Business

Steven Syre | Boston Capital

Venture firm’s timely bets on life sciences pay off big

The founders of Boston’s Third Rock Ventures turned heads in the venture capital world when they managed to launch three of their small life sciences businesses onto the public stock market over just three months in 2013.

The success of the popular initial public offerings — for bluebird bio Inc., Agios Pharmaceuticals Inc., and Foundation Medicine Inc. — are only part of the story. Business developments at those companies since they went public and the surging value of all three stocks are startling.

Advertisement

The three companies now have a combined stock market value of more than $8 billion, their shares outpacing other life sciences stocks by a great deal.

Shares of Agios, which focuses on cancer therapies, have soared 528 percent since going public. The company’s IPO raised $120 million, but the popularity of its stock allowed Agios to collect $350 million more in two secondary offerings last year.

Get Talking Points in your inbox:
An afternoon recap of the day’s most important business news, delivered weekdays.
Thank you for signing up! Sign up for more newsletters here

Bluebird’s stock has spiked by 439 percent since its IPO, and it had two additional stock offerings that raised $376 million. The company is focusing on gene therapies for a variety of diseases.

Foundation Medicine’s stock is up 160 percent since the cancer diagnostics company’s IPO. It struck a deal last month to sell a little more than half of the company for over $1 billion to the drug giant Roche Holding AG.

More on all three companies in a minute. The story of the venture firm that helped them grow is just as interesting.

Advertisement

The founders of Third Rock aren’t exactly old hands at the venture business. Kevin Starr, Robert Tepper, and Mark Levin, all former executives of Millennium Pharmaceuticals Inc., were hanging out in 2006 at a Las Vegas casino, of all places, when they decided to go into venture capital. They formed Third Rock the next year.

“We’re more serial company start-up people than we are investors,” said Starr. The founders had spent their careers “building companies or working at the bench,” he said.

They saw a confluence of life sciences business trends creating a remarkable opportunity in venture capital at the time.

As Starr tells it, big drug companies were preoccupied with their equally big business problems and ignoring early-stage life sciences companies as investment opportunities. Money for those companies was hard to come by.

“We were in the middle of a lost decade for scientific innovation,” said Starr.

He meant the funding of new ideas. Actual life sciences innovation — in academic labs and medical centers — was exploding.

New technology in fields such as big data, next-generation tools, and robotics was making it possible for life sciences companies to advance ideas at dramatically faster speeds.

“When we walked around the halls of academia, we thought we were in the middle of the greatest innovation era of our lifetime,” Starr said.

Levin, Tepper, and Starr believed there would be a huge appetite for new drugs and other medical products.

The Third Rock founders also thought investors would reward companies that could demonstrate real progress — though even they would admit the stock prices of their star companies have outstripped Third Rock’s early expectations.

A few qualifiers are in order here. Third Rock is certainly not the only Massachusetts venture firm focused on plowing money into life sciences businesses today. And ground-shaking results are hardly a given. Third Rock has invested in 37 businesses since 2007.

But the outsized success of Third Rock’s IPO class of 2013 supports many of the ideas behind the firm’s process. Most important, they demonstrated how documented progress on the treatment of diseases will be rewarded in financial markets.

Agios has shown striking results in relatively small numbers of cancer patients so far.

The company’s treatment doesn’t destroy cancer cells; it reprograms them to become functional again. Some patients gained no benefit, but many showed improvement and even remission.

Bluebird has been targeting a rare children’s blood disorder as the first commercial application of its gene therapy.

On Monday, the Food and Drug Administration gave the bluebird process a “breakthrough therapy” designation.

Foundation Medicine’s stock performance had not been particularly impressive until Roche, the world’s largest producer of cancer drugs, struck a deal in January to acquire a majority of the company.

The shares more than doubled immediately after that, based on the drug giant’s apparent confidence in Foundation Medicine’s technology.

Venture capital of all kinds is a risky business. Building a company around a medical therapy is an uphill battle.

But new technologies and tools really do make many more things possible. And the rewards speak for themselves.

Steven Syre is a Globe columnist. He can be reached at syre@globe.com.
Loading comments...
Real journalists. Real journalism. Subscribe to The Boston Globe today.