4Bioengineering.com

For years, venture capitalists have been seeing opportunity sitting on the shelves of pharmaceutical companies: abandoned drugs, possibly approved by the FDA but, in the eyes of the pharmaceutical executives, capable of generating only a small amount of sales.

To VCs, however, these markets aren’t so small. And many have built successful companies around unwanted compounds they’ve acquired in exchange for milestone and royalty payments.

Now, in a move that could drive up the price for venture investors interested in these compounds, GlaxoSmithKline plc has established a unit through which it would take stakes in companies in return for turning over discarded intellectual property to them.

Called the Genetics & Discovery Ventures Group, the unit is shooting to return a “large” but unspecified financial gain to GlaxoSmithKline within the next three years, said Lisa M. Gray, head of the group’s venture operations.

To meet its goals, the unit intends to swap those non-core assets in exchange for a percentage, usually less than 20 percent, of the company licensing this technology. This compensation potentially could be significantly higher than current price tags that are based on a percentage of the sales generated by the new drug.

Ms. Gray said that the current system has a key disadvantage for the corporation getting rid of the compound. Typically, she said, the company receiving the compound or technology is responsible only for the up-front payment. If the technology is never successfully developed, the corporation that sold it will obtain little in the way of additional returns.

Under the program rolled out by GlaxoSmithKline, Genetics & Discovery Ventures Group would benefit from the new company’s growth, even if the licensed compound never makes it out of clinical trials. And the companies that Genetics & Discovery Ventures will target, Ms. Gray said, are likely to have a portfolio of other products.

Such a program could change the equation considerably for venture capitalists if other pharmaceutical companies follow GlaxoSmithKline’s example. In addition to seeing the acquisition of compounds coming at a higher price, venture investors also will need to look at pharmaceutical companies as potential equity partners, not just as sources of partially developed products.

GlaxoSmithKline’s 7-person unit, led by Osagie Imasogie, already has handled its first deal, teaming up with publicly traded FLIR Systems Inc. to license infrared imaging to Thermogenic Imaging Inc. The newly formed company, located in Billerica, Mass., is developing a system using thermal radiation to measure the impact of compounds on parts of the body.

Genetics & Discovery Ventures, Ms. Gray said, will be looking primarily to relatively mature companies, ones either preparing to go public or seen as undervalued on the public market. “We want to see a capability to develop the asset,” she said.

The unit, according to Ms. Gray, will focus on four non-core assets: terminated drug compounds, platform technologies, databases and pure intellectual property.

“We’re like a venture firm,” Ms. Gray said. “The distinction is that they use cash to get stakes,” while “we use intellectual property or assets.”

It is not uncommon for drug companies to terminate compounds because they are too small to generate set revenue goals. GlaxoSmithKline, for example, wants its drugs to bring in £500 million ($720 million) a year. So, a compound that might only bring in £200 million would be cast aside.

Ms. Gray believes that plenty of companies might have an interest in such compounds and assets. She cites a saying of Mr. Imasogie, the Nigerian-born leader of the unit, that “the crumbs of an elephant’s meal is a feast for an ant”-a proverb borne out by the venture-backed companies created in recent years specifically to acquire compounds from pharmaceutical companies.

San Diego-based Prometheus Laboratories Inc., last month raised $95 million to acquire four pharmaceutical products. AlgoRx Pharmaceuticals Inc., meanwhile, received seed funding to license and develop prescription pain management drugs that large pharmaceutical companies have decided not to pursue. InterWest Partners, Menlo Park, led the financing.

Prometheus, AlgoRx Pharmaceuticals and others hope to follow the course of The Medicines Company, which went public last year. The company was set up to acquire compounds from corporations, and then license and develop them.

Because Genetics & Discovery Ventures intends to limit its stake in companies to less than 20 percent, the companies will be able to sell products to other pharmaceutical companies without fear of conflict of interest, Ms. Gray said.