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Snapshot: Third Rock Ventures

Third Rock Ventures
Name: Mark A. Goldsmith, M.D., Ph.D.
Title: Venture Partner, Third Rock Ventures; Chief Executive Officer, Global Blood Therapeutics; Executive Chairman, Constellation Pharmaceuticals
Company: Third Rock Ventures and Global Blood Therapeutics
Location: San Francisco (Third Rock Ventures West office)
Third Rock Ventures
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Year Founded: Third Rock was founded in 2007; the firm established its San Francisco office in September 2010
Number of Employees: More than 40 professionals
Description: Third Rock Ventures is a VC firm dedicated to launching transformative life sciences companies. With more than $800 million and two funds under management, the firm is focused on working with passionate entrepreneurs to build exceptional companies in areas of disruptive science that will make a difference in patients’ lives.
Select Portfolio Companies: California-based companies: Ablexis, Afferent, CytomX, Global Blood Therapeutics, Igenica, MyoKardia and Topica

How would you describe the VC funding environment overall?  In California?

Overall, the environment continues to be tight and has been on a downward trend compared with funding in the last two years. In California, there is a general feeling that there are fewer investors and less capital available than five years ago. Certainly, there are fewer investment firms for entrepreneurs to go for investment capital. In this environment, it really is only the best ideas and most promising technologies that are getting funded.

However, there are pockets of bright light – a recent Xconomy article pointed out that, with the exception of Q4 2011, Bay Area (is this true for all California?  If so, change to California) companies collected more venture money in Q2 and Q3 than in any other quarter since Q3 2000.

How is this impacting the industry overall?  In California?

Many venture capitalists are focusing their investments on later-stage companies with products further along in development. They are also more focused on single-product companies versus those pursuing a broad platform.

However, we at Third Rock are bucking that trend and that has not gone unnoticed in the industry. Since fewer firms are showing a willingness and commitment to investing in the early-stage technologies that are the future of medicine, there are many investment opportunities that come our way. At Third Rock Ventures, our strategy and operating model are heavily focused on adding value at throughout the lifecycle of a company, including at the front end of innovation. With our portfolio companies, we not only add capital, but also take a hands-on approach to designing the strategy, building the team and company structure, and establishing an effective operation to make visionary science a business reality.

Why is VC funding important for the California life science industry?

VC funding is more important here in California than in many other areas of the country because of the tremendous skill set in the region. The major universities and medical schools in the state are known for their breakthrough science. It’s particularly important to unlock the potential clinical impact that this breakthrough science can provide. Furthermore, this area has a track record for building groundbreaking companies that have created tremendous value.

In the absence of venture capital, there are few other substantial sources to start promising, new companies. Venture capital is critical to the life sciences ecosystem in California and for creating vibrant, entrepreneurial companies.

Why did you select California for your second office?

Third Rock Ventures established an office in San Francisco to better enable the firm to engage scientists and entrepreneurs in the area and to work directly with a growing portfolio of West Coast-based companies. The Bay Area continues to be a life sciences hub, and California’s universities and medical schools are among the best sources of leading-edge science in the world.

This past year has been an exciting year for our California team with the formation and launch of two biotechnology companies – Global Blood Therapeutics and MyoKardia – out of our West Coast office. The formation and ideation of these companies followed a process that is a hallmark of Third Rock, bringing expert thought leaders together and allowing ideas to form and grow over time before seeding and ultimately starting a company. Third Rock Ventures served as the solo Series A investor in both of these companies – launching Global Blood with a $40.7 million commitment and MyoKardia with a $38 million commitment. In 2012, we also participated in the CytomX Series B expansion and Igenica’s $33 million Series C financing.

Several VC groups have had difficulty raising their next funds and the overall amount raised in healthcare VC has declined.

What do you think are the major factors behind this?

Fundamentally, financial rewards have not kept pace with other sectors due to the inherent risk profile of drug discovery, including scientific, clinical, regulatory and commercial pitfalls that can undermine value creation. Many investors have pulled back and redirected their investment dollars to areas perceived to have a greater probability of success.

At Third Rock Ventures, we believe we can modify the risk profile of biotechnology by coupling our capital with our firm’s expertise in company building. With decades of cross-functional operational and leadership experience, we have the breadth and depth of expertise to actively engage and collaborate with our portfolio companies, and where needed, initially fill key leadership roles and thereby to provide an active helping hand in strategy and execution.

What are you doing that is innovative to address these issues?

Most importantly, Third Rock Ventures is committed to finding the most promising, disruptive technologies and providing the resources to set a new company up for success. Third Rock not only has demonstrated a willingness to take on risk, but also continues to invest the effort to de-risk through brainpower and hard work. We have an extensive network and broad base of experience – from medical training and hands-on practice to reimbursement expertise. We also have the ability to tap into experts in all aspects of product development at all stages of the life cycle so we can understand what we need to do to mitigate risk. Another way that we mitigate risk is through our very deep relationships with big pharma power players. We make sure to know what their needs are and what they’re looking for in the long run. By working closely with them, we’re able to make sure that our portfolio companies’ products in development are of interest.

What are your companies doing that to address decreased funding or finding alternative funding?

Many of our portfolio companies have obtained additional funding through creative partnerships or sources. One example is the agreement announced earlier this year between Constellation Pharmaceuticals for a broad epigenetics drug discovery collaboration. This agreement featured an innovative deal structure with key terms including Constellation receiving committed funding of $95 million and Genentech holding the future option to acquire all outstanding shares of Constellation.  We had a great time crafting this deal structure to enable an exciting, synergistic relationship between the two companies.

As another example, Warp Drive Bio was launched this year through a groundbreaking strategic partnership with Sanofi with financing from Third Rock Ventures and Greylock Partners. The breakthrough business model provided $125 million in initial funding to Warp Drive and created a new paradigm in pharma/biotech deal making – a predefined acquisition agreement and agreed-upon purchase price that Warp Drive can elect to exercise if it achieves certain milestones.

Additionally, grants from non-profit organizations, such as the Multiple Myeloma Research Foundation, The Leukemia & Lymphoma Society and the California Institute for Regenerative Medicine, have served as important sources of non-dilutive funding for a number of our portfolio companies, including Constellation and bluebird bio.

The amount of early stage funding appears to be declining with preference being towards more “proven” science:

Do you think this is a correct statement?

Rather than a preference toward more “proven” science, I would say that many venture capitalists are more inclined these days to invest in products later in the development cycle with the hope that one is skipping over a risky discovery stage.

However, from my perspective, this simply changes the type of risk inherent in the investment – clinical risk, commercial risk, regulatory risk and reimbursement risk all come into play eventually. By being involved in an early-stage company, Third Rock Ventures has the opportunity to lend our expertise from the very beginning  — which we believe better positions the company for long-term success.

If so, do you think this is a permanent or temporary shift?

It’s impossible to predict whether the trend of investing in later-stage companies will continue. The big picture for us is that the world will continue to crave innovative products. Society will still demand solutions to unsolved medical problems, of which there are many. Whatever form pharmaceutical companies take over the next 10 to 50 years, there will continue to be the appetite and commercial reward for groundbreaking science and life sciences innovation that addresses unmet medical needs.

What impact will this have on the industry?

The impact of the decline in early-stage funding is a more intense evolutionary selection pressure – there is much greater selectivity about which projects are funded. Unfortunately, sometimes even great projects get squeezed out as well.

What are early stage companies doing now for funding?

Early stage companies continue to view venture capital as an important source for funding, but are also looking to innovative partnerships with pharmaceutical companies, as well as non-dilutive funding by non-profit organizations. Additionally, angel investing is more visible these days, but the challenge remains that in life sciences a small amount of money does not go very far.

What do you think about the shift of pharma companies partnering directly with academic institutions?

With public funding very tight, investigators at medical centers are having a very difficult time obtaining funding. The partnerships between pharma companies and academic institution help to fill this gap. This may provide some level of return to pharmaceutical companies in terms of promising development projects, but we imagine that it will not significantly change the demand for venture capital and true company building. There is something special about a company created around a big idea, the skills that they can draw upon and the ability to focus their efforts – it’s a concept that has been proven over and over again, and it’s often where real value will be created.

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