To: Chris Viehbacher, CEO, Sanofi Aventis
From: The Boston Biotech Community
Re: Making the Most of the Impending Merger
Dear Mr. Viehbacher,
In the heat of the discussions regarding an acquisition of Genzyme that now look like they are on track for rapid completion, you may not have had much time to think about exactly what will happen in the aftermath. Sure, you have plans for Genzyme’s products as well as for the teams and facilities involved in producing them. Those products—and their revenue streams—are presumably why you are buying the company.
But don’t forget Genzyme’s excellent R&D. Unlike many other biotech companies serving the specialty market, Genzyme has grown organically as well as by acquisition. It has done so in part by spending heavily on R&D—the recent amount has ranged between $200 million and $225 million a quarter—and cultivating a group of researchers whose contributions could still be immense. If you downsize Genzyme the severe way that some expect, you might be throwing away enormous potential for future products to benefit human health.
Instead of taking this drastic and, in our view, unnecessary step, we have a different suggestion. Inspired by the example of the merger of Ciba-Geigy and Sandoz to form Novartis in 1996, out of which the successful Novartis Venture Fund was eventually born, we suggest that you consider setting aside some money to create Sanofi Genzyme Ventures. A new VC fund could provide several benefits to Sanofi and it could have a hugely positive impact on your standing in the Boston biotech community. Let’s look at the reasons to do something like this and then look at how it could work.
1. A VC fund could provide a more valuable transition for some of the more ambitious members of the Genzyme R&D team than dead-end severance pay. Think of it as a combination of “outplacement services” and a way for Sanofi to stay connected to some outstanding scientists. Sure, in addition to setting up a fund, Sanofi would still have to honor the employment contracts of those working at Genzyme. But think about how much more motivating it would be for those who are leaving to be given a chance to participate in the next generation of biotech innovation without leaving Boston.
2. Such a fund would put Sanofi back on the map in terms of corporate venture capital. Yes, we know that you chose to shut down Aventis Ventures rather than continue those efforts. And Sanofi does not have a very extensive track record at externally funding venture-type companies. But look at your competition: Lilly, Johnson & Johnson, SmithKline Beecham (now GlaxoSmithKline) and Novartis started very early with venture funds (respectively, Lilly Ventures, JJDC, SROne, and Novartis Venture Funds) and some of these have arguably made quite a bit of money for their balance sheets from savvy venture investing. Pfizer, Merck Serono and Boehringer Ingelheim have recently entered the venture game with funds of their own. Corporate VCs stand at a position of great influence at the heart of the life science innovation world now. Establishing a fund could rapidly advance Sanofi to the head of the pack in terms of learning about and managing innovation in a way that helps corporate R&D efforts. This is an opportunity. Why wait?
3. Setting up the fund in Cambridge or Boston could put Sanofi’s team at the forefront of the fervent deal activity taking place among the many financial investors in the area that are doing healthcare deals. Sanofi has already expressed several strong votes of confidence in the Cambridge-Boston area with its corporate deals with Merrimack Pharmaceuticals and Avila Therapeutics as well as with the June 2010 announcement of its decision to locate an oncology division here. Having a venture presence would deepen and broaden that commitment. The list of active life sciences funds in Boston is long, even after several years of downward momentum in the overall VC sector. These are the survivors and they are good people to get to know.
In order for this to work, Sanofi would have to have serious “skin in the game.” We’re thinking on the order of at least $150 million to $200 million. Assuming that the new fund worked with the typical venture syndicates, this range could provide enough “dry powder” to fund about six to eight preclinical deals through early clinical development or three or four deals to proof-of-concept.
Rather than creating the fund in the way the Ciba-Sandoz fund was created—as an extended “make-work” runway for researchers that had to be reorganized into the current Novartis Venture Fund structure when the money ran out—instead, learn from the past fifteen years of venture experience and choose a model that could be financially very successful in addition to playing a role in the transitional phase for Genzyme. How? Here are our thoughts:
• Choose experienced VCs, not just pharma people, to run the new fund. Best would be to hire investors such as the current head of Genzyme’s existing venture effort, Alan Walts, as well as some people who have experience as financial VCs in order to get away from “corporate-think” and recognize the best deals.
• Don’t insist that all the deals come from within Genzyme. Only by looking at and doing some outside deals will your fund managers be able to recognize the value they see from the inside opportunities.
• Give the Genzyme groups some support as they transition to the possibly unfamiliar role of entrepreneurship. Well before the potential merger, many of Genzyme’s R&D people have already been preparing themselves for a more “Darwinian” type of project funding environment. Offer them some help in the form of business planning and financial advice as well as market research.
• Insist on financial performance instead of or in addition to “bringing products home” as the driver for the fund managers. One shortcoming of some corporate VC funds is failure to incentivize their managers sufficiently compared to their colleagues in the financial VC sector. Another one is insisting on “callback rights” for any product funded by the VC fund. We think that such callback rights are a millstone around the necks of company founders and that everyone is better off if the corporate VC parent is given the freedom to seek out those deals that will make the most money, not those which will bring back the most products. Both of these pitfalls can be avoided by allowing the financings to take place in the absence of any coupled corporate deals (more like the way Siemens Venture Capital does it) and rewarding the managers in a way that is more in keeping with the way the financial VC sector does so.
• Be patient. A five-to seven-year time horizon should be sufficient to see significant progress from some of the portfolio of such a fund. Ten years, which is more the industry norm, would be even better. Many corporate funds live at the mercy of yearly or even quarterly budget cycles. The best ones—think Novartis, Lilly, JJDC, GSK’s SR One—do not.
We realize that $200 million is not an easy amount to commit. However, given the synergies and benefits that Sanofi expects to reap from the Genzyme deal, it seems to us that it would be a small price to pay for an entry ticket to the future of biotech and to the tight-knit and productive community of Boston healthcare innovators.
Your new neighbors,
The Boston Biotech Community
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