FORTUNE -- The future of pharmaceutical innovation is in peril. Big pharma has slashed R&D at the behest of Wall Street, under the assumption that future growth can be driven via acquisition. Early-stage venture capital investment into the sector also has decreased (for a whole host of reasons), thus reducing the number of future acquisition targets.
It's a topic I first broached in late 2011, and things have only gotten worse since then.
So this morning I was pleased to see a small glimmer of hope, when GlaxoSmithKline (GSK) and Avalon Ventures announced a partnership to help form 10 new early-stage drug discovery companies.
Here's how it will work, according to a press release:
Avalon Ventures will identify promising new technologies focusing on early-stage discovery across various therapy areas. A joint management committee of Avalon and GSK will then approve the formation of new companies based upon these technologies. Together, Avalon and GSK will finance these newly-established companies. Avalon Ventures will provide funding of up to $30 million from its recently announced $200 million Fund X. GSK will provide company seed funding, research and development support and success-based preclinical and clinical milestones up to a total of $465 million for ten companies.
Avalon will provide executive leadership and operational management consistent with its current portfolio strategy. GSK will have the option to acquire each company upon the generation of a clinical candidate. Should GSK elect not to exercise this option, company ownership will remain with Avalon, and Avalon will be free to enter into other strategic transactions.
In other words, Avalon is required to commit just $3 million per company -- thus avoiding the massive funding requirements that often prevent small venture funds from investing in pharmaceutical startups. It also gets to bake in venture-level returns, since Glaxo would be acquiring each company at around $40 million. For its part, Glaxo is required to invest just a nominal amount up-front but get exclusive access to potential acquisitions at what may be a bargain price. And, most importantly, patients may receive new therapies to treat their diseases.
Avalon managing director Jay Lichter says that the partnership arose from conversations last year with GSK business development executive Lon Cardin, with whom he had co-founded genomics company Sequana Therapeutics back in the early 1990s (it was later acquired for $166 million). “Lon said to me that the relationship between pharma and venture is at an all-time low and that he wanted to do something to improve that… For us it’s a venture return and limited downside, and for GSK it gives them very innovative science at an early-stage that they could acquire at a good price.”
It's way too early to say that this model is worth replicating, or to predict the broader impact it will have on medicine. But at least some folks are trying to come up with creative solutions to a vital problem. Hopefully more big pharma companies and VC firms will follow suit.
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