JPM Takeaway: Pharma Wants to Engage Earlier & More Actively

Posted January 11th, 2013 in Biotech investment themes, General Venture Capital, Pharma industry

Most of the news flow around the JPM Healthcare conferences centers around the main event: public companies presenting their earnings forecasts, R&D updates, new partnering deals, and the like.  There’s also a small private company track at JPM, and there are a few satellite conferences catering to private companies like the EDB’s Biotech Showcase or the New Paradigms meeting.  But my partners and I didn’t manage to spend much time at any of those events unfortunately.  Instead, we had a few dozen meetings with Big Pharma/Biotech companies to review updates on our biotech portfolio, highlight some of the new investment themes and seed projects we were making, and understand what they were looking for in their partnering and outreach strategies.

The resounding theme we heard from Pharma was about their desire to not only identify, track, and potentially partner around innovative early stage assets, but their interest in helping build new startups with us prospectively.  Continuing a trend over the last few years, Pharma clearly wants to get closer to venture creation around new startups.

Unlike past JPMs, I didn’t repeatedly hear the “this is too early, keep us posted when you get your Phase 2 data” message from prospective partners.  What I did hear a lot of was “what new startups are you working on…”“there aren’t enough innovative assets in Phase 2 or 3”, and “we’re looking for pre-IND stage innovative programs”.  Their collective interest has definitely moved upstream into earlier stage R&D, and includes late discovery and development candidate programs in IND-enabling work as well as new platforms for exploring novel biology.  Whether or not this will translate into more deals remains to be seen, but it certainly is a change in the posture of Pharma’s external engagement relative to only a few years ago.  Innovative preclinical programs like Nimbus’ IRAK4 and Acetyl-coA Carboxylase inhibitors, miRagen’s cardiac miR-208 inhibitor, and RaNA’s gain-of-function approach were of great interest to many prospective partners.  Lotus’ acquisition this week by Shire highlights this as well – its lead program was a preclinical orphan disease protein replacement therapy.  And multiple early stage platform collaborations were announced this week with GSK-Priaxon, Gilead-Macrogenics, and Cubist-Heptares.  

Here are a few sub-points of this theme worth highlighting:

  • Pharma wants to creatively engage in earlier BD around high innovation-quotient new medicines.  One exec mentioned that all of their recent deals but one were for pre-IND stage candidates, and that all of those were based on relationships that had been built over 12-24 months of tracking, monitoring, and engaging on the biotech’s scientific plan.  Building trust around the robustness of the science and integrity around collaborative potential is critically important.
  • Seed-stage discovery projects were of particular interest to Pharma.  The opportunity to work with us closely around some brand new startups, primarily for shaping and proximity and not for exclusivity, was of clear interest.  Its also not about primarily about providing access to seed-stage capital: Pharma recognizes (as do we) that they have a deep bench of talent in areas like lead optimization, pharmacology, preclinical, and early development that could greatly aid startups’ early plans, and doing so would put them in the pole position for future deal-making.  J&J’s new Innovation Centers concept is aimed at this type of interaction.
  • Accessing “open market” input as a way of shaking up their internal R&D culture was also a recurring message: getting objective, external market views on their early stage programs, leveraging the currency of entrepreneurship, engaging externalization partners as a means of building a prospective pipeline outside of the confines of the internal R&D organization.
  • Lastly, Pharma is clearly very interested in tighter linkages with VCs, and vice versa.  These relationships go way beyond just information sharing around “VC-days” and the like.  They increasingly involve collaborative arrangements (like Atlas-Shire), as well as more significant LP arrangements (e.g., GSK just announced another LP commitment into Sanderling; Merck invested in Flagship last year; etc…).  I suspect this type of interaction will increase in frequency in 2013.  Importantly though, these deeper links are likely to happen primarily between early stage LS funds and Pharma; late stage venture funds and spec pharma focused investors just don’t cater to the high innovation-quotient interests that most Pharma seem to be expressing.

As a side note, its worth highlighting that as Pharma goes upstream, risk-sharing is going to continue to accelerate, and the structured deals we’re working through now are likely to continue to be in favor.  As early stage investors we’re very open to these types of models: securing a return for early innovative risk-taking with an opportunity to leverage a larger R&D budget to achieve future success milestones.  The alternative is to take on significant dilution from later stage investors to carry these projects forward without a partner in the hopes of a bigger exit or IPO.  The calculus around this is clear – if the immediate returns are interesting enough, and the capital required to finance a development program large enough, the clear case for early stage deal-making can be made.  Further, Pharma typically has a strong perspective around how to conduct clinical development, and for them there’s a real premium for them in taking on responsibility for projects early in clinical development.  These are win–win deal structures from my perspective, combining risk-sharing and reward-sharing: venture–backed biotech take risk around new biology, modalities, and programs, while Pharma engages as those projects mature and integrate them into their global development models.  The emerging data around milestone-payouts support this premise: about a third of milestones are getting paid, a third are still hoped for, and a third have been missed.  This is a reasonable hit rate compared to historic R&D attrition rates.  Risk-sharing can be structured to be good for all parties.

To close out, sitting on the JetBlue flight home from JPM yesterday with 150 other Boston biotech folks, the post-conference mood seemed very positive, albeit exhausted.  We’re all hopeful 2013 delivers on the excitement of this year’s kickoff circus – and that’s going to require pharma, biotech, and venture to work constructively to support the ecosystem.

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  • Thanks for the insight as always. The trend seems clear, but a bit disappointing for public market biotech investors who like to scout and find early stage, promising assets – more of these are being plucked up by big biotech and pharma firms before ever seeing the light of day!

  • RD

    Bruce, nice description of what’s happening with the VC side of the equation. I work in an academic TTO and have notice the trend. It seems “easier” for Pharma to partner with small biotechs, in which due diligence and asset assessment has been already done by a third-party. However, I’m afraid that VCs can be missing part of the pie just, or majorly, focusing on the coasts. There is a number of non-coastal Universities that are willing to invest to de-risk assets and get leads that will need be optimized. Partnering with those Universities will increase the partnerships deal between VCs and Pharma and will help Universities move their inventions to trials and ultimately to the market.

  • Jimbo

    Hi Bruce. Interesting take. My guess is that big pharma will not succeed in this new strategy. Having seen some of these players from the inside, most of my previous BP colleagues are just not creative enough to be truly innovative and they seem to be better at killing small company innovation as opossed to harnessing it.

    Do you know where us non-attendees could get any analysis on the small company or private company presentations? I am particularly interested in what bluebird and ultragenyx presentations, but an analsyis of the small company insight in general would be interesting

  • In my view, the shift already happened a few years ago. As someone involved in BD, I used to find that “come back when you have phase 2 data” that you mention, now they seem to be more open to early stage projects. Still, pre-IND projects need more validation and proof-of-principle activities that universities or small biotechs sometimes can’t afford. I’ve seen good projects turned down by pharmas because they need this or that experiment done. A collaborative approach would involve pharmas signing option agreements or right of first refusal contracts to help conduct these validation experiments, something I haven’t seen too often.

  • Joshua Anderson

    Hi Jimbo, I think you’re selling big pharma short. They seem to realize that the most creative innovations are coming out of VC, and instead of intervening and controlling these fledgeling companies, they’re buying into the VC funds and letting the startups do what they do best. I think they’re smart to do this because they’re fattening up the pipeline of startup companies and projects which gives them more choices later on. Plus, since they have a seat at the VC table, they can keep tabs on the startups and theoretically identify the promising assets more easily and maybe earlier when they can buy them cheaper. In addition, VC funds generally have good returns, so it’s not really money spent, instead it’s long-term invested in an asset class that historically has good returns. It’s much safer than making a multibillion dollar deal for a midsize biotech.

  • Thanks for sharing your observations. How well these represent the climate within the medical device space?

  • Suleman

    I’m not sure that Big Pharma have really learnt their lessons from their own inefficiency in R&D. If they engage too early with startups as a very dominant partner they risk bringing their bureaucratic mindsets into the collaboration, and thus nullifying the R&D advantages of small startups. With power comes the need for much control, which I fear Big Pharma does not have the wisdom to see.

  • Creditor

    Xceleron Ltd (specialists in AMS technology) went into administration (chapter 11) almost exactly a year ago owing GBP 7milion. There are question marks over the competence of the management but if a bsiness like that fails, does that not show the dangers in seed funding?

  • Creditor

    What are your thoughts on Xceleron Ltd (AMS specialists) going into administration owing GBP7million in th UK?