7 Secrets VC Investors Want Biopharma Heads of R&D To Know: Investing Intellectual Capital In Assessing Intellectual Property - Part 3
By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL
Though VCs kicked off 2015 as if their investing would blow biopharma clean off its hinges, the door closed on last year with a near inaudible click. In fact, since the mid-July 2015 peak there has been a steady decline that has continued into 2016. When things become unpredictable, it pays to have as much insight as possible to improve your decision making. Earlier this year I had the opportunity to attend an invitation-only event focused specifically on the concept of what biopharmaceutical VCs look for when working with heads of R&D. From this we decided to create a three part article series — Seven Secrets VC Investors Want Biopharma Heads of R&D to Know. In part one of the four part series we gained insight into what VCs think Big Pharma is doing correctly in terms of managing its R&D portfolio. In part two we learned how communication with Big Pharma guides VC investing, as well as what VCs think about when having to reconcile differing opinions on a biopharma asset. Here we explore what VC do when being approached by Big Pharma with a potential asset for sale.
Secret Number Four — Imagine you get that call from a Big Pharma. They tell you they are divesting X, which is not part of a strategic reprioritization. In other words, they’re not exiting that therapeutic category, just this particular target/product. How do you know what to look for in determining if it is a quality asset or if it actually belongs in the garbage dump?
“It’s not the most straightforward project,” a VC admits. “We see so many products that we have to use proxies to reprioritize these opportunities. If there is an asset which is right in a strategic area for a pharma company, and the company is divesting this asset for reasons other than being strategic, then there is some rationale behind why it is not good enough to keep. This doesn’t necessarily mean that it might not be a good enough asset for a smaller pharma. But it does mean that even if you produce positive data on this molecule, that the asset may not be transactable. In such situations, it is imperative to understand if maybe there is a different threshold that makes the asset less viable in terms of dealing with current competition.”
“You’re slightly schizophrenic,” adds another VC. “The fact that they’re willing to divest it makes you wonder what’s wrong. On the other hand, molecules coming out of Big Pharma tend to have a great pedigree. They don’t take shortcuts that the biotech companies do, and there are a lot more things that would have been done correctly, which is very helpful in making the best determination. In the end, it’s not really about determining if the asset is a dog or not, but rather what are the pluses and minuses. Every plus or minus on an asset has a risk and reward associated with it. This is what really drives the capitalist structure. After all, if everybody had the same kind of risk-reward tolerance, would there ever be an asset transfer? Depending upon the type of company you are, the risk-reward differential determines whether or not you will have a transaction.”
“What enables a review of the intrinsic properties of a program being shopped around is the conversation as to why and the history of what led to the decision,” shares a different VC. “We have examples of where we’ve been told, very explicitly, the reasons why the company is deciding not to pursue an asset, such as it being outside the strategic focus within a therapeutic area. A general part of the R&D process is the divestiture of noncore assets, and something we should always be doing. We see many assets move across companies, which is a big part of how our industry works. But it has helped us by having those up-front conversations about the explicit reasons why you are not moving forward with an asset in your company.”
Secret Number Five — Do you think Big Pharmas shop around assets as a means of having VCs expend intellectual capital to help them determine if they have something viable or not?
“Unfortunately, it still happens,” admits all of the VCs. “Usually you find out when you are very close to having an agreement.”
According to one VC, over the last five years, they had been involved in at least three deals that got beyond the term sheet. “On two of those deals, because we got so interested, the parent company decided that the asset was suddenly more interesting to keep. While I haven’t had this happen recently, when it does, it is a very bad experience and causes you to question the relationship on a lot of factors. Because when you go through a process with real intent and expect it to happen, when people change their minds — which is always a possibility — you have to wonder how earnest they were from the beginning.”
In our fourth and final installment of this series we will divulge biopharma VC investor secrets number six and seven.