Who Needs Biotech VCs, Anyway?

Xconomy San Francisco — 

Welcome to In Translation, and thanks for reading. As a companion to Xconomy’s regular life sciences coverage, this new column provides me with a chance to dive a little more deeply into strategic, cultural, and scientific topics around the biotech world, and bring more of my own point of view to bear. I welcome and encourage your feedback, of course. With summer vacations and schedules in full swing, we’ll publish the column every other week to start, then reach for a higher gear when we’re all back in our offices, labs, and schools after Labor Day. Enjoy.

“The model is broken.”

I used to hear that chant from biotech VCs all the time, often accompanied by the thwack of self-flagellation. The model was supposed to work like this: put money into highly risky science, nurture it, and wait a long time—sometimes five years, usually a lot longer—for that risk to become an unlikely reward. Most efforts would fail, but a few home runs would propel the investors to the next fund. That model built Genentech, Amgen (NASDAQ: AMGN), Gilead Sciences (NASDAQ: GILD), Regeneron Pharmaceuticals (NASDAQ: REGN), and so many others.

But those ambitions, to build companies with the muscle to make a medical difference, have largely fizzled, and at least 10 well-known venture firms have exited health care or called it quits in the past few years. At a time when the world’s health crises—Alzheimer’s disease, obesity, drug-resistant pathogens, and more—require all hands on deck, can biotech VCs be a major force behind the next 50 years of cures?

You could argue venture’s job is not to cure the world; it’s to provide superior returns. But as Big Pharma increasingly looks to biotech as its “farm system,” the uncertainty puts pressure on the entire pharma industry.

Brad Vale

Brad Vale

“This era has made us all step back and say what the heck is going on,” says Brad Vale, who runs Johnson & Johnson Development Corp., the health care giant’s 41-year-old venture group whose fortunes, despite different strategic goals, are intertwined with those of traditional VCs. “What are the fundamental principles of success in venture, and what do we have to do to be successful?”

Is the model still broken? I haven’t heard the complaint as often lately. Some interesting things have happened in the past few years. Some biotech VCs, facing limited partners skeptical of the traditional model, began tinkering with new ways to build valuable products and services faster. The genomics revolution that produced a bubble and a ton of disappointment more than ten years ago began to deliver insights, and a few products. And public markets roared back from the recession (even though jobs haven’t), pulling nearly 100 U.S. healthcare firms, most of them biopharma-related, through the IPO window since the start of 2013, according to Renaissance Capital.

But all those exits, plus the ascending fund sizes of a few prominent firms—Third Rock Ventures, OrbiMed Advisors, Sofinnova Ventures (which just filed notice of its intent to raise a new $500 million fund)—mask a different reality. If you prefer, call it the 2014 version of “the model is broken.” In biotech innovation, VCs have lost their appetite for risk, and thus are losing relevance.

To express his disdain for the lack of courage, Bob Nelsen of ARCH Venture Partners described biotech VCs with a crude word for female anatomy—and generously invited us to print it. (We declined the offer.) Even without the locker-room language his point stands: Only a handful of life science VCs are bravely pursuing the old model, risking big dollars to build big companies, and that pursuit, Nelsen argues, is ultimately what leads to real medical progress.

He counts himself among the few and the brave. On my recent visit to his tower office with a view of Seattle’s skyscrapers, Nelsen ticked down a list of “billion-dollar companies” he’s helped build, including Alnylam Pharmaceuticals (NASDAQ: ALNY), Illumina (NASDAQ: ILMN), Agios Pharmaceuticals (NASDAQ: AGIO), and Ikaria. These days, he is the co-founder, director, and lead investor of Juno Therapeutics, a Seattle company pushing forward two different, cutting-edge kinds of cancer immunotherapy, licensed from three major research institutions, and backed by $176 million in Series A cash; ARCH contributed a big chunk of the money, the biggest bet it’s ever made on one company.

Nelsen is dismissive of small-bore risk-management strategies, and he’s contemptuous of scientific … Next Page »

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4 responses to “Who Needs Biotech VCs, Anyway?”

  1. Theral says:

    Kudos on the commitment to a regular personal column, Alex. Looking forward.

  2. Barbara Nelsen says:

    Agreed on all counts- but alternative investors are filling the gaps and taking the risks. Particularly those looking for a more direct route for their philanthropic giving with a potential return to humanity. Nature Biotechnologies recent article on alternative early-stage investors http://www.nature.com/bioent/2013/131201/full/bioe.2013.15.html

  3. MikeG says:

    Great column, Alex. These are important questions. A few thoughts . . .

    With a few exceptions, venture is no longer a significant mover of early-stage ideas. HBR’s Gary Pisano famously said that venture’s secret sauce was its unrivaled proximity to academic research. Most ideas come out of academia. But five years into ever-deepening ties between universities and big pharma has put pharma in that position. VC’s are essentially high-paid midwives. Pharma can do that, too. And do you remember at Elsie’s 2011 PSA, McKinsey’s Ajay Dhankar saying that VCs have never been able to deliver the “smart money” . . a fully optimized lead that a pharma could look at and say “Yep, that’s what we need.” Instead, pharma has to spend time and money redoing a lot of the assays. In many ways, it’s a very inefficient model. And despite VCs pulling out of early-stage investing, there has not been a noticeable diminution of really good therapeutic ideas moving through the pipeline. Thanks in large part to big pharma. Also to disease foundations and highly-motivated angels. And research hospitals like Children’s Hospital of Philly — nurturing and launching Spark Therapeutics. I have to think other well-capitalized hospitals are taking note.Yup, its a whole new world out there, and venture doesn’t seem to be part of it.

  4. Nice read, Alex. Thanks for the “deep dive” column; and the title “In Translation” is super! Looking forward to future columns.
    One comment: very little in the article on philanthropy. we in the business of drug discovery must invite/welcome philanthropy, HNW individuals and small family foundations to participate in the early discovery/translational research to bring forward modern medicines for the underserved patients. As the founder/CEO of a nonprofit drug discovery organization (http://americanmedchem.org) with a cause to serve the needs of effective medicines for kids with serious diseases, I expend much effort to bring drug discovery science to the community. My observation is that people are facinated by the output and outcomes of drug discovery research. This interest leads to hope in what we can deliver, and a great incentive for small family foundations to work harder to raise money and participate in this work – in most cases to honor the memory of a lost child. These family foundations never get much visibility.
    Drug discovery is to serve the people; the great teacher George W. Merck III taught us this lesson in the 1950’s.
    A radical label change would help our work very much; lets stop using “valley of death” in the context of creating medicines, and instead call it “valley of serendipity” – drug discovery is all about serendipity, whether we like it or not! George W. Merck III said so too!