IVCA Feature: The 2017 Venture Capital Portfolio Company of the Year is Naurex Inc.

IVCA Feature: The 2017 Venture Capital Portfolio Company of the Year is Naurex Inc.

November 8, 2017

Funding Naurex
 
Naurex’ compounds target depression, a medical condition often requiring treatment that affects nearly 7 percent of U.S. adults and costs an estimated $83 billion a year.
 
While each venture capital fund’s investment strategy varies, one common factor is clear: The fund assumes significant risk with each individual investment. A company may have little or no revenue, a nascent business plan and a founder or founders without extensive management experience. Still, venture capitalists finance early-stage companies they believe can have favorable futures and strong potential to build value.  
 
That was the situation in 2011 when Adams Street Partners first invested in Naurex Inc., then a three-year-old clinical-stage company developing a promising compound to treat severe depression. At the time, the startup was in a clinical trial with its lead compound. The company had grown out of earlier research by its founder, Joseph R. Moskal, Ph.D., and colleagues at Northwestern University’s Falk Center for Molecular Therapeutics. 
 
For its part, Chicago-based Adams Street Partners has focused since 1972 on private market investment management and manages over $30 billion of assets. Terry Gould, a partner for 24 years, heads its Venture/Growth Equity Investments and specializes in healthcare investing.
 
Adams Street was the lead investor in an $18 million Series A financing in May 2011 for Naurex. The company used the funds primarily for a Phase II trial of its lead compound. Just over four years later, Allergan purchased Naurex for $560 million in cash, plus additional future considerations. 
 
Gould first learned of Naurex from an acquaintance in the industry, and upon a review of the Naurex board, he realized he knew two of the directors. He had lunch with one and concluded that it might be worth learning more about the opportunity at Naurex. Gould then asked Bill Gantz, the former president of Baxter International and a veteran of several venture-backed success stories, to meet with the Naurex team. 
 
That Initial Meeting 
 
After a two-hour meeting in the Naurex office in Evanston, Ill., the two men felt that the company had interesting data regarding its lead compound and a potential, large market opportunity. Gould decided to pursue his diligence further and learn more about the trial data and the management team.   
 
After a number of months, he started to put together the $18 million Series A financing. 
 
Offering Counsel
 
In addition to the investment capital provided by Adams Street Partners, Gould provided counsel to Naurex on a number of issues -- from personnel and clinical trial design to spending plans, compensation and other possible sources for capital. 
 
Gould and Gantz became directors, with Gantz serving as board chairman. They attended board meetings and spoke regularly to Naurex officials. In addition, Gantz dedicated one day a week to work with the company after the initial financing round, in which Gantz was also an investor through his firm PathoCapital.
 
Financing Round II 
 
Naurex’ Phase II trial results put the company in a position to raise additional capital. In December 2012, Naurex completed a $38 million Series B financing that was led by new investor Baxter Ventures, which Baxter International had established in 2011 to invest up to $200 million in promising companies. Adams Street Partners participated in the Series B financing and played a major role in lining up up additional investment partners for the Series B round. 
 
Naurex used the Series B proceeds to fund several key programs that included conducting a Phase IIb trial of its compound, and further developing second- and third- generation programs for other central nervous system disorders. Norbert G. Riedel, Baxter’s chief science and innovation officer, joined the board in conjunction with Baxter’s investment.
 
Looking Ahead
 
Naurex management continually considered possible scenarios for its future, including going public or entering into an acquisition or strategic partnership. This is common practice with promising startups, especially in the pharmaceutical industry where Big Pharma often looks for drugs or compounds that could help fill their new product pipeline needs. 
 
As Naurex’ clinical trials continued, and as results showed promise, the company needed additional financing. Its lead compound to treat depression was going to be entering its final testing phase in 2015. If all went as planned, Naurex hoped to release the product commercially in 2019.
 
Company management and board members began preparing for a third round of financing at the time as well. In addition, in January 2014, board member Riedel was named the company’s president and CEO, succeeding interim CEO Derek Small, who continued as a director.
 
In December 2014, Naurex raised $80 million in the Series C funding. Five new investors joined this funding round along with Adams Street Partners and a number of previous investors.
 
Naurex management then began a dialogue with investment banks and pharmaceutical companies to consider the path forward.
 
Allergan Acquisition
 
On July 26, 2015, Dublin-based Allergan, a leading global pharmaceutical company, bought Naurex in an all-cash transaction. “We were quite pleased with the transaction,” says Gould. “It met the firm’s objectives in terms of the multiple of invested capital returned.” Gould adds that the Naurex investment fits the profile that investment firms such as Adams Street Partners seek in a startup. “We’re not buying established businesses. We’re trying to create things, to build companies.” Gould is hopeful that the Naurex project may be the beginning of future success in the biotech/pharma space in the Chicago area. A number of former Naurex employees are now leading Aptinyx, a spinout of the Naurex technology platform. Gould and Adams Street Partners provided seed capital to Aptinyx and then helped the company raise $65 million in Series A financing in early 2016 to advance therapies for neurological disorders. 
 
“Perhaps Aptinyx will build on the success of Naurex and become another notable success in the Chicago biotech marketplace,” Gould says.
 
Adams Street was the lead investor in an $18 million Series A financing May 2011 for Naurex.
 
”The Naurex investment fits the profile that investment firms such as Adams Street Partners seek in a startup. We’re not buying established businesses. We’re trying to create things, to build companies.”