Telling a room full of Big Pharma and contract research organisation (CRO) R&D people that – in financial terms - drug innovation is too much of a risk is a bold opening gambit.
The audience is either going to give you their full attention or give you their full attention while booing.
Fortunately for Johnson, delegates at Partnerships in Clinical Trials (PCT) in Barcelona didn’t yell when he suggested that to a venture capitalist the words ‘game changer’ or ‘radical’ mean ‘high risk" and "probably won’t work.’
He explained that: “From the financial perspective innovation is not necessarily good news and in fact the ideal is to be just slightly behind that innovation wave. So let somebody else do the hard yards to work out if this thing is really going to work and then come in with something better.”
“It’s way better from a financial perspective to come in at that point, so the real race is usually first to be second” he said, explaining that such projects are very low risk, have a clear development path and how the drug is differentiated from others on the market is what will determine its success.
Despite this risk aversion venture capitalists continue to invest in early drug development projects according to Johnson, who said such funds recognise they are part of a financial ecosystem that supports drug development and ultimately new revenue generating products.
“The challenge is not to get regulatory approval. The challenge is to getting paid for that [approval], so reimbursement is the issue. It’s the challenge that the pharma companies feel most acutely and because that’s their pain point, it’s also ours.
“If something is a bit iffy about reimbursement, then they [big pharma firms] won’t even go there and we will be stuck with whatever company in our portfolio. So the reality is that we finance innovation because we don’t have a choice.”
The killer experiment
Index Ventures’s strategy for coping with risk is to insist start-up companies pass what Johnson calls “killer experiments,” where investors actively try to derail research to ensure only projects with greatest chance of success go forward.
Johnson explained that Index uses a “seed pool” to provide early development projects with up to $1m, which is an amount the fund can afford to lose, which he said “makes you much more able to tolerate risk, so you can do some really crazy stuff.”
The main caveat is that such projects pass a “killer experiment” in which scientists from Index's partners like GlaxoSmithKline (GSK) and Janssen – which contribute to the organisation’s IL6 fund - test the data.
Johnson said the approach means Index can “tap into the brain trust at two of the largest pharmas on the planet” in return for giving GSK and Janssen “full exposure to these [early phase] companies as they develop.”
He explained that: “This is where the pharmas come in. Most of the due diligence on an early phase programme is a waste of time. What is not a waste of time is finding out what the critical point that turns this from an interesting project to one where we can say, yes definitely.”
“The pharma guys have the biggest say in this as they have probably seen something like the project in question before, or have had failed programmes in similar areas. So they are well placed to assess if a new project will succeed” Johnson said, adding that “we try to reduce it to a binary outcome.”
Partnering with Big pharma companies also puts venture capital funds at the centre of outsourcing agreements according to Johnson, who cited the deal he signed with Lonza in late 2013 as an example.
“For all of our portfolio companies that are developing biologics, we have a template agreement with Lonza under which the firm will manufacture them all.”
This approach is vital to helping the small organisation in which Index invests to minimize inevitable delays Johnson continued, pointing out that smaller biotechnology firms’ biggest timeline challenges are usually related to manufacturing the drug candidates and recruiting patients for clinical trials.