The evolution of the asset-centric approach in biotech venture capital

In this episode of Conversations in Healthcare, Mike Ward speaks with Francesco De Rubertis, co-founder and managing partner at Medicxi, about the evolution of the biotech venture capital model and the emergence of the asset-centric approach.

Mike Ward: I’m delighted to be joined by Francesco De Rubertis, a co-founder and managing partner at Medicxi, one of the most prominent financial supporters of innovative biotech activity. He’s going to provide some insights on how the biotech venture capital model has evolved in the past decade or so, from creating fully integrated pharma businesses through the support of platform technologies and the hybrid of the two, towards the emergence and evolution of the asset-centric approach.

You have been an active venture capitalist in the biotech sector since the late 1990s. What were the challenges biotech-focused venture capitalists were facing that prompted the creation of what is now called the asset-centric model?

Francesco De Rubertis: When we started many, many years back in the late nineties, there was not a lot of venture capital in Europe. There were some pioneer firms like Sofinnova Partners, like Abingworth, like Atlas Ventures. The list was pretty much that. These are among the oldest venture capital institutions on European soil. When entrepreneurs really needed to create or wanted to create companies, there were really those three shops, plus a few others, that were relevant sources of capital and advice.

That is why my partners and I decided in the late nineties to create Index Ventures, as an additional shop that would provide venture capital financing, not only actually for biotech companies, but most importantly, for technology companies. Index’s expansion was focused two-thirds on technology and then one-third on biotechnology. As we put Index Ventures up and we started to play the game, it was very exciting because I happened to be lucky enough to have the seed round of Genmab as one of my very few first investments.

Genmab was available to a venture capital firm like Index, which back then in the late nineties hardly had any cash available because the landscape was very, very immature. Now, I want to say that that was a blessing for Index, but at the same time represents a weakness of the venture capital market. Because of course, a company like Genmab could only go to so many shops. So that has been true for many, many years. Being on the board of Genmab and witnessing the growth of Genmab, I was lucky enough that we established ourselves as a venture capital firm among others.

I started feeling what was the key challenge for entrepreneurs in Europe. The fact that venture capitalists were very few and that for the long run of a drug development and discovery company, the available venture capital resources were not sufficient. That was going to cause downstream a domino effect and consequences, which was misalignment of incentives between venture capitalists and management teams. When you know that you have just a few dollars available, and that the goal line is beyond the reach of those dollars, you need to find other ways of being able to finance. Those other ways start to collide with the interests of venture capitalists.

All of these, in maturity and scarcity that I was seeing in the early-stage biotech scene in Europe is really what pushed me. I was still very young. I was encumbered from any kind of business model that had been followed for many years already. After a few years of Genmab, I was still in my very early thirties, so I was still unencumbered.

“I was thinking to myself, there must be a better way of helping company creation in Europe. There must be a more tailored way of doing venture capital to Europe.”

The answer to that question was of course, as you know very well, Mike, because you have been a very insightful observer of the evolution of the business models in this industry for many, many years – asset centricity is the answer that we found to that set of weaknesses. We started developing this idea and that was not a fully shaped idea from one day to another, but of course it was an initial direction of travel that I started to take in 2003 and 2004. The first real investment that followed asset centricity was closed in 2005. That is when we discussed at length what I meant by asset centricity. Since then, there has been an evolution, an adaptation and lessons learned.

Before I go too far, that was a key core weakness in the European biotech industry in the late nineties.

Mike: You were one of the pioneers of that asset-centric model. Can you explain how it was designed to solve the challenges of company building models that you just outlined? Can you expand on the idea that there was a disconnect between the availability of venture capital and the timelines that actually required to develop new drugs?

Francesco: This is key, and this is behind the insight of asset centricity. Quoting one of my business partners, David Granger, “Every biotech company from the startup phase, all the way up, every biotech company has been always developed, originated and started as a pipeline of compounds.”

By definition, a pipeline of compounds is composed of different compounds, some of which are really earning high conviction levels, and some of which are less convincing because maybe they’re more speculative or they are less advanced or they’re more unclear, but still very justified and very possible, very fair as assets. According to David, every pipeline is a mix of gold medals and silver medals. Not because people decide to focus on silver medals, but because three quarters of the assets are lower conviction before they become high conviction.

The big problem that I saw was that a silver medal and a gold medal cost the same amount of money to be developed. They cost the same amount of money, but the reward side of the equation is really driven up by the gold medals, moreso than the silver medals. When I was investing in Genmab, there was of course, a collection of great assets, some of which turned out to be gold medals, some of which failed or turned out to be disappointing assets. Because Genmab was so beautiful and big and cash rich, we could still succeed at Genmab even though the first assets failed.

My reasoning was the following: is there a way of only investing in gold medals rather than silver medals? It sounds very easy and rational. Who would want to invest in silver medals when you know which ones are the gold medals? The problem is just that. That when you create a company with a pipeline, you don’t really know which ones are gold medals and silver medals, because it’s not so clear to say these are high conviction assets (e.g., this is a 70% conviction, this is a 63% conviction). It’s very difficult to know which ones are the gold and the silver medal assets.

I decided that I was going to use one way to sort of enrich the probability that I would only invest in gold medals and leave the silver medals. That model or that proxy dictated I would not invest in Genmab again (though by the way, I love Genmab. My career has been built on Genmab). I’m just talking about if you’re not the best company in Europe, like Genmab has been, you need to find another way of financing your innovation.

“If you can create a single asset company around a single asset with top people that commit their professional career to a single asset, that single asset represents a high conviction asset.”

The other way that I found was, I’m going to invest in startups that only commit to develop one molecule. You could say, how the hell can you decide that investing in one molecule is less risky than investing in a pipeline of molecules? The point goes to the quality and value of people. If you can create a single asset company around a single asset with top people that commit their professional career to a single asset, that single asset represents a high conviction asset. Where people are happy to commit their outcomes to that asset. It can still fail, but in their best belief, in their souls, in their brains, in their heart, that asset is worth their career. That is a high conviction asset.

A silver medal or an asset that probably is not as convincing as a gold medal asset, probably would not be good enough to catalyze the formation of a single asset company – could be good enough to be a “number four or five in a pipeline company,” but you will find less often, a single asset company formed around a silver medal asset. That was the insight. That led me to say in 2005, let’s do single asset investments. If you fast forward the movie 15 years and I’ve done the formal analysis and you say, okay, was that insight a good one or not? We counted, we simply measured the outcome of success in our portfolio that we had when we checked the R&D maturation. The success in phase II, to speak in our jargon, of a portfolio composed of single asset companies.

If we compare the success rate to the phase II success rate of a portfolio composed of classic pipeline companies, it was very clear that the hit rate has gone much, much higher. More than 60% of the assets that we had invested were single asset containing companies, and more than 60% of them turned out to be successful companies – either acquired or phase two readouts.

The reason for that was not that we had become smarter or that we had a better deal flow, I’m sure that that is also related. The fact is that by pushing the opportunity costs of the decision that the founders of these companies were facing, because they couldn’t say, okay, we don’t know about the asset, but we have three assets, one of them will end up working and you pay for three assets, but only one asset is really the value driving asset. Because we were telling them, no, it’s just that asset. Do you believe in it, or you don’t believe in it? The opportunity cost of their decision was so high and because they were brilliant people in their field, we pushed to 60-65% the probability they were right and the probability that we would be successful.

Once we’ve proven the concept, that correlated to the increase in success rate. We said, okay, bingo. We have found a way in which there may be some silver assets that maybe are worth being developed. However, the early-stage biotech company capital is so expensive that there are probably better ways of getting financed. That is the core principle that has been at the basis of asset-centricity for the last 15, 16 years. That is a concept that we have trademarked many, many years back.

Mike: Am I right in saying the plan was that once you’d got to that phase II proof of concept, then you’d move the asset onto organizations that had more financial firepower to continue with this sort of program development?

Francesco: Exactly. The difficult part that big pharmaceutical companies are less naturally suited for is the very early stage serendipitous and randomness discovery part. When you are a large and structured organization, and you have labs and diabetes researchers that are on payroll, they’re going to look for the next diabetes drug. If it turns out that that molecule is better for another kind of indication, too bad, it’s lost in translation, that kind of evidence. I really believe that the very early state of R&D is where the flexibility of a deconstructed R&D environment creates value for the pharmaceutical industry.

I think we have demonstrated that because many of our molecules are now inside the late-stage pipelines of pharma, but then of course, as you say correctly, at phase II, phase III, once with the little car we found our track and we are now on the highway, when you’re on the highway, it’s about, okay, maximize your speed now. You know that you can go straight. It’s easy to find your way now. It’s just about resources and knowing how to drive. Pharmaceutical companies are incredible. They’ve got resources, they know the game, they’re very competent organizations. They are not well suited for the serendipity of early-stage R&D in my opinion. The natural outcome for asset-centric companies is to go in phase II or phase III at large established commercial organizations.

Mike: The funds that you established at Index and then what became Medicxi, those funds were cornerstoned by multinational pharmaceutical companies. What contribution, apart from the financial one, did they provide in selection and development of the assets that you decided to pick?

Francesco: It was a really strategic contribution. Put the movie back to 2010, 2011, which is when we decided that they were going to be part of our story. In 2004, we started playing asset centricity. Asset centricity is a very different ball game than classical start-up buildup, which is what other venture capitalists do, and they have to capture another part of value creation. We can discuss that. Once I decided asset centricity will be our game, part of the game is that in phase II, you need to ensure that what you have been developing for the previous three, four, five years, it’s relevant to who is part of your match, of your game now. Which is the pharmaceutical company.

We did not want to market commercially – we needed to go to our intermediaries, which were the pharma companies. It became very important that as part of the protocol and the recipe that I was designing for the success of our investment model, to be sure that I would be very well connected with the mindsets, the understanding and the knowledge base that was inside pharma. That is when I decided to reach out proactively to pharma. Of course, I was connected because some of our molecules and companies had been acquired by pharma.

Then as I reached out to pharma to say, “Hey, we’re doing something a little bit different. We’re not building companies. We are developing drugs.” The unmet medical need in the industry, why venture capital exists, is not to create more companies. That is not the unmet need. The unmet need is that there are diseases that are not addressed. That is why venture capital money has value, because we can help find those drugs. Creating companies doesn’t help in that endeavor, ironically.

I had this conversation with pharma and they loved the positioning and angle of the story. In 2010/2011, I was six years into asset centricity and I was starting to have the first proof of concept that indeed the R&D numbers and outputs were becoming really impressive.

That is when I was able to convince the first organizations (GlaxoSmithKline and Johnson & Johnson) in 2011 to co-invest in the funds. For what purpose? Not for the purpose of the funds. Of course, it was good to have their cash, but I accepted their cash for their commitment for putting their top R&D people on my scientific advisory board.

That was a step for me to lock in a bridge to these pharma companies, but not for their checkbooks, for their minds. That is really what helped me understand better. Their contribution was providing commercial relevance. Oh, Francesco, yeah, this mode of action that you want to develop in this company, it makes total scientific sense. We were working on this, in the end, we did not find a commercial application that was worth it.