GlaxoSmithKline and Avalon Ventures forge $495M biotech startup alliance

Jay Lichter, Avalon Ventures

GlaxoSmithKline ($GSK) has a new plan to improve the economics of investing in drug discovery. The London-based drug giant has partnered with veteran life sciences investors at Avalon Ventures to bankroll a crop of drug-hunting startups in San Diego, with GSK committing the bulk of the alliance's $495 million to fuel the new companies.

In search of breaking discoveries from outside the company's walls, GSK has allied with multiple VC outfits in recent years, chasing after "external innovation" along with a herd of other drug giants such as Johnson & Johnson ($JNJ) and Sanofi ($SNY). The pharma companies have learned the hard way after spending billions of dollars on internal operations that have come up short in some cases, and the early partnerships with venture groups offer them access to big ideas in biotech that are starving for capital.

San Diego-based Avalon plans to pump $30 million into the startup activities, with GSK coming up with as much as $465 million, according to a release on the new venture. The partners expect to launch 10 or so startups over the next three years, housing them in a common facility next door to the Torrey Pines Golf Course's driving range, according to a report in The Wall Street Journal. Each startup will focus on discovering drugs against promising disease targets. And under the reported plan, GSK gets to approve which groups get green-lighted for funding as well as the first dibs on acquiring the successful companies.

Glaxo, which has its own venture unit called SR One, has backed the work with Avalon after announcing a $50 million investment in a $250 million fund for biotech startups from San Mateo, CA-based Sanderling Ventures in January and joining forces with J&J and Index Ventures on a $200 million biotech fund in the first half of 2012. All the deals put GSK in close proximity to new drugs without having to foot the bill to fund the projects internally. The risk-reward ratio in the Avalon pact appeals to GSK's top brass.

Moncef Slaoui

"We are going to immediately own this idea if it is successful, and the level of financial exposure is, frankly, quite small," Moncef Slaoui, who heads Glaxo's research and development, told the WSJ.

For Avalon, the deal with GSK appears to significantly extend its own ability to invest in drug-discovery outfits. Last year the VC firm, which backs both life sciences and IT groups, raised a new $200 million fund, which can only get a firm so far in the capital-intensive biotech game.

Avalon's Jay Lichter and the rest of the life sciences team have made some fortunate biotech bets. In 2011 Bristol-Myers Squibb ($BMY) snapped up Avalon's portfolio company Amira Pharmaceuticals for $325 million in upfront cash. Also that year, Amgen ($AMGN) scooped up Avalon-backed Biovex for $425 million down and up to a $1 billion down the road. The WSJ reports that deal between the firm and GSK evolved from Lichter's discussion with Glaxo R&D exec Lon Cardon, who worked with Lichter at the San Diego biotech Sequana Therapeutics.

The discovery stage of biotech carries some of the highest risks and has generally starved for capital in recent years. Big pharma companies have come to the rescue in some cases, including Sanofi's deal last year to join forces with Third Rock Ventures to launch a discovery-stage biotech called Warp Drive Bio.

Venture firms alone lack the capital fund all the ideas that deserve funding. Last year life science VC outfits raised $2.5 billion, down steeply from the average of $7.8 billion during the years of 2007 and 2008, according to a recent report from the law firm Fenwick & West. Venture companies and startups crave capital, and drugmakers hunger for innovation. Today we see how these interests have converged yet again, and it should be good news for young biotech startups.

- here's Avalon's release
- check out the WSJ article (sub. req.)

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