In April last year UK-based biotechnology company Heptares Therapeutics simultaneously sealed a two-year drug discovery collaboration with Japan-based pharmaceutical company Takeda and an equity investment from its corporate venturing unit Takeda Ventures.

The move aligned Takeda with a British company that has developed a highly sought after technology.

Graeme Martin, chief executive of Takeda Ventures, said Heptares’ technology enables the design and development of drugs against G-protein-coupled receptors (GPCRs), which are the most common targets for medicines in the human body. The study of GPCRs is at the forefront of medical science. On Wednesday this week two scientists in the field, Brian Kobilka and Robert Lefkowitz, won the Nobel Prize for Chemistry.

Heptares’ technology is used to mutate GPCR proteins so they are stable outside the cell membrane and their structure and function can be studied in great detail. It calls these stabilised GPCRs, or “StaRs”.

Martin said: “Being able to stabilise trans-membrane proteins like GPCRs for high-throughput structural drug design had been a holy grail for pharma for quite some time.”

The partnership marries a Japanese company, which is an expert in Heptares’ field, with a breakthrough start-up.

Martin, who is a board observer at Heptares, said: “Takeda has a significant research history in GPCR drug discovery and de-orphanisation, and this was an internal research strength through the 1980s and 1990s.

“Of relevance to this, we are now developing a GPR40 agonist [a chemical that triggers a cell receptor by binding to it] for type 2 diabetes (TAK-875); GPR40 was first de-orphanised by Takeda scientists in 2003, and as far as I am aware, we are leading drug development in this field.”

The deal involved an upfront payment of £1.7m ($2.75m) by Takeda for Heptares’ help investigating a drug for cen-tral nervous system disorders, as well as a £2.8m equity investment by Takeda Ventures.

Heptares is also eligible for milestone payments of up to £60.5m. Heptares was advised by UK-based law firm Olswang, while Takeda was counseled by Osborne Clarke.

Heptares has also partnered on research with Ireland-based pharmaceutical company Shire, UK and Sweden-based peer AstraZeneca and the Novartis Option Fund, which is a corporate venturing unit of the Switzerland-based pharmaceutical that is also an investor in Heptares.

These partnerships and internal projects have led to Heptares developing a pipeline of drug candidates for the treatment of serious disorders, including Alzheimer’s disease, Parkinson’s disease, schizophrenia, depression, chronic insomnia, addiction disorders and diabetes.

Malcolm Weir, chief executive of Heptares, said: “The Takeda deal gives us the opportunity to work with one of the finest pharmaceutical companies around.

“It and Astellas are the biggest, global Japanese pharmaceutical companies and the others tend to follow their lead. They are flagship companies and we are delighted to have a relationship with Takeda, given the quality of sci-ence and validation it brings us.”

The deal provides Heptares with a strong partner in Japan, but the deal was principally motivated by pharmaceutical issues. Weir said: “The primary reason for doing it was not to have a partner in Japan, but because they are a good partner who understands the technology and how we can use it in drug discovery. The collaboration is doing very well, and the technology is proving useful for them. Nonetheless it is definitely a good thing to have a deal with Takeda from a Japanese market perspective.”

Weir added Heptares continues to court the Japanese market. “We had an excellent visit to Japan in April hosted by UKTI in the British embassy in Tokyo. In this marketing exercise we saw not just Takeda but other companies too.”

It is one of three companies targeting the area of GPCRs, with competitors being US-based peers Receptos and ConformetRx.

Weir said: “We have made spectacular progress on the technology. Every aspect has checked out and it has been established just as we hoped it would be, providing a structural platform to do drug design. We are in a unique position to findmolecules to targets that people have struggled or failed with before.”

Heptares had £12.2m in cash and short-term invest-ments, according to its accounts to the end of 2011 filed at Companies House, up from £5.2m at the end of 2010.

Weir said: “We are generating revenue, but the generation of revenue is not the economic pay-off for the company. What you are looking to do is get a large hike in the share price based upon its inherent value.

“It is not our purpose to make a big profit by flipping our assets into revenue. The key point for all governments to understand is companies like Heptares and other biotech companies are not about generating profit in the short term.

“They are about developing highly innovative, high-value drugs. Our company is incentivised to do this, as everybody from top to bottom is a shareholder.”

Weir added: “We are likely to need further financeas we move into the clinic, but at what point and through what mechanism is moot. We are not looking at an exit in the near term, as we are some way off hitting the valuation sweet spot we are capable of achieving through a trade sale or an IPO [initial public offering].”

How the deal happened

Takeda had become aware of the company fairly early on in its development.

Takeda’s Martin said: “I know Fiona [Marshall, Heptares’ chief scientific officer] and Malcolm quite well from the days we all worked in UK pharma. I met Malcolm at a science meeting before Heptares had been funded. He said they thought they could stabilise GPCRs. As they know what they are doing it gave the company instant credibility.”

Marshall and Weir were both high-ranking executives at UK-based pharmaceutical company GlaxoSmithK-line [known then as GlaxoWellcome], before moving on to different roles working at and advising biotechnology companies.

Martin added: “This company started from the get-go with a very solid investor base who were in there for the long haul and understood what is required to get it to go forward. When we invested the technology had been validated, but it had some way to go to become industrialised.”

He also said investing in the UK was “straightforward” for Takeda Ventures as its mandate covers Europe and the US.

He said: “We have a pretty plain vanilla mandate of North America and Europe. I don’t think there are tax implications to our investments in private companies in these geographies as the dollars are drawn down from the R&D budget.”

In 2009 the company raised £21m in its series A round from the Novartis Option Fund and venture capital firms Clarus Ventures and MVM Life Science Partners.

MVM had backed the spin-out of Heptares from the MRC Laboratory of Molecular Biology in Cambridge – famous for pioneering the sequencing of DNA and funded by the state-backed Medical Research Council – with £1m of seed funding in 2007.

Martin said: “We tried to invest in the A round but it was oversubscribed. It may have been they felt that too much corporate money [Novartis Option Fund were also signifcant series A investors] might come with entanglements they would rather not have at that time.”

In 2009, Barry Kenny moved from his role at Takeda in Cambridge to become chief business officer of Heptares.

His presence at Heptares helped the transaction get signed, according to both Takeda’s Martin and Heptares’ spokesman, although his move to Heptares was before talks began.

The arrival of Takeda Ventures as an investor at Heptares provided the portfolio company with a strategically-focused corporate investor.

Novartis Option Fund’s Anja König, who is on Heptares’ board, said: “We act as a financial investor, so it is positive to have a strategic investor on board. For a small company, it is always a good idea to have industrial partners as they can apply the technology to a much broader range of areas than the company can by itself.

“In Heptares’ case in particular, it has selected its own in-house programmes but its GPCR-focused platform has unlocked a far larger drug discovery opportunity and this is what pharma companies are very interested in.”

Takeda’s Martin said: “We are purely strategic in what we do. The purpose is to build relationships with executive and non-executive teams and use our inspection privilege as board observers to facilitate interactions with Takeda R&D.

“In addition to getting a preview on a company’s emerging pipeline, we also get to observe the quality of what the executive management team is doing and how they are doing it.”

Weir at Heptares said: “Corporate venture funds keep a firewall between themselves and their parent company when it comes to confidential aspects of your operation, and vice versa.

“It is an arm’s-length relationship, which means it works. Because it is configured that way it is the primary reason they are aligned to what we are doing. They have money to follow their investment and are good board members and observers. Some corporate venturers, I believe, are not quite as arm’s-length, but the ones that I have encountered fit the bill.”

Eric Bednarski of MVM Life Science Partners, who is also on Heptares’ board, said: “Both the partnerships and the internal programmes contribute value to the company.

“A key strategic question is how to best manage the priori-ties of the business and allocation of internal resources to optimise risk-reward and deliver long-term value.

“Strategic prioritisation is particularly noteworthy in the case of Heptares because the company enjoys a range of options that results from having a productive breakthrough technology, wide application space, and great demand from potential pharmaceutical partners.”

Box: Takeda’s Martin: a sceptical Brit abroad

Graeme Martin is extremely positive about the success of Heptares, saying: “Heptares is a flagship for what can be done in the UK to get innovation finance.”

Yet he is also concerned about the wider state of the commercialisation of UK innovation. With a perspective as a Silicon Valley-based executive of a Japan-based corporate, Martin is concerned foreign companies looking to invest in the UK face problems.

He said: “There is another side of the UK biotech coin, which can be intensely frustrating. It is regionally fractionated, which makes it difficult to be confident you are tapping into everything.”

He said that although the quality of biotechnology in the country was high, there was no single point of entry into the UK life sciences sector, which can make it difficultfor overseas investors.

He added: “With respect to early-stage venture investing in the UK – as in the rest of Europe – syndicating investments remains an issue. As a strategic investor coming in, it is always tough to find syndicate members prepared to invest early and be prepared to support the company for the long haul.”

However, he did say organisations such as Imperial Innovations, a UK-listed early-stage investment firm, and Syncona, a venture fund just launched by the Wellcome Trust, will go “a long way to improving the availability of early stage financing”.

Asked whether being English had helped him do deals in the country, he said: “I would love to say yes, of course, but I don’t have any evidence to support it. For example, [Japan-based drugs peer] Astellas has been pretty active in the UK over the same time period as Takeda Ventures. I do not think it has translated into a real business advantage, although I have a more extensive network than perhaps some of our Japanese competitors might have.”

Box: The venture firms’ view

Heptares’ venture backers are also delighted with how the company has performed.

Michael Steinmetz, a Clarus Ventures managing director who is on Heptares’ board, said: “The company is doing very well and is one of our best portfolio companies. We are very pleased with management and the way they are able to achieve goals.”

MVM’s Bednarski said: “MVM was the founding investor of Heptares. MVM provided seed capital with key objectives to industrialise the technology, advance proprietary programs and bolster the team and capability.

“To the team’s credit, all initial goals were met which doesn’t happen very often. This success allowed the company to develop rapidly and support a larger financing from MVM, Clarus Ventures and Novartis Venture Funds to accelerate the business.”

Steinmetz added: “I have known the [Heptares] chairman, John Berriman, for a very long time, long before Heptares. When they raised the firs tinstitutional round, he approached me.

“The CEO, Malcolm [Weir], came along and presented the company to me much earlier than it is now and I liked what I heard. We did our due diligence and participated in the series A. He said he had first heard the idea in Italy, and had had other meetings with the company in London and Boston.”

Box: A scientific breakthrough

There are very few eureka moments in science, which instead moves forward to groundbreaking discoveries as a result of a concert of experts collaborating over the long term.

Heptares’ development is no exception. The science behind Heptares is based on research conducted by the Medical Research Council (MRC) Lab-oratory for Molecular Biology (LMB) in Cambridge, which was conducted by Richard Henderson, a Heptares board member and founder, who with scientific colleagues, including Chris Tate, an adviser and founder of Heptares, made a breakthrough in the study of GPCRs.

Henderson said he has been working on membrane protein structure for 40 years, but the present research began to take shape when the group at LMB began to study GPCRs from cell membranes around 1990, although it took many years to come to fruition, and the laboratory made a breakthrough in the study of GPCRs only in 2005.

At that time Henderson said it became clear it was possible to mutate GPCRs from a cell membrane, yet still keep their drug-binding properties intact.

Henderson said he had had a long relationship with Heptares’ chief executive. He said: “Malcolm Weir, who was at Glaxo, was the very firstperson to ask us for our bacteriorhodopsin membrane protein coordinates in 1988, so that relationship goes back a long way.”

Henderson added: “It was not until 2005 after trying hundreds of things, that we tried the idea of making mutations in GPCRs to make them more stable in detergent. James Bowie, at UCLA [University of California, Los Angeles,] originally thought of doing this in 1999. I heard him speak in Sweden in 2000.

“I remember thinking it was a most interesting, novel, new approach. We did not take it up immediately and simply followed what he was doing, but in the end he put the approach aside and moved on to do other interesting things.”

Weir said: “When I was at Glaxo we had collaboration with Richard Henderson and Chris Tate, who were doing research to generate receptors in a form that could be crystallised.

“Even after I left Glaxo I kept in touch for almost a decade afterwards, as did our chief science officer and co-founder Fiona Marshall.

“I was later called by the chief executive of the MRC, who said Richard and Chris were making progress and would I like to speak with them? At that stage they had formed very tiny crystals but it was immediately obvious they had made a fundamental breakthrough.

“I had very little doubt it was going to work out, although there was a question mark over the amount of capital needed and at what time it was appropriate to start actual discovery operations.”

Weir added: “The key feature underpinning the development of the technology is that for 16 years from 1991 to 2007 it was successively funded by big pharma companies, namely Glaxo, Zeneca and Pfizer, and by the MRC and the UK’s Department of Trade and Industry [subse-quently renamed Department for Business, Innovation and Skills].

“It wasn’t huge amounts of money, but it was long-term money and long-term thinking, which left the intellectual property in good shape.”

Henderson added: “Traditionally LMB is a pioneering lab that aims to do revolutionary rather than evolutionary research. As soon as something gets big and demands many more resources, it is usually spun out. Otherwise it comes to dominate the culture.

“Various research institutes and about a dozen companies have evolved from the LMB environment.”

Henderson added: “Of the four people we took on with the Pfizer/MRC Technology (MRCT) grant in 2005, one is still here as a career MRC scientist. The other three have gone on to biotech companies related to the work they were doing here.”

One of these individuals, Maria Serrano-Vega, recently joined Heptares.The patents that helped form Heptares were invested in by the LMB’s parent organisation, the MRC, in part by chance.

Henderson said: “We set up a schedule for Roberto Solari, when he started as chief executive of MRCT, [the MRC’s technology transfer unit] to talk with four groups at LMB, each of which had something of possible relevance to commercialisation or medicine.

“Roberto went off and chatted to them all. At the end of the day he asked what I was doing, and I said it was related to GPCRs. He said that was very interesting and we ended up with MRCT development gap funding (DGF).

“Because Chris Tate had already interested Pfizer in the idea of systematic mutagenesis, we ended up with about £650,000 of research support, which was enough for four people for three years. Without MRCT, we would not have got Pfizer, and if we did not have Pfizer we probably would not have got MRCT.”

The involvement of MRCT compelled the scientists to patent their work, which they were not even sure they could do.

Henderson said: “As part of the agreement with MRCT DGF funding we had to protect any inventions through patenting. We did not really know what could be patented when we started out, and we had a number of internal debates about what was a true invention and so patentable” – until eventually the group developed the first patent on which Heptares is based. Heptares now has more than 30 approved and pending patents, the company said.

Michael Dalrymple, a director at MRCT, said: “The project was extremely high-risk but had the benefit of having interest from Pfizer, giving it validation. There were various objectives within the development gap fund project and they were largely met. It was a fairly big success, much to our surprise.”

Dalrymple added: “This was a great success story for the LMB, Richard, Chris and the Development Gap Fund. The MRCT put all this together and managed to get venture capital firms interested in investing. It is a nice little story and they are going great guns at the moment.”

MVM’s Bednarski said: “We think the Heptares team and technology are very special. MVM has had previous success launching two businesses from the LMB. Prior to Heptares, MVM was the founding investor of Domantis, which was acquired by GlaxoSmithKline for more than $400m, and Gendaq, which was acquired by Sangamo.

“From these ties and our relationships with leading experts at the LMB, we became aware of what would become the Heptares technology and its vast potential to improve drug discovery. We were actively involved from the start and worked closely with the founding management team to spin out the technology and set up a new company.”