Nurturing Innovation

As the number of life sciences venture capitalists willing to fund start-up companies shrinks, talk in the industry has centered on how to ensure the health of the biotech ecosystem—a fragile environment predicated on good ideas pairing up with investments to support them. Meanwhile, drug firms have significantly cut back on their own early-stage research and are more dependent than ever on biotech innovation to fill their pipelines. The situation has forced big pharma companies to find creative ways to support early discoveries.

Some drugmakers are attempting to maintain a steady influx of innovative science by establishing laboratories in their own facilities as incubators for fledgling biotech drug ventures. Companies pursuing the incubator model say it’s a good way to get a broad sampling of early innovation while also developing relationships with entrepreneurs. Helping to foster young companies is not only good for the life sciences ecosystem, pharma executives say, but it also polishes the brand of the host company in the biotech start-up world.

The rationale for biotechs to rent space in a big pharma incubator over other lab space is that the often full-service setups allow tenants to get to work quickly. At the same time, new companies gain access to technology, know-how, and business connections that might have otherwise been out of reach at such an early stage. Naysayers, meanwhile, worry that a connection to big pharma, no matter how loose, could stifle innovation at nascent biotechs.

Most of the incubators with pharma links have been started in lab space left idle after a major layoff. For example, GlaxoSmithKline in 2011 donated a facility and equipment that, along with contributions from several partners, enabled the creation of a bioscience park at its site in Stevenage, England. Similarly, AstraZeneca this year turned its Alderley Park, England, site into a bioscience park run by BioCity, a third-party management firm.

Some have taken a more direct tack. Janssen, the pharmaceutical R&D arm of Johnson & Johnson, and Bayer have both set up in-house incubators where tenants are selected on the basis of the host’s interest in the science involved.

“The whole goal of this is to provide a flexible, capital-efficient platform that allows companies to get started quickly and easily,” says Melinda Richter, head of J&J’s incubators, Janssen Labs. The point is to help companies use their resources wisely enough to reach the next level, when other investors or partners are more willing to make a commitment. Along the way, relationships develop that could eventually lead to business partnerships.

Companies concede that these efforts stem from an earlier incubator model that didn’t pan out. Both Pfizer and Biogen Idec started incubators five years ago that attracted only a smattering of tenants and soon shut down. Both firms sought a stake in the companies housed in their incubator spaces, a move that industry watchers say doomed them from the start.

But pharma firms say they’ve learned from those efforts that tying tenants up in the big pharma machine can stifle innovation, says Daphne Zohar, managing partner at PureTech Ventures. “The problem with big pharma trying to be entrepreneurial is that they have a good idea, but still subject it to the bureaucracy of a larger organization.”

And attaching strings can limit the kinds of partnerships a company can pursue, says G. Steven Burrill, chief executive officer of the life sciences investment firm Burrill & Co. “While a string may not look like a big string to the incubatee or incubator management, it is a giant barrier for an investor,” he says.

Janssen and Bayer arguably have been the most directly involved in their incubators, but they have pointedly chosen not to take a stake in the companies they bring in. “If we close the system, it would make it less attractive for venture capital to fund them,” Richter says. “It is important for these companies to have access to different kinds of partners.”

Bayer, which in September 2012 opened the CoLaborator, an incubator located in the Mission Bay neighborhood of San Francisco, also forgoes taking a share in tenants’ businesses. “We looked at Pfizer and Biogen models, where they had strong strings attached, and realized there seemed to be challenges,” says Christopher Haskell, head of Bayer’s U.S. Science Hub.

For Bayer, which set up its first research facility in San Francisco three years ago, the incubator is a way to build trust in a vibrant but competitive life sciences environment. “We’re moving into the shadow of some very well-established biotech companies that have a long history of involvement with the innovation community here,” Haskell notes.

But the incubators are not just about goodwill. Janssen and Bayer are interested in attracting companies that could one day potentially augment their own research endeavors, a consideration that can influence the selection of tenants. A neuroscience company, for example, probably wouldn’t be a good fit at Bayer, Haskell says, as the firm has gotten out of that area and is unlikely to reenter it anytime soon. On the other hand, synthetic biology companies have visited, “and while there’s not an obvious project for us to work on together, it’s clearly an emerging technology that has the potential to impact drug development,” Haskell says. Even nonconfidential discussions can help build value on both sides, he adds.

Janssen, which debuted its first incubator in La Jolla, Calif., in January 2012, is also focused on start-ups working on technology—whether it’s drug, diagnostic, or health care information technology—that falls within J&J’s therapeutic areas of interest or might one day fit into the company’s endeavors. The criteria for tenants are stringent, Richter says, with the acceptance rate for applicants at about 10%.

Once accepted, Janssen’s tenants are able to hit the ground running. La Jolla tenants share about 40,000 sq ft of space that is evenly divided among individual lab and office space and communal amenities. Those amenities include 70 pieces of equipment, a chemistry lab, a biology lab, a virus room, cell culture and bacteria rooms, cold rooms, a business center, and conference rooms—all operated by Janssen staff.

The big pharma companies hope that by providing such services under their own roofs, throwing in access to their internal experts and business development groups, they are offering start-ups a better package than the more common shared resources arrangement.

They are also trying to get tiny companies to spend their money wisely and focus on what’s important: the science. “You want to do just the critical stuff when it’s critical,” rather than trying to do things outside your area of expertise, says Douglas Crawford, managing ­director of Mission Bay Capital. Crawford also ­manages QB3@953, the new incubator ­adjacent to the University of California, San Francisco’s Mission Bay campus where Janssen has taken 5,000 sq ft of space.

Troy Wilson, a founder of Wellspring Biosciences, agrees that focus on new science is important. “You don’t want to constantly reinvent the wheel.” Wellspring is the most prominent graduate of the La Jolla incubator and the first tenant to forge a drug discovery pact with Janssen. For Wellspring executives, saving time and resources was key, as was the ability to grow into larger labs when needed.

The big pharma companies say they are also able to offer tenants in their incubators insights, connections, and a provenance that would otherwise be tough to come by. Janssen, for example, regularly encourages interactions between its business development group and tenants at its incubator.

“We really invest our time in these companies, making sure we do not just shop them around internally, and champion them internally, but that we also take them around to our different venture capital partners or grant-making agencies,” Richter says.

Being able to tell private investors that a start-up has gone through a big pharma vetting process, along with being “based at a recognizable institution rather than a garage,” was helpful when Arcturus Therapeutics sought out seed funding earlier this year, says the firm’s CEO, Joseph Payne. Payne, a first-time biotech entrepreneur, also sees value in having access to J&J’s insight as his RNAi therapeutics firm develops its strategy.

Bayer, meanwhile, has learned in the past year that the start-up companies at the CoLaborator “really want to be talking to Bayer more frequently,” Haskell says. “We found that we could bring input from groups like toxicology that, even in a nonconfidential way, can be of high value to these tenants.” Bayer is now exploring how to introduce a formal process for enabling companies to tap into its internal expertise, Haskell says.

And although GSK is only one partner in the Stevenage incubator, the company notes that it does connect tenants to its scientific experts both in informal settings, such as regular morning coffee meetings, and formal events where they are able to showcase their work in front of a GSK R&D audience.

That access and the brand-name recognition are less important to experienced entrepreneurs who already have the connections needed to form partnerships and raise money. The Wellspring founders, for example, are seasoned biotech executives who previously started Intellikine, a cancer drug discovery firm sold to Takeda in 2011.

And doing a deal with Janssen isn’t necessarily a direct result of being a tenant in the incubator. In fact, Wellspring’s Wilson notes that talks with the drug firm began before the company moved into the La Jolla incubator.

Indeed, venture capitalists say the big pharma imprimatur is only valuable when it comes at the bottom of a deal sheet. The vetting process to get into an incubator is nice, but “investors decide whether they want to invest based on their own due diligence,” PureTech’s Zohar says.

Furthermore, not everyone believes in the value of big pharma’s input, no matter how subtle, during the early stages of discovery. “The behavior of small companies and big companies are violently different,” Burrill says. He’s not convinced a large pharma company has the right background and know-how to be truly helpful to a tiny start-up. And he fears some investors may be reluctant to look at a company if its strategy has been biased by a big pharma firm’s interests.

But both Janssen and Bayer have been sufficiently satisfied with the early results from their incubator experiments to expand into other cities. Janssen held the opening for its San Francisco site in October and last month unveiled its Boston incubator.

Bayer is replicating the model at its Berlin site, where an incubator will open next year. Because the biotech business and science environments in Germany differ from those in the U.S., the strategy will have some twists on the Bay Area site’s approach. But the general concept of establishing an open and early dialogue as a way of building value for both sides will be core to both endeavors, Haskell says.

As companies bring the model to new locations, the question of how to define success lingers. The ultimate return on investment is signing a deal, Janssen’s Richter says. Nearly two years into Janssen’s experiment, Wellspring is the only company to have formally linked with Janssen. Bayer, meanwhile, has developed relationships with three of its four tenants that range from simple material transfer agreements to benchmarking a company’s technology against what it’s seen elsewhere.

Improvement to a pharma company’s brand is another measure of success. “We see more opportunities that we wouldn’t have seen in straight licensing discussions because we’re open to different relationships,” Haskell says. The hope is that, down the road, visibility gives companies a better shot when going after deals. Moreover, “not only do we have a seat at the table for these deals that we might not have had before, but I think we’re able to get deals at a better valuation,” Richter adds.

Although less tangible, success can also be measured by the tenants’ influence on the host company’s internal R&D. “When we look at companies and we follow their growth, we learn something that then evolves how we think about science or how we think about business,” Richter says.