Who Needs Biotech VCs, Anyway?

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incrementalism. “No one wants a VC as an asset manager,” he says. “Make a drug curative and you’ll get paid. Anyone who invests in a drug that promises seven weeks of life extension should be shot. Too many VCs are chasing risk reduction for two-, three-, or five-x returns. As an asset class, we don’t take enough risk.”

By “asset managers,” he means the growing number of VCs building virtual companies around single products or programs, with a shorter R&D timeline in mind, and ideally, a buyer waiting on the other end of that timeline. Versant Ventures, Atlas Venture, Index Ventures, TVM Capital, VenBio, CMEA Capital, and Avalon Ventures are all systematically trying versions of this model (often while still making more traditional investments, it should be noted).

There have been a few exits, too. Most notably, VenBio has turned its narrower strategy into big returns, topped recently by Genentech’s purchase of Seragon Pharmaceuticals.

VenBio is an important example of another shift in the life-science VC world, to a different source of funding. The firm closed its first fund in 2011 with $180 million in commitments from three drug-industry companies—Amgen (NASDAQ: AMGN), Baxter International (NYSE: BAX), and PPD (NASDAQ: PPDI)—and pointedly not from traditional institutional investors such as pension funds or endowments.

Bob Nelsen

Bob Nelsen

Other VCs mentioned above are also turning to Big Pharma for help, either as limited partners or as the potential buyers of their virtual companies. (Versant’s new fund, as we reported here, leans heavily on what it calls its “build to buy” model.) GlaxoSmithKline has been particularly aggressive as both a backer of venture funds and potential buyer of venture-sourced startups, as I’ve written about before.

There’s another way Big Pharma has come to the rescue. Their venture groups, usually using a different pot of money from the LP and acquisition funds, are increasingly involved in early-stage syndicates. According to Silicon Valley Bank, the number of biopharma Series A rounds that included at least one corporate investor jumped to 30 percent in 2012 and 35 percent in 2013, the highest since SVB began tracking the data in 2005. (The previous high was 22 percent, in 2008.) More of that participation is significant, too. In 2012, for example, Novartis Venture Funds made six Series A investments, all as the lead or co-lead.

“Corporate VC has been the savior of early stage biotech innovation,” says Silicon Valley Bank managing director Jon Norris. “Without them getting involved early and forming syndicates, biotech could have fallen down like device venture did.”

Other non-traditional financial sources are playing prominent roles. Back to Juno for a moment: ARCH and Venrock are two familiar VC names, but much of the massive round was supplied by the State of Alaska’s Permanent Fund and Amazon CEO Jeff Bezos’s personal investment company. Elsewhere in biotech, angel investors, either alone or in networks of growing sophistication, provide seed capital and occasionally go deeper.

Nonprofit disease foundations want to use their cash to help move products into pipelines, not just fund basic research. And crowdfunders like Poliwogg have touted the disruption their platforms, once fully operational, could bring to venture.

If all these alternative sources suddenly disappeared, there would still be biotech startups. But in five years … 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!