With $100M Fund, NYC Wants A Bite Of The Biotech Apple

The city and three industry giants are looking for VCs to run a new early-stage fund and match their $50 million. To sweeten the pot for new companies, some of the cash will be non-dilutive.

Many of New York City’s biomedical research institutions are, as the song goes, top of the heap: Rockefeller University, Columbia University, Icahn School of Medicine at Mount Sinai Medical Center (NY), and Memorial Sloan Kettering Cancer Center, to name a few.

But biotech companies prefer to make a brand-new start of it on the West Coast and (oh the indignity) in arch-rival Boston. New York wants to change that with a new city-centric $100 million biotech venture fund that aims to keep the research at its institutions from leaving the five boroughs and, presumably, to lure outsiders as well.

The fund was unveiled with much fanfare the week after Thanksgiving, with the city and three private partners – Eli Lilly & Co., General Electric Co., and Celgene Corp.– promising to put up a total of $50 million. By early next year, the partners aim to have in place at least one and perhaps more venture firms to run the fund and bring their own $50 million to the table. The fund, dubbed the Early-Stage Life Sciences Funding Initiative, will invest in 15 to 20 companies through this decade with a mix of biopharma, device, and diagnostics in the portfolio.

New York has always lagged behind other regions in attracting biotech venture funding, and local leaders have been hand-wringing about it for years. In the late 1990s, then-mayor Rudy Giuliani ordered up a task force to strengthen the city’s biotech presence. A report by an urban planning institute from the same era was titled “Biotechnology: The Industry That Got Away.” In a more current example, a clinical program at Memorial Sloan-Kettering with stellar early results in cancer immunotherapy is being incorporated into Juno Therapeutics Inc., a start-up based in Seattle [See Deal] (Also see "Juno Launches With Competing Immunotherapy Programs" - Scrip, 19 Dec, 2013.).

[Editor’s Note: This article first appeared in “The Pink Sheet”’s sister publication, the monthly magazine START-UP, which focuses on emerging medical technologies and companies. For more information about START-UP contact customer care at [email protected] or call either [phone] or [phone]]

Small Fund, But Non-Dilutive Funding May Be A Key Attraction

New York has suffered from a dearth of biotech-friendly real estate, but new projects include up to a million square feet of commercial space along the East River, an incubator in Harlem, and facilities in a renovated army terminal along the Brooklyn waterfront (often tagged with the description “long-delayed”). “The talent is here,” says Eric Gertler, an executive vice president at the New York City Economic Development Corp. Now, the city needs early-stage capital: “By bringing in a VC partner with expertise in building companies, we can create the community needed in this area,” says Gertler.

How can a relatively small fund now serve as a key catalyst? The answer could be in one of the details that didn’t emerge immediately from the fanfare: the city and the strategic limited partners will make part of their cash, which will match whatever amount the general VC partner decides to invest, non-dilutive. How much exactly remains to be seen – or negotiated during the selection of the general partner or partners.

That non-dilutive cash could be necessary to help the city walk the right side of the line when making investments. “We need to be sensitive, and the fund will be structured in a way that’s wholly consistent with our charter as a not-for-profit,” says Gertler, although he declines to get into what he calls “legal details.”

The anchor VC, or VCs, should be selected by next quarter. If there are two, it’s expected that one will focus on biopharmaceuticals, the other on devices and diagnostics, says Darren Carroll, vice president of corporate business development at Eli Lilly. The first investments should be in the portfolio by mid-2014.

Several well-known venture groups in recent months have announced substantial new life science funds, including OrbiMed Advisors LLC, Third Rock Ventures, and 5AM Ventures . But the activity is a bit deceiving. Life science venture remains in decline. According to the MoneyTree report, a collaboration between PricewaterhouseCoopers and the National Venture Capital Association, the 541 biotech and device deals reported through September 30, 2013, comprised the lowest nine-month total since 2005. The situation is starker for new companies: in the first nine months of 2013 only 104 life science firms raised first-time venture capital, the worst showing since 1996. (However, START-UP’s annual A-List, which measures Series A rounds but not seed rounds, tells a different story for companies that get past the seed stage. The most recent A-List shows that A-round fundings rose from 84 in 2004, the first year of the survey, to 103 in 2012. And a mid-year tally shows that 2013 was on pace to top 2012 (Also see "The A-List: The Trend-Shaping Series A Financings Of 2012" - Scrip, 25 Jan, 2013.).

Carroll says the NYC fund won’t be constrained by employment or location quotas. For example, start-ups that take the fund’s money won’t have to meet hiring requirements or promise to stay in the city for a minimum length of time.

Lilly has had an R&D presence in Manhattan since it bought oncology antibody developer ImClone Systems Inc. in 2008 [See Deal]. Carroll says the company spurred the fund idea several years ago, corralling academics and Bloomberg administration officials to sign on. Lilly’s venture group is one of the pharma industry’s more aggressive and diversified, and it has tried at times to pair its venture strategy with the for-fee availability of Chorus, its alternative development program (Also see "With Partner Lilly, TVM Capital Gets A Canadian Makeover" - Scrip, 11 Sep, 2013.). Celgene, which did not respond to a request for comment, has also made equity investments a strategic key, although it usually takes equity in biotechs as part of alliances and partnerships. It has not formally established a venture group. The third strategic partner in the fund, GE, recently revamped its venture approach, moving its team out from its GE Capital financial division. In 2012 it brought on board Sue Siegel, a veteran of Silicon Valley firm Mohr Davidow Ventures and former president of Affymetrix Inc., to run the group (Also see "GE’s Health Care Venture Adventure" - In Vivo, 19 Jul, 2013.).

With New York pledging $10 million through its Economic Development Corp., the three companies are each putting up about a third of the remaining pledged cash, or roughly $13 million. It is unclear how, if at all, the non-dilutive component of the investments will affect the four partners’ pledged amounts.

Other details will likely remain unresolved until the venture team or teams are secured. But the details could be important enough to make a difference in the fund’s success or failure. For example, Celgene, Lilly, and GE say they’ll receive “early visibility on quality deal flow” because they’ll be involved in helping the venture partners with due diligence. But on the other hand, they say they won’t meddle in the investment process. “We’re not going to provide a second investment committee,” says Carroll. “If [the VCs find] eligible investments and they make commitments, we’ll make the matching funds available.”

Pharma companies have tried hard in recent years to become less bureaucratic and sclerotic, or at least convince outsiders that they’re working on it. Now that they’re involved in an investment fund bound by civic regulations and priorities, it behooves these three to make doubly sure of it.