Third Rock raises $616m for fourth biotech venture fund
Less than a decade old, and with more than 40 companies in its portfolio, Third Rock Ventures cemented its position at the heart of the biotech startup scene Monday with the announcement that it raised $616 million for its fourth and biggest drug discovery fund.
The new fund, one of the largest anywhere devoted to life sciences investments, also marks a pivot to a new management look for Boston-based Third Rock. The firm said it would add two new partners, while cofounders Mark Levin and Kevin Starr — two of the industry’s highest profile figures — step back from active involvement with the new fund.
Third Rock’s third cofounder, Robert Tepper, will lead investments from the new fund along with a team of partners that includes Alexis Borisy and new partner Abbie Celniker. They’ll invest in treatments for diseases ranging from cancer to immunological and neurodegenerative disorders. Their approach, as in the past, will be to start most of their companies from scratch and look to generate multiple products.
“The science and technology for treating human diseases have never been better,” Tepper said in an interview. “And that’s the fuel for everything we do.”
Third Rock’s new fund was “oversubscribed,” meaning that it didn’t take all the money offered by investors such as endowments, foundations, family funds, and pension funds. Tepper said the fund’s limited partners include investors in previous funds and some new investors, but the firm turned away others because it feared losing focus if it got too big.
The firm typically invests in 10 to 12 companies from each fund, and its partners spend a combined 10,000 to 15,000 hours of their own time at each company exploring scientific approaches and serving as top executives for a period before hiring outsiders. If successful, the companies eventually go public or are acquired by established drug makers.
“We got a lot of interest from new investors,” said Tepper, who recently stepped down from a two-year stint as interim research chief at Third-Rock-backed Neon Therapeutics in Cambridge. “But our model is very bound up with our team getting involved with these companies, especially in the first one or two years.”
Third Rock’s founders, all former Millennium Pharmaceuticals executives, conceived of the firm during a 2006 visit to a Las Vegas casino, where they lamented the dearth of funding for biotech startups. Since it launched the following year, Third Rock has raised $1.9 billion across its four funds. A dozen of its companies have gone public in initial public offerings, including Agios Pharmaceuticals, Bluebird Bio, and Foundation Medicine, while four have been sold to larger companies.
The latest fund is an infusion of capital in the biopharma industry at a time when there are fears of a dropoff in financing. Nationally, venture outlays for biotech startups fell nearly 15 percent to $1.8 billion in the third quarter, from $2.1 billion in the same quarter last year, according to MoneyTree data prepared by accounting firm PricewaterhouseCoopers. During that period, the number of funding deals tumbled 30.4 percent, from 125 to 87.
Other local venture capital firms have also been actively bankrolling early-stage biotechs. Flagship Ventures of Cambridge last year raised $537 million in its fifth and largest fund, boosting its total capital under management to $1.4 billion. Polaris Partners, based in Boston, has raised about $4 billion in seven funds to invest in high-tech and life sciences startups.
Third Rock’s new fund will bring more companies and biosciences talent to the Boston area, said David Schenkein, chief executive of Agios in Cambridge, which was initially funded by Third Rock, Flagship, and Arch Venture Partners of Chicago. Third Rock cashed out of its Agios investment in the 18 months after the company went public in 2013.
“There’s no question Third Rock has really helped take the biotech community in the Boston area to the next level, just by the amount of money they’ve invested,” Schenkein said. “What’s made Third Rock special is that most of their investments have been in big bold ideas with big risk and potentially big returns for patients.”
Agios is expected to submit its first drug candidate to the Food and Drug Administration later this year. It and Third Rock-fueled companies have taken dozens of experimental drugs into clinical trials. But there also have been setbacks. One of Third Rock’s portfolio companies, Zafgen Inc. of Boston, had to retrench last year after the deaths of two patients who had taken its obesity drug in a clinical trial. Zafgen is conducting new tests on the medicine.
Third Rock said Monday it has made several moves to strengthen its management team. In addition to its new partner Celniker, formerly chief executive of Eleven Biotherapeutics in Cambridge, Charles Homcy, a San Francisco-based venture partner, is becoming a partner at the firm. Three other executives who have worked as entrepreneurs-in-residence — Frank Gentile, Stephen Sherwin, and Barbara Weber — will become venture partners.
Levin and Starr will advise colleagues on Fund IV investments, but they won’t be actively involved in starting new companies. Both will continue to work with and serve on the boards of companies started with the prior funds. They’ll also work on operational and financial strategy for the firm.
“I wouldn’t call this retirement,” Tepper said. “I got here just before 7 this morning and Mark [Levin] beat me here by a half hour. And that’s pretty typical.”