Sanofi (NYSE:SNY) CEO Chris Viehbacher has definite thoughts about how to marry life science ideas with the financing that is the life blood for that innovation. The pharmaceutical giant earlier this year partnered with venture capital firm Third Rock Ventures to launch biotechnology company Warp Drive Bio.
Supporting biotech company launches is not a typical activity of Big Pharma. But Viehbacher said that business and financing models are changing, and investors and pharmaceutical companies must change as well. Warp Drive’s proprietary genomic technology was incubated within Third Rock. What the partnership offers is a pathway to develop the science and a partner in Sanofi, who could vet the research and perhaps commercialize it. To start, the partnership provides Warp Drive with $125 million in initial funding, including $75 million in equity investment, to support development of the biotech’s technology.
But just as important, the agreement provides an exit for Warp Drive’s investors. The partnership is structured in a way that allows Third Rock to force Sanofi to buy the company if certain performance criteria are met, Viehbacher explained. Sanofi can also force the venture capitalists to sell under certain conditions. Viehbacher said other venture capitalists are interested in pursuing similar deals.
“Every venture capitalist I’ve ever talked to is interested in this model because they clearly see opportunities,” Viehbacher said. “The science is fabulous today. But if you don’t have an exit strategy, you can’t really afford to get into it.”
Viehbacher spoke with journalists during the recent CED Life Sciences Conference in Raleigh, North Carolina. Here’s a portion of the discussion.
How is the financing model changing?
The uncertainties … Can you get a drug approved? What’s it going to pay? And the fact that the IPO window is closed means that the time now for a biotech company to get all the way to the marketplace exceeds the time frame that a venture capitalist is willing to stay (invested). So, you either have a problem of startup companies finding funding, or you have a problem where a lot of companies are forced to sell just because nobody is going to fund development beyond a certain time frame. Big Pharma, I think, you’ll see move into much earlier-stage research. The biotech company we founded in Boston is an example of that. A VC company was willing to invest in a startup company because Big Pharma was co-investing. And in the contract, there’s a clear exit. Venture capital likes to be in an exit in about five years.
Is this an opportunity for Big Pharma? Will there be more such relationships going forward?
What Sanofi is doing is reducing its own internal research capacity. The days when we locked all of our scientists up in a building and put them on a nice tree-lined campus are done. We will do less of our own research. We’re not going to get out of research. We believe we do certain things well in research but we want to work with more outside companies, startup biotechs, with universities.
Is this cheaper?
It is cheaper. But research and development is either a huge waste of money or too, too valuable. It’s not really anything in between. You don’t really do things because it’s cheaper. The reality is the best people who have great ideas in science don’t want to work for a big company. They want to create their own company. So, in other words, if you want to work with the best people, you’re going to have go outside your own company and work with those people … And, you want to work with them, why do they want to work with you? The reality over the last 10 years is, (a small biotech) wouldn’t get caught dead working with one of these big cumbersome pharma companies. Once you have a funding gap, suddenly there’s a much greater willingness of earlier-stage companies to work with Big Pharma. We’re looking earlier and people who are early need help.
Why work with venture capital firms?
There’s two reasons I like (working with venture capital firms). One is, they can sometimes bring competencies we don’t have, like for instance in how to help a startup company. The second thing is to give you a second opinion. Somebody in your company is going to love the science and be championing this internally. But you want to have a second opinion. If you have a venture capital company that’s willing to put money in, that kind of gives a little validation of that.
Are there any examples of these partnerships?
The one we’ve talked about is Warp Drive, the company we created in Boston. If you look at what we have traditionally done, Big Pharma has gone outside its boundaries. But it’s largely in search of a product. If you’ve got a biotech company and you’ve got a product, I want your product. I’ll pay you some sort of up-front payment to take into account all of the risk and research you’ve already invested, and I’ll either fund your research or I’ll just say I’m going to do it. If the product goes further, you get milestones. One day, if it makes it to the market, you get royalties. The new model, where we’re trying to go, we believe that Big Pharma has competencies in validation. So, if a Big Pharma company does a deal with a smaller company, the smaller company’s share price goes up because people believe that Big Pharma has depth of competencies to judge whether this science is any good or not. Now big companies, and not just Big Pharma, big companies I believe, are not any good at doing innovation. There has to be some element of disruptive thinking to have innovation and I can tell you that big companies do everything to avoid any disruptive thinking in their companies. So, you want to work with companies that are a little bit more disruptive in thinking, but bring those competencies together.
Does this mean pharma companies are taking on more risk?
You will never get any innovation if you’re not prepared to take the risk. The amount of money at risk is not as much as it costs me to mow the lawns in front of all our research and development facilities. You don’t spend as much money at that stage. The really risky part of our business is the time you go into phase 3. We have an asset that’s probably going to cost a billion dollars. That’s a whole lot more risky going into a phase 3 billion-dollar program than investing probably $10 million in an early stage asset. I want to be more risk averse going into development, but I’m probably going to be much more willing to take the risk at an early stage.