Strange Bedfellows: Novartis Marries VC & Business Development

We’ve been following the two Novartis VC funds for some time now, more extensively here in START-UP and also, in August, here at the Blog. The older of the two funds is a more traditional corporate VC group, reporting ultimately to the CFO.

The second, called variously the MPM Pharma Strategic Fund and the MPM Bio IV NVS Strategic Fund LP, is a joint program between MPM and Novartis’s pharmaceutical business unit, run by Thomas Ebeling.

What’s unusual is that both funds want to get options on research programs along with their investments. The first is looking for options on very early-stage programs and has already managed to sign several deals. But the pharma group’s fund wants options on the far more valuable later-stage candidates.

Now that second fund has closed its first deal: a $10 million equity investment in Radius Health and an option on Radius’s Phase II osteoporosis candidate, BA058.

The press release seemed to imply that the option came as part of the investment. Not true – although that’s originally what Novartis wanted, according to one source.

The Novartis-affiliated MPM fund bought its equity at the same price Radius’s venture investors (including MPM) had paid in its $57.5 million second round, which closed in April. But Novartis is also paying an undisclosed option fee, says Radius CEO C. Richard Lyttle, PhD, plus providing some “in-kind services”--access to Novartis expertise, presumably in the development of osteoporosis drugs. As for governance, Lyttle was a bit cagey: Novartis wouldn’t get a board seat “as a direct part of this deal.”

The option gives Novartis a few months (we estimate 90 days) to look at Radius’s Phase II data once it’s collected– during which time Radius can’t show it to anyone else. At the end of the option period, Novartis can say “no” and walk away (leaving Radius to shop the product to anyone they want)—or “yes” and trigger a pre-negotiated deal.

That deal is worth some $500 million in fees and milestones, $125 million of which go back to Ipsen—the French drug company from which Radius originally licensed the peptide, an analog of the natural peptide human parathyroid hormone-related protein. The terms, says Rich Lyttle, are equivalent to the money they would have gotten had they already had the Phase II data. He knows this, he says, because he talked to a number of Big Pharmas before signing the option agreement with Novartis, getting a good sense of what they’d be willing to pay.

Maybe. As most dealmakers will tell you, the dynamics of an auction aren’t predictable. It’s quite possible that Radius could have gotten a better deal when more companies were hooked with real Phase II data for a bone-building product.

But Lyttle says that even if they could have gotten a few extra dollars in an auction, the process of negotiating a deal would have taken months, delaying the Phase III primary-care trials Radius certainly can’t afford on its own, and ultimately destroying value. If Novartis triggers the option, he says, the program can start right away—and patients will get the drug faster. Certainly, Novartis would be motivated to move it along, he notes, since BA058 dovetails nicely with the Swiss company’s Aclasta, approved in various countries outside the US for Paget’s disease but in trials for osteoporosis (BA058 apparently builds bone rapidly; Aclasta prevents bone loss).

In any event, it’s certainly not a bad deal—the other VCs in the deal wouldn’t have let it happen if it had been obviously harmful to their interests. But it is nonetheless highly unusual, maybe unprecedented (we’d love to hear from you about any previous recent examples of minority investments bringing options on later-stage drug candidates—we don’t know of any).

Indeed, Novartis has managed to combine true business development with a venture-capital strategy. That’s clearly been a goal of many corporate VC programs: get some early looks at interesting technologies which have sometimes led to later transactions. But rarely if ever has the initial investment come with an option. The granddaddies of corporate VC, GlaxoSmithKline's SR One and Johnson & Johnson's J&J Development Corp., have been religious in observing the divide between the medical businesses of their parents and their own investment activities. They’ll facilitate deals—but not if they compromise their investment roles.

The MPM/Novartis fund is, on the other hand, a true melding of business development and VC. And that’s why the outcome will be important to watch. If the Radius deal is more than a one-off example, the fund will provide a popular model for product-poor Big Pharma to gain preferred access to the pipelines represented by VC portfolios. On the other hand, if the deal is seen as preventing Radius from getting a profitable exit for its investors, serving Novartis' needs at their expense, corporate VC will go back to the drawing board.

Read More

Dalton Joins Pfizer

The make over of the corporate VC world continues.

IN VIVO Blog has recently learned that Pfizer Inc. brought aboard Barbara Dalton, formerly of SR One and EuclidSR, to lead its Pfizer Strategic Investment Group. In hiring Dalton, Pfizer is sticking with the decision to be represented by professionals with experience on the front lines of venture capital investing rather than shuffling people out from the corporate side of the business.

Dalton joins Debra Yu, formerly of Delphi Ventures and Bay City Capital, who helped start the group three years ago. She replaces Ilya Oshman. She’ll report directly to Ed Harrigan, senior vice president of worldwide licensing and business development. “We are certainly pleased to have Barbara join us – she brings a great deal of experience, is very well-respected in the field, and will surely put her stamp on Pfizer’s venture investment group,” Harrigan told IN VIVO Blog in an email.

Pfizer is taking a unique approach with this venture effort. First, as we stated earlier, it’s bringing in outside people with venture investing experience and, more important, connections. To be sure, any VC or chief executive will return a phone call from Pfizer. But the program clearly benefits from having familiar faces represent in the field at conferences and other venture gathering places.

Second, from the very first day the venture group steered clear of Pfizer’s internal research and development wheelhouse—pharmaceuticals—as well as some external efforts (remember the Pfincubator and our other posts?). Instead, the group sought to invest in companies that might influence how pharmaceuticals are used, marketed or paid for.

The group has built a significant portfolio in diagnostics and, no doubt as part of this effort, the corporate side of the house has stood up and taken notice, becoming an aggressive and progressive player in diagnostics. “She brings the needed talent and personality to the job that is important as our venture activity evolves to its new place in the organization," Yu told us in an email.

Prior to moving over to EuclidSR in 2003, Dalton had been president of SR One, one of the grand daddies of corporate venture programs in the pharmaceutical world, for two years. Founded by Peter Sears in 1985, SR One first invested on behalf of Smithkline Beckman. It has survived all these years as its corporate sponsor went through mergers.

Dalton became president in 2001 when Brenda Gavin, who took over for Sears in 1999, moved on to co-found Quaker BioVentures in 2001.

Dalton left SR One in 2003 with two other principals to become full-time investors at EuclidSR, a New York venture capital firm. This group grew out of a partnership between Euclid Partners, a venture capital firm, and SR One. The firm that sought to invest in companies that benefited from the “convergence” of health care and information technology.

EuclidSR raised at least one fund in 2000, the first year of the partnership. Dalton and other SR One principals invested on behalf of both GSK and EuclidSR until their departure in 2003. It’s unclear what Dalton’s departure means for EuclidSR. She couldn’t be reached for comment.

Read More

The Downsizing Opportunity: Pipeline on the Cheap?

The IN VIVO Blog was in Michigan last week, attending a profiting-from-downsizing symposium.

Would Pfizer—we wondered at the Michigan Growth Capital Symposium--use its pull-out from the state (and the near-term freedom of some 2350 full-time Michigan-based Pfizer employees) as a way of pursuing an alternative research strategy—an experiment in externalization?

The venture world is all over Pfizer right now, looking for preclinical and clinical programs. And they’d particularly love ones that come wrapped with some of their key scientific supporters. Theoretically, we reasoned, the Michigan shut down could allow Pfizer to at least keep some of these researchers tied to the mother ship by letting them – on the VCs’ dime – take ownership of programs Pfizer will be shelving. Meanwhile, Pfizer would get equity and some kind of option on the programs, should they prove interesting to its marketers. If uninteresting to them, the program still might prove commercially worthwhile, giving Pfizer a nice equity upside.

But from the discussions in Michigan, and subsequent chats with VCs, it’s increasingly clear that Pfizer—despite an ongoing program to study how it should go about out-licensing or spinning off internal assets—isn’t moving fast enough. Its best Michigan-based researchers will soon be working for other companies, including Pfizer competitors. And when they're gone so will be the best conduits to, and conductors of, Pfizer's unwanted research programs.

Not that Pfizer is uninterested in venture opportunities that provide it relatively low-cost access to interesting programs. But if our Pfincubator post is to be believed, Pfizer would prefer to win cheap access to programs it didn’t create. That seems to be the intention behind its San Diego venture idea, in which Pfizer swaps infrastructure and capital for a start-up’s equity and options on its research output.

Success of that program seems just a bit more likely than an experiment at Novartis. Its pharma division’s option fund aims to co-invest with other venture funds but get, along with its equity, an option on its investee’s product. Since most VCs we know aren’t in the habit of giving co-investors in a round a better deal than they get (in this case, Novartis would get equity at the VC price plus the option), we don’t think this arrangement will get much traction. We’re likewise skeptical that VCs backing the start-ups Pfizer hopes to woo to its San Diego facilities will be particularly happy about ceding product rights for cheap space and some cash. We’ll be happy to be proven wrong.

Indeed, neither the Pfizer nor the Novartis venture adventure leverages its parent’s real differentiable assets—de-prioritized research programs. And it is only with that kind of unique asset (money and space are commodities) that a drug company can create the opportunity to get both equity appreciation and pipeline help. Novartis in particular should understand the value here: its only major recent primary care launch, Tekturna, came about because a small, privately held company, Speedel, created a product out of a de-prioritized Novartis program—on which Novartis had kept an option.

Pfizer and Novartis aren’t alone in their unwillingness to let start-ups take over assets on their shelves. Most companies won’t. Pulling together all the relevant information is expensive, invasive, and potentially competitive. It actually took the shutdown of all of its early-stage research efforts for Procter & Gamble Pharmaceuticals to try to monetize some of its unrealized value. It’s getting equity in a new Cincinnati-based spin-out, Akebia Therapeutics, which is developing two ex-P&G programs: an angiogenesis promoter (initial target: peripheral artery disease) and a Fibrogen-like EPO inducer. P&G also out-licensed two other programs—one for heart failure and one for atrial fibrillation, but these went to established companies, one large, one small.

But that doesn’t mean pharma shouldn’t do it – at least as an experiment in an alternative research strategy. Roche is the leader here—in deals, for example, with new companies, like Synosia and Amira, based around Roche IP. Lilly has certainly done plenty of out-licensing to already existing companies, like Vicuron and Cubist, but its recent deal with Versant Ventures to exploit its Chorus development division is a big step in the start-up direction.

The real question is whether more pharmas will begin to take advantage of the enormous opportunity to experiment with virtualized R&D – at very little cost to themselves. With the retirement of Pfizer's R&D chief and its most senior opponent of out-licensing, John LaMattina, it's likely that Pfizer will reassess the strategy it's so far pursued. In that reassessment, they'll soon realize that if they don’t provide some of the key research assets, they can’t hope to get low-cost options on what the start-ups do with them.

Read More