On 26 September Deerfield Management announced a $635 million plan to build a life sciences campus in New York City. The move is the latest step in the company’s decade-long transition from public market investor to venture capitalist, seed funder and now start-up incubator as well.
When New York–based Deerfield was set up 25 years ago, it invested mainly in large, well-established healthcare companies that were listed on the stock exchange. Today, Deerfield has more than $8 billion under management, including in listed companies. Yet over the past decade it has progressively shifted its focus upstream to invest in earlier-stage, privately owned biotechs and healthcare companies, venture-capital-style. (Nat. Biotechnol. 34, 608–615, 2016).
In late 2017, continuing this push toward earlier stage ventures, Deerfield begin sifting for the best innovations at the source, in the corridors of academia. It has since signed more than half a dozen R&D alliances with US universities, the latest, in June 2019, with Columbia University. These institution-wide alliances have some advantages over typical venture capitalist (VC) deals with academic institutions because they reduce the delays and red tape that can bedevil negotiations, which are often executed one license at a time for each academic investigator, starting from first principles. Deerfield committed $130 million in initial funding over ten years at Columbia to support and accelerate drug discovery and development across high-need therapy areas. By 2030, the company expects to have committed over $2 billion in research and seed funding.
What has driven Deerfield’s shift to early-stage funder? Clearly, investing early can lead to a larger financial return if the ideas work out. But the change also follows a desire to do something directly meaningful for society, says Deerfield managing partner James Flynn. Delving into early research to help pluck out great medicines is “inherently more useful than, at the other end of the spectrum, trading public stocks.” Thus, the company began its “purposeful move” to equip itself to “add value to the healthcare system” ten years ago, says Flynn, creating its first private-investment funds, plus the Deerfield Institute, which develops and analyzes healthcare system data and innovations. (The non-profit Deerfield Foundation was also created at around the same time, to support healthcare projects for children and under-served communities. The Foundation is funded in large part from Deerfield’s own profits.) “Investing in early-stage research was not, originally, our goal. It is happening because we believe that is where we can add value,” says Flynn.
He also argues that the 2008 financial downturn led to some early-stage funding being withdrawn from the sector just as scientific discovery was flourishing. As such, it is “an excellent time to put ourselves into the [early stage] space,” he says, to help fill the funding gap between federal grants and a typical series A round of venture capital investment.
Each of Deerfield’s string of multi-year R&D alliances follows a similar template: Deerfield provides $65 to $130 million over 5–10 years through a newly created company. “We have no limitation in the field of invention, but it must have the potential to be transformative,” says Flynn. To access funding, scientists submit their proposals—including a development plan through to Investigational New Drug application readiness—to a committee of experts from both Deerfield and the university. The winners are funded equally by two for-profit funds, the Deerfield Private Design Fund IV and the Deerfield Healthcare Innovations Fund. In addition to early-stage funding, the academic alliances receive operational and development support and, potentially, follow-on funding too.
Deerfield is of course not alone in scouring academia for the best ideas. Traditional VCs like Atlas Venture, 5AM Ventures, Third Rock Ventures, Arch Ventures or Paris-based Sofinnova Partners also work closely with academics to discover and incubate early-stage science. Big pharma and their corporate venture arms have also been planting their feet in or close to academic hubs for almost a decade.
Yet Deerfield claims to be hunting earlier, as well as with more money, and will not require scientists to have licensed patents. That said, any target, and its potential value, must be clear. So must the models or experiments necessary to assess the probability of success. Most VCs, even those labeled ‘early-stage’, tend to want to see solid patents or patent applications, animal models, validated data, or something that is closer to the clinic, says Orin Herskowitz, executive director at Columbia Technology Ventures. Many VCs did indeed draw back from early-stage investing after 2008, but others, like Third Rock Ventures, were founded precisely to fill that gap (Nat. Biotechnol. 36, 393–401, 2018).
Where Deerfield stands out from many other VCs is in its ability to finance programs all the way. Other early-stage funders, such as London-headquartered IP Group, are going after the same perceived ‘dead zone’ between federal and industry funding. IP Group has relationships with six US universities, including Columbia, Princeton, University of Pennsylvania and Yale, but it is working on an entirely different scale—with fewer people, and many fewer millions. What’s more, rather than selecting from scientists’ proposals, as Deerfield does, “we get in there and help [scientists] work up those proposals. We think bottom-up,” says Jason Smith, IP Group’s Director of Life Sciences in North America.
It’s all good news for translational science, says Third Rock Ventures partner Jeffrey Tong. “The availability of ideas, and capital, has accelerated significantly over the last five years,” he says. The money is not necessarily being spread evenly: as VCs like Third Rock raise ever larger funds, more money is being put into the same number of projects (Nat. Biotechnol. 36, 393–401, 2018). But “I think most good ideas get funded today,” claims Tong. Tech transfer executives like Herskowitz disagree, arguing that good ideas are outpacing available funding. That long-standing tension is unlikely to disappear.
In most of its academic alliances, Deerfield will share profits from any ventures equally with the institution and has the option to license any IP that emerges from the collaboration. Pre-agreed contractual terms for any startups are designed to accelerate throughput. The upside for any university startup is largely equity, rather than milestones or royalties. Flynn argues that the universities do as well, or better, under this arrangement than with traditional equity-and-royalty deals because the equity is protected from dilution, which happens as new investors are brought in. In Columbia’s case, the university gets more equity than normal to begin with, and benefits from anti-dilution protection that lasts longer than post-series A, as is typical for Columbia, according to Herskowitz.
Deerfield’s experts span diverse backgrounds—from academia, biotech and big pharma to contract research organizations—but each alliance has an on-campus CSO. These CSOs typically have 20 years’ or more experience in drug discovery as a front-line manager. Mike Foley is orchestrating discovery across all the academic alliances; he was previously a director at the Broad Institute, with which Deerfield has been collaborating since 2017.
Real estate is also part of Deerfield’s ambition, as the recent New York infrastructure deal reveals. The group acquired real estate on Park Avenue South in Manhattan, where it aims to create the 300,000 square feet of life sciences campus, working with the New York City Economic Development Corporation. The space, expected to open in early 2021, will house Deerfield’s own offices, plus lab and digital space for life sciences and technology companies and incubator and accelerator facilities for entrepreneurs. “It is designed to be a hub for healthcare innovation that will leverage our academic relationships and our [wider] investments in healthcare companies,” says Flynn.
Such a move puts Deerfield in competition with Alexandria Real Estate, which also builds incubators and provides seed funding in NY. Two years ago it opened the Alexandria Center for Life Sciences in Manhattan, and the Alexandria LaunchLabs @ Columbia is due to open in the Spring of 2020 on the university campus. Deerfield also invested $275 to create a medical devices incubator, NXT Biomedical, in 2018 with Stan Rowe, previously CSO at Edwards Lifesciences.
Deerfield hopes to take full advantage of its growing network of academic alliances. “We may discover something at the Broad, something at John Hopkins or at Chapel Hill, and bring these together and build a management team around them to create critical mass,” says Flynn. The Broad, Deerfield’s first alliance partner, has four projects under management and has generated two spinouts since the 2017 tie-up.
Meanwhile, Deerfield’s investment activities look set to continue all along the spectrum from public equity and debt to crossover, seed and everything in between. They still typically hold equity or debt interests in over 100 public companies at any one time. “We see ourselves as an information-based firm that does the optimized thing based on the information we see,” says Flynn.