Sanofi CEO Chris Viehbacher recently spoke with journalists during the recent CED Life Sciences Conference in Raleigh, North Carolina. He discussed his thoughts “about how to marry life science ideas with the financing that is the life blood for that innovation.” The pharmaceutical giant earlier this year partnered with venture capital firm Third Rock Ventures to launch biotechnology company Warp Drive Bio.
Supporting biotech company launches is not a typical activity of Big Pharma. But Viehbacher said that “business and financing models are changing, and investors and pharmaceutical companies must change as well.”
Warp Drive’s proprietary genomic technology was incubated within Third Rock. What the partnership offers is a pathway to develop the science and a partner in Sanofi, who could vet the research and perhaps commercialize it. To start, the partnership provides Warp Drive with $125 million in initial funding, including $75 million in equity investment, to support development of the biotech’s technology.
But just as important, the agreement provides an exit for Warp Drive’s investors. The partnership is structured in a way that allows Third Rock to force Sanofi to buy the company if certain performance criteria are met, Viehbacher explained. Sanofi can also force the venture capitalists to sell under certain conditions. Viehbacher said other venture capitalists are interested in pursuing similar deals.
“Every venture capitalist I’ve ever talked to is interested in this model because they clearly see opportunities,” Viehbacher said. “The science is fabulous today. But if you don’t have an exit strategy, you can’t really afford to get into it.”
How is the financing model changing?
The Sanofi CEO noted that the financing model is changing because there is uncertainty in the regulatory process: can you get a drug approved? How much return will that product have? “And the fact that the IPO window is closed means that the time now for a biotech company to get all the way to the marketplace exceeds the time frame that a venture capitalist is willing to stay (invested).”
As a result of the current trend, “you either have a problem of startup companies finding funding, or you have a problem where a lot of companies are forced to sell just because nobody is going to fund development beyond a certain time frame.”
However, Viehbacher predicted that “Big Pharma,” will begin to fund much earlier-stage research. As long as there is a “clear exit” for companies investing in startups, about five years, he predicts this happening in the near future.
One of the things he said “Sanofi is doing is reducing its own internal research capacity.” He said the company will do less of their own research. They are not going to get out of research entirely. Sanofi will continue doing research it does well, but the company also wants to work with more outside companies, startup biotechs, with universities. Why? Because it’s cheaper.
But research and development is either a huge waste of money or too, too valuable. It’s not really anything in between. “You don’t really do things because it’s cheaper,” Viehbacher said. The reality is the best people who have great ideas in science don’t want to work for a big company. They want to create their own company. So, in other words, if you want to work with the best people, you’re going to have go outside your own company and work with those people.
In the past, these smaller companies typically did not want to work with Big Pharma, but because of funding gaps and more onerous regulatory, approval, and marketing requirements, “there’s a much greater willingness of earlier-stage companies to work with Big Pharma. We’re looking earlier and people who are early need help.”
Viehbacher pointed to two reasons why he likes capital venture firms. First, “they can sometimes bring competencies we don’t have, like for instance in how to help a startup company.” The second thing is to give you a second opinion. “Somebody in your company is going to love the science and be championing this internally. But you want to have a second opinion. If you have a venture capital company that’s willing to put money in, that kind of gives a little validation of that.”
The Sanofi CEO gave further details about this new “model,” using Warp Drive as an example. To explain the new model, he first distinguished it from the old model. Previously, Big Pharma would look for a product, pay some sort of up-front payment to take into account all of the risk and research already invested, and either fund research or take over the research. If the product goes further, you get milestones. One day, if it makes it to the market, you get royalties.
In contrast, the new model, capitalizes on Big Pharma competencies in validation. So, if a Big Pharma company does a deal with a smaller company, the smaller company’s share price goes up because people believe that Big Pharma has depth of competencies to judge whether this science is any good or not. He also noted that Big Pharma should work with big companies as well because they have an element of “disruptive thinking that helps bring about innovation and bring Big Pharma Competencies together.
Conclusion
Ultimately, Viehbacher noted that companies will “never get any innovation if they are not prepared to take the risk.” He noted that the risky money doesn’t come in the beginning phases, but rather, in phase 3 clinical trials, where costs begin to enter the billions. He noted that it’s a whole lot more risky going into a phase 3 billion-dollar program than investing probably $10 million in an early stage asset. Accordingly, the Sanofi CEO said moving forward, he wants to be more risk averse going into development, and that he probably is going to be much more willing to take the risk at an early stage.