The past five years have brought fundamental change to biotechnology. The pharmaceutical industry has undergone massive consolidation; drug discovery has been reengineered by advances in genomics and automation; and biotechnology companies have reached profitability by successfully developing and marketing their own products. Nonetheless, despite pervasive structural and technological change in biotech and big pharma, there remain a plethora of unmet medical “needs,” which in biotech VC vernacular means “new product and technology opportunities.” Although these “unmet needs” provide a compelling rationale for continued investment in healthcare innovation, the changing face of the industry has forced venture capital to innovate itself to create new investment strategies that go beyond and complement the proven, more traditional approaches to venture finance.
Primarily because of the fundamentals of the sector, and in part because of the volatility of the information technology field, venture capital investing has in many ways had to reinvent itself. Unprecedented interest in the life sciences has resulted in record levels of committed capital ($9.6 billion in 2001) which in turn catalyzed the emergence of a new type of VC to respond directly to change. At MPM, we have created a highly integrated, multidisciplinary team, where industry veterans with hands-on operating experience, are as valued as those with financial expertise and access to capital sources. Here, our long-term commitment to biotechnology investing takes precedence over opportunistic shifts to equally high risk-high reward, “hotter” sectors and provides a competitive advantage both to investors and the companies we choose to finance. This, then, is the “New Era” of biotechnology investing, an era characterized by fundamental change in the industry, rapid technological progress, and increased access to capital all of which work together, presenting not only the challenge of exceeding historical returns but also the challenge of navigating the increasing complexity of scientific and medical developments.
MPM BioVentures is led by seven GPs who combine venture investing experience at firms such as Accel, Mayfield and Venrock, with R&D and business leadership in pharmaceutical and biotechnology companies such as Roche, Genentech and Millennium. Whereas in the past, we might have focused on a particular stage of financing, our “New Era” business plan calls for value investing across the continuum of startups to late-stage companies on a global basis. Furthermore, because of the consolidation of the pharmaceutical and biotech industries, we are pioneering new spinout strategies that can be opportunistic and unlock much of the value that the merger mania may have trapped.
Attractive late-stage investments are being created by combining the strategic interests of Big Pharma with venture capital’s vision of building companies with critical mass, validated product pipelines, and attractive valuations. These types of investments have the potential to create tremendous value for Big Pharma companies at a minimal cost to them. For example, in 2001, MPM committed over $100 million to collaborate with multi-national pharmaceutical companies in the financing of three spinout companies: Biovitrum (Pharmacia), Affymax (GSK), and Bioxell (Roche). These companies combined, employ over 1,200 people, have a pipeline of marketed, clinical and pre-clinical products and product candidates, and yet were capitalized at a cumulative pre-money valuation of less than $140 million. This type of investing is relatively new to biotechnology, and requires venture professionals with extensive industry operating experience in research and business development.
At the other end of the spectrum but equally relevant in view of the pervasive structural and technological change – are the more traditional start-ups, where investment in a company is decided following a due diligence process, driven by a strict set of qualification criteria, balance of risk among the two classic business models, and the use of in-house resources to originate and manage concept-based deals. A successful candidate for an early-stage investment must be based on highly innovative and patent-protected science and founded by thought leaders who are willing to commit a significant portion of their time over several years to champion their company; an investment professional usually undertakes an active management role in the start-up. Investments are balanced between two broad business models, platform technology and product development. Platform technology companies direct their science to solve R&D bottlenecks, a $30 billion per year market, and grow through value-sharing deals with the pharmaceutical industry. This business model offers reduced risk, but requires that a company give up significant product value early on. Conversely, product companies align value creation with the development of a proprietary product pipeline, thus taking more early risk but retaining more of the long-term upside. Biomarin, GPC Biotech and TransForm, are MPM investments that capture the firm’s early-stage strategy and tactics.
Biomarin was founded in 1997 as a spinout from Glyko, a public Canadian company focused on analytical carbohydrate technology. Unlike its parent, Biomarin aspired to become a therapeutic product company that leveraged Glyko’s technology to generate a pipeline of protein products as replacement therapies for patients with genetic deficiencies. Early on, Biomarin focused on the treatment of Hurler’s syndrome, a monogenic disease that, if left untreated, can result in premature death. MPM identified Biomarin as an unusually attractive product investment opportunity by virtue of the reduced development risk associated with protein replacement therapy and led the first round, eventually committing a total of $7.5 million over three years. Clinical development of Aldarazyme ensued. MPM founding GP Ansbert Gadicke assumed the role of interim President when the company was transitioning its CEO. The company had a successful IPO in 1999 and yielded a 16x cash on cash return to MPM investors. Presently, the company has reported positive data on two pivotal clinical trials and expects to reach the market in 2004.
One of the most important bottlenecks in drug discovery is the process of validating a molecular target that point of intervention where a drug can actually impact disease to cure it or dramatically reduce symptoms that affect quality of life. There are anywhere between 30,000 and 150,000 potential drug targets in human biology, each having widely differing importance to disease. Even when a single target has been identified and validated, it can be years before large groups of chemists are able to generate drugs that will be selective and efficacious for such a target. GPC Biotech was founded in 1997 to tackle this area of “functional genomics” in a highly comprehensive way by leveraging the untapped scientific and technical resources residing in European academic and industrial organizations. To launch this effort, MPM invested a total of $6 million and MPM GP Michael Steinmetz became the founding CEO. As part of its growth plan, GPC acquired US-based Mitotix before executing on one of the most successful German IPOs, raising $110 million. Presently GPC has a product candidate in clinical trials and has formed several collaborations with Pharmaceutical companies in the US and Europe.
A different but equally compelling platform opportunity resides in the scientific disciplines that are used to translate a promising new drug candidate into a commercially viable therapeutic product. Once the chemical structure of a drug candidate has been identified and before it can be tested in humans, it needs to be “transformed” into a physical form that is suitable for human use. The selection of the right physical form, for example, a pill or intravenous injection, profoundly impacts a drug’s clinical and commercial performance. Unlike other discovery platforms, the science of “form and formulation” has not yet benefited from fast-paced technological innovation, and TransForm was founded to fill that gap. Its technology, co-invented by MPM GP Nick Galakatos and MIT Professor Robert Langer, uses nanotechnology and semiconductor technology to generate and rapidly screen millions of candidate forms to discover the best form and formulation for promising drug candidates, enabling the optimization of drugs for clinical and commercial performance, and therefore significantly increasing their value. Dr. Galakatos served as the founding CEO of TransForm, recruited the senior management team and led fundraising and business development activities that resulted in a multi-year corporate relationship with a large pharmaceutical company and a pipeline of late-stage pre-clinical compounds. MPM was the founding investor in TransForm and has invested a total of $8 million. The company intends to file for an IPO in 2003.
Today, biotechnology investment opportunities are abundant, and venture capitalists are partnering with experts in their field who have valuable hands-on experience, executing on innovation, all the while capturing both these traditional and novel opportunities. MPM has emerged over the past few years as one of the world’s leaders in life science investing by vigilantly looking for opportunity as well as new strategies for capturing the value inherent in them. That is not to suggest that MPM has identified and inflexibly committed to any single “New Era” strategy. Rather, that as the sector evolves, MPM’s strategy, which is driven by value and opportunity, will continue to adapt and evolve along with it.