S.R. One 2.0?

Andrew Witty hasn’t officially taken over the reins at GlaxoSmithKline from Jean-Pierre Garnier. But already there are signs of significant change. Last week came news of an impending management reshuffle. Now IN VIVO Blog has learned that Witty wants to create a new corporate venture fund that could have as much as $500 million at its disposal.

The eponymously named GSK Venture Fund, which hasn’t formally been announced, will have a two-fold agenda: First, the group will make strategic investments outside the company that will bolster the pharma’s internal R&D strategy; second, the venture group will commit capital to build start-ups around assets that GSK has deprioritized.

Russell Greig, currently GSK’s president of Pharmaceuticals, International, will take control of the fund on June 2, reporting directly to Witty. Prior to running Pharma International, Greig was senior VP of world-wide business development for GSK. No doubt he has a Rolodex—or even an Outlook folder—filled with contacts that will serve him well in the clubby world of VC. Rumor has it, he’s already off to an aggressive start: Greig apparently has spent the past few months renewing or establishing contacts with East and West Coast venture capital firms as part of the diligence required to start the new fund.

This isn’t GSK’s first foray into the world of corporate venture. Back in the 1980s, the pharma established SR One, an evergreen fund that to date has invested $550 million in 125 companies Those investments have been primarily passive—in other words, SR One hasn’t actively sought to gain rights for GSK to the products or technologies of the companies in which it invests. "We don't take options and there are no call-backs," said managing partner Joyce Lonergan, at Windhover's March Pharmaceutical Strategic Outlook meeting. "Our mission is to be on the outside edge of where GSK's BD guys are," said Lonergan.

It seems likely that won’t be the exclusive modus operandi for the GSK Venture Fund, of which SR One will now become a part. Rumor has it that one reason Witty is so keen to start this new fund is that SR One's investments haven't had much impact for GSK. Said one insider, SR One “doesn’t move the needle for GSK.” Certainly, Greig and his team will have unprecedented access to GSK’s top brass, something SR One has never enjoyed. (Until this restructuring, the SR One group reported to GSK’s head of business development, Ad Rawcliffe, who in turn reported to Moncef Slaoui, GSK’s head of R&D.)

GSK is just the latest pharma to take a more active interest in corporate VC. As we reported back in November, big pharma is reaching far and wide for new business development strategies that might help them fill their pipelines without having to overpay for the best licensing and M&A deals. They're are eager to function more like traditional stand-alone venture capital firms, with an eye toward locking early into the best deals and identifying new industries that might help them broaden their product portfolio. Pfizer Inc.'s venture group, for example, is investing heavily in diagnostics while Novartis' venture group is investing in medical device companies. In addition, Novartis company also has a $100 million option fund for investing in companies with early stage platform technologies. The idea: at the time of investment, the fund takes a no-cost option on a given start-up's program--usually after its reached clinical proof-of-concept--giving the pharma (theoretically) cheap access to new compounds.

Nor is GSK unique in looking for new ways to monetize low-priority assets. Every major pharmaceutical company we’ve talked to recently is thinking aggressively about out-licensing and risk-sharing options. (Even Pfizer, which made news last week with the spin-out of Esperion 2.0. We’ll have more about that Big Pharma’s BD strategy in the upcoming May IN VIVO.)

The new bus dev mantras? First, out-license products for cash and royalties, preferably with an option to buy back the product if it’s successful. Alternatively, consider teaming up with another Pharma—preferably one with deep pockets that is willing to share development and commercialization costs—and therefore the risk—much the way Bristol Myers Squibb did in its deals with AZ (two diabetes compounds) and Pfizer (the anti-coagulant apixiban). Pharma companies are also looking to start new companies around non-strategic assets, getting equity in the newco in return for contributing the compounds.

The creation of the GSK Venture Fund raises numerous questions. First, what happens to SR One? The group has been making venture capital investments for more than two decades. Just how will the fund will function as part of this newer, larger GSK Venture Fund entity isn't clear. It's worth noting that despite its 20-year history, management of SR One has seen some significant turnover ever since founder Peter Sears left the group.

Second, GSK already had tried and failed to build a program to license unwanted assets. The now-defunct GSK Ventures had been set up to invest not money but GSK assets--technologies, early-stage compounds, patents--into new venture-backed companies. The program took a hit when its founding managers left GSK to start their own firm. But observers tell us GSK's R&D group simply balked at providing the assets. This is where Greig's direct report to Witty might help just a bit.

Finally, how far afield might GSK Ventures go? Will the group look outside of its core industries as Pfizer and Novartis have done? Could diagnostics, devices, or even services be part of the group's future portfolio?