Pre-baked exits – in which a big pharma firm helps a venture firm found a new company in exchange for pre-negotiated acquisition rights – are on the rise.

Versant Ventures recently helped Quanticel Pharmaceuticals Inc. broker a deal with Celgene Corp. that gives Celgene an exclusive option to acquire the start-up. Meanwhile Third Rock Ventures LLC teamed up with Sanofi SA to launch genomics firm Warp Drive Bio, also giving Sanofi an acquisition option. (See BioWorld Insight, Nov. 28, 2011.)

But such structured-exit deals are not the only way big pharma is experimenting with support for start-ups. Johnson & Johnson recently launched two initiatives that fall at the opposite end of the spectrum: a partnership with Polaris Venture Partners and a 30,000-square foot incubator in San Diego. Both are aimed at supporting life science innovation, but neither includes any kind of rights or options for J&J.

No Strings Attached

Earlier this month, J&J's Janssen Research and Development division unveiled a partnership with Polaris Venture Partners through which J&J will provide funding and mentoring support for Polaris' @dogpatchlabs project.

@dogpatchlabs is an incubator of sorts, with locations in Palo Alto, Calif.; Cambridge, Mass.; New York City and Dublin, Ireland. Entrepreneurs in the tech and life science industries can apply for physical space, but the real benefit is the opportunity to network and brainstorm with other start-ups. The funding from J&J – the amount of which was not disclosed – will allow @dogpatchlabs to expand its life sciences community, and J&J will provide a dedicated entrepreneur-in-residence to mentor biotech and healthcare firms.

Polaris emphasized in its announcement that J&J does not get equity rights or a right-of-first refusal to any @dogpatchlabs companies in exchange for its support. Seema Kumar, vice president of R&D communications for Janssen, confirmed that the support for @dogpatchlabs has no strings attached.

"The pharmaceutical industry as a whole is dependent upon a thriving ecosystem of innovation, and a diversity of innovation," Kumar said. "By supporting early stage life science, everyone wins."

That sounds rather altruistic, but the J&J folks insist they are sincere. "A healthy biotech sector is critical to our future. We believe the tide will rise for all ships, and we will all benefit," Diego Miralles, site head for Johnson & Johnson Pharmaceutical Research and Development LLC's West Coast research center, told BioWorld Today last October when discussing J&J's new San Diego incubator. (See BioWorld Today, Oct. 18, 2011.)

The incubator, which celebrated its grand opening last week, also follows a no-strings-attached model. Start-ups pay rent in exchange for their own space; as well as access to common areas that house equipment for nuclear magnetic resonance, mass spectrometry, flow cytometry and other analyses; but J&J gets no rights or options on anything.

The hands-off approach makes J&J's incubator quite different from corporate incubators of the past. Pfizer Inc. and Biogen Idec Inc. launched the industry's first corporate incubators back in 2007. Both provided facilities as well as funding, and both took a strategic angle, aiming to eventually acquire or negotiate some sort of option deal on the technologies passing through their doors. Neither was particularly successful. (See BioWorld Today, March 19, 2007.)

Kenneth Widder, general partner with Latterell Venture Partners, said he never looked seriously at the Pfizer incubator because there were too many restrictions and clauses that complicated things. But Widder turned out at J&J's grand opening, eyeing the new incubator space for potential portfolio companies.

"This is the right strategy at the corporate level," agreed Bruce Steel, managing director of BioMed Ventures, the strategic investment arm of BioMed Realty.

Entrepreneurs at the event were similarly excited. "Maybe with something like this you could avoid venture," mused one CEO. "You could raise $100,000 from friends and family, use this facility, and get your answer."

The Payout

But while the no-strings-attached business model seems to resonate with investors and entrepreneurs, J&J is certain to derive some benefit from its @dogpatchlabs and Janssen Labs San Diego incubator projects. The benefit will probably be a less tangible finger on the pulse of innovation, as well as good will and relationship building with start-ups that could give J&J an advantage in future licensing.

"Everything is personal in life. Having a personal connection with people – at the end of the day – it gives you an advantage, preferential access," said Miralles.

In that way, the strategy is somewhat similar to many corporate venture arms of pharma firms.

Back when corporate venture was first gaining traction, VCs were terrified the corporates would prioritize their parent company's licensing interests above their financial responsibility to maximize exit returns. But those fears turned out to be largely unwarranted: Corporate funds learned to balance their strategic and financial interests, and many said that, beyond financial return, their greatest benefit was simply access to start-ups and serial entrepreneurs. (See BioWorld Insight, Aug. 10, 2009.)

Of course, corporate venture arms at least have the carrot of financial return to dangle in front of their parent company. Many at the Janssen Labs opening muttered that Miralles must have had a heck of a time convincing J&J to let freedom reign in the incubator. But the bet appears to be paying off, at least at first glance: Janssen Labs has received more than 100 applications just in the last two months. That's a lot of exposure to new start-ups, and it's got folks wondering which pharma will be next to enter this realm long dominated by universities and economic development groups.

They may not have to wait long to find out.

Bayer AG announced earlier this month that it plans to open a Bay Area "CoLaborator" facility, which will house three or four start-ups. Yet Bayer said that in return for low-cost lab space, it will seek "preferred access to partner" with the start-ups it supports. How the terms around that preferential access compare to approaches previously tried by Pfizer and Biogen remains to be seen.