Pfizer’s VC Leader, Barbara Dalton, on Corporate Venture and Northwest Deal Hunting

Pfizer is the world’s largest drugmaker, and it tends to make headlines when it pulls off megadeals like its pending $68 billion takeover of Wyeth. It’s one of the deals the company is hoping will help replenish its pipeline with new medicines after the patent expires in 2010 for atorvastatin (Lipitor), the $12 billion a year drug that accounts for about one-fourth of its revenues.

Plenty of people have written about Pfizer’s R&D failures and subsequent cutbacks, but what fewer people have noticed is that Pfizer is also looking to fill up its pipeline partly through corporate venture capital investing. In July 2007, it hired Barbara Dalton, a “venture capital star” according to Pharmalot (a great blog that is, sadly, now defunct). Dalton was in Seattle this morning to give a keynote talk at Invest Northwest, so I caught up with her for an interview before she gave her talk.

Dalton, the company’s vice president for venture capital, is part of a four-person VC team based at Pfizer headquarters in New York. She had previous stints in venture capital at SR One, a corporate venture firm aligned with the world’s No. 2 pharmaceutical company, GlaxoSmithKline, and Euclid SR, a more traditional venture firm with limited partners, that also included Glaxo. Dalton, an immunologist by training, made her connections with Seattle biotech at SR One during the mid-90s, when she invested in Corixa and got to know its founder, Steve Gillis. She has managed investments in more than 60 companies in the U.S. and Europe.

Here are the highlights from our conversation:

Xconomy: Who are some of the folks you know in the Northwest, besides, obviously, Steve Gillis?

Barbara Dalton: All the venture guys in healthcare out here, from Arch, Frazier, and OVP Venture Partners.

X: It sounds like you had a lot of experience here in the mid-to-late 90s, then went away. Why is that?

BD: Opportunities were elsewhere. It was never a geographic focus for investment, it was a matter of going where the deals were. That’s the way we invest now. We’re not wedded to Boston and San Francisco. We look for good companies, and good management teams, wherever they may be located.

X: What kind of strategy are you employing in terms of the number of deals, and the kind of disease areas that can make a difference for a company the size of Pfizer?

BD: My mandate is to invest for return, in areas that are of current or future strategic interest to Pfizer. With a company the size of Pfizer, that’s quite a broad mandate. There’s a lot of different things we can touch on. We do not have to be aligned with the company, we can be out in front of them in many ways. New areas, new technologies, new targets.

X: What kinds of diseases are you most interested in?

BD: Pain, Alzheimer’s disease, schizophrenia, diabetes, inflammation, oncology, and anti-infectives. There are very few therapeutic areas we don’t touch on. We don’t do women’s health per se. We’ve announced we’re no longer doing research in ophthalmology, although we are maintaining our ophthalmology products on the market. We have de-emphasized dermatology, and gastro-intestinal disorders.

X: When you look at what’s here in Seattle, why come to Invest Northwest? Why look at what’s here?

BD: You need three things to create great companies. You need management. Seattle has had several successes in the past, which have generated a number of people with experience at entrepreneurial startup companies and building them into something large. You need good technology. You have excellent universities and research institutions in the area. You need financial capabilities. As an investor who resides in New York, I’ll always want a local investor to participate in a transaction, and you have a venture community that is strong in healthcare here. And you have a fourth thing, and that is, I would say an entrepreneurial culture, which isn’t always found in other geographies. There are four strong things going for the Northwest.

X: How much capital do you have to work with, and how do you like to deploy in terms of seed versus later stage?

BD: I inherited a portfolio when I joined of nine companies, and we have 12 in the portfolio now. So we have a portfolio that needs to be supported. We’ll look to do approximately four new deals on an annual basis. We work off of about $50 million a year for investing purposes. That needs to go into follow-on investments as well as new investments. We’ll invest in any stage, we’re a small group, with only four in our group. Therefore, doing any early-stage deals that requires a lot of hands-on work, requires too much time. So those will be fewer than the typical B-round type of transactions. We’re not stage-limited, it’s the opportunity we look at.

Right now, if we have any emphasis in the portfolio, it’s to bring therapeutic companies into the portfolio. We don’t have any therapeutic companies. It’s the legacy I inherited (which focused on diagnostics, and tools).

X: Why join Pfizer?

BD: Pfizer is a company going through a lot of change, and to me that represented a lot of opportunity. I felt I could have an impact. I like the proximity to the customer on behalf of the small companies I invest in. It really helps to know what the customer is thinking. It helps you to be a better adviser to your portfolio companies, by understanding the customer. That’s one thing I bring to the table, knowledge of pharma.

X: What’s the goal of your portfolio companies? To be acquired by Pfizer?

BD: To be successful. I’m serious. As a corporate venture capitalist, I’ll be successful if we make money from a transaction. I’ll be doubly successful if we make money from a transaction and it creates a strategic relationship between the portfolio company and Pfizer. I’ll also be successful if we don’t make much money, but a strategic relationship is formed with Pfizer. There’s multiple opportunities to declare success as a corporate venture capitalist. I want to build good, strong, successsful companies, because they’ll make the best partners for Pfizer.

My goal is to have 50 percent of the companies we invest in have some strategic relationship with Pfizer. Be it a research-based collaboration, a product alliance, a co-promote marketing deal or acquisition. Those are the opportunities. If 100 percent of them lead to deals, then we’re probably too directly aligned. We need to do things that are out there ahead of the organization. We’re doing the riskiest things.

X: But you don’t want these companies to go down the street and do a deal with Glaxo, do you?

BD: If Pfizer has turned them down, in order for the companies to be successful, they need the freedom to do deals with other companies. I want to make sure that Pfizer gets their look. That’s true of most of the corporate groups. The whole idea is to help a company grow to a certain point in time. At a certain point, maybe two years after your investment, it’s ready for prime time. It’s ready to look for a licensing agreement. If it’s not right at that time for our business for whatever reason, and it’s in the best interest of the portfolio company to partner with someone else. That will make it a successful business. Then our corporate group can at least make money, if they don’t get a strategic relationship out of it.

By virtue of being a corporate investor, you don’t want to limit the opportunities of that small company. That’s not in your best interest as an investor, it’s not in the company’s best interest, and it’s not in the best interest of other investors. It’s about people and relationship building.

X: With all the turmoil going on in the industry, and consolidation, can you still get the attention of senior leadership at Pfizer?

BD: We still have a commitment to do this. It’s actually going to be more important going forward.

X: Why?

BD: For the kind of transaction that Pfizer and Wyeth are talking about, it extends our opportunities. There are more areas now that can be impacted by innovation. And we know that a lot of it happens outside the walls of a large corporation.

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