The “Build-to-Buy”Framework  

Three parties are used: (a) a science company with a novel technology, (b) a venture capital firm and (c) a big pharma company.

All parties must agree on a pre-set acquisition price for (a).  This is the hardest part. (c) retains an exclusive option to purchase (a) at the pre-set price when a specific milestone is achieved e.g. a first lead compound reaching the filing stage of an investigational new drug (IND) application.  Both (b) and (c) contribute funding, drug development expertise and resources to develop (a’s) novel technology.

The players: A science companyInception 3  

Inception 3 is an effort to bring together a leading academic in the field of hearing loss with a major pharmaceutical company (Roche).  Stefan Heller, professor at the Stanford University School of Medicine, is a pioneer in the field. His research focuses on finding strategies to restore the inner ear sensory cells that detect sound (called hair cells) that are required for hearing.  Dr. Heller discovered the presence of cells in the inner ear of mammals that can differentiate into hair cells. He and other researchers have also developed the concept that drug compounds could regenerate hair cells in the damaged cochlea, restoring hearing in patients.

The players: A venture capital firm- Versant Ventures   

Versant Ventures created the Inception business model to match world-class academic researchers with pharmaceutical partners and form new drug discovery programs. The Inception program has now formed multiple companies, including Inception 1 (partnered with Shire), Inception 3 (partnered with Roche), Inception 4 (partnered with Bayer) and Inception 5 (partnered with Roche).  Versant invested Series A financing into Inception 3 as part of the build-to-buy deal, with Roche contributing the remaining funding into the program.

The players: A big pharma company- Roche

In 2012, Roche signed 55 new agreements, including three product transactions and 43 research and technology collaborations. Among Roche’s main transactions in 2012 was the exclusive partnership with Versant Ventures and Inception Sciences to create a drug discovery incubator, Inception 3, for the treatment of sensorineural hearing loss.

The Exit

Key monetizing event: sale of company (a) at pre negotiated price to (c).  (a) and (b) are paid by selling their shares of (a) to (c). (c) has complete ownership of (a) includingIP and future revenues.  Benefits from the build-to-buy deal construct: Inception 3 benefits from Roche’s funding and drug development expertise; Roche gains access to Inception 3’s innovative technology platform and novel drug candidates; and Inception 3 and Versant Ventures both gain a risk-mitigated path to liquidity.

Source of info: Roche, Versant Ventures and Inception 3 websites.