March 21 (Bloomberg) -- GlaxoSmithKline Plc and Johnson & Johnson are forming a $200 million fund with Index Ventures to invest in early-stage biotechnology companies, a move that may entice venture capitalists back to the industry.
Glaxo and New Brunswick, New Jersey-based J&J will each put in $50 million, while Index Ventures will contribute $100 million and make investment decisions, the two drugmakers and the venture-capital firm said today. Moncef Slaoui, head of research and development at London-based Glaxo, and Paul Stoffels, J&J’s chairman of pharmaceuticals, will sit on the fund’s advisory board.
Early-stage companies have been struggling for financing as venture-capital firms turn instead to more mature businesses or less risky industries. The new fund will stick to Index Ventures’ strategy of investing in early-stage, single-asset companies in Europe, the U.S. and Israel, a model the firm said has generated typical venture-capital returns in half the time.
“By investing in this fund, they are really super-powering or turbo-charging the asset-centric investment model,” said Francesco De Rubertis, the Index Ventures partner who is leading the fund, in an interview in London. “They are validating it as a potential new model for early-stage R&D funding.”
Large drugmakers need greater insight into what cutting-edge research is going on, since only about 0.01 percent of science is happening inside their labs, Slaoui and Stoffels said.
“We need to strategically identify the other great ideas that exist anywhere,” Slaoui said in an interview today before discussing the fund at the Bio-Europe Spring conference in Amsterdam. “Index is pretty smart because they’re accessing 30,000 scientists’ worth of due diligence and insight and judgment in terms of how they would see the ideas” by putting executives from two large drugmakers on the advisory board.
More cooperation is needed among companies and scientists to make research more efficient and avoid repeating mistakes that others have made, Stoffels said.
“We have a lot of failures and successes in the past,” Stoffels said. “We can give some advice on where to invest and where not, if we have failed already.”
‘Shots on Goal’
To get financing under the asset-centric model, a biotech company must agree to focus on one molecule, and add to its executive team one of more than a dozen entrepreneurs affiliated with Index Ventures. If at some point that entrepreneur deems the project isn’t worth pursuing, development ends and the executive moves on to another Index-funded company.
“You get multiple shots on goal, but one at a time,” De Rubertis said. “This really focuses the decision making on single drugs. This has turned out over the last five years to really improve the profitability, the productivity of the R&D efforts.”
Following the asset-centric model has cut in half the time it takes to reach a return on investment, De Rubertis said. “The returns we have seen are top-tier venture returns,” he said. He declined to be more specific.
“The fact that J&J and GSK have endorsed this shows it’s working,” De Rubertis said. “If the asset-centric model keeps on working as well as it is, more VCs will follow it, as it delivers better and faster returns.”
Closer to Market
The approach is “a dream scenario” for scientists who want money to bring their inventions closer to market, without having the project get lost inside a large organization, De Rubertis said.
“We are giving you cash, and an Index drug developer who is going to live with you in the company until death or fireworks,” he said. “If the plug is pulled, the founder still gets the molecule, the company, and at least it got financed that much.”
Initial venture-capital investment in biotechnology startups declined in the U.S. last year, according to a January report by the National Venture Capital Association and PricewaterhouseCoopers LLC. A survey by the association released in October found that almost 40 percent of 150 firms have decreased their investment in life sciences in the past three years, and the same proportion expect to reduce spending over the next three years.
“Biotech has a very difficult time,” Stoffels said. “It’s very highly needed for the benefit of health care in the future, that capital flows into the biotech environment. Otherwise the innovation will dry up and that will be a problem for pharma.”
Some drugmakers, including Glaxo and J&J, have started their own venture-capital arms. Corporate venture capital, where a financial return is the main goal, “is one approach” to stimulating innovation, Slaoui said. The fund announced today won’t change anything in their corporate venture arms, Slaoui and Stoffels said.
The market for initial public offerings, another way for companies to get funding, has also been sluggish. There were 29 biotechnology IPOs worldwide last year, according to data compiled by Bloomberg, down from 36 five years ago.
Partly as a result, biotechs are becoming more reliant on licensing deals or acquisitions by larger drugmakers to access capital, Stoffels and Slaoui said. That’s not always the best avenue for either the drugmaker or the biotech, they said.
“The tagline if I’m an entrepreneurial scientist is: here’s an opportunity for me to access capital and the huge knowhow of two large pharmas without having the kiss of death,” Slaoui said. “If you’re a startup idea, you don’t want to partner with large pharma on day one.”
Should Glaxo or J&J want to license the rights to a compound that the fund backs, they will have to bid as any other drugmaker would, De Rubertis said.
In addition to De Rubertis, Slaoui and Stoffels, William Hait of J&J and Paul Peter Tak of Glaxo will also sit on the scientific advisory board of the fund, dubbed Index Life VI. Other Index partners on the board are Kevin Johnson, Michele Ollier, Roman Fleck and Remy Luthringer.
“This is the first time there is delegation of big powers to a venture-capital firm,” De Rubertis said. “They’ve poured the fuel into the car, but Index is driving. They of course are passengers in the car and can make comments. But in the end, Index is really the decision-maker.”
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