At Novartis, competing venture funds aim to avoid the high cost of biotech innovation

As biotech deal prices skyrocket, pharma’s trying to get in on the ground floor, hoping for a bargain. But innovation-for-less, observed the IN VIVO Blog at BIO this week, is tough to engineer, and not everyone agrees on how it can be nurtured--and who is best placed to do the nuturing. Novartis’ dilemma is an interesting study.

The central set of actors: Novartis’ pharma division and its Cambridge-based research group, NIBR. Each has now set up competing visions of lower-cost venture-based paths to innovation. Neither, apparently, wants much to do with the other.

Novartis’ pharma division started its pharma option fund—a $100 million investment into a kind of side-pool of MPM Capital’s latest fund. The idea: as part of any investment it makes, Novartis Pharma gets a no-cost option, after clinical proof-of-concept, on one of the company’s programs, and thus—theoretically--cheap access to new compounds.

Very theoretical: it’s unlikely that the other investors in the round will take kindly to paying the same price without, like Novartis and its option, getting something additional. And it’s the rare biotech with valuable IP desperate enough to give away a free option on it. No word on any deals that have yet closed, though one collaboration is in negotiation (the option, in this case, won’t come for nothing—if a deal ever closes). One apparent reason for the fund: Thomas Ebeling is at loggerheads with NIBR’s chief, Mark Fishman. Ebeling’s pharma group believes they’ll never get products out of NIBR, either self-invented or through its business development activities. So they’ll find them on their own, thank you very much.

Meanwhile, NIBR execs started up a $200 million venture fund—the similarly named Novartis option fund--to actually found brand new companies, up to 10 of them. The group is run, however, not by NIBR, but by the parent’s finance group (not only could NIBR not have managed the fund—doesn’t have “a clue” on how to manage venture, says an insider—it didn’t want the hit to its budget should one of the ventures turn suddenly “impaired”). As part of its founding investment, Novartis will get a series of time-limited options on particular very early-stage programs. The price for the option increases as the project advances – and the option dies if it hasn’t been exercised by Phase I. No investments yet—and no real venture experience. One observer figures the fund should let more experienced venture investors lead the way in its first few investments.

The key message from all these contortions: biotech deal prices have started to hurt. Venture seems to be the general territory for the answer. And pharma’s different constituencies are fighting to get there first. If there’s a there there.