By Wayne Koberstein, contributing editor
A conversation with the head of SR One reveals the evolving strategies, aggressive portfolio building, and key lessons learned by a Big Pharma’s venture into the VC space.
As the funding gap for life sciences companies grows into a yawning abyss, new players enter the field to keep the flame of innovation alive: venture funds created by large pharma companies such as Novartis with Novartis Venture Fund (NVF), Pfizer with Pfizer Venture Investments (PVI), J&J with the Johnson & Johnson Development Corporation (JJDC), and GSK with SR One. Many of the pharma VCs are relatively new, although SR One launched almost 30 years ago and is the second oldest pharma venture fund after JJDC. Big Pharma’s movement into the VC world belies the industry’s dependence on academics and small companies for the majority of new drugs and devices and, perhaps even more important, for new directions in medicine.
Pharma VCs are often “evergreen” funds, typically investing less than $100 million per year but at a steady rate; nonevergreens are subject to funding cycles and interruptions. The steady contribution and unique assets of pharma funds, as separate but parallel units of the pharma giants, may amplify their impact on the investment scene. And in the latest twist, pharma and nonpharma funds are combining resources, as with GSK, J&J, and Index Ventures, which last year collaborated to create a new €150 million life sciences fund in Europe. Significantly, the pharma partners will sit on the new fund’s scientific advisory boards, setting direction but not choosing investments.
Companies that have spawned VC units have no problem acknowledging their self-interest in helping to fill the life sciences funding gap. “In the top ten pharma companies, in-licensed products can make up 50% to 60% of their pipelines. So they know that more than half of their pipeline might not come from the inside; it will come from the outside,” says Jens Eckstein, president of SR One. “So you need a window on external innovation, and you need to look out the window, find the innovators, and put money behind the ones you consider most likely to produce positive financial and medical returns.”
For his company, the window Eckstein describes is venture funding. SR One gives it intense involvement in new research and related business initiatives on the ground floor of disruptive technology development. Without the potential for overturning old ways of delivering medical care, a start-up has little or no chance of landing funds from SR One.
“The biggest goal for us is innovation,” Eckstein says. “We invest globally and broadly in healthcare and the life sciences, and we want to invest in technologies that will become extremely important for the whole healthcare industry within six to seven years from now — technologies that will significantly change the way medicine is done, for the better.”
Investments are diverse, and candidates may include therapeutics, diagnostics, biomarkers, electronics, information technology, or materials, he says. “We are especially excited about some of the convergence areas, where you can start breaking down the old silos of therapeutics, diagnostics, and so on, and use them in a way that manages the whole patient, not just a disease.”
Funding for Profit, Investing for Innovation
A “patient-centric approach to therapeutics” might once have sounded cliché, but the very real prospect of reimbursement based on patient outcomes, not product use, has apparently sharpened the industry cliché into a cutting edge. Just the fact that a venture investor in the life sciences, whether at SR One or any other experienced firm, talks about patient outcomes and integrating diverse technologies in healthcare represents a sea change.
Traditionally, many VCs put their money on products and potential markets, without much care for large-scale waves of reform in healthcare. Market share and sales projections largely rested on static assumptions about the four Ps — patients, providers, payers, and policymakers — plus the big R, regulators. The idea was to exit as early as possible and hopefully make your profit before the new tide actually washed in.
Eckstein maintains SR One operates as independently and financially driven as any other investment fund. Its funding decisions, negotiations, and contracts place no ties to GSK on the recipients, GSK obtains no special rights or access to confidential information from the deals, and the fund must ultimately base all of its investments on monetary return. But given those ground rules, SR One pursues its larger vision of supporting potential leaps in healthcare, and thus the environment in which its parent, GSK, competes. SR One’s patient-centric perspective also mirrors GSK’s strategic commitment to developing drug therapies that improve the full range of outcomes in patient care, using any effective supporting technology as needed.
“We want to address not only the maintenance of disease but also curative approaches. That is why we are going beyond just therapeutics. If we can find a new material or piece of electronics that could be curative, that is what interests us,” Eckstein says.
From Investment Strategy Down to Candidate Choices
One principle that keeps SR One grounded in reality arises from the fundamental nature of venture funding — every investment candidate is unique and must undergo a critical evaluation based on its own merits. Philosophy becomes phylogeny as the evolutionary history of each candidate plays out in live-or-die tests of the proof of concept. The fund’s investment analysts draw on experts not only in their own personal networks, as do their peers in other venture firms, but also in the vast GSK organization.
In 2012, SR One invested in almost 20 different enterprises, covering not only pharma and biotherapeutics but many other, sometimes surprising, areas of healthcare. Individual cases are informative; they show how the group translates high-minded words about true innovation into financially sound deals. Funded companies represent a single-digit percentage of all the candidates sorted through or sought out by the investor team. Eckstein highlights three deals as examples of how the fund balances prudent financials with its “revolutionary” aims:
Auxogyn, the first deal of 2012 for SR One, is a small company developing clinical tools to improve fertility. Now in a collaboration with Merck-Serono, the company already markets the Eeva test, a visual algorithm to determine the fitness of fertilized eggs for in vitro fertilization (IVF), now available in the United States and soon in Europe. Embryo viability is the primary challenge in IVF, and a highly accurate way of measuring and boosting it could greatly raise the efficiency and effectiveness of the practice.
PsiOxus, an oncology company featured in our September 2012 issue’s “Companies to Watch,” is developing a “systemically available oncolytic vaccine” that kills cancer cells like a virus, selectively — thus combining targeted and immunotherapeutic strategies. Citing a recent success by Biovex with an earlier oncolytic vaccine, Eckstein depicts the PsiOxus product as a second-generation approach that addresses first-generation issues with side effects and local administration. “That would be a fantastic breakthrough.”
IlluminOss Medical has a potentially groundbreaking bonefracture treatment in development, which Eckstein summarizes as “No more metal, no more big plates, no more big surgery.” The noninvasive procedure starts with a micro-incision and insertion of a balloon catheter that injects a monomer liquid inside the bone channel, and then a filamental light source in the catheter polymerizes the liquid into solid form inside the bone. With no cast or other supports needed, the stabilized bone retains enough flexibility to promote healing, yet patients may be load-bearing in a day, avoiding bed-ridden or hospital time and costs. Osteoporosis-related fractures may be the ideal area for such a treatment, reducing comorbidity such as with infection.
One common and important thread through many of SR One’s investments is a connection, however oblique, back to the business of therapeutic drugs, drug/device combinations, diagnostics, and other supporting technologies currently in the portfolios of many “pharma” companies — including, of course, GSK. Even the bone-fracture procedure would encourage greater, and presumably more effective, use of therapeutics: “If you can get patients walking again quickly and to keep using their medicines, you have a better outcome altogether. So that reflects our view of the world — that you manage the patient, not just a single condition,” says Eckstein.
Pharma Fund Pluses: Strategy, Continuity, & Longevity
Venture funds that look beyond the short-term financials, adopting a more environmental view of investment, rightly deserve the adjective “strategic.” On a continuum, then, the other end would be the “nonstrategic” VCs, somewhat infamous for their propensity to bolt and run long before the final verdict on a product’s success in the real world comes.
Eckstein observes that some institutional venture funds have pharma companies as limited partners where “strings” do exist and thus might be more affected by the pharma partner’s strategy than are more independent VCs like SR One or the Novartis Venture Fund. “You have to look at the books these days to figure out what the strategy of a given venture fund really is. It’s an interesting change in the world.”
Strategic funds will naturally be able to pursue opportunities the less-strategic ones overlook. Does a strategic approach therefore increase the risk of investment? “There is a general rule that, if you are the only one looking at a particular investment, you are either crazy or you’re a genius! Maybe sometimes we’re both,” jokes Eckstein. “This is an interesting time; because of the scarcity of VC money, we have a huge smorgasbord of opportunities in front of us. I like finding ones that at first may look a little bit crazy, because you have to push the envelope to change something, and we have many changes under way.”
Perhaps balancing the risk of a more strategic approach is SR One’s ability to rely on what Eckstein calls the “huge database” of expertise and experience in the worldwide GSK organization. “We have the freedom to pick up the phone anytime and call someone at GSK. We can conduct due diligence quickly and get a quick feel for the concept under consideration. It’s all on a nonconfidential basis, of course. Collaborations and even acquisitions can and do arise for GSK from such interactions, though only incidentally to the SR One investment.
“Most of the team have been in venture capital for some time, so we all have our personal networks and brand as well,” says Eckstein. “The venture business is still very personal; some deals we’re looking at specifically because someone wants to work with a certain person on my team or vice versa. In a business like this, you pick up on ideas. We always go through an exercise prior to a deal: We look at all of our projects and identify white spaces — areas with medical need not yet addressed by VCs or entrepreneurs. We also have ‘holy grail’ projects in areas of huge medical need without current breakthrough innovation because of risk or lack of success through traditional approaches. In those areas, as in others, we bring a broad piece of science together and envision the best development path to patients.”
Eckstein marks a recent trend toward more investment at an early development stage. “More and more, we go directly to academia or the principal investigators and talk with them about the science, and if we like something, we will pay to repeat some of their experiments. We might even improve some of the critical experiments and create data sets that will help us make a decision, based on early-stage data, about whether we should go forward or invest more time on evaluation.”
Supporting the Survivability of Funding Recipients
As a deal passes the selection stage and begins to coalesce into an investment relationship, Eckstein sees plenty of opportunity for reducing risk by ensuring the good health of the funded company. One of the points in his CV that helps account for his view is his membership in the Society of Kauffman Fellows. He explains, “Kauffman Fellows go about building businesses according to the old mentorship model, because venture capital is a business you cannot learn at the university; you learn by doing, by working together with people who know the business, who have been there before, and once you figure something out, you try to give back.”
The mentoring often begins with a business plan, a treatment that lays out all of the potential strengths and challenges of the company and how it will deal with them. Each company in the portfolio can use SR One’s resources to improve its business model and operations, but the fund is also mentoring on a wider scale. It recently launched a business- plan competition in Europe named OneStart (www.oxbridgebiotech.com/onestart), offering a top prize of £100,000, plus free lab space and IP/legal advice.
Mentoring extends beyond the business plan to help solve key challenges that are strategic, technical, and operational. For example, life sciences start-ups often run afoul of costly problems in manufacturing scale-up and supply of product for clinical trials. SR One can tap GSK’s manufacturing expertise as needed to help.
A Two-Way Window for Investor & Investment Seeker
Elaborating on the reasons for SR One’s and other pharma funds’ existence, Eckstein explains the implications of his original Big Pharma “window on innovation” analogy. “If you want to tap into the best minds, it doesn’t matter where they are; you go there and try to work with them. Whatever knowledge you gain through conversation, you can pass along to someone else, and that’s the best way to find what you’re looking for.”
At the same time, Eckstein is eager to get a message to those who are looking in through the investor’s window: “If your idea is sound, and you’re willing to get advice and work together with people, you will get funded. I’m very optimistic right now. There are always great ideas out there. We have learned a lot through all our pains, and it is a fantastic time right now for life sciences investment.”
If nothing else, the note of optimism in an otherwise bleak VC environment might prove as stimulating to innovation as the investment itself. If the pharma-supported funds succeed in breathing new life into the industry, it will be by delivering money and mentoring where they are most lacking and needed — those brave little start-ups that could change the world.