Investors worried about a recession like venBio Partners’ risk-mitigated approach to venture capital investing. That approach has led new limited partners to join earlier backers in putting nearly $400 million into the San Francisco-based firm’s new fund.
VenBio announced Friday it closed its third fund, raising $394 million which it plans to invest using the same guidelines that led it to back 29 biotechs since its inception in 2011.
Corey Goodman, venBio co-founder and partner, in 2014 told Xconomy that venBio raised its first fund with the philosophy that “we won’t start companies assuming they’ll have IPOs. We’re assuming M&A.” It’s the same thesis it took into its second fund, and to hear Goodman tell it, not much has changed since then.
That steadfastness, he said in a phone interview this week, is a key factor in what drew its earlier limited partners back again—and enticed new ones to invest, even as the perception of the likelihood of a recession increased given the market’s lengthy bull run.
VenBio’s sweet spot is backing companies that are developing new medicines that will be appealing for acquisition by a pharma or biotech company by, generally, the end of Phase 2 testing. That means potential portfolio companies need to be looking to generate a return within three to five years. That considerably narrows investment opportunities in the biotech world, given new drugs can take much longer to develop.
However, Goodman says it’s that very thinking that has kept the firm disciplined.
“We never have started companies or invested in companies purely thinking our investments required hot markets or open IPOs,” he said. “The nature of how we built companies has never been based on some of these, what I think are, exorbitant valuations that the companies got into during these very hot times.”
Before launching venBio, Goodman (pictured) spent time as an executive at Pfizer (NYSE: PFE).
“I was just so aware of how a big pharma company looks at its needs, preclinically, clinically, [and] how to maintain a portfolio, because those companies, whether it’s a recession or strong economic times, need new drugs,” he said. “It doesn’t matter in the next year or two if we’re in a recession—they still need to be acquirers of innovation.”
VenBio invests when it believes a company has a high probability of getting good data, and, if and when those data are generated, there are multiple large companies’ portfolios into which the company could fit nicely, Goodman said.
An example of that approach is Labrys Biologics, which was venBio’s first exit. The firm, with other venture outfits, founded Labrys after determining that if an experimental antibody drug, acquired from Pfizer, that blocks the CGRP protein to treat migraines panned out, it would be a hot commodity. Israel’s Teva Pharmaceutical (NYSE: TEVA) snapped up the startup for $200 million up front less than two years after its founding. The drug, fremanezumab (Ajovy), won FDA approval in 2018.
“You look at a field like that and you say, if something comes along that really works, that is going to be so game-changing that any of the firms interested in migraine are going to want it, and that is in fact what happened,” Goodman said. “That’s the kind of bet you have to make: You have to look and say, if this works, who is in this area, and who is going to have to have it or their current drugs are going to get pushed aside?”
Two other drugs developed by venBio-backed companies have reached the market: Aragon Pharmaceuticals’ apalutamide (Erleada), for prostate cancer, and Harmony Biosciences’ pitolisant (Wakix), for narcolepsy.
As it adds capital, Goodman says venBio is looking to avoid pitfalls he’s seen trip up other growing life sciences investment firms by staying lean. Notwithstanding the new fund, the firm doesn’t plan to add to its six-person investment team, nor expand geographically.
“Our philosophy has been that as a team, our strength comes from the way we interact together in one office, in one room,” he said. (Of course, for the time being, that room is virtual.)
Among the companies in which it has invested in recent years are Apellis Pharmaceuticals (NASDAQ: APLS), Turning Point Therapeutics (NASDAQ: TPTX), Precision Biosciences (NASDAQ: DTIL), and Akero Therapeutics (NASDAQ: AKRO). Friday’s announcement brings venBio’s total committed capital to nearly $1 billion.