Avalon Ventures’ $495M Deal Grew from GSK Quest for Academic Inroads

Xconomy San Diego — 

The partnership between Avalon Ventures and GlaxoSmithKline (NYSE: GSK), which is intended to invest as much as $495 million in 10 early stage life science companies in San Diego was a confluence of many factors, and the culmination of months of negotiation.

A key element of the deal, though, is that the venture firm founded in San Diego 30 years ago has gotten very good at what may be the riskiest stage of VC investing—identifying key breakthroughs in biomedical research and starting new companies to commercialize those technologies.

“What this is about for us is being able to partner more effectively with a broader spectrum of academia,” said Lon Cardon, GSK’s senior vice president for alternative discovery and development. And what Avalon has, Cardon added, is an outstanding network for identifying important scientific discoveries and a demonstrated ability to start new companies.

In what they describe as a “first-of-its-kind collaboration,” Avalon and GSK agreed to form as many as 10 new life sciences companies in San Diego over the next several years. Avalon is contributing $30 million to the effort, and will do the technology prospecting—focusing on early stage drug discovery across a variety of therapeutic areas. GSK, which currently has no presence in San Diego, agreed to put up as much as $465 million for seed funding, R&D support, and milestone payments.

Avalon partner Jay Lichter and GSK’s Cardon will jointly approve the formation of new companies to commercialize the technologies, which could come from anywhere. Avalon will recruit the business and scientific leaders, and GSK will have an exclusive option to acquire each company once it generates a clinical drug candidate.

It will be an active partnership, Avalon’s Lichter said in a phone call yesterday from Chicago, where he and Cardon are attending the annual BIO International Convention. “Our expectation is to try to get a couple of deals done this year,” Lichter said. “It’s obviously a big opportunity for San Diego.”

While much has been said about various efforts by Big Pharma to find new ways to get new drug candidates into the development pipeline, Cardon says GSK’s partnership with Avalon is “less about bolstering the VC ecosystem” and more about extending the British drug maker’s reach into academic research. He noted that GSK has longstanding avenues for making venture investments through SR One, Sanderling Ventures, and Index Ventures.

The academic community doesn’t always know what the commercial applications of their work may be, Cardon explained. “They recognize whether [a breakthrough] would be a good paper for Science or Nature, but they wouldn’t necessarily know what questions to ask, or if there is a drug or a product at the back of this thing,” Cardon said.

Avalon has been particularly good in gathering intelligence about promising biomedical discoveries from an informal network of scientists and academics the firm has cultivated over the past three decades.

“We would prefer to know about the technologies before they are published,” Lichter said. “That way we can get a deal completed—get the licensing done, and get a company set up—a few months before publication.”

Even the partnership itself serves as a case study in networking, beginning 20 years ago when Lichter and Cardon worked together at Sequana Therapeutics, a San Diego startup that Avalon founder Kevin Kinsella established in 1993. Kinsella also served as CEO.

After South San Francisco-based Arris Pharmaceuticals acquired Sequana in 1998 (for $166 million), Lichter says he moved on to Genset, Pfizer, and eventually joined Kinsella at Avalon. Cardon became a professor of bioinformatics at Oxford University, followed by stints at Seattle’s Fred Hutchinson Cancer Research Center and the University of Washington, and he joined GSK last year.

At a meeting in San Francisco last year, Cardon asked Lichter about making inroads in academic research, using GSK’s Discovery Partnerships with Academia program as a model. Their conversation led to a broader discussion of a potential partnership between the British pharmaceutical giant and the San Diego venture firm.

While the negotiations to work out the details took months, Lichter said, “the will was there, and one of the things that kept it going was our trust in each other.”