By Denise Roland

LONDON--Novartis AG (NVS) has spun off a trio of pipeline drugs into a newly formed U.K. biotech company, in a risk-sharing move that is becoming increasingly commonplace among big pharmaceutical companies.

In exchange for the assets, the Swiss pharmaceutical giant will receive a noncontrolling stake in the new company, Mereo BioPharma Group Ltd., as well as future milestones and royalties.

Mereo, meanwhile, has raised $119 million from two U.K. institutional investors, Woodford Investment Management LLP and Invesco Perpetual, to fund the next steps of clinical development for the drugs.

Big pharmaceutical companies are increasingly entering risk-sharing deals for drugs that fall outside their core areas of focus. In many cases, these assets attract higher valuations when pulled out of the crowded pipelines of large companies. Last year, GlaxoSmithKline PLC (GSK) spun off an Alzheimer's drug into a new company for $5 million. That company, Axovant Sciences Ltd. (AXON), whose sole asset is the former Glaxo drug, later fetched a valuation of more than $2 billion in a New York Stock Exchange float.

The drugs involved in the Mereo deal have already undergone human proof-of-concept trials at Novartis. BPS-804 is aimed at improving bone density in brittle-bone syndrome, a rare disease with no existing treatment. BCT-197 treats acute exacerbations in chronic obstructive pulmonary disease, while BGS-649 is designed to normalize testosterone levels in obese men with a hormone-imbalance disease known as hypogonadotrophic hypogonadism.

"We wanted to have products which were not correlated by indication, mechanism of action or by market," said Denise Scots-Knight, chief executive of Mereo. "That's because the model is to provide investors with diversification of risk."

David Epstein, head of Novartis Pharmaceuticals, said the deal meant the Swiss company had found a way to "work together to bring these valued innovations to patients."

Dr. Scots-Knight added that she planned to add up to four more drugs to the pipeline. Under the terms of the deal, Mereo is tied to acquiring drugs exclusively from Novartis's pipeline for one year, but after that it will be free to look elsewhere. She declined to provide the value of the Novartis stake but said it was "by no stretch of the imagination a controlling stake." In addition, Novartis intends to make cash investments in future financings of the new company, according to the announcement from Mereo.

Write to Denise Roland at denise.roland@wsj.com

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