Largely gone are the days when venture capitalists could hatch a biotech and take it public without much regard for the needs of Big Pharma. Public investors seldom buy into new biotech companies, and drugmakers have increasingly become early partners with VC firms and their young ventures. In the process, pharma has gained significant clout in the biotech VC game.
At Flagship Ventures, Managing Partner and CEO Noubar Afeyan has kept a close eye on the role of pharma in the biotech sphere and helped make the evolving dynamics of drugmakers' influence on early-stage venture investing an asset to his firm. About a decade ago the Cambridge, MA-based firm helped launch and fund privately held Adnexus Therapeutics, which drug giant Bristol-Myers Squibb ($BMY) acquired in 2007 for $430 million. And Japanese pharma powerhouse Eisai bought the Flagship-backed biotech firm Morphotek in the same year for $325 million.
The latest crop of Flagship's biotech startups could begin talks with Big Pharma groups, or at the very least Merck ($MRK), way before they start to entertain buyouts or exits. Merck invested in Flagship's $270 million fund closed in January, and the VC firm later announced an alliance with the pharma company's Merck Research Laboratories and Merck Research Ventures Fund. This alliance allows Flagship's and Merck's teams to stay on the same page in terms of directing the path of new startups.
"I think that the health of the biotech ecosystem today is directly proportional to the health of pharmaceutical partnerships within that ecosystem," Afeyan said. He later added: "I look at capital from pure financial investors as almost being attracted to that dynamic versus preceding that dynamic. So the notion that investors invest, and then pharma companies do partnerships, is to me a little bit backwards. To me pharma companies doing partnerships attracts investors to certain types of companies."
Not every biotech startup gets off the ground with support from Big Pharma, yet Flagship and a growing number of other venture firms such as Index Ventures, Third Rock Ventures and Polaris Venture Partners have at least been able to secure alliances or financial ties with large drugmakers. Those relationships could help guide their investment decisions. GlaxoSmithKline ($GSK) and Johnson & Johnson ($JNJ) backed Index's $200 million fund announced in March, providing half of the capital for the fund and gaining a say in investment decisions. Polaris and J&J have agreed to weigh joint investments in biotech. And Third Rock recently co-founded a therapeutics startup called Warp Drive Bio with Sanofi ($SNY).
"There are a number of companies that we are both starting or looking to invest in where we have benefited from Merck's insights," Afeyan says. He didn't name the companies, but he says that his firm may elect to announce projects in which Merck played a role at some point.
Many have feared that the biotech ecosystem suffers from too little money to get new startups off the ground. Flagship's strategy involves forming new companies through its own VentureLabs program and later playing a leading role in financing the companies, often with syndicates of other VC groups. Unfortunately, biotech venture investing has hit a slump in part because not enough VC groups are willing to take the same kinds of risks on early-stage drug developers as Flagship and a limited group of other investment outfits.
"We've been in a pretty long period of self-doubt in the early-stage biotech investment community," Afeyan says. "A lot of people have either moved away from the early-stage [opportunities] or moved away from biotech altogether. And I think that some of that is self-fulfilling."
Afeyan's rationale follows the logic of how bearish trends emerge and impact financial markets: When investors start to think disaster awaits, their actions can contribute to those worries becoming reality.
Flagship, which Afeyan co-founded in 2000 and has nearly $1 billion under management, has stuck to its guns as some of its VC peers have become bearish on biotech. Its latest fund of $270 million surpassed its $250 million goal as well as the $235 million hauled in for its previous fund. Flagship plans to stick to the early-stage strategy that brought wins such as Adnexus to the firm. And Afeyan says that some of the new startups incubating at the firm include Moderna Therapeutics, which is researching new ways to harness RNA science to create new drugs, and Seres Health, which is leveraging insights from the human microbiome to generate new treatments.
Afeyan and his partners have kept most of the activities of these biotechs under wraps, but bet on those activities to position the companies for partnerships with pharma players. -- Ryan McBride (Email | Twitter)