Novartis Option Fund Managing Director Says First Responsibility is to Portfolio Companies, Dislikes “Corporate VC” Moniker

10/31/08

Don’t be confused by the name of the Novartis Option Fund. The fund’s purpose isn’t to gain options in companies for Swiss drug giant Novartis to later acquire, says Lauren Silverman, the fund’s managing director. And it isn’t a traditional corporate VC firm that operates as an extension of the parent company.

Rather, Silverman prefers to think of the fund as a more general venture capital fund that happens to have a single limited partner. That partner, to be sure, is Swiss drug giant Novartis (NYSE:NVS). However, says Silverman, “We really don’t consider ourselves as a strategic fund (to Novartis) at all. In terms of our investment mission, we can invest on strategy with Novartis or not on strategy with Novartis.”

For all the ways it is similar to mainstream VC outfits, however, the Cambridge, MA-based Novartis fund is different from most venture firms in other ways. For one, the fund plays a role in helping Novartis purchase options to certain uses of its portfolio companies’ technologies. Silverman acknowledges that this aspect of her fund is indeed “strategic,” in terms of serving the product interests of Novartis, but she notes that the option rights return to the startups if Novartis doesn’t exercise them within a set period.

Also, unlike other VC firms that must tap numerous limited partners to raise money for their own investments, the option fund launched out of the gate in January 2007 with $200 million from its parent company—an enviable trait to venture investors struggling to raise money amid the current economic crisis.

Good news for newly hatched life sciences startups. With its considerable resources, the option fund searches for opportunities to invest in biotech firms at their earliest stage of development—even as many traditional VC firms steer their resources toward more mature enterprises. Over time, Silverman says, the fund aims to invest between $20 million and $25 million in its portfolio companies.

To be clear, the option fund’s own board is composed both of Novartis executives and independent members. Further, the option fund is part of Novartis Venture Funds, which is one of the largest corporate biotech VC units in the world with more than $600 million under management. (Here’s our list of some of the Boston-area corporate VC firms focused on life sciences.) Yet Silverman was adamant about the limits of Novartis’ influence over her fund, noting that the board is led by independent chairman Spyros Artavanis-Tsakonas, a professor of biology at Harvard Medical School.

Thus far, the option fund has placed bets on the following five startups:

Adenosine Therapeutics — Charlottesville, VA

Adenosine was acquired this summer by Newton, MA-based biotech firm Clinical Data (NASDAQ:[[ticker: CLDA]]) for $11 million in cash and additional fees linked to development milestones. Novartis has an option to develop one of the firm’s molecules in pre-clinical studies to treat asthma and diabetes, according to Clinical Data.

Ascent Therapeutics — Cambridge, MA

Ascent is developing a therapeutic platform discovered at Tufts Medical Center with applications in treating inflammation, cardiovascular conditions, and cancer. Novartis Option Fund invested in the startup’s $19 million Series A round, and Silverman serves on the board of directors there.

Cequent Pharmaceuticals — Cambridge, MA

Cequent was spun out of Beth Israel Deaconess Medical Center to advance TransKingdom RNA-interference to treat such things as inflammation and cancer. Steven Tregay, a managing director of the Novartis Option Fund, is on the board of directors at Cequent.

Forma Therapeutics — Cambridge, MA

Forma is a stealthy startup founded by Novartis Option Fund managing director Tregay with the help of scientists at the Broad Institute of Harvard and MIT in Kendall Square. Silverman declined to discuss details of the startup, yet she confirmed that the firm aims to commercialize science from the Broad. (I wrote this story about Forma when the firm was just getting off the ground earlier this year.)

Proteostasis — Cambridge, MA

As its name suggests, Proteostasis has set out to commercialize discoveries related to protein homeostasis to treat neurodegenerative diseases such as Alzheimer’s and Huntington’s, as well as genetic disorders. (Luke wrote about the firm’s science and founders in this recent post.) Novartis Option Fund invested in the startup’s $45 million Series A round this summer.

Silverman declined to discuss the specific options her fund has arranged between Novartis and its portfolio companies, yet she did note that Novartis itself pays cash for the options. And though she would not specify how much Novartis typically dishes out for the options, she said that it’s “real money” and more than a low six-figure sum.

Still, some entrepreneurs worry that taking investments from corporate VC firms could hamper negotiations with potential buyers (although this didn’t appear to hinder pharma giant GlaxoSmithKline (NYSE:GSK) from buying Cambridge-based biotech Sirtris, which had taken investments from Novartis and large biotech Genzyme (NASDAQ:GENZ)). To put such worries to rest, Silverman says: “…I have to show at every board meeting that my first fiduciary responsibility” is to the portfolio company.

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