The Thinking Behind Domain’s $760M Life Sciences Deal in Russia

Xconomy San Diego — 

The partnership that the life sciences venture firm Domain Associates and the Russian state technology firm Rusnano disclosed yesterday began almost two years ago, at a time when the U.S. financial crisis was especially bleak.

Domain partner Brian Dovey says he initially conceived of the alliance as a way to tap a new and substantial source of capital for the firm’s portfolio of life sciences companies. “In the beginning, that was kind of the driving force,” Dovey told me last night. “But the more I’ve gotten into it, the more I see the opportunities in developing a medical products company in Russia.”

Domain, which maintains offices in San Diego and Princeton, NJ, and Rusnano, a Moscow-based nanotechnology firm owned by the Government of the Russian Federation, agreed to work together to invest as much as $760 million on both sides of the globe. The deal is intended to provide additional capital for Domain-backed startups in the United States, and to jointly establish a drug and medical device manufacturing facility in Russia.

The agreement calls for Rusnano to invest on a 50-50 basis with Domain and its venture partners in roughly 20 U.S. life sciences companies developing a host of new drugs, medical devices, and diagnostic technologies. Most of the investments would provide crucial late-stage funding for companies already in Domain’s portfolio, although Domain would present Rusnano with investment opportunities in a few early stage deals as well. Either way, Rusnano has agreed to match the amount invested by Domain and its VC partners.

Under a separate-but-related agreement, the startups backed by Domain and Rusnano would grant technology licenses to a manufacturing facility the partners plan to jointly establish somewhere in Russia. The Rusnano plant will make and sell “advanced therapeutic products,” focused chiefly on heart disease, cancer, infectious diseases, wound treatment, and eye disease and target markets throughout Russia, the Ukraine, Belarus, and other members of Russia’s Commonwealth of Independent States.

Russia doesn’t currently have much indigenous pharmaceutical capability, and Dovey estimates Russia now imports about 80 percent of its prescription drugs. So he views the partnership as an opportunity to help the Russians develop a new domestic drug pipeline, more or less from scratch, to produce drugs and other products developed by U.S. companies.

No decisions have been made on which companies would be selected, but Dovey says most of them want to do it. Other VCs that have invested with Domain also support the idea.

“Clearly we’ve had discussions with our co-investors,” Dovey says. “They recognize that this is a whole new source of capital to fund our companies at a time when the IPO market is problematic and a lot of the late-stage funding has been difficult because of the economic crisis. So it’s a way to fund the companies to the next stage, which I think will generate significant additional value.”

Brian Dovey

In addition, the joint venture will manage late-stage clinical trials of new pharmaceuticals and other products in Russia, with a goal of winning regulatory approval in Russia, the United States, and other potential markets. Under their agreement, Rusnano is limited to investing in Domain-backed life sciences companies. But Dovey says it doesn’t preclude the U.S. startups from negotiating exclusive licensing agreements with Big Pharma partners in Europe, the United States, and other markets, nor does it preclude Rusnano from investing in other U.S. life sciences startups.

Dovey says the genesis of the deal “was almost serendipitous,” and began almost two years ago when he was invited with other venture capitalists to meet with Russian officials in Moscow. “They had made a decision at the highest levels to go into high tech, based on the quality of their engineering and educational background,” Dovey says. “It was not just life sciences, but almost everything. They realize, of course, that the co-founder of Google is Russian and they have 20,000 to 30,000 of their people in Silicon Valley.”

The Rusnano/Domain deal comes just a few months after two Boston biotechs—BIND Biosciences and Selecta Biosciences were awarded $25 million apiece by Rusnano.

In the week he was in Russia, Dovey says the American venture capitalists met with a lot of people at different levels, including the Moscow school superintendent. Their meetings culminated in an hour-long session with Russian President Dmitry Medvedev. He came away impressed.

Afterward, Dovey says he began to see the possibilities of a deal as he contemplated how the economic crisis had made late-stage equity funding problematic—and life sciences VCs “were having to sell our companies earlier than maybe we’d like.” With funding from Russia, “It struck me that we could move products farther along in development, and we could generate a lot of additional late-stage value.”

The ensuing negotiations took nearly a year and a half to work out. “If you think about it, the development of any drugs is going to be done by the portfolio companies, by the funders,” Dovey says. “The Russian company is going to be the recipient of the successful programs and the intellectual property, so they’ll be leveraging those nickels. Net-net, I’m pretty excited about it.”

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