How the New Funds Work
The newer biopharma-venture partnerships are designed to offer something for everyone: For biopharma giants, it’s access to new technologies through startups that offer potential licensing or acquisition opportunities. For those startups, it’s the expertise and capital of big pharma, not to mention investment from other partners. And for venture firms, it’s connection to the expertise from the life science partners as well as potential buyers or licensors for the startups they back.
“The gain is greater than the losses, especially in the environment where raising capital is very difficult, so pharma companies have become a very good source of fundraising for venture funds,” Ron Laufer, M.D., senior managing director of MedImmune Ventures, told GEN. “While theoretically the venture funds are supposed to be the ones that offer expertise, they always like to fill in their gaps and strengthen their weaknesses by having those relationships and access to consultants within the pharma industry.”
Nonetheless, for VC and pharma firms, these partnerships are a departure from what they’re used to. VC firms have generally focused on a narrower set of diseases that allow for shorter trials and/or have more certainty. Big pharma, though, will likely invest in a broader range of drugs that may require more extensive clinical trials. Also, venture investors invest through syndicates seeking to maximize their returns as opposed to maintaining relationships.
That said, pharma companies too will feel a pinch. A significant aspect of the new partnerships is the degree of investment control that pharma partners have ceded to venture firms in return for a greater say in innovation development. In the GSK-JnJ-Index arrangement, investment decisions will be made by Index Ventures.
In the Merck-Flagship agreement, Merck Research Ventures Fund made an undisclosed investment and became a limited partner in the $270 million Flagship Ventures Fund IV. That investment will allow Merck Research Labs to offer scientific consulting to the startups, but neither the Merck fund nor its namesake pharma company will be able to control Flagship’s investment decisions. And Merck will have an opportunity but no formal option or special rights to acquire any startups being created through the Flagship-led fund.
Merck approached Flagship Ventures to create the partnership, which Flagship’s managing partner and CEO Noubar Afeyan told GEN is less about investment than innovation. He noted that Merck will provide insights and ideas on where the big opportunities lie in terms of therapeutic areas including those with unmet needs and types of drugs. “The most actionable way to act on those insights is to start new companies,” Afeyan said. “If we know there’s a growing giant need for XYZ, then if we see it, we’ll just invest.”
For Merck, competitive advantage comes from the proximity and the relationship with the portfolio companies, Reid J. Leonard, Ph.D., managing director of Merck Research Ventures Fund, told GEN. “We feel that having our scientists engage with these companies at a stage when we previously would not have been able to have the scientific engagement, that creates a greater familiarity and understanding on our part, so that we may therefore see an earlier-stage deal with one of these companies that is less risky than we might have coming in blind from the outside,” said Dr. Leonard. “We will be helping to de-risk and improve those programs, so that in fact they are more likely to meet our high standards for the sort of opportunity that we would pursue.”
Merck cut internal R&D spending 14% in the first quarter to $1.862 billion from $2.158 billion. That’s on top of its 23% overall reduction last year to $8.5 billion from $11.1 billion in 2010. The company has announced plans to close research labs and lay off R&D staff among 13,000 set to lose jobs by 2015.