7 Secrets VC Investors Want Biopharma Heads of R&D To Know: People And Profits - Part 4
By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL
Though VC investing began 2015 with a flurry of activity, lately it seems that biopharma has lost a bit of its luster. We began this four part series of articles from insights gained from having attended an invitation-only event focused on biopharmaceutical VC investing. As the funding pendulum has begun to swing back to a more conservative posture, you might wonder how this impacts biopharma investor thinking. Imagine what wisdom might be gained from being able to stand unobserved near a water cooler while biopharmaceutical VCs discuss their various approaches to assessing an asset, or how they manage risk versus reward when balancing portfolios. In part one of this four part series, we learned what VCs think Big Pharma is doing correctly in the management of its R&D portfolios. Part two explored how communication with Big Pharma guides VC investing, and how VCs reconcile differing opinions on an asset. During part three we learned how VC go about assessing a biopharmaceutical asset. We conclude this four part water cooler series by exploring VC secret number six (i.e., does acquiring an asset also require buying its champion), and secret number seven — how to make big pharma feel good when they may have sold a billion $ blockbuster.
Secret Number Six — When a pharma is divesting an asset, how important is it to take the asset and the people (i.e., the champions and asset experts) when determining your capital allocation? When do you say that the people have to be included, and what are some of the considerations on the intellectual capital, besides the actual product?
“The people dimension is critical,” shares one investor. “In every deal I have been involved with there was always at least one person who was core to the program in the parent company. That continuity of knowledge, the ability to actually bridge the transition in the first year is key because there is a lot of knowledge and data transfer, such as where to find things and who to talk to. I don’t know that we could have done any of those deals successfully without at least one person coming, and sometimes more than one. In some cases, the people dimension is part of the story of creating a role and a future for them. We’ve seen the transition of human capital as a very positive dimension for the originating company. We’ve also seen proposals to take three assets and 150 people to build those assets, which for us, would be going a bit too far.”
“In countries outside the U.S. these look like spinouts,” adds a VC. “In Europe, you’re more likely to get a spinout with a lot of people. We had a spinout situation where the parent company wanted us to take 50 people, but we only took 20, which resulted in negative street demonstrations. Sometimes all you want are one to three people that are key to the project, not 15, 20, or 50.”
“Of course the people are key to make sure the understanding of the program is there,” a VC adds. “However, we believe that in early stages of discovery, because we don’t know necessarily where the project will go, having the least amount of infrastructure and constraints is better when having to make tough, sometimes ruthless, decisions that change the direction of an organization. Strategy No. 1 for us in early-stage investing is not taking on lots of human capital as that can overcommit you and make it harder if you have to kill the project. For us, keeping the company or project agile is paramount. Before we bring, say 50 people, into a company, we really want to feel pretty sure that we have something versus getting one year into a project that ends up having to be shut down and putting 50 people out of work. In other words, we want the one or two key product champions, especially when if it’s a novel mechanism of action or really complex biology when bringing over an asset. It takes a champion to partner on any asset, and having them involved is a big component of de-risking. Conversely, it would be difficult for us to take a department and build a company around it.”
“In our experience, it’s been a little different,” says another investor. “For most of our portfolio we have either started the companies or entered into relatively early to midstage financing rounds. We have engaged with Big Pharma, Big Biotech, and on several occasions looked at assets and businesses that companies were looking to either outlicense or spin out. Usually the situation involves portfolio rationalization. The context of such a conversation is a commercial opportunity that follows a certain threshold for very large P&L balance sheets that may make more sense in our hands, as we can focus dedicated resources and have a longer patient profile and do it off of a public company balance sheet.”
Secret Number Seven — As a VC, how do you make the selling company, say a Big Pharma, feel good about the process such that if you buy an asset that ends up developing into a billion company that it doesn’t make the seller look like they gave away the store?
“I think there are two approaches,” says a VC. “One is from the structuring of the deal and demonstrating that the company has some skin in the game — some equity ownership. The other approach is to remind the head of R&D that their average tenure is five years, and they most likely won’t be around, so don’t worry about it,” she laughs.
According to another VC, probably the most effective way is to have some sort of ongoing relationship or to provide structured re-entry for the Big Pharma partner should the product turn out to be a home run. However, another VC shares that they are not necessarily a fan of the latter. “When we’re looking at a spinout, one of the things we hate is when the pharma company has an option on the product, because they don’t exercise the option unless things are particularly good. Thus, a nonexercised option can taint future investors from wanting to participate. Further, we have seen that when some companies do buy back in they can often slow things down. The inverse of an option is doing a build to buy, where the pharma company knows they’re paying $20 million today for the option to get back in, and say $450 million at a later point if it ends up working out.”
As the VCs disperse from their water-cooler discussion, you bend over to refill your reusable water bottler. The audible “glug, glug” of the dispenser serves to signify that your biopharma VC wisdom cup has been filled as well.