Why Biogen Idec Got Out of the Corporate VC Business

1/27/12Follow @xconomy

Steve Holtzman got his first taste of corporate venture capital back in 1987, when he raised money from SR One, back when it was part of an old company known as Smith, Kline & French.

The concept was unorthodox 25 years ago, yet over time, most every Big Pharma company has become an active equity investor in biotech startups. But Holtzman, early in his tenure as lead dealmaker at Weston, MA-based Biogen Idec (NASDAQ: BIIB), chose to buck the trend, helping put the kibosh on the company’s VC investment group in the past year. This was no small decision, given that Biogen started its venture investing group in 2004, committed $200 million to it, and made investments in companies like San Diego-based Intellikine, South San Francisco-based iPierian, San Diego-based Calcimedica, and Cambridge, MA-based Aveo Pharmaceuticals (NASDAQ: AVEO), among others.

Holtzman outlined four main reasons why Biogen has gotten out of the VC game during an interview earlier this month at the JP Morgan Healthcare Conference. But before diving into those reasons, they should be placed in the context of what’s been a busy first year of dealmaking he has overseen as part of CEO George Scangos‘s new management team at Biogen.

Besides shutting down the venture investment effort, Biogen also closed down its startup incubator, so that more resources could go to internal R&D projects, Holtzman says. Given that Biogen has plenty of drug candidates (six) in the third and final phase of clinical trials usually required for FDA approval, Holtzman’s mandate has been to in-license drugs that can fill gaps in the early-stage part of the pipeline. Two recent partnerships, with South San Francisco-based Portola Pharmaceuticals and Carlsbad, CA-based Isis Pharmaceuticals (NASDAQ: ISIS), reflect that desire. Expect more in-licensing of early-stage drug candidates for autoimmune and neurological disorders in the year to come, Holtzman says.

Given that backdrop, here are the four arguments that Holtzman says are commonly made in favor of corporate VC activity, which he says don’t make sense for Biogen:

1. “Corporate VC investing provides a window on novel technologies.” That might sound reasonable on the surface, but Holtzman says it’s not necessary, and not the best way to stay plugged in. “I’d submit to you that the best window on novel technologies comes from your scientists, who are identifying new things all the time,” Holtzman says.

2. “It’s a good way to network with VCs who have an inside look at what’s hot. If you don’t invest with them, you aren’t connected to them.” This argument doesn’t apply to Biogen, because its senior executives—particularly Scangos, R&D head Doug Williams, and Holtzman—have all been in the biotech business for 25 years and have extensive Rolodexes in the venture capital world.

“We are intimately familiar with all the VC players on a first-name, friendly basis,” Holtzman says. “We have multiple meetings here [at the JP Morgan conference] with the leading VCs in the industry, where they sit down and go through every company in their portfolio that might be of interest to us. We are very happy to do that. We get calls regularly from VCs who say, ‘We’re thinking of starting a company in the following area. Are you interested in that area?’ And beyond that, they ask us, ‘What do you think are the interesting areas where we ought to start companies?’

Personal relationships with the VCs can be forged through conversations like that, and they won’t be strengthened by going a step further and co-investing, Holtzman says. “I was just in a meeting in this room with [Venrock's] Tony Evnin, one of the grandfathers of this industry. Tony invested in my first company in 1987, he invested in Millennium, and he invested in Infinity. I walked in here and we hugged. We hugged. That’s what it’s like with meeting most of them.”

3. “As a corporate VC, you can get a preferred seat at the table when it’s time to buy the new technology.” This is essentially a myth, or at least it should be, Holtzman says. “As someone who was a CEO of one of those startup companies, and had Novartis Venture Fund as an investor, you owe it to the shareholders, and you owe it to yourself, if you have something interesting, to go get the best deal that’s right for your company. Therefore, there are no preferred seats at the table.”

4. “There’s a need to support the life science innovation ecosystem now that traditional VC is declining.” This is a more recent argument in favor of corporate venture investing, Holtzman says. But there are other ways to support the innovation community than by making venture investments, he says. Specifically, Biogen looks to support the ecosystem by sponsoring what he calls “strategically important research at universities” and by entering into alliances with young biotech companies.

And even though Biogen isn’t technically making venture investments, Holtzman notes that it can always make equity investments in small companies when it forms a development partnership. Biogen can still add an equity component to the usual upfront, milestone, and royalty payment structures that companies use to share the risk and rewards of drug development, he says.

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  • http://About.me/ZenVen Zen Chu

    Great article, Luke. Having worked in corporate venture capital in Silicon Valley, I totally agree with Steve’s assessment — for the focused management teams that have those VC relationships and pattern recognition. The history of corporate venture funds are littered with high turnover teams and investments which neither perform well or end up serving the original investment thesis.

    However, for many companies with large portfolios and separate business silos, the corporate venture groups provide an important role in identifying common problems to be solved across product lines and navigating startups to partnerships earlier. This navigation and pollination role is often more important than the investing role.

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