Still Waiting for the Ships to Come in at Third Rock Ventures
Third Rock Ventures was in the enviable position of turning away some institutional investors when the life sciences venture firm recently closed on $516 million for its third venture fund.
So first let me say, “Congratulations!” to team Third Rock.
Mark Levin has demonstrated at Third Rock and as the chairman and CEO of Cambridge, MA-based Millennium Pharmaceuticals that he can generate excitement around the commercial potential of cutting-edge science like no one else in the business.
However, despite the impressive vote of confidence from the institutional investment community, Third Rock has yet to prove their investment model. To do that, they must demonstrate they can reliably provide cash-in-cash-out returns to those investors sufficient to justify the risk and illiquidity of investing in early stage pharmaceuticals. For that to happen, Third Rock has to sell companies, which takes longer and is even harder than selling individual products to pharma.
If Third Rock sticks to the strategy of funding breakthrough platforms rather than products, they are making the implicit assumption that big pharma will want to get back into the discovery and early development business when they buy a Third Rock company. Otherwise the old venture adage applies: Why buy the cow when you can get the cream? The idea of providing a monopoly or even a major headstart in a particular branch of research hasn’t served the venture community well in the past.
In the 1998 to 2002 time frame, the venture industry proved quite effective at developing platforms—including Levin’s genomics platform at Millennium—in areas like combinatorial chemistry, anti-sense, gene-expression profiling, gene, protein and other “omics” to quote Sydney Brenner.
However, the VCs proved far less successful at realizing the value of those platforms and generating returns for their investors. Much, if not most, of the $8.8 billion Takeda paid to acquire Millennium has been ascribed to Millennium’s lead product bortezomib (Velcade), which was not a product of their genomics platform but came with Millennium’s 1999 acquisition of Leukosite.
It’s still relatively early in the game. Levin and co-founders Kevin Starr and Robert Tepper started Third Rock less than six years ago, and it takes most pharmaceutical startups a decade or longer to reach the goal line in terms of creating true value. While Third Rock’s progress in “pharma-time” is clearly impressive, the return multiples from individual investments required for the fund to compete in larger financial market become challenging above five years and virtually prohibitive after ten.
Perhaps Third Rock can do what’s never been done. I wish them well trying. Big pharma, which has a shortage of new drugs under development, needs this kind of support from biotech to address the most pressing challenges and opportunities it faces. We all benefit from successful companies in the sector. However, good works alone are not sufficient to sustain a firm or an industry, as the venture community demonstrated once before. The venture, biotech, and pharmaceutical industries should be pursuing more of these new approaches if we expect to meet the needs of investors and patients and stay in the game.