7 Secrets VC Investors Want Biopharma Heads of R&D To Know: Communication And Reconciliation - Part 2

By Rob Wright, Chief Editor, Life Science Leader
Follow Me On Twitter @RfwrightLSL

Though the biopharmaceutical industry closed out the second quarter of 2015 with a 32 percent increase in VC investment when compared to the quarter previous, the second half of the year seemed to indicate that the biotech bubble might soon pop. During such times such as these, wouldn’t it be nice to know what biopharma investors are actually thinking? Well wonder no more. Having had the opportunity to attend an invitation-only event focused on biopharmaceutical R&D, what follows is a behind the scenes glimpse of what VCs look for when engaging with biopharmaceutical company heads of R&D. In part one of the four part series, Seven Secrets VC Investors Want Biopharma Heads of R&D to Know, we overheard four VCs standing around a water cooler sharing their thoughts as to what Big Pharma is doing correctly in terms of R&D management. Here in part two we reveal biopharma VC secrets around communication and reconciliation.

Secret Number Two — How does communication with Big Pharma guide your investments?

“When their team is open to having a dialogue and tells us they are looking at a company working in a particular area, it is like the gleam in a professor’s eye when stating a hypothesis,” one VC analogizes. “You are tasked with trying to figure out what the stated hypothesis means. Should we invest in an opportunity because they like it, or should we invest because they don’t? To get another data point I like to ask the head of R&D or BD, ‘For you to invest in this, what will it have to look like for you to turn this into a partnership? What stage will it need to be for you to want to acquire us?’”

“When having a discussion with a head of R&D, I don’t look at the specifics around a mechanism of action or a specific asset,” says another VC. “Of course that is very valuable information. But in our experience, what is much more important is to speak with these people to understand how they really think globally about the risk and rewards of their programs. How do they think about their therapeutic area strategies a few years out? When we have a due diligence on a specific asset that we want to get some advice on, there will be multiple interaction points throughout the organization with the people that have been actually applying their brains to the specific asset. However, from heads of R&D I’m really looking for strategic insights to gain an understanding of how they think. This is driven by asking many questions and by interacting with them to gain a sense of if they are conservative, aggressive, or more strategic and long-term. I want to know how they got to where they are. Was it a natural internal progression or because they made bold decisions that took their company to a different position than others? Just as heads of R&D evaluate VC firms and portfolio companies, we [VCs] evaluate heads of R&D not to exercise judgment, but to become smarter at how we do our jobs.”

“What we look for from the heads of R&D at very large companies is more around tone and strategy,” says another VC who has been eavesdropping on the water cooler conversation of her peers. “When it comes down to specifics around an individual therapeutic area or project, often we find it’s the therapeutic heads who can provide insight into the specific areas, indications, and biomarkers that lead to the value inflection point. For those therapeutic-head discussions to be productive require the head of R&D to set the appropriate tone, encouraging their leaders to talk to us and have a legitimate conversation. To talk to an investor about an idea can’t be perceived as them giving away the crown jewels.”

Secret Number Three — What happens when you talk to the head of R&D at a Big Pharma who is very positive on an idea, yet when you engage one layer down you find they are very negative. Does that idea become almost impossible to get through your portfolio committees?

“We certainly think there are contrarians,” a VC reflects. “For a Big Pharma company to hold a universally negative view of something requires having some really good reasons to support such a position. When you get a divergence of views, it is useful to understand why the company or person X was so negative, while the company or person Y was very positive. Part of what we do is to take contrarian bets. Sometimes they are contrarian bets a Big Pharma company doesn’t want to take.”

Another VC adds, “An example of a contrarian bet may be when we see a Big Pharma, by either going through a strategic review or a reprioritization of their portfolio, and the head of R&D says they are getting out of a particular therapeutic area,” “We may see this as an opportunity for us, and have several examples where we worked with them to actually take companies, assets and people to a competitor. When taking a contrarian view, the first question we always get from our partners is, ‘If someone’s getting out, why are we getting in? What’s the story? For us to get in the story has to be a strategic decision as opposed to yet another wounded or half-dead portfolio asset. I have a bias on killing programs early. There are some projects in discovery and development that actually commit suicide. Those are the easy kills. The ones that are hard are those high-dollar projects where you have some gray area of data emerging. These often look like potential company spin-outs, which personally we don’t like and would prefer just be killed. What we find more interesting as part of the ecosystem is where a whole therapeutic area or indication is being shut down. That is much more appealing because there is an obvious lack of bias coming from the originating parent company.”

“Going back to your original question,” a third VC says, “when we get negative input from pharma-relevant people, what do we do with that? Does it kill anything or not? For us it does not kill anything, per se, because it really depends on what the negative feedback is (e.g., clinical data). It is never black and white, but there is wisdom in listening to all the opinions. If it is a very early-stage program, there is a lot of judgment. Our job as venture capitalists and investors is to try to determine what is just an opinion and what is bias. After all, everyone isn’t going to be right. Positive and negative experiences in an organization can taint being open or closed to a potential target. On the other hand, it could be that there is so much knowledge that many people inside or in an adjacent organization have tried that target before and have much greater visibility into its feasibility. That can be very relevant information. It’s not necessarily being contrarian, but breaking down and analyzing what are really facts versus normal human behavioral bias, which can be very dangerous if it proliferates into groupthink. For example, two weeks ago I was in Japan and met professor Tasuku Honjo. He is credited with having discovered the anti-PD-1 immuno-oncology drug star, nivolumab, a medicine boasting seven FDA approvals for three cancers (i.e., melanoma, lung, and kidney). Honjo was telling me how in 1992 he went to every Japanese Big Pharma at least four or five times with his idea, and all of them said no. Not wanting to give up, he went to see a friend who worked at Ono Pharmaceuticals. As he describes it, Ono’s decision to license the product was based on a whim and that friendship. Nivolumab (Opdivo marketed by Bristol-Myers Squibb in the U.S.) has proven to be the most successful member of this new class of drugs. Five clinical trials involving Opdivo have been stopped early because it showed such a strong advantage.”

Stay tuned for the third installment of this series where we reveal secrets four and five.