be very little funding for these early-stage companies. It’s huge.”
“Third Rock puts more people on [projects] and stays longer,” says Bruce Booth, a partner at Atlas Venture who also tracks life sciences investment trends for Forbes. “In some ways they take the model to another dimension.”
Of course, right now only a small number of Third Rock’s companies have begun to turn a profit for their investors. But this past summer, when three of the companies went up for their initial public offerings, the firm demonstrated that its bets on early-stage research may equal big payouts. At press time, the share price for rare-disease company Bluebird Bio had jumped 85 percent since it began trading in June, while Agios Pharmaceuticals, whose treatments slow the metabolism of cancer cells, saw a 74 percent spike within hours of its launch. In late July, Foundation Medicine announced its IPO. Biotech journals were giddy, proclaiming that the pharmaceutical industry was finally back.
Not everyone is so sure. “Personally, at this point it’s difficult to tell if this is a fundamental change in biotech-drug development,” says Karen Andersen, a biotech-industry analyst with Morningstar. “The pipelines are improving…and I think more people are looking at that growth and anticipating that more promising early-stage companies could be set up to go in the same direction.”
It will take time before the bulk of the treatments that Third Rock is developing make their way to patients. Which leaves open the question of whether the firm’s model is actually sustainable. Even with a big team and deep pockets, the effort put into launching these companies leaves some partners stretched thin. (When Third Rock launched, its partners estimated that they would each take the helm of a new company for six months. In reality, it’s more like 12 or 18.) So whether they’ll be able to maintain the same level of commitment to projects depends in part on how well partners such as Borisy can juggle multiple CEO gigs.
In a June interview with the industry journal Start-Up, Third Rock cofounder Kevin Starr said that while the firm has typically started five or six new companies a year, its partners are so busy that it might have to launch only two or three this year. In the meantime, they’ve decided to double their recruitment team, in the hopes of bringing in top executive talent earlier so the partners can continue scouting out new science.
Even so, “By providing the industry an opportunity to invest in innovation, and to really pick up new ideas, I think you’re getting some of these disruptive technologies that would be very difficult to be developed otherwise,” Barker says. What’s more, she argues that Third Rock is fixing a major problem with our healthcare system. By turning federal investments in academic research into treatments, they’re working to ultimately improve our healthcare delivery and better address the costs of care. “Let me put it this way,” she says. “If this doesn’t work in terms of a new model, I think we have a problem with how we’re going to translate our investments at the federal level into products for patients.”
Brett Kopelan knows that the process will take time, and that the DEB treatments, promising as they are, still have to navigate through the labyrinth of FDA approval before they’ll be able to help his daughter. But he says that he hasn’t been as excited about anything since Rafi was first born.
“We’re on the cusp of something so huge,” he told me from the car while driving Rafi to her sixth surgery. “It’s the first time that you could see something and almost touch it.”