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Exclusive Life Science Feature GSK Pushes Into Innovation Innovation Investment 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. A s 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 investApril 2013 LifeScienceLeader.com 31