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Avalon, GSK Team Up to Be Creative Force in Drug Innovation

In a unique deal that will create and bankroll 10 new San Diego drug companies, La Jolla investment firm Avalon Ventures has teamed up with British drugmaker GlaxoSmithKline Plc to funnel up to $495 million into new startups over the next three years.

“No one in the industry has done anything remotely similar,” said Jay Lichter, managing director of Avalon. “This is a new way to try and get big pharma and venture capital to work together, rather than work at odds as it has been.”

Indeed, the move is unusual in that it allows large pharmaceutical companies to get in on drug development at the ground level. Big pharma typically waits until small, venture-funded companies have reached certain developmental milestones before entering collaboration agreements to fund further research, said Joshua Hofheimer, a Los Angeles attorney with Sidley Austin LLP. The law firm helped broker the Avalon-GSK partnership.

But this deal is consistent with the pharmaceutical industry’s attempt to try and change the medicine innovation process: As larger companies downsize and outsource more and more of their research processes, they turn to smaller companies and academics to provide innovation.

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“GSK’s trying to find better ways to access and partner with academia,” said Lon Cardon, senior vice president of alternative discovery at GSK. “What we’ve found is that big pharma’s not always the best vehicle to forge those collaborations. With this plan, the discovery process doesn’t become a big pharma, slow bureaucratic approach but a VC biotech approach — we’re trying to play to both funding models’ strengths.”

Combining Approaches

The aim, he said, is to combine Avalon’s approach of investing in early-stage life science innovations with GSK’s expertise and resources in drug discovery and development. Avalon will search for promising targets for drug development, and a joint management committee between Avalon and GSK will then decide whether or not to move forward with developing a company around the research.

Avalon plans to provide up to $30 million in startup funding, or about $3 million per company. And GSK will tack on seed funding of about $6 million to $7 million per company, as well as research and development support and success-based milestone payments for a total of $465 million. GSK has the option to acquire these startups in advance of commercialization.

“By helping form smaller companies, I think you can create better financial incentives for the entrepreneurs for investing their sweat, their skills and their expertise into drug development,” Hofheimer said.

He said the move also helps GSK and Avalon mitigate some of the financial and technical risk, since both are fronting less cash than they would if they were exclusively funding a company.

“It also helps GSK and Avalon have a better idea early on whether the targets are going to be commercially relevant — or not,” Hofheimer said.

The Avalon-GSK venture will look for promising research coming out of universities, and help leverage the science into forming new companies, Cardon said. The initiative is modeled in part on GSK’s existing Discovery Partnerships with Academia program, which connects academics, who aren’t interested in starting their own companies, with the private sector to share their research. It now has eight projects under way in the U.S., Canada and the United Kingdom.

New Approaches

Other drug companies such as Pfizer Inc. and Novartis AG have also started collaborating with universities to identify potential drugs for development. And Eli Lilly & Co. has formed a venture fund called Lilly Ventures that launched a variety of early stage companies, including San Diego cancer drug developer Cylene Pharmaceuticals Inc.

The relationship between Avalon and GSK grew out of the professional relationship between Lichter and Cardon. They worked together in the 1990s at San Diego biotech Sequana Therapeutics. After running into each other at a pharma event about a year ago, the two brainstormed the GSK-Avalon venture, in an effort to find creative new ways of pharma and VC working together to create early stage innovative technology.

Avalon Ventures has an impressive track record in launching companies — and later selling them for significant profit. Launched in 1983, the La Jolla firm has founded or funded more than 100 information technology and life sciences companies.

This year alone, three Avalon-funded biotechnology companies in San Diego have received sizable pharma deals. RQx Pharmaceuticals Inc. could receive up to $111 million from its new drug discovery collaboration with Genentech, a member of the Switzerland-based biotech giant Roche Group. Afraxis Inc. entered a $187.5 million global licensing agreement with Genentech to develop drugs for an undisclosed neurological disease. And Zacharon Pharmaceuticals was acquired by Novato, Calif.-based BioMarin Pharmaceutical Inc. for $10 million upfront.

The research to fuel this joint venture between GSK and Avalon can come from anywhere in the world, the new companies will be based in San Diego, Lichter said. The plan is to launch one new company per quarter.

“We’re going to pick companies the same way we’ve always done it,” Lichter said. “Confer with academics and source ideas. Find the best investigators with the most innovative technologies, and convince them that working with Avalon and GSK is the best thing for them.”

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