Friday, September 21, 2007

Strange Bedfellows: Novartis Marries VC & Business Development

We’ve been following the two Novartis VC funds for some time now, more extensively here in START-UP and also, in August, here at the Blog. The older of the two funds is a more traditional corporate VC group, reporting ultimately to the CFO.

The second, called variously the MPM Pharma Strategic Fund and the MPM Bio IV NVS Strategic Fund LP, is a joint program between MPM and Novartis’s pharmaceutical business unit, run by Thomas Ebeling.

What’s unusual is that both funds want to get options on research programs along with their investments. The first is looking for options on very early-stage programs and has already managed to sign several deals. But the pharma group’s fund wants options on the far more valuable later-stage candidates.

Now that second fund has closed its first deal: a $10 million equity investment in Radius Health and an option on Radius’s Phase II osteoporosis candidate, BA058.

The press release seemed to imply that the option came as part of the investment. Not true – although that’s originally what Novartis wanted, according to one source.

The Novartis-affiliated MPM fund bought its equity at the same price Radius’s venture investors (including MPM) had paid in its $57.5 million second round, which closed in April. But Novartis is also paying an undisclosed option fee, says Radius CEO C. Richard Lyttle, PhD, plus providing some “in-kind services”--access to Novartis expertise, presumably in the development of osteoporosis drugs. As for governance, Lyttle was a bit cagey: Novartis wouldn’t get a board seat “as a direct part of this deal.”

The option gives Novartis a few months (we estimate 90 days) to look at Radius’s Phase II data once it’s collected– during which time Radius can’t show it to anyone else. At the end of the option period, Novartis can say “no” and walk away (leaving Radius to shop the product to anyone they want)—or “yes” and trigger a pre-negotiated deal.

That deal is worth some $500 million in fees and milestones, $125 million of which go back to Ipsen—the French drug company from which Radius originally licensed the peptide, an analog of the natural peptide human parathyroid hormone-related protein. The terms, says Rich Lyttle, are equivalent to the money they would have gotten had they already had the Phase II data. He knows this, he says, because he talked to a number of Big Pharmas before signing the option agreement with Novartis, getting a good sense of what they’d be willing to pay.

Maybe. As most dealmakers will tell you, the dynamics of an auction aren’t predictable. It’s quite possible that Radius could have gotten a better deal when more companies were hooked with real Phase II data for a bone-building product.

But Lyttle says that even if they could have gotten a few extra dollars in an auction, the process of negotiating a deal would have taken months, delaying the Phase III primary-care trials Radius certainly can’t afford on its own, and ultimately destroying value. If Novartis triggers the option, he says, the program can start right away—and patients will get the drug faster. Certainly, Novartis would be motivated to move it along, he notes, since BA058 dovetails nicely with the Swiss company’s Aclasta, approved in various countries outside the US for Paget’s disease but in trials for osteoporosis (BA058 apparently builds bone rapidly; Aclasta prevents bone loss).

In any event, it’s certainly not a bad deal—the other VCs in the deal wouldn’t have let it happen if it had been obviously harmful to their interests. But it is nonetheless highly unusual, maybe unprecedented (we’d love to hear from you about any previous recent examples of minority investments bringing options on later-stage drug candidates—we don’t know of any).

Indeed, Novartis has managed to combine true business development with a venture-capital strategy. That’s clearly been a goal of many corporate VC programs: get some early looks at interesting technologies which have sometimes led to later transactions. But rarely if ever has the initial investment come with an option. The granddaddies of corporate VC, GlaxoSmithKline's SR One and Johnson & Johnson's J&J Development Corp., have been religious in observing the divide between the medical businesses of their parents and their own investment activities. They’ll facilitate deals—but not if they compromise their investment roles.

The MPM/Novartis fund is, on the other hand, a true melding of business development and VC. And that’s why the outcome will be important to watch. If the Radius deal is more than a one-off example, the fund will provide a popular model for product-poor Big Pharma to gain preferred access to the pipelines represented by VC portfolios. On the other hand, if the deal is seen as preventing Radius from getting a profitable exit for its investors, serving Novartis' needs at their expense, corporate VC will go back to the drawing board.

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