Pension Fund Makes Big Investment in Biotech

Silicon Valley Business Ink

Bay Area biotech venture capitalists just got a $235 million shot in the arm from the California Public Employees Retirement System. In June CalPERS unveiled its $500 million California Biotechnology Program, a new venture for the state employees’ pension fund, and recently announced the firms that will receive the first round of $285 million. More than 80 percent of that will go to three area venture capital firms and a university.


The pension fund was looking for one strategic partner to deploy the money, but it tossed that idea out.  “No one candidate could effectively distribute the amount of money we had allocated,” says Patricia Macht, chief of public affairs for CalPERS. So the pension fund chose five firms to invest the initial disbursement.


Prospect Venture Partners, a Palo Alto-based venture capital firm specializing in life sciences, and MPM Biotech Crossover Fund LP, a South San Francisco health care investment firm, received the lion’s share of the investment, with $100 million each. That’s a significant chunk of change for MPM, which manages $830 million in committed capital. Ashley Ledbetter, a principal with MPM declined to discuss the firm’s strategy for investing the new capital.

Biotech is a young industry. Its U.S. market capitalization is $350 billion, basically the size of two large pharmaceutical companies, Ledbetter says. “But biotech growth opportunity remains outstanding,” she added. In early 2001 CalPERS expects to invest the remainder of the $500 million fund in other biotechnology ventures at universities, institutions and companies. Although it’s relatively new to biotech, the pension fund wants to become the “investor of choice” for the industry. “When top researchers are looking for investment capital, we want them to first think of CalPERS,” says Macht.


CalPERS has spread its eggs into many baskets. EuclidSR Partners of New York was the only out-of-state firm CalPERS chose. Steven Reidy, one of the firm’s nine general partners, reckons CalPERS chose the firm based on its strong ties to the pharmaceutical industry and its talent for helping create new biotech companies that develop products and technologies to help large pharmaceutical identify potential new drugs.


The vast increase in biotech information, much of it due to the mapping of the human genome this year, is overwhelming pharmaceutical companies. They can’t fund all the viable projects on the table and have put some on the back burner. Euclid can help smaller biotechs license that technology and develop it, Reidy says. With so many opportunities in biotech, the industry needs the deep pockets CalPERS can provide. With assets of about $170 billion, it is the largest public pension fund in the U.S. and figures it’s one of the best sources of capital for biotechs because it is willing to invest large amounts of cash and wait for long-term returns.


And it’s confident those returns will come eventually. Patient biotech investors have enjoyed the rewards. The compound annual growth rate for the Nasdaq biotech index over the last five years was 40 percent, compared with 23 percent for the S&P 500 Index, CalPERS reports.

Prospect Bio Ventures