J&J Sprouts New Innovation Centers In Industry Hot Spots

In an effort to expand outreach to and interaction with innovation-rich communities, J&J is creating four new regional innovation centers to act as scouts, deal-makers and alliance managers in Shanghai, Boston, California and London.

Johnson and Johnson has announced a significant reshuffling and expansion of its external innovation initiatives. It is creating four new hubs in Boston, California, London, and Shanghai that will act as combined scouting, deal-making, and alliance management centers in biotech hotspots.

J&J’s introduction of its Innovation Centers on Sept. 18 is partly an opportunistic ploy and partly defensive maneuvering designed to gain access to and help prop up what it sees as an increasingly fragile innovation ecosystem. Though the health care giant is not setting up new labs, the new centers will house a “beachhead” of top scientists alongside business development, legal, and investment staff, and experts in the development, regulatory, and reimbursement arenas. The groups will not act autonomously, however, instead making decisions in concert with existing J&J departments.

As a reflection of the new initiative’s importance at J&J, the four leaders of the new sites – current J&J executives Patrick Verheyen in London and Diego Miralles in California, and as-yet-unannounced appointees in Shanghai and Boston – will report to J&J’s worldwide pharmaceuticals chairman Paul Stoffels. The centers will be staffed with a combination of existing J&J employees and through external recruitment. All appointments will be made by the end of 2012.

“We continue to do internal research and we’re very good at it,” Stoffels said in an interview. But like every other pharma, J&J is increasingly reliant on partnerships and looking to access innovative science, technology, and assets earlier in the value chain, he said. To do this effectively, J&J had to organize differently.

The shift illustrates J&J’s recognition it needs to change the way it accesses external science. In a twist on the old proverb, J&J is in effect moving the pharmaceutical mountain. Beyond the reorganization, it’s also an expansion of efforts to fulfill a growing need for R&D substrate at J&J.

In other words, J&J needs to broaden its funnel of opportunity, said Stoffels: “We need new targets, we need biomarkers, we need scientific insights in pathways, molecules, platforms – we need so many different pieces to get to a new therapy that being out there and working all the appropriate partners is critical.”

Each innovation center will comprise anywhere from 15 to 30 staff. Half will support deal-making, and half will be scientists and other experts with insight into design of proof-of-concept studies, regulation, or design of products that will appeal to payers, for example. The teams will rely on expertise within the broader organization as needed. “It’s important that the connection [back to J&J] is there to be able to call on the right experts” when necessary, said Stoffels.

Joining Forces

Not all deal-making at J&J is moving to the new innovation centers. “We continue to do late-stage deals from the central office,” said Stoffels, including M&A and larger alliances. “It’s the research and early development – say, up to proof of concept,” that will be executed and managed from the regional outposts.

J&J has long sought to tap into others’ early-stage research in several ways. Its Johnson & Johnson Development Corp. is the oldest pharmaceutical corporate venture capital organization, started in 1973. Its corporate office of science and technology, or COSAT, identifies and accesses potentially important early stage technologies. And Red Script Ventures has emerged to help start-up companies access J&J internal clinical development and regulatory capabilities (Also see "J&J’s New Path Forward – An Interview With Alex Gorsky" - In Vivo, 26 Apr, 2012.).

The Big Pharma has also formed partnerships with Polaris Ventures and MPM Capital, whereby J&J operates ‘sidecar’ venture funds that co-invest alongside those traditional VCs in certain portfolio companies. And most recently, J&J invested earlier this year alongside GlaxoSmithKline PLC in Index Ventures’ €150 million life sciences venture fund ILVI. ILVI will mainly invest in single-asset opportunities and is unusual in that senior executives at its two corporate limited partners, including Stoffels and GSK R&D chief Moncef Slaoui, will participate in evaluating investment opportunities and guiding research among the fund’s portfolio companies (Also see "Backing New Index Fund, GSK, J&J Buy Into Asset-Centric Vision Of Biotech Future" - Pink Sheet, 26 Mar, 2012.).

The new innovation centers incorporate, rather than replace, J&J’s existing venture and early-stage business development efforts. For example, said Stoffels, “Johnson & Johnson Development Corp. will continue to exist but the investors … will operate from the innovation centers,” and act as part of those integrated teams.

Other venture initiatives will be covered by specific regions. Though J&J could not comment on specifics, it’s reasonable to assume that the Boston hub will cover the MPM and Polaris relationships and London will be the liaison for the Index fund.

Overall the innovation centers make J&J’s outward-facing activities more efficient, said Miralles, currently head of J&J’s Janssen Innovation and its West Coast research center. “That means to make it faster, to make it easier, for the outside world to interact” with the company.

Immersed in the Ecosystem, Tied to NJ

Part of that efficiency is moving J&J’s external innovation apparatus “to those geographic areas where there’s much more intensity of entrepreneurial activities,” said Miralles. As such the company is recruiting from the local scenes as it sets up its innovation centers and pairing them with J&J’s own team.

“It’s important for us that we really step up our competitiveness, generate more value by changing our innovation model and bringing people to the hotspots,” said Verheyen, currently VP new ventures at J&J. The company needs to move its best scientists and engineers to the communities where innovation is happening, he said. “We also want to simplify access” to J&J for entrepreneurs, venture capitalists, academics, and biotechs, he said.

It’s a lesson Miralles has learned since he relocated to San Diego in 2008 to run J&J’s R&D facility there. “That experience was transformational for me because when you are in one of those hotspots, with that degree of entrepreneurial activity, you realize how important it is to be outward facing as an individual and as an organization,” he said. When you’re “3,000 miles away from the mothership,” you’re forced to rely on the broader industry community, he said.

And so J&J is positioning itself to become part of the local innovation fabric, but at the same time it relies heavily on the direction and funding of its New Brunswick, NJ headquarters. For example, the innovation centers don’t have a budget, per se. “Because our R&D funding for internal and external is one and the same, we allocate our budgets according to the opportunity,” said Stoffels. “There’s no specific budget we put forward because it’s all funded by the specific therapeutic areas and businesses doing the deals.”

And the centers won’t necessarily have full autonomy. Decisions on deals and funding commitments will be made in conjunction with the relevant therapeutic area head. “The innovation centers are really going to be the facilitators, and execute on the strategies of our businesses and therapeutic areas,” said Verheyen. “We’re part of the overall community of J&J … to help advance the internal and the external pipeline” at the company.

Measuring Success

Like a venture capital fund, it might take five or 10 years to fully gauge the initiative’s success. Quality of deals will trump quantity as a measuring stick, said Stoffels. Ultimately, success will be determined by an uptick in drug candidates in later-stage development, he said, but if you incentivize people to sign a certain number of deals, that’s counterproductive. How well J&J establishes itself in these communities, and the networks it develops, will be the first milestone against which it measure progress. “Those relationships give you preferential access, and then you can start to create value,” said Miralles. After two years, he said, J&J can start to assess the portfolio. For example, is the company bringing in phase IIb assets more effectively and efficiently?

Meanwhile J&J executives expect a welcome reception from their new neighbors. “Venture capital has some stress, and we believe that supporting and nurturing start ups will be good for the entire ecosystem and for J&J. Our success depends on the success of the entire sector,” said Verheyen. “Increasing our knowledge of the ongoing science and early product opportunities, as well as being close to the scientists and the innovators will give us better insights and early access” if J&J makes good investment decisions. “And it will increase the probability of success of on-boarding those products,” he said.

“We’re in an era of networked science and I think some of the economic pressures are forcing many of the industry participants – whether they are non-profit organizations or for profit, venture or governments -- closer together in creating a more capital efficient system for innovation,” said Verheyen.