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MPM Capital, World’s Biggest Healthcare VC Fund, Balances Startups With Stocks

MPM Capital has grown into such a colossal healthcare venture fund, it makes people who follow the industry (like me) wonder whether it can stay true to its roots. The fund, with $2.5 billion under management, has a tradition of making seed-stage bets in startup biotech companies, including winners like Cambridge, MA-based Idenix (NASDAQ: IDIX). But to keep the returns growing as stakes get higher, it has put money to work in a world further removed from cutting-edge innovation and seed-stage ventures, with investments in biotech stocks with late-stage product candidates that can pay off promptly, and big.

I stopped by MPM’s perch on the 54th floor of the John Hancock Tower in Boston recently to hear more about how it plans to balance early innovation with later-stage candidates that can generate quicker returns. I spoke with John Vander Vort, the firm’s chief operating officer and managing director, and Kazumi Shiosaki, a managing director and former leader of scientific development at Millennium Pharmaceuticals.

MPM, which raised its most recent $550 million fund in 2007, is designed to be a “soup to nuts” investor, spreading its bets on a mix of startups through late-stage growth equities, Vander Vort says. It aims to allocate about 75 percent to 80 percent of its capital to biotech investments, and the rest to medical devices. The strategy is to invest $20 million to $30 million per company, in 15 to 22 companies, Vander Vort says. For the fund to be successful, it should deliver “a handful” of companies that generate returns of 5 times to 15 times greater than its initial investment, and some that return 2 to 5 times the original investment, Vander Vort says. “Obviously you have some klinkers too,” he says.

Still, when MPM announced its new fund in March 2007, it didn’t make it sound like it was patiently putting money into cutting-edge companies and waiting a decade or so for them to bear fruit, if they ever did. Instead, it pointed to how a couple of stocks helped it deliver double-digit positive returns in the first few quarters of the fund’s life.

That may have contributed to a misperception in the market about MPM, Shiosaki says. “Because we’re a large fund, people think it’s only about late-stage investing. We really focus and invest heavily in innovation. There’s actually a requirement in our portfolio to have high-risk, highly innovative, no-one-else-has-seen-it-yet kind of companies,” she says.

Interestingly, MPM’s formula puts about 60 percent of the fund in late-stage investments, while a hefty 40 percent is steered into startup companies, Vander Vort says. Since the fund elected last year not to continue funding the Seattle-based Accelerator—a successful incubator for small, leading edge biotech companies—I figured that placing those smaller bets may just not generate the kind of financial returns a big fund like MPM needs to survive.

Not so, says Shiosaki. MPM keeps its eyes open for big ideas in biology that are probably 10 years away from becoming reality, just not the “pie-in-the-sky” concepts which the firm considers is still 20 years or more away, she says. MPM scouts for these ideas every year in an annual retreat with its scientific advisers—people like Nobel Laureate H. Robert Horvitz of MIT, stem cell researcher George Daley of Harvard Medical School, and Irving Weissman of Stanford University.

A little more than a year ago, the group concluded that epigenetics—the science of turning genes on or off without any alteration to the underlying sequence—was an idea ready for prime time.

So MPM started building a company inside its Hancock Tower offices called EpiZyme, and got the folks at Kleiner Perkins Caufield & Byers to co-invest. This company remains in stealth mode, but Shiosaki, who has served as EpiZyme’s founding CEO, told me it has hired a “dynamic duo” from big pharmaceutical companies to lead the operation. More details are coming soon on how it plans to tackle this tough problem, she says.

MPM also sees itself as one of the venture funds that puts its partners to work in building the startups hands-on, not just putting down $30 million and attending a board meeting once a month, Vander Vort says. That’s been Shiosaki’s role at Epizyme. Other managing directors like Robert Millman handle intellectual property strategy, and Vaughn Kailian, a former CEO of COR Therapeutics, brings a commercial perspective on what healthcare products will ultimately sell.

MPM just recently held its 2008 scientific retreat, and Shiosaki wouldn’t say what big theme in biology the fund decided is ripening for investment, like epigenetics was a year ago. She did drop some hints, however, about asthma as a disease worth tackling, when asked what opportunities should bear fruit for biotech investors within the next 10 years. She made it sound like it’s in the firm’s interest, financially, to swing for the fences with some of these riskier bets. “These technologies can’t be just a little bit better than what’s out there,” she says. “They are fundamentally new mechanisms we’re talking about that will be differentiated in the marketplace. That’s the only way you really get paid.”