New Jersey Star Ledger
March 18, 2012
Princeton venture capital firm and Russians collaborate on life sciences
By Susan Todd
Domain Associates’ latest investment is as much a bet on Russia as it is on the potential of new medicines.
The Princeton-based venture capital firm is teaming up with the Russian government-backed investment group Rusnano in an ambitious deal to bring new medicines and medical devices to Russia’s emerging healthcare market.
“It’s very daunting and it’s very exciting,’’ said Brian Dovey, a partner at Domain. “The Russian government is very committed to establishing a regional pharmaceutical industry.’’
The agreement calls for Rusnano and Domain to co-invest in as many as 20 U.S. life science companies with products in advanced stages of development. The joint investment will provide up to $660 million over a three-year period to the companies — all of which will be selected from Domain’s existing portfolio.
And there’s more to the deal — a specialty pharmaceutical company will be created in Russia and through a combination of technology transfer agreements and licensing arrangements, the new company will have rights to manufacture and sell products resulting from the joint venture. In that way, Russia will gain a local pharmaceutical company with a variety of products in a few years — far quicker than if the business was started from scratch. Forming the new company will be funded with an additional $190 million, according to the agreement.
Domain, which has $2.4 billion of capital under management, is known throughout the country for its investments in the life science industry. Nearly 25 years ago, it provided early financing to Amgen and helped the company grow into a biotech giant. Its portfolio also includes such names as Align Technology, which makes clear braces and Cardiac Science, a defibrillator maker.
The collaboration with Rusnano represents its first venture in Russia.
It’s not such an unusual bet though. With the market for initial public offerings withered by the wobbly world economy and many early-stage companies considered too risky, venture capitalists are putting their money on the promise of emerging markets.
In addition to Russia, venture capitalist firms are pouring money into China and India.
For Russia, the partnership provides a leveraging of Domain’s life sciences expertise and for Domain, the partnership is strengthened by Rusnano’s knowledge of Russia and neighboring markets in Ukraine, Belarus and Kazakhstan.
Pavel Rodyukov, Rusnano’s senior investment manager, said the group will invest in products that are in the later stages of development, enabling them to go to market within about four years. “This will be one of the first big players in a regional pharmaceutical industry,’’ Rodyukov said. It is also the country’s first brush with innovation in the pharmaceutical area.
“New original products,’’ he said, “are not a regular thing for Russia.’’
Russia currently imports nearly 80 percent of its medicines and many of those are generic drugs. The fast-growing Russian market for pharmaceuticals is forecast to reach $19 billion by 2014, according to Decision Resources. That’s still a sliver of the U.S. market which is expected to be worth $368 billion in another two years.
“What these deals are saying is, yes, we need manufacturing, we need entrepreneurship, and we need innovation,’’ said Lulu Pickering, an analyst with Decision Resources who follows the emerging markets. “When you don’t have any of that in place, this is how you do it.’’
Dovey said the collaboration took about 18 months to negotiate. “I would like to be able to say it was well-planned,’’ he said, “but it was a little more serendipitous.’’
Domain’s Dovey was part of a delegation of U.S. venture capitalists who traveled to Russia at the invitation of the government in mid-2010. For many of the venture capitalists, it was their first glimpse into Russia’s ambitious investment and economic development plans.
The visit included a series of meetings and a dinner at the home of then-President Dmitry Medvedev, who seemed eager to receive advice from the group of venture capitalists from the U.S. “He had a meeting in a very substantive way with us,’’ Dovey said.
Tatiana Saribekian, who led Domain’s effort to forge the collaboration with Rusnano, said many of the meetings leading up to the deal continued into the early morning hours. It was not unusual for meetings among business people and lawyers to last as long as 16 hours, hammering out complicated legal issues.
“When we started, we had only a concept,’’ she said. “We had no idea how it all might work.’’
Russia’s commitment to creating a local pharmaceutical industry is reflected in a two-year-old government policy referred to as Pharma 2020. The policy is considered a driving force behind the effort to establish drug research facilities and pharmaceutical manufacturing operations inside Russia.
“The idea is to bring drugs of higher social importance, for cancer and infectious disease are our preference,’’ Rodyukov said. The Russians also hope to obtain healthcare technology — including equipment that uses nanotechnology — as part of its deal with Domain, he said.
The partners have already chosen Russian executive Leonid Melamed, the head of Russia’s largest mobile phone company, to lead their specialty drug company. Neither Domain or Rusnano have disclosed the companies they intend to include in the investment. The deal provides for a transfer of technology to occur, so any products produced as a result of the collaboration can be made and sold in Russia and neighboring markets.
“Most countries go from a cycle of importing products to buying generics to creating new products,’’ Dovey said. “We said, let’s leapfrog the classic path and go right to making unique products.’’
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