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evolution of how pharmaceutical companies are engaging life sciences venture firms to plant seeds that sprout into companies that can eventually help build their pipelines. This has manifested in various ways, including investments in venture funds and startups themselves, as well as creative alliances that focus on company creation.
On one hand, Booth says, five to 10 years ago, Atlas syndicated its brand new deals to a mix of traditional VC firms. Now, more than 70 percent of the firm’s investments have a large corporate player involved in them, such as an Amgen.
On the other hand, creative partnerships have become increasingly common. Some are structured in a way that ensures a buyout of a startup, such as Sanofi teaming with Third Rock Ventures to form Warp Drive Bio. That deal enables Sanofi to potentially acquire the company later at an already agreed-upon buyout price. Other structures are more open, like Polaris Partners’ collaboration with Johnson & Johnson, or Merck’s with Flagship Ventures. The Merck/Flagship alliance is run very similarly to the way Atlas’s partnership with Amgen and Novartis is set up in that the idea is for Merck to be close to the innovation without having any specific rights to it. But the structures of the funds that precede such alliances are just as noteworthy. Booth and Jean-Francois Formela, another Atlas partner, are bigger supporters of the “open market” fund models, in which pharmaceutical companies are limited partners for “strategic proximity,” as opposed to closed market models, where “everything is locked up by a single [pharmaceutical company].” The two believe those type of funds are likely to continue gaining steam. [An earlier version of this paragraph incorrectly cited Booth as comparing open and closed deal structures, rather than fund structures. We apologize for the error.]
Under an open market model, “we’re more likely to bring value than a fund that would be semi-captive or would be contractually obligated to do most of what they do,” Formela says.
The key difference between the Merck/Flagship collaboration and Atlas’s deal is that Atlas is working with two corporate partners instead of one. Booth says that when Atlas was raising its latest fund, it focused on bringing two corporate partners in because it provided enough “diversity of opinions and expertise” without becoming too cumbersome to manage.
Atlas typically owns about 25 percent to 40 percent of a company following a Series A investment, and the firm’s target is to own 25 percent at the moment the startup gets acquired. That’s often difficult to do, because biotech companies often require lots of capital infusions, and each successive round of financing dilutes the value of existing shares.
“If we think it’s going to cost more than that, it’s probably not a deal that we’d want to be starting here at Atlas or helping to build,” Booth says. “Capital intensity has been the bane of returns in the biotech business [and] frankly in the venture business as a whole, and we’d like to maintain an exquisite focus on capital efficiency.”