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Insight & Intelligence : Sep 8, 2011
Biopharma Venture Funds Are Stepping Up Where VC Firms Are Stepping Out
Such deals bring corporate giants some control in technology developers, who in turn gain the possibility of an exit through M&A.!--h2>
In their scramble to cut costs, drug developers have restructured their R&D operations in numerous ways. As discussed in this space previously, GlaxoSmithKline (GSK), Merck & Co., Novartis, Pfizer, and Roche have reported R&D layoffs and laboratory closings tied to restructurings following blockbuster mergers and acquisitions, with some planning to cut research and development further. Sanofi has said it can’t rule out cutbacks if its planned multibillion-dollar acquisition of Genzyme goes through.
Over the first half of this year, according to a survey of 15 companies by India’s Pharmabiz.com, Pfizer, Merck, and GSK cut R&D spending further, while AstraZeneca, Eli Lilly, and Novartis increased R&D spending compared with 2010. Overall R&D spending by the 15 rose 8.2% to $41.06 billion.
However they differ on R&D, nearly all major biotech, pharma, and combination drug-device companies have pursued an alternative to in-house research spending, creating venture funds that invest in early-stage companies whose technologies are believed to hold promise. One of the latest examples of such fund development came July 28, when Baxter announced it will create a $200 million fund that will invest in “promising” early-stage companies. Those companies could be developing therapies that complement the company’s portfolio, though Baxter says some investments will be made in therapies and technologies outside of its portfolio “that have sustainable long-term growth potential.”
“Baxter Ventures will make its first investment as soon as we’ve identified the first opportunity that fits our criteria,” Baxter spokesman John P. O’Malley told GEN. “In terms of timing, Baxter Ventures will invest $200 million in equity over the next several years.”
Baxter is following a path traveled by numerous biotech and pharma giants. As sizeable as their funds are, these funds have a long way to go before they fill the gap created by declines in traditional venture capital financing of biotech companies, according to several people familiar with life sciences corporate funding.
“It’s in their own self-interest to make sure that there’s plenty of money to invest in some of these seed and smaller-stage companies, so that they can have those pipelines available for them to acquire later,” Tracy T. Lefteroff, global managing partner, venture capital and life science industries services for PricewaterhouseCoopers, told GEN.
According to a PricewaterhouseCoopers report released on August 11, VC investment in biotech companies dropped during the second quarter to $1.2 billion, 9% below the second three months of last year, and fell to 116 deals completed, down 24% from Q2 2010.
Lefteroff said the biopharma corporate venture funds are “just one more arrow in the quiver, in addition to everything else” companies use to fund research and development, from traditional straight-up license deals to option arrangements.
But where those deals are intended to capitalize on rights and usage of intellectual property developed alone or with partners, the venture fund deals also bring with them terms granting investors control to varying degrees in the companies receiving capital. That parallels traditional VC fund activity, in which venture capital firms take ownership stakes in companies in return for their investments. Yet given the risks and costs of bringing new drugs to market, those stakes are less likely than in past years to be taken by venture capital firms.
“It’s becoming evident that VCs are moving away from being in their biotech investments for the long haul. They’re talking about early-stage investments, three-year windows, flipping things to pharma after those three years, and so I think it’s clear on that front too that they’re recognizing that the pharma relationship is going to play a tag-team role with the private VCs,” Joseph Panetta, president and CEO of the San Diego region’s life sciences industry group BIOCOM, told GEN. “I don’t think the pharmas are quite ready yet to get into the very early stages, so maybe there’s a perfect opportunity for a marriage there.”
That marriage, he said, will come in the form of partnerships between private venture funds and biopharma venture funds—beyond the financing syndicates that have already been employed in many deals. One potential attraction big pharma or biotech giants can offer private investors, according to Panetta, is access to technologies from their labs rather than simply dollars from their venture funds.
“Pharma has access to some more sophisticated predictive tools and databases that can assist them in being able to make some objective decisions about getting in early on,” before their traditional investment entry of late Phase II or beginning of Phase III trials, Panetta said. “Through the tools that are out there—and that are being more developed in genomics and in information science—there’s going to be some sense of greater confidence in the ability to make a decision about getting in early on. And I think big pharma is going to have the ability to do that more.”
Among examples of strong biopharma funds Panetta cited was Pfizer Venture Investments (PVI). Founded in 2004, PVI maintains a $50 million annual budget for private investments, and may invest up to $10 million per round in companies at any stage of development, with what it terms a strong focus on growth stages. Companies receive $6 million on average. Since its inception, PVI has invested more than $120 million, plus commitments for additional tranched investments, in a total of 22 private and public companies.
“Our goal is not to fill the funding gap but support the growth of quality companies that will provide strategic and financial return to Pfizer as well as spur continued innovation within the industry,” Barbara Dalton, Ph.D., PVI’s vp, told GEN. “Initially our fund primarily invested in product technologies and services for currently marketed products. But when I came on board in 2008, we broadened our remit to be more aligned with the interests of the entire Pfizer enterprise. It makes sense to invest in R&D given that product innovation is core to our business.”
Given the paradigm shift in how biopharma companies have been operating in recent years, it also makes sense for their funds to invest in companies at stages that require more of the R&D that used to be conducted in house.
And it makes sense for companies to seek funding from pharma funds, Douglas Crawford, Ph.D., associate director for the California Institute for Quantitative Biosciences (QB3), told GEN. QB3 is in its fourth year of a partnership with Pfizer that has generated $3.5 million a year in sponsored research. Dr. Crawford believes that pharma companies will continue acquiring biotech firms, so it’s essential for startups to understand where pharma firms are headed.
QB3 has joined with investors to establish Mission Bay Capital, a seed venture fund with $11.3 million under management. One of Mission Bay Capital’s portfolio companies, Redwood Ventures, said in June that it secured funding from Takeda Ventures, the venture arm of Japan’s Takeda Pharmaceuticals. Proceeds are designed to advance Redwood’s site-specific protein modification technology for enhancing antibody-drug conjugates and peptide therapeutics.
Two other pharma funds—Lilly Ventures, Eli Lilly’s venture fund; and SR One, the independent healthcare venture arm of GSK—joined with VC firm Atlas Venture in co-leading the $24 million series A financing round announced June 28 by computer-based drug discoverer Nimbus Discovery. Proceeds are intended to speed up existing development programs for treatments targeting IRAK4 and ACC in inflammation, cancer, and metabolic disease, and to expand the Nimbus pipeline. Lilly Ventures and SR One joined Atlas and another previous investor, Bill Gates.
Lilly Ventures has $200 million under management in its first venture fund, and to date has invested in 17 companies with a focus on focus on North American and European businesses. One of those companies, Avid Radiopharmaceuticals, was acquired by Lilly in December for its diagnostics development platform, which covers several disease areas including Alzheimer disease, Parkinson disease, and diabetes.
Even when the financing market was at its recent worst, in late 2008 through 2009, Lilly Ventures had to compete with other firms to complete investment deals. “Today, most of the deals we’re looking at, we can tell that there’s other horses in the race early on, at the same time as us,” Ed Torres, managing director with Lilly Ventures, told GEN.
“There’s still a general cautiousness about having very good investors around the table, and the right number of investors around the table, because we all wonder if we’re going to be surprised one day by a phone call from a co-investor saying that their fund is closing down. So I have noticed that if a deal would have been a three-handed deal in 2008 before the collapse of Lehman, or in 2009 or 2010, now most of them are becoming four-handed deals,” Torres added.
SR One has invested approximately $650 million in more than 140 companies since 1985, of which 28 private and public companies make up its current portfolio. “We typically make an initial investment in the $4 million to $10 million range and participate in follow-on financings, so that total amount could potentially reach $20 million to $25 million,” Brian Gallagher, vp and partner with SR One, told GEN.
According to Gallagher, most of SR One’s investments in the last few years were in technology companies, where its initial investment either led or participated in a seed, series A, or series B financing round.
“The VC industry, and more specifically the biotech-focused VC industry, has been shrinking in recent years due to a number of factors and pressures. Firms that have successfully raised new funds tend to have less capital to deploy investing in biotech companies. As a result, SR One and other pharma corporate VCs have played a much more prominent role in funding early-stage biotech companies,” Gallagher said.
Another large corporate investor, Roche Venture Fund, has invested 40% of the CHF 500 million ($620.2 million) available. The evergreen fund, which has invested in more than 60 companies globally over the past 20 years, has a current portfolio of more than 40 companies, from which about 30 are actively managed.
The fund invests up to CHF 20 million ($24.8 million) per company over the life of its investment, with actual amounts per round varying. In its most recent deal, announced July 14, the Roche fund joined PVI, two VC firms, and the Ontario Institute for Cancer Research in closing on a $14.6 million series A round. Proceeds are intended for accelerating the company’s commercial manufacturing scale-up of its solution, which includes the CyTOF® high-throughput mass cytometer for individual cell analysis and a suite of MAXPAR® reagents.
“Many biotech VCs limit early-stage investing to one or two portfolio companies, with the exception of the early-stage specialist funds, such as 5AM Ventures and Third Rock Ventures. Meanwhile, corporate VCs tend to step in and invest earlier,” Claudia Schmitt, a Roche spokeswoman, told GEN.
A good example, she said, was Alios BioPharma, which closed a $32 million series A preferred stock financing in 2009 with no fewer than four corporate investors, namely the venture funds of Novartis, Roche, Novo, and SR One. Novo and Novartis led a first round a year earlier, with Roche participation, while SR One chipped in $8 million to complete the financing.
As venture firms respond to the still-unsettled financial market by consolidating or by shifting investments to other technologies from medical devices to social media, others will eventually fill the void. And while biopharma venture funds may not have filled the funding gap yet, they have emerged as key suitors for a growing number of early-stage drug discoverers willing to cede equity for the cash of fund investments and the prospect of an exit through M&A activity down the road.
Alex Philippidis is senior news editor at Genetic Engineering & Biotechnology News.
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