Authored by Karl Simpson
A marriage made of true love or one of convenience. Whichever, these consummations between pharma and venture capitalists are increasingly frequent and in recent weeks we’ve seen a couple more lovebirds go all doey-eyed.
Most recently, Atlas Ventures announced its resurgence after a spell of over-expansion followed by strategic realignment, by kicking off of its Fund IX with $265m. Some of this will be funding biotechs while also disseminating funds to the technology industry. (For more on the fund’s strategy you can read Bruce Booth’s open account of where Atlas Ventures are today.) What is interesting about Atlas Ventures is they are very keen on investing alongside corporate venture businesses, in fact they do more co-invest deals than not, around 75% currently. One of the first indications of this was an original tie up with Shire Human Genetic Therapies which they announced back in late 2011, a deal which was aimed at a long-term collaboration between the companies to seek out opportunities for early stage investment in rare diseases. In this sense they have had some success, the most recent example of which is Nimbus Discovery, who Shire HGT just struck a deal with to take on a development asset in lysosomal storage disorders (LSD) from Nimbus, thereby harvesting from the investment. Atlas Ventures added to this corporate ‘love-in’ by adding both Amgen and Novartis to their collaborative mix to support their Fund IX. The new Corporate Strategic Partners will then have a close association with the early stage investments in biotechs which will be a continued investment strategy of Atlas Ventures. While many other VCs have deserted the early stage hands-on investment approach, Atlas Ventures are focused on this, like their Boston neighbours, Third Rock Ventures. Third Rock have also joined up with pharma giant Sanofi to start-up their venture Warp Drive Bio.
GSK have got their interests in venture financing. With SR One, they have a venture arm which is driven by slightly stronger rigour than some of the other ‘evergreen’ funds offered up by their corporate pharma peers. GSK are not new to the venture financing business, SR One has been around for a while and from that experience has probably grown a bit of sage investment wisdom. In their sights now is a collaboration with Avalon Ventures, with who they will co-invest in up to 10 new early stage biotechs in the San Diego area. In essence, the deal is a bit of a ‘scout and seed’ approach, with Avalon looking for new technologies or assets in the discovery of new therapies. Drawing down from its $30m fund, Avalon will then invest alongside GSK who have offered up a $465m commitment to bring seed funding to the ventures and fund further R&D towards a clinical stage, where they may then exercise a right to acquire. Like Atlas and Third Rock Ventures, Avalon is another early stage investor who rolls their sleeves up and does the heavy lifting to get a venture off the ground.
GSK also joined hands with Index Ventures and Johnson & Johnson to create a $200m fund to invest in early stage biotechs. GSK and J&J weighed in with $50m each and Index Ventures stumped up the other $100m. Index Ventures have really pioneered the shift in investment strategy towards single-assets biotech companies, a model demonstrated by Index’s partner Kevin Johnson at Pangenetics. Index Ventures believe strongly that biotechs can be more successful and return investment if the companies focus around a single molecule. In essence, they want to invest in the product with the greatest chance and not have executive teams diverting their time, attention and investment towards a range of assets that have considerably less potential for return. This is a model Index Ventures promote as bringing very good returns.
At a recent meeting, Francesco De Rubertis talked about needing to ensure that projects are ‘killed early’ if they hold no potential. In investing in the early stage ventures, Index parachutes in one of its partners to help drive the company, bringing close management and monitoring, backed up by the strategic advisory board populated by GSK and J&J executives, including ex-Tibotec CEO Paul Stoffels who is now chairman of J&J Pharmaceuticals. Stoffels himself seemed very bullish about the collaboration when speaking at a recent pharma summit. He recognised the fact that J&J absolutely needs these sorts of R&D discovery capabilities and is very much an advocate of collaborative business models and open innovation.
The marriages between VCs and pharma are very much part of the changing models in investment as investors look for capital efficiency and improved returns in viable timelines. Index Ventures are not the only investment company changing the optics from portfolio investment to single-assets and this is very much an emerging feature of a rapidly changing investment landscape.
Large pharma has pipeline deficiencies and is looking for new opportunities in areas of high innovation across therapies and modalities, so it is clear there is a growing symbiosis with venture capital, either through corporate-VC investing or relationships such as those examined here. And companies with promising pipelines are also at it, such as Celgene, who recently funded the launch of Quanticel with their VC partner Versant Ventures. The trend is clear and so we expect to see many more nuptials being struck.