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Nucleonics Positioned as a Serious RNAi Contender With Financing Round

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Last week, Nucleonics reported that it had raised $40.9 million in a Series B round of venture financing, giving the 12-employee RNAi startup a new status as a serious RNAi player and putting it in a stronger position to compete with its larger rivals.

The company, which was founded in 2001 to commercialize gene-silencing technology developed by the company’s founders while they were scientists at Apollon, is currently developing an RNAi-based treatment for hepatitis B, which is expected to be ready for phase I testing as early as the first quarter next year. It also has a hepatitis C therapy a little further behind in the pipeline.

Under the terms of the financing arrangement, Nucleonics has already received one-third of the $40.9 million. The remainder will be paid in two tranches based on the achievement of certain milestones. Nucleonics president and CEO Robert Towarnicki told RNAi News that the first of these two payments would be triggered by the generation of undisclosed preclinical in vivo data, while the second is tied to certain regulatory and clinical activities. He declined to comment specifically on the milestones, but added that they are expected to be reached this year and in the first half of next year, respectively.

Through the financing, Nucleonics’ Series A investor SR One has increased its percentage of ownership of the company to mid-to-high teens, Towarnicki said. New investor and leader of the Series B round, New Enterprise Associates, has taken a similar stake, he added.

“We’ve been looking for an opportunity to invest in [the RNAi] area for some time,” James Barrett, general partner at NEA and newly appointed member of Nucleonics’ board, told RNAi News, noting that his firm committed $15 million to the Series B round. “We started watching Nucleonics a little less than a year ago and the more we got to know them, the more we felt [that] they had a reasonable chance of achieving a clinical endpoint.

“We think their approach avoids a lot of the difficulties with the direct delivery of RNAi [molecules],” he added.

Although Nucleonics’ technology is promising — it uses DNA plasmids that have been designed to express long pieces of double-stranded RNA targeting multiple genomic sequences — the firm has thus far contributed only a small piece of the larger RNAi-as-therapeutics puzzle, especially when compared to rivals Sirna Therapeutics, a public company that raised $48 million in a private placement this time last year, and Alnylam Pharmaceuticals, which was founded by some of the biggest names in RNAi and is currently preparing for an initial public offering valued at up to $86.3 million.

Late last summer, however, Nucleonics seemed poised for growth when it found its new leader in Towarnicki, a seasoned industry executive who most recently served as president and CEO of biotech firm Cell Pathways, helping orchestrate that company’s acquisition by OSI Pharmaceuticals.

From the start, Towarnicki was focused on raising capital for Nucleonics, but at the time had his sights set much lower, targeting $20 million for the Series B round.

“When I came in I was following my old model, which is: Let’s go raise a Series B that would finance us through an [investigational new drug application filing], and with that accomplishment … we would then go out and raise a Series C round,” which would be worth about $30 million, he said.

“We actually had one or two potential lead investors who would have followed that model, but NEA came in and proposed a different model, which is what we’ve done here,” Towarnicki explained. “Their argument is: ‘In today’s environment, an IND is not a value generator for investors, therefore let us invest through [clinical data-driven] value generation.’”

With That Out of the Way

Having secured capital enough to carry it into late 2006 or early 2007 (by Towarnicki’s estimates), Nucleonics is now getting down to the real business of drug development.

Towarnicki said that the company is planning to increase its staff to about 22 by year-end, with another eight to 13 being added during 2005. While the majority of this year’s new hires are expected to be scientists, he said, first on the list is a vice president of regulatory affairs.

“We are anticipating filing an IND [on our hepatitis B candidate] as early as the first quarter of next year, and we need that expertise in-house pretty quickly,” Towarnicki said. Recruitment of the new vice president is expected to begin shortly.

Additional hires will be made in areas including quality control, he said. Even though Nucleonics plans on contracting out its manufacturing duties, which are expected to begin in the third quarter in preparation for the IND filing, “we will be doing some of the quality control work in house,” Towarnicki noted

Funds from the Series B financing are also going to be applied toward an investigational second-generation delivery system to allow Nucleonics to use its RNAi technology, known as expressed-interfering RNA, in tissues outside of the liver.

Successful development of this delivery technology will clear the way for the company to broaden its pipeline, Towarnicki said. While Nucleonics’ co-founder had told RNAi News recently that the company was considering tackling HIV next (see RNAi News, 2/20/2004), Towarnicki stressed that a final decision has yet to be made.

Noting that the company is focused on chronic viral diseases, he said that “HIV is a potential [area of interest, but we’ve also] kicked around the ideas of herpes, of HPV — there are a variety of diseases that are of interest to us. The development [of the delivery technology] will help to define where we want to go with our next target,” he said.

In keeping with the concept of value through clinical results, Towarnicki said that although Nucleonics has spoken with potential partners in the past, “we have not been real active in going out and seeking … meetings. My philosophy is that we have some more scientific work to do before we go out and start to bang on the doors of big pharma — I want to go in with data, not promise.”

As such, the company is keeping its sights set on getting its hepatitis drug candidates — both of which it plans to partner on after phase II work is completed — and its delivery system. “Once we do that, we will then go out to the pharmas” to find partners for indications in areas beyond viral disease such as cancer, autoimmune disorders, and inflammatory conditions, Towarnicki said.

IP Morass

At the same time Nucleonics was wrapping up the Series B financing, the company was hit with a widely expected patent infringement lawsuit by Australia’s Benitec (see RNAi News, 4/02/2004).

Though it was unclear at the time how much impact the situation had on Nucleonics’ financing efforts, it turns out that the answer was: not much.

According to Barrett, the Nucleonics investment was “a project that we’ve done the most IP due diligence on in recent times than any other we’ve done. We’re fully aware of the intellectual property landscape and the complexity of it, and we think [Nucleonics] has a reasonable chance of being able to successfully deal with them,” he said.

“Everyone knows this field is a morass of patent applications and very few issued patents,” Towarnicki noted. “We feel we are in as strong [an IP] position, if not stronger position, than almost everybody else in the field.

“But everyone says that, and it’s all going to play out over time,” he concluded.

Towarnicki reiterated previous comments that Nucleonics believes it has not infringed Benitec’s patent and that it will defend itself in court if necessary. He also said that the company would consider taking a license to the patent if such a deal made sense from a business standpoint.

Towarnicki added that he hasn’t spoken to Benitec officials for “quite some time.”

In a recent filing with Australian securities regulators, however, Benitec stated that it has begun licensing negotiations with all the defendants named in its lawsuit.

— DM

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