AMSTERDAM – In the latest example of biotech venture capitalists and Big Pharma joining forces to prospect for products, Index Ventures announced March 21 that it had raised a new €150 million life sciences venture fund, Index Life VI, and said that GlaxoSmithKline PLC and Johnson & Johnson had committed a combined 50% of the fund’s total capital.

Index has been an early and vocal proponent of asset-centric investing, in which company creation is eschewed in favor of a leaner, less expensive drug discovery and early development environment Also see "PanGenetics' NGF Antibody Sale Illustrates Index's Asset-Focused Strategy" - Scrip, 1 December, 2009..

That strategy will continue with ILVI, said Index partner Francesco De Rubertis, who emphasized that GSK and J&J will receive no special rights to compounds or companies Index chooses to back, and that Index retains full decision-making control, including the right to nominate five of the nine members of a scientific advisory board that will meet regularly to review potential Index investments. The pharma companies are only “buying proximity” to the assets, he said, but it is “non-captive proximity,” meaning no strings are attached and each investment will be sold in a fair market auction in which any buyer may participate.

GSK and J&J will contribute advice and guidance to Index, however. Moncef Slaoui, chairman of R&D at GSK, Paul Stoffels, worldwide chairman of pharmaceuticals at J&J, and other senior executives will join the nine-member scientific advisory board.

This is Index's first life-sciences-only fund – previous funds have included technology investments – and it is the first time Index partners will be confined to private company investments. “We will manage for returns” and not to its pharma limited partners' agendas, De Rubertis said, adding that the proximity purchased by GSK and J&J should enable the fund to identify, back and develop assets most likely to excite any potential pharmaceutical acquirers. Returning limited partners contributed the other half of the new fund’s capital.

VC And Pharma Strengthen Ties

The new fund marks the latest iteration of the VC-pharma tie-up outside of typical corporate venture capital initiatives and at least the fourth time in the past two years that a big drug firm has played a strategic LP role in a venture fund or group of funds. Though rarer than the now-ubiquitous corporate venture funds first launched by GSK (SR One) and J&J (Johnson & Johnson Development Corp.), these venture-pharma relationships allow closer and earlier interaction of pharma guidance and cash with venture-backed company creation. Such interaction is crucial for VCs who want to know as early as possible what their ultimate customer – the pharma acquirer – is looking for, and it's crucial for the pharmas that need to fill their pipelines from outside sources.

The investment of multiple pharma companies in the Index fund fundamentally distinguishes ILVI from previous strategic LP deals by Eli Lilly & Co. and Merck & Co. Inc. Also see "Merck's Capital Idea: Industry's Latest Push to Strengthen VC Ties" - In Vivo, 1 September, 2011.. De Rubertis claims that having two strategic partners dispels concerns about a fund being in cahoots with one company – and thus limiting the strategic options for its portfolio companies.

The level of financing commitment, along with the active participation from Slaoui and Stoffels and their senior colleagues, separates the new fund from more passive precompetitive efforts that tend to pull in multiple investors.

At J&J, the Index relationship will complement not only JJDC, but a so-called sidecar fund that allows J&J to invest alongside MPM Capital, an investment in Polaris Venture Partners’ Dogpatch incubator, and other initiatives including its own recently opened Janssen Labs incubator in La Jolla.

Venture Firms Exploring Asset-Based Financing Deals

In 2005, Index Ventures seeded PanGenetics BV, which housed two separate asset-focused LLCs. Late in 2009, Abbott acquired one of the two, generating an exit for the firm, while the other was eventually shuttered
Atlas Venture has established Atlas Venture Development Corp., an entity designed to control multiple LLCs. Each one, such as migraine drug developer Arteaus Therapeutics LLC, will be a product-centered company. Arteaus has no full-time employees; its CEO is Atlas Venture partner Dave Grayzel.
Versant Ventures launched Inception Sciences Inc. in mid-2011. The drug discovery company will spin out assets into separate companies, such as Inception I and Inception II, in order to streamline their eventual sale if appropriate buyers are found.
Last year, CMEA Ventures created Velocity Pharmaceutical Development, which will support development of assets housed in one-off companies. Assets will be obtained by trading equity in those companies, rather than paying cash to their sellers.

Each of these collaborations is part of a broader pharma effort to access innovation earlier and less expensively. This trend is driven by the same forces that have amplified the wave of pharma-academia deal making and greater interest in early stage assets aimed at truly first-in-class products. Pharma R&D – at least R and early D – have failed to meet pharma's and pharma's investors' expectations.

Asset-Centricity Draws Admirers

Index’s asset-centric approach, epitomized by erstwhile portfolio company PanGenetics BV, whose anti-NGF antibody was acquired by Abbott Laboratories Inc. in 2009, was a significant draw for GSK and J&J, the companies said [See Deal].

Backing projects, rather than companies, is a concept gaining momentum even as there are few data points available to prove the model's worthiness. Traditional venture investors Atlas Venture and CMEA have each announced asset-centric initiatives, Atlas Venture Development Corp. and Velocity Development Corp. LLC, respectively. (Also see "Atlas, CMEA Test New Biotech Model " - Scrip, 1 April, 2011. and Also see "CMEA Ventures Into Development, But Not Tied To Lilly As Expected" - Pink Sheet, 27 June, 2011.). Groups affiliated with scientific institutions, such as Karolinska Development AB, are also pursuing asset-focused strategies. Index’s version relies on a dozen or so Index Drug Developers, or IDDs, a cadre of managers who push assets forward under highly-tranched funding conditions within Index’s investment framework, aiming to quickly advance – or quickly kill – a product candidate.

This R&D funding model, says De Rubertis, removes important asset development decision making from corporate scientists whose career paths can be determined by the success or failure of their projects. Within the IDD scheme, several fast failures can precede success. An IDD simply moves on to the next project.

Success for Index in ILVI will be measured in the same way as success in any other fund is measured, says DeRubertis, that is, solid financial returns borne from selling portfolio companies and assets. For GSK and J&J, success will likely be measured by how many assets from ILVI wind up in-house after Phase II proof-of-concept testing. “There is real value in being close to an asset,” said De Rubertis. Only time can test that hypothesis for Index’s pharma partners.

Selected Recent Collaborations Between Pharmas and Venture Capital Firms
Pharmas have increasingly partnered with venture firms as a way to gain access to early-stage research and development. Whether by investing directly in venture funds as a limited partner or by investing alongside VCs – sometimes through a corporate venture arm – pharmas stand to gain from proximity to nascent projects, and at times even take options to acquire start-ups in the process.
Fund Name	Venture Firm(s)	Pharma Collaborator(s)	Size of Fund	Details
Index Life VI	Index Ventures	GlaxoSmithKline plc, Johnson & Johnson	€150 million	Each pharma contributed roughly 25% of the fund, which will target assets
Merck Research Venture Fund	Undisclosed	Merck & Co. Inc.	$250 million	Merck will be a limited partner in several VC firms worldwide; it has already invested in one U.S. fund
Eli Lilly “mirror funds”	Undisclosed	Eli Lilly & Co.	Estimated $250 million each	Lilly will take 19.9% stake in funds for $50 million apiece, taking call options on some compounds developed by portfolio companies
venBio Global Strategic Fund	venBio	Amgen Inc.; others undisclosed	$175 million	Multiple pharmas will be passive investors in growth-stage companies
MPM Bio IV NVS Strategic Fund	MPM Capital	Novartis AG	Undisclosed	Pharma takes options on compounds in joint investment program
N/A	Atlas Venture	Shire plc	N/A	Established collaboration to incubate and co-invest in rare disease programs
Sources: News stories, Elsevier’s Strategic Transactions database, and SEC filings

With supplementary writing and reporting by Paul Bonanos (p.bonanos@elsevier.com)

Backing New Index Fund, GSK, J&J Buy Into Asset-Centric Vision Of Biotech Future

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