- In 2018, Pfizer announced its plan to stop R&D activity in the central nervous system disease space and to create a venture fund that will invest in biotech firms conducting innovative neuroscience research
- The strategy of investing in a therapeutic space exclusively via corporate capital is coming into greater focus for early-stage innovations given the interest in difficult-to-treat high-risk disease areas, improving R&D scale and efficiency, and benefits of spreading risks across external stakeholders while allowing the manufacturer to retain its right on the assets
- The concept of external investment may represent a positive trend in the neuroscience space where different size firms are focused on their comparative strengths, although several challenges still remain to ensure a successful product launch
This blog post is PART I of CBPartners’ 3-part series: 2019 Key Considerations for CNS Investment – read PART II: Alzheimer’s Disease Clinical Trials: Where Do We Go Now? and PART III: Parkinson’s Disease Clinical Trials: How Close Are We to Disease-Modifying Therapies?
Investing in neuroscience through venture fund instead of in-house R&D
Last year, Pfizer ($PFE) publicly announced its decision to stop its Research and Development (R&D) program in Central Nervous System (CNS). This included assets targeting Alzheimer’s Disease (AD), and Parkinson’s Disease (PD), and instead create a venture fund that will invest in biotech firms pursuing innovative neuroscience research. This strategy was further clarified in June when $PFE declared its plan to invest $600M in Pfizer Ventures, with approximately 25% of the capital dedicated for promising early-stage neuroscience companies. In late October, $PFE reported its collaboration with Bain Capital to form a new company called Cerevel Therapeutics, where $PFE will contribute several clinical and pre-clinical assets targeting CNS disorders such as AD and PD while Bain Capital will provide $350M in funding with the ability to provide additional capital as needed in the future.
Understanding the novelty of $PFE’s approach requires us to assess whether other companies have engaged in something like this. It turns out that in addition to Pfizer Ventures there are many pharma corporate venture capital (CVC) firms such as Novartis Venture Fund ($NVS), SR One ($GSK), Amgen Ventures ($AMG), and Johnson & Johnson Development Corporation ($JNJ). Such tactics appear to be aimed at spreading the investments broadly and allocating resources efficiently considering that, in terms of early-stage R&D efforts, it is often unclear which technology will feasibly address the underlying issues and how the therapeutic landscape will evolve in the near future.
Are corporate venture capital firms aligned with their parent companies?
A pharmaceutical company often uses its CVC arm to explore biotech firms operating in a space that reflects the parent company’s research focus. This is advantageous for accessing emerging technologies, finding firms that can be acquired, and assessing competitive threats in the disease space. Nevertheless, there are a few cases when a pharmaceutical company aims to explore a certain disease area or technology that is not a part of its current product pipeline. This approach can be illustrated by how $GSK early stage R&D in bioelectronics. Rather than conducting the R&D in-house, $GSK has formed a specialized CVC arm called Action Potential VC, funded external investigators to perform exploratory research projects, and organized an innovations challenge.
In another example, Merck’s ($MRK) Global Health Innovation Fund has funded potential healthcare solutions that combine data and IT platforms. Such tactics are often pursued in the context of not only novel technologies but also challenging disease areas. The Dementia Discovery Fund, which aims to discover and develop novel dementia therapies, counts several pharmaceutical companies as its investors. While some companies are known for their CNS focus (e.g., $BIIB and $LLY), there are other companies with currently no CNS asset in their pipeline (e.g., $PFE and $GSK). These examples suggest that the strategy of supporting research exclusively through investments and partnerships rather than in-house R&D is a relatively new concept, although it is not unique to $PFE and has been conducted by some pharmaceutical companies.
Novelty of conducting research through external investment
At this point, understanding whether such an approach will be fruitful is limited by several factors, including its brief track record, the novelty of technologies being funded, and the dismal clinical trial history of therapies in the CNS space. Nevertheless, we see $PFE’s strategy of pursuing CNS therapies externally to represent a positive shift toward the landscape where companies specialize in their core competencies, with small biotech firms developing innovative therapeutics and large pharmaceutical companies providing the required capital, supporting the clinical trial programs, and handling the eventual commercialization process.
1) External investments in a competitive disease area can result in the pharmaceutical manufacturer having multiple assets that target the same disease and patient population. Such approach can be advantageous by spreading the risks and allowing a product with the best clinical data to be selected. But having multiple products in the same therapeutic space can introduce a systematic risk if the products are based on the same mechanism of action, limit the value of individual products, and create challenges in designing product-specific value positioning strategy. It will be important for the manufacturer to develop a portfolio strategy that integrates these products and align them with the company vision.
2) External investments can be valuable in a difficult-to-treat high-risk disease area with each stakeholder specializing in its core competencies. Given the research efficiency of biotech firms, the parent company can improve its R&D scale and efficiency, reduce the risk exposures to each therapeutic asset, and still retain the product rights. Nevertheless, the resulting efficiency can come at a price, given the typical smaller clinical research data packages generated, the priority of successful phase 2 proof of concept study over phase 3 randomized study, and the decreased ability to adapt the product into the overall portfolio or overarching strategy.