The more the merrier: VC fund says it's safer with multiple pharma partners

The answer was in the question: "Medicxi Ventures, GSK and J&J: Is the VC/Pharma Collaborative Model Working?"

That was the title the publisher of BioCentury, Eric Pierce, gave to the session he organized and moderated at BIO-Europe Spring® 2016 in Stockholm. Yet no sooner had the session started than Pierce dismissed the question altogether, and as a result opened up the session to its real purpose, which was a celebration of the success of the VC/pharma collaborative partnerships managed by Index Ventures, and the christening of the newest offspring of that union, the freshly created Medicxi Ventures.

When big pharma climbed in bed with VCs some five years ago, it raised eyebrows and made many investors uneasy. But with time and some mixed successes, the marriage has been legitimized.

Called strategic partners, big pharma today are warmly welcomed into biotech venture funds, and better, they are actually seen as giving a syndicated partnership credibility. And the more the merrier, as the audience learned during the panel discussion moderated by Pierce.

"There has been a legitimate concern that a strategic investor would dominate the agenda for the venture fund," said Kevin Johnson, a co-founder of Medicxi Ventures. "And no matter what we write in the LP [limited partner] agreement, it is still not enough to give people assurance that we are not simply an off-shoot of the pharma partner in the fund. Financial category partners told us we are bringing an 800-pound gorilla into the room, that they are going to get squashed.

Kevin Johnson, a co-founder of Medicxi Ventures

"Yet experience now shows actually the opposite. Far from any one partner dominating the others, there is a real partnership, which means that no one is in charge. A scary idea, perhaps, but it actually works quite well," he said.

"In fact, the new fund we just raised was done among just our advisory board members. It took only weeks to raise the fund. And it was five times oversubscribed. So there was a legitimate concern to begin with, but it has gone away," he said closing the argument.

One of the 800-pound gorillas, Patrick Verheyen from Janssen Business Development, a division of Johnson & Johnson, said the idea of entering a venture capital fund was first discussed as early as 2005, well ahead of the financial crisis.

"But there was not an appetite for that model of investing at that time," he said. "Following the downturn in financial and capital markets, as money became scarce, pharma companies became more open to the idea. The crisis was the catalyst that enabled this construct, an alternative model for starting up life science companies in a very unique way."

Another gorilla on the panel, and also an investor in the new Medicxi Ventures, Luigi La Corte is Senior VP for Finance and the Head of Global Business Development for GlaxoSmithKline Pharma. He said partnerships with VCs, and specifically with Medicxi Ventures, "help us to take the pulse in the industry, to see opportunities that are outside the five or six areas where we are focused."

As to dominating the agenda and steering the investments of the venture fund, he said, "I cannot point to one portfolio company of a fund of which we are a strategic partner where we have ended up buying into or licensing the company."

Verheyen noted that J&J has built a wide window on the life sciences through its Innovation Centers, which he helped to set up in 2013. In the first nine months, he said more than 1,000 opportunities were studied.

[caption id="attachment_9053" align="alignleft" width="450"] Luigi La Corte is the Senior Vice President for Finance and the Head of Global Business Development for GlaxoSmithKline Pharma

"Where Medicxi fits in this effort is that it helps us step out and not narrow our focus. We have no pre-emptive rights in the portfolio companies, but it gives us a line-of-sight and an earlier look at data that may stir interest. And if they spot something, the opportunity is probably innovative because what is compelling is that this is a fund run by scientists," he said.

If there is only one pharma partner in the fund, he said, this naturally provokes a suspicion that the pharma partner will dominate. Yet where there are two pharma partners or more, when both GSK and J&J sit at the table as they do with Medicxi Ventures, the inclusion serves as a check-and-balance for influencing the fund.

"Moving forward, all VCs are going to have some strategic partners in the boardroom," said Johnson. "A venture fund can't act as though it is a free-standing entity, develop a program and when it's ready to talk to the pharma companies say, 'Ta-da' Here it is! You can buy it now!'

"We still get this question. But if there are two or more pharma partners, it is a short conversation," he said.