Give us a brief introduction to the Global Health Innovation Fund and to Merck. A lot has changed after our first interview five years ago.
I joined Merck – it will be actually seven years this April – to start their venture capital activities. They had not actually done any venture capital work prior to that. Before joining Merck I was at Johnson & Johnson for close to 20 years, and spending the majority of my career investing for them as well.
So today we are a $500m fund, we have over 35 portfolio companies. We have had about seven exits to date, and Merck has actually acquired two of our companies to date, so we think we are delivering what Merck asked us to on day one, which was to try to give Merck a number of options around this non-core area of healthcare.
Give us some examples of what “connected health” means to Merck and your fund.
One of the most important things that a venture fund needs to do is have a strategy – especially a corporate venture fund. The way we think of our strategy, and healthcare is uniquely positioned to have this type of strategy, in that what happens in healthcare versus other industries is really hard to scale, because of the local and regional nature by which healthcare is practised. So you have to build a strategy around how you are going to invest and how you are actually going to scale, and then bring that value back to your parent company.
So we created this thing called connected health. It operates on two fundamental investment theses. Our first thesis is that we believe data is the currency we are going to use in the future market. This means that we want all of our companies to touch data in some way. Because healthcare is based on value and outcomes, so data is what drives that value and outcome.
The second thesis – one of the big lessons I learned from all the years investing at J&J, in healthcare specifically – is point solutions do not work. A point solution is a very narrow company focused on a very narrow widget, if you will. And the problem with healthcare is that it is much broader than that. So we work in what we call an interconnected healthcare framework. We try to connect companies. When we look at a company, if we cannot connect it to another company within our portfolio or outside our portfolio, we do not do that investment. We are trying to make sure we can partner this company. Partnering can mean a lot of things, it can mean merging them or it can be a commercial agreement, or it can just be a handshake that we are going to try to work together and deliver an integrated solution to the market.
We think of data as commodity data. These are things like electronic medical records and data of patients’ healthcare. Everybody has access to the data – you can actually buy this data. The problem is it does not tell you a lot about a specific patient. So we are really interested in investing in what we call emerging informational tools. And they can be things like point-of-care diagnostic companies. It could be molecular diagnostic companies, it could be remote monitoring. It could be mobile and social. It is all this new data that is being generated by these companies. Our goal is to merge this new data with commodity data, and you create what is called a large patient data set, that is much deeper and allows us to know more about a patient.
What is really important for us is the next step, which is investing in the middle layer – health IT platforms. If you cannot aggregate data, integrate data and harmonise data, you cannot actually use the data you are collecting. So we want an infrastructure layer that allows us to do three main things. One is secure data in a private setting, so it would comply with confidentiality laws.
Two is to aggregate, integrate, harmonise that data. And the third is analyse that data. So we are interested in companies that can do all those things, because the problem is you cannot get to a solution if you just have disparate data and you do not have it infrastructurally.
We are very interested in clinical awareness and decision support tools and how we get them to work well in practising medicine. We are really interested in quality and performance improvements, or how you go into a hospital system and remove costs and create better efficiencies. That could be things like care coordination, it could be things like infection control. If I were very interested in the provider of patient engagement, how do you actually talk to the physician and talk to the patient and how do they talk together? So you can actually bring better quality information to all the right parties.
But all this works together, because if you just do investments in any one of these small buckets, that is a point evolution. If you do investments in these buckets and connect them to other buckets, that is the integrated healthcare framework that we work in.
You have talked about your ecosystem structure. Talk it through and give us an example.
When we think in terms of the integrated healthcare system that we like to invest in, we created something called ecosystem investing. We do not start with a company, we actually start with what we call a use case or a customer need. First we try to understand what is happening and whether we can solve that problem for the end user. So we start with something that, in healthcare it is called a use case, but it is really just solving a problem in healthcare.
The big thing about healthcare is that it is not really about solving a technology problem. It is really about solving a healthcare problem utilising technology. Technology is an enabler. So that is why we do not really start with the company first, we actually start with the problem.
Once we have identified the problem, we try to identify what we call an anchor tenant. The anchor tenant, like in a mall, is the store that draws everybody in. So it is a company that can solve typically anywhere from 50% to 60% of the use case or the problem. It never solves 100%. Those companies are not easily findable and really do not exist.
Then, much like how a mall is built, we put stores around it, so we invest around it to fill the gaps. That is how the ecosystem is beginning to get built. So you can almost say that the anchor tenant is your sun, and the planets around it are the areas where you are trying to fill all the gaps of that particular need.
Over time we try to connect these companies and have them work together. They can work together in a number of different ways, leveraging their key strengths. The collaboration can include a vendor relationship, a joint venture or go-to-market agreement. It can be a platform collaboration. It can be a merger. But the idea is that, over time, by building this ecosystem, it allows us to build bigger scale, so should Merck want to partake in whatever that use case is solving, it is easier for them to do it by aggregating companies and bringing a much more integrated solution to the market. What that scale then does for Merck or any parent is it drives a better relationship with the customer you are trying to help, but it also drives for us revenue and earnings per share.
We call it roll-up. You might start with just a company or companies with handshakes or some kind of commercial agreement, but the whole idea over time is you figure out which companies work best together within that ecosystem, and it may not be all the ones you have invested in within that ecosystem, and you bring them together to deliver the best solution.
We have created an ecosystem around remote care monitoring in the cardiac space. We started with a venture investment – our anchor tenant – in a company called Preventice, but it actually started with a use case. The use case in this particular instance was the prevalence of AFib, or atrial fibrillation – a fluttering of the heart which can lead to things like a stroke or a heart attack. It was causing a 30-day readmit into the hospital program, where a patient gets discharged, but they end up back in the hospital because they cannot control the AFib.
We invested in Preventice, which was just the front end of the monitoring. They had a patch that looked like a bandaid that could monitor AFIb. Our partner was Mayo, and they would send readings to the Mayo cardiology lab and they would read them and then get back to the patient and manage the patient.
Preventice was just the patch. We did not have a back end. How do you handle a call centre? Who’s actually doing the readings? How do you clean the devices and get all of the different devices out of the patient? How do you handle reimbursing? All these things concern the solution after monitoring a patient. We identified a company called eCardio. What had them begin to work together in a commercial partnership – Preventice was providing the front end, the actual device, and eCardio was providing the back end, the physical monitoring. We decided to roll them up and bring them together into an integrated solution, where we had the ability to offer both the front end and the back end in a single entity.
One of the pieces we were missing though was the care coordination component. How do you actually care for the patient if they are on this device? So we acquired a third company called C3 Nexus which is just a care coordination company around the 30-day readmit in the cardiovascular program. They have nurse programs, they contact the patient, walk the patient through how to use the device and how to manage the condition. By bringing those three pieces together, we are a better solution.
Merck is not a cardiovascular company, it is not one of our therapeutic specialities. So we deconsolidated our position and brought in Boston Scientific as our lead partner, it being both a device company and a cardiovascular company.
Are you able to share the financial benefits of using the approach you have described here?
In the case of the Preventice-eCardio deal, when we ended up deconsolidating our position, because we had created such value, we paid Merck back all the money we had previously invested. Corporates can add better value – they are one of the few entities that have the ability to do this aggregation of assets. Typically, private venture firms do not have the ability to do that, and certainly private equity firms do, but we have more expertise within our own industry and actually make a better partner to these companies than private equity, because we have skin in the game, we are in healthcare as a vendor.
But generally speaking for our fund, we are measured in a couple of different ways. From a financial perspective, Merck did not hire me to lose money – they would like us to provide a return and be evergreen. The important thing for us is that we do not ever have to go back for Merck to replenish the $500m. The idea is to be self-sufficient and Merck allows us to keep any gains on sales of assets, and then we just replenish the fund and keep moving forward and keep adapting our strategy.
From the strategic side, are we doing what Merck asked us to do? Are we giving them option on their M&A? Are we giving them assets that they believe are viable? If we are not providing them those assets then we are not investing in the right way. Fortunately for us, they have acquired a number of our companies, so we continue to build value. As long as we have built a good investment and a good healthcare company, we can exit that, then reinvest in places that Merck might find more attractive over the next few years.
What do you do to relax?
I have two daughters and they keep me quite busy with their activities, but on a personal level I love to sail. Most people do not realise that I grew up in Miami, Florida, so always lived around the ocean and loved to sail and boat. And I like to play golf. And though I travel a lot with my job, I do like to travel with my family.
Taranto will be on a panel Gaule is chairing at the GCV Symposium on May 23 in London – Making CVC truly strategic through innovative new value chains.
You can listen to this and other interviews on a podcast available at gaulesqt.podomatic.com
Andrew Gaule leads the GCV Academy, developing the capabilities and expertise of organisations leading open innovation, venturing and corporate venturing programs to drive strategic benefit. He also supports innovation programs and collaborations in “innovative new value chains” in global organisations.
To contact Andrew Gaule and for future interview ideas, email andrew.gaule@aimava.com or James Mawson, jmawson@globalcorporateventuring.com
Special report: GCVI Summit raises $5,400 for charities
Andrew Gaule, leader, GCV Academy
We had fun and raised a lot of money for great causes at the Global Corporate Venturing & Innovation Summit in Sonoma, California, in January.
As it was Burns Night, which celebrates the birth of Scottish poet Robbie Burns, I felt it was appropriate to let the largely US audience know about the traditional rituals. With the help of three co-opted “Scots” – Brad McManus, investment director at Motorola Solutions Venture Capital, Matt McElhattan, investment director at Munich Re/HSB Ventures, and Jeff McRae, senior vice-president of corporate strategy and business development at Allstate Ventures – the haggis was piped in, the toast to the haggis was given, as was the toast to the lassies. Claudia Fan Munce, venture adviser at NEA and chairman of the GCV Leadership group, provided a reply on behalf of the lassies.
We then held a true-or-false quiz for the audience, and raised $2,700 from summit delegates. Thank you to Tracy Isacke, managing director of corporate relationship management at Silicon Valley Bank, for helping to count, bank and donate the money. James Mawson, founder of GCV magazine’s publisher Mawsonia, matched the sum raised, enabling us to donate $5,400 to these three charities:
• San Francisco Giants Community Fund
• Hope4China Children charity – see the thank-you video here: https://www.youtube.com/watch?v=QuCcc9FLAs&feature=youtu.be
• Trevor Project, the charity nominated by the winner of the True or False Quiz.
You can see the fun and the ceremony on the GCV Academy YouTube Channel at https://youtu.be/QuCcc9FLAs