Making drugs on slim budget Yaupon uses little capital

Posted: December 05, 2005

A Radnor biotechnology start-up has raised a small amount of equity capital, only $3 million, but has managed to get four drugs into development, including two being studied already in patients.

Normally it costs tens of millions and takes years to get a drug through preclinical and human studies. But Yaupon Therapeutics Inc., founded in 2002, has speeded up the process by carefully choosing potential products and partnering with academic researchers who have secured millions in government funding.

"It's not the classic model," said the company's president and chief executive officer, Robert Alonso, a former executive at Merck & Co. Inc. and Hoffmann-La Roche.

Biotechnology start-ups often raise a small amount from wealthy individuals, who are called "angel" investors, and then move quickly to try to attract venture funding. But Yaupon chose a different financing method: relying on federal funds.

By steering clear of hefty investments from venture firms, which typically trade cash for equity, Yaupon has been eligible to apply for - and has received - $5 million in federal Small Business Innovation Research (SBIR) grants.

"We've been successful with the government, and our investors just felt that we can pretty much finance the company this way rather than take in big dollars from the venture world," Alonso said.

Yaupon used SBIR grants to continue development of its four products: two drugs for methamphetamine and smoking addiction, one for cancer, and one for pain.

"Part of our business philosophy is that anything we touch needs to go through the National Institutes of Health because the NIH gives grant dollars and also validates our technology," Alonso said. "If they don't like it, we get that feedback, and it's really not worth investing in from our perspective."

Yaupon's scientific founders, Peter Crooks and Linda Dwoskin at the University of Kentucky College of Pharmacy, are experienced in applying for federal grants, and secured $9 million from the NIH to work on potential medicines to treat addictions. While the $9 million stays with the university, any discoveries that result will belong to Yaupon, which is the university's corporate partner under licensing agreements with Kentucky.

Alonso met Crooks and Dwoskin in 2001, and persuaded them that their ideas were commercially promising. In 2002, the trio and two others, formed Yaupon, which took its name from an native American Indian word for "tree leaf."

The company's headquarters, with seven employees, is in Radnor. The scientific laboratories remain on the Lexington, Ky., campus, where the company rents labs and uses an FDA-approved manufacturing facility. Crooks and Dwoskin work four days a week for the university, and one day for Yaupon.

Yaupon has raised $3.3 million in equity capital from angel investors, mainly in the Philadelphia area, and from several groups.

Crooks said the start-up's partnership with the university has been ideal and has allowed the small company to leverage the resources of a large academic institution. "And it's a great way of bringing in money in the form of grants that don't have to be paid back," he said. "For every $1 the investor puts in, we can just about match, or exceed, it" with public money.

Yaupon recently was named "life-sciences start-up company of the year" by the Eastern Technology Council, a Wayne group that assists member companies with business-development issues.

"Yaupon is a model for using minimal amounts of money to maximum effect," said Barbara Schilberg, CEO of BioAdvance, a state-backed organization focused on aiding development-stage life-sciences businesses in the Philadelphia region. BioAdvance has invested in Yaupon.

"They have used a lot of federal funding and other resources, and they've picked products that can be developed in a way to have higher success rates and lower development costs," she said.

Yaupon's most advanced compound, Clearazide, is a topical ointment using a generic intravenous chemotherapy drug to treat cutaneous T-cell lymphoma, a difficult-to-treat skin cancer.

Stuart R. Lessin, director of dermatology at Fox Chase Cancer Center in Philadelphia, will begin a pivotal clinical trial at Fox Chase and five other sites, including the University of Pennsylvania, in the first quarter next year. Yaupon hopes the study will be the final testing required.

Lessin said he learned about Yaupon from an investor, and brainstormed with the company about possible skin treatments, including a chemotherapy compound for T-cell lymphoma that had been around for years, but was never formulated into an FDA-approved gel.

"Much to my pleasant surprise, they felt it was an appropriate first drug," Lessin said. The cancer product is expected to be Yaupon's first to reach the market, probably in 2008.

A second compound in Yaupon's pipeline, Lobeline, is derived from the Lobelia plant. Development is being 100 percent funded by the NIH to treat methamphetamine addiction. If approved by regulators, it would be the first drug, an oral tablet, for methamphetamine addicts.

"Lobeline has been known for many years, but was never looked at for drug abuse until we got hold of it and figured out how it worked," Crooks, a chemist, said. A mid-stage Phase 2 trial will begin next year.

Yaupon is studying another compound, nornicotine, found in tobacco, which has shown promise to help overcome nicotine addiction.

Yaupon's fourth drug, for neuropathic pain, is structurally similar to an existing drug, Ketamine. But Ketamine can cause hallucinations. Crooks and a South Florida doctor have developed a variation of Ketamine, which in preclinical testing does not cause hallucinations.

"We're raising money right now in the angel community, not the venture community, and we're planning to hire three to five more people in the next year" based in Philadelphia, said Alonso, who used to work at Merck's West Point complex in Montgomery County. "Kentucky has the basic science. Philadelphia is the development engine."

Contact staff writer Linda Loyd at 215-854-2831 or lloyd@phillynews.com.

Public vs. private funding

Yaupon Therapeutics Inc. has relied more on public funds than private-equity capital to develop new medicines. The following are the sources of the $17.3 million that the Radnor company has raised:

Federal funding

$9 million from National Institutes of Health to University of Kentucky researchers.

$5 million in Small Business Innovation Research grants to Yaupon.

Nonfederal funding

$500,000 from BioAdvance, a state-backed fund for early-stage life-sciences companies.

$250,000 from Ben Franklin Technology Partners of Southeastern Pennsylvania, a state-backed economic-development program.

$100,000 from Kentucky Science & Technology Corp.

Private investment

$2.45 million from undisclosed private investors.

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