Sofinnova Ventures Defies the Grim Mood, Raises $440M For Biotech-Only VC Fund

10/17/11Follow @xconomy

Talk to biotech VCs, and you’ll hear a lot of moaning about how tough the FDA has become, how grim the IPO markets are, and how hard it is get insurers to pay for new products. Nobody in this club can brag about backing investment supernovas like Facebook or Zynga. But none of that has discouraged Menlo Park, CA-based Sofinnova Ventures and its backers from going all-in for biotech.

Sofinnova Ventures is announcing today it has pulled together its eighth venture fund, with a total of $440 million in new capital to invest, bringing its total money under management to $1.4 billion. The firm, founded in 1974, has a long history of investing a majority of its dollars in information technology, and as recently as 1997, put 85 percent of its money there, and the rest in life sciences. But based on the team, its track record, and its strategy, Sofinnova has gradually shifted so that it now invests all of its money in drug development, says Mike Powell, a general partner with Sofinnova, and former group leader of drug delivery at Genentech.

Biotech hasn’t exactly been the hot investment trend lately, as CB Insights reported declining investment in life sciences in the most recent quarter, and a couple of VCs recently called biotech “the Rodney Dangerfield of venture capital.” Sofinnova is challenging this notion; Powell says the firm had to raise the $400 million ceiling of this fund to accommodate all its limited partners who wanted in. The firm, like most VCs, doesn’t disclose its returns, but it has been able to generate returns through a number of recent IPOs—Trius Therapeutics (NASDAQ: TSRX), Amarin Pharmaceuticals (NASDAQ: AMRN), and Anthera Pharmaceuticals (NASDAQ: ANTH)—and a few acquisitions—Vicept Therapeutics (by Allergan) and Movetis (by Shire).

The decision to go all-in on life sciences, Powell says, “is driven by returns. The partnership is focused on sectors where we think we’re going to make money. When fund after fund, you make more in one sector than another, it’s natural that you move more toward that sector.”

He adds that Sofinnova’s limited partners—pensions, endowments, institutional funds—were not afraid to bet on a specialized drug-development-only fund, as opposed to a more diversified healthcare fund that includes devices, diagnostics, or health IT. “The LPs are not only behind it, they encouraged us to do it,” Powell says. “Drugs account for a small fraction of the cost of healthcare, and the amount of benefit you get from drugs is huge.”

Mike Powell of Sofinnova Ventures

Sofinnova is well aware of the complaints that many VCs are making about how tough and unpredictable the FDA has become, which they say has added more time, money and risk to the biotech drug development model. Powell brushed off those concerns. “The Sofinnova position is that the FDA is tough but predictable, and we focus on the second word,” Powell says. “We know they are tough, everybody knows that. But if you listen to what they say carefully and take their suggestions seriously, you can navigate the FDA and get where they want to go.”

Sofinnova is seeking not only to mitigate its regulatory risks, but also its technology risks, by avoiding most of the raw but promising areas of biotech (like, say, stem cells). The firm plans to invest in new drug development ideas being spun out of Big Pharma companies, which are typically already primed to enter the second or third phase of clinical trials needed for FDA approval, Powell says. Sofinnova will often look to make Series A founding investments in companies, but these will not be the really raw, two-guys-in-a-garage-with-a-bold-idea kind of company. Many of these startups will be spinoffs that come with intellectual property and senior management talent from a larger company that’s downsizing or re-prioritizing its research portfolio, he says.

Sofinnova will seek to diversify its fund by investing in different therapeutic areas, which can fall in and out of favor over time, Powell says. Right now, the firm likes ophthalmology companies, dermatology, oncology, and drugs for rare diseases. Sofinnova is steering clear of diabetes drugs at the moment because of the high hurdles at the FDA, and it’s avoiding certain neurological disorders, like Alzheimer’s, which require too much time and capital to address, Powell says.

Like any successful investor, Sofinnova has had to be nimble about its market timing. Sofinnova made sure to liquidate its entire holdings in San Diego-based Orexigen Therapeutics (NASDAQ: OREX) during a window of opportunity about 10 months ago, when the company got a positive recommendation from an FDA advisory panel for its obesity drug. The stock soared for a while, but crashed back to earth when the FDA rejected the compound and asked the company to run another long, expensive clinical trial to prove it doesn’t raise the risk of heart attacks and strokes. Sofinnova, like a lot of investors, had a feeling the FDA might do that to Orexigen, after it rejected a couple other obesity drugmakers. “We were nervous,” Powell says.

At least for this new fund, which will take three to five years to dole out in new investments, Sofinnova isn’t that concerned about the other major boogeyman in life sciences—reimbursement. Healthcare reform passed in 2010, removing some of the uncertainty about drug price controls, Powell says.

“Reimbursement has been an issue for 40 years, and there will always be reimbursement issues,” Powell says. “If you go after indications where you save someone’s life and have a huge impact in their outcome, like you reduce their time in the hospital, reimbursement still takes time to get, but you will absolutely get it. It may not go as fast as you like, but if you have a drug that actually works, you’re fine. If you have a me-too drug, or that is taken twice a day instead of an existing drug that’s three times a day, and isn’t really differentiated, that’s another thing.”

Still, the issue of future price controls is bound to rear its head in life sciences investing at some point, Powell says. Just not in the next 10-year return cycle for this fund. “Another 10 to 20 years from now, that issue could be front and center,” Powell says.

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