In the past 12 months, corporate venturing units have been involved in more than $3bn of investment rounds for nearly 200 healthcare companies around the world.
These syndicates, estimated to involve about $1bn of corporate cash, have been more than paid for by just the top 10 takeovers of existing portfolio companies, which have a headline value of just over $6bn, according to Global Corporate Venturing research.
The trade sales include Plexxikon to Japan-based Daiichi Sankyo for $935m and Avid Radiopharmaceuticals and Ardian for up to $800m each. US-based medical device maker Safeguard Scientifics’ three top-10 exits to peers have helped push the company to the top of the most influential corporate venturing units, according to Global Corporate Venturing (see most influential table).
Safeguard received net sale proceeds of more than $145m for its shares in Avid (see case study in related content) and Clarient – which General Electric bought for $580m – and will reap aggregate proceeds of more than $140m for Advanced BioHealing, which Shire has agreed to buy for $750m. Safeguard has been more circumspect about its investments in the past year but its public deals have included PixelOptics’ $45m round.
Medical devices
Medical technology, such as precision instruments, has been the best-performing sub-sector over the past 20 years, according to research by Gary Dushnitsky, associate professor at London Business School, in a presentation at the Global Corporate Venturing Symposium last month (see event report in related copy).
Dushnitsky presented the performance award to Chris Coburn, executive director at Cleveland Clinic Innovations, as representative of the healthcare industry at the Global Corporate Venturing banquet that evening.
US-based bank SVB Financial Group, which was a sponsor of the symposium and banquet, said its analysis of 49 "big exits" of medical device companies in trade sales worth more than $50m from 2005 to August 2010 found a 6.3-times cash-on-cash return.
Larger multiples (nine times and higher) account for 22% of all device big exits, with Safeguard making a reported 13-times return on Advanced Bio- Healing. Device multiples on average are higher than biotech, which average 4.4-times over the 53 acquisitions between 2005 and August 2010, SVB said (see table).
The average big exit values in device and biotech were similar, SVB said, but the average biotech had $82m of venture money invested while devices had $41m during this five-year timeframe.
A slightly larger sample to encompass all of 2010 by SVB, however, found biotech companies were quicker to exit at just under five years compared with 10 years for devices.
This was primarily because 55% of biotech big exits were preclinical or phase I assets at the time of exit compared with many of the device big exits, which were later-stage with US Food and Drug Administration (FDA) approval or CE mark (required to sell in the European Union) clearance and revenue.
Hanson Gifford, executive president of Foundry, a California- based medical device incubator, told news provider Peninsular Press: "The medical device industry is constantly fighting to be more efficient. However, it is almost impossible to speed the clinical trial process and its very significant follow-up."
The relatively early-stage biotech exits were leading to a shift among buyers to predominantly structured deals that pay a portion up front with the remaining payment coming if the company hits future milestones. Three years ago, nearly 80% of significant life science M&A transactions paid the entire transaction amount up front, SVB added.
For example, Switzerland-based drugs company Novartis picked up the Global Corporate Venturing Best Practice in Healthcare certificate for the past year for the quality of its communication in its venture funds’ annual report and success of its Option fund, which provides nondilutive financing for a secondary development project at a portfolio company in return for the right to buy it at a later stage (typically for up to $200m).
The acquisition of biotech assets or the rights to them at this relatively early stage to potentially replace drugs falling out of patent protection in the future is also encouraging healthcare companies’ corporate venturing units to invest at an earlier stage. Since 2000 there have been 10 times the number of series A rounds to big exits and flotations, SVB said.
Novartis, which fell to second in the Global Corporate Venturing most influential rankings, has in the past year primarily invested in series A and B rounds, including Tepha, Akebia, Advanced Animal Diagnostics and Euthymics Bioscience.
And these early rounds were becoming larger and increasingly financed by corporate venturers as many established venture capital firms struggled to raise independent funds from traditional investors, called limited partners (LPs).
Spyros Artavanis-Tsakonas, chairman of the Novartis Option Fund, said in its annual report: "Earlystage biotechnology companies rely on the ability and foresight of venture capital to support them.
"In difficult economic times, including the past year, fundraising for earlystage concepts becomes particularly challenging, and it is for this reason that the role of the Novartis Option Fund is exceptionally important."
This fundraising difficulty also curtailed their investing. In the US, venture investment in healthcare companies last year fell 7% to $7.4bn in 702 deals, according to data provider Dow Jones VentureSource. In medical devices, the number of seed and first funding rounds fell in the past two years, according to VentureSource.
In 2008 there were 21 seed financings and 93 first-round deals for medical-device companies worth $799m, but last year this fell to 12 and 65, respectively, worth $320m in aggregate.
To compensate for an absence of traditional LPs, corporations are becoming more important investors, able to strike favourable terms with selected VCs. In September, US drugs company Eli Lilly committed up to $150m in three VC funds as a cornerstone investor.
Darren Carroll, vice-president of Lilly Ventures, the drug company’s corporate venturing division, told newswire Bloomberg it would commit up to 20% of each of the three so-called Mirror funds that could raise $250m each.
Bloomberg said CMEA Capital, a US-based VC firm, started raising money in August for one of the funds with Lilly, with each expected to contain up to 20 experimental medicines from different therapeutic areas.
The funds are designed to take the medicines through the high-risk phase from a year before testing in humans until the mid-stage clinical trials, and then give Lilly the right to buy them at fair market prices.
The support of VC firms and larger investment rounds for earlystage deals are attempts to do with the uncertainty of knowing which groups will be around for future funding as well as the cost and uncertainty of having a treatment approved by US authorities.
Life science executives said regulatory and political issues were their number-one challenge, a bigger problem than access to equity financing, scaling their operations for growth, competition or access to credit, according to the SVB survey Startup Outlook 2011.
One respondent to the survey said: "The FDA is by its very design killing innovation and entrepreneurship. Its very charter utterly excludes the notion of fostering development, opting instead for a one-way ratchet that can only lead to longer, more costly development cycles with no improvement in real safety for efficacy."
Healthcare companies have been at the forefront of using corporate venturing as part of a broader, more open innovation strategy to help find a way through this regulatory maze.
This approach can see corporations approach a promising area of development through internal research and development, minority and majority investing in third parties and traditional partnerships and licensing agreements.
David Phillips, managing partner at SR One, drugs company GlaxoSmithKline’s (GSK) corporate venturing unit, at the inaugural Global Corporate Venturing Symposium in London last month said his team had taken on incubating and spinning out internal ideas recently to encourage innovation.
This was leading to joined-up portfolio management in business development for GSK. Phillips added: "A good example is epigenomics [which controls which genes are turned on and off] where we have internal R&D [research and development, such as EpiNova], business development with partnership with third parties [such as Cellzome, which gained $45m in upfront payments] and strategic investment inConstellation Pharmaceuticals."
SR One led the second round of funding for US-based Constellation in June last year, in what was one of the first deals for its short-term chief executive, Christoph Westphal.
People changes
Westphal earlier this year said he would leave SR One after GSK funded his independent VC firm, Longwood, in what has been the seventh change in the top role in the past nine years, according to insiders.
The uncertainty at SR One hasresulted in the group being downgraded to 15th in the most influential rankings as it awaits a long-term leader that understands the role corporate venturing can play. There have been a number of senior changes of personnel in the past 12 months as groups are set up and expanded or established leaders are promoted internally.
In October, Darren Carroll was promoted to vicepresident of corporate business development at US-based Eli Lilly after five years running New Ventures, which manages all its private equity investing through Lilly Ventures and Lilly Asian Ventures.
Carroll set up the first pharmaceutical company’s corporate venturing fund in Asia and developed innovative networks with VCs and its peers.
He is now in charge of all Lilly’s business development, alliance management and venture capital investment activities. There has been a similar transition at Sigma-Aldrich, with Christine Karslake, head of its New Ventures group until February, becoming director of strategy and corporate development.
Other significant moves include changes at AstraZeneca’s MedImmune Ventures team, with Ron Laufer, a co-founder of Lilly Ventures,
brought in as senior managing director in April last year.
His arrival at theUS-based team coincided with managing directors Maggie LeFlore and Frank Top becoming venture partners, and Eva Jack left MedImmune Ventures to become chief business officer at Novartis-backed Pulmatrix from December. In their place, Laufer has recruited Samuel Wu, ex-principal at SV Life Sciences for eight years, and Isai Peimer as a principals.
As a result of corporate venturing’s part of the investment ecosystem, there has been a number of moves to and from VC firms and internal divisions.
Johnson & Johnson Development Corporation, which set up the well-regarded RedScript Ventures unit, hired Dalton Einhorn from VC firm Latterell Venture Partners, but Niamh Pellegrini moved to its Acclarent subsidiary, while Allison Robbins, an associate at Genzyme Ventures, left in July last year to join Green Shoots Life Sciences, and Covidien Ventures hired Amy Belt from Advanced Technology Ventures.
Also in the US, Etsuya Matsutani retired from Takeda Ventures, the corporate venturing unit of Japan’s largest drugs company, Takeda Pharmaceutical, while MP Healthcare, the jointly-owned subsidiary of Mitsubishi Tanabe Pharma and its parent company Mitsubishi Chemical, promoted Takahiro Mukohira after the retirement of Hidenobu Ikoma.
With Matsutani’s retirement, Yuji Iizawa was seconded as vice-president of Takeda Ventures in April. Iizawa previously worked with Graeme Martin, president of what is now Takeda Ventures since 2003, for two years before taking responsibility for the strategic oversight of Takeda research affiliates worldwide and returning earlier this year.
In January, Takeda Ventures was renamed from Takeda Research Investment as part of a move by the company to expand abroad, including buying Swiss-based peer Nycomed for $13.6bn.
Martin said the name change reflected a shift to use external corporate venturing as a "probe into new potential markets and therapeutic avenues that might extend the Takeda range" rather than simply to provide strategic intelligence and increase discovery capabilities in existing research areas.
Others have followed its lead in setting up or expanding their teams. New corporate venturing groups over the past year have included US-based Merck & Co setting up a $125m Global Health Innovation Fund, having previously operated the Merck Capital Fund, under William Taranto; Germany-based peer Merck setting up a bioincubator in Israel with €10m to see it through to 2018; Ipsen and Shire using their corporate development groups to strike deals; and Cephalon starting a corporate venturing fund, just before Teva agreed to buy the company for $6.8bn.
The strategic shifts in direction or acquisitions of corporate venturing units’ parents remain an important factor in changes affecting teams, but the maturity of the operation and ability to leverage capital by bringing in other investors are other factors. Quintiles Transnational spun off its NovaQuest unit in November, with the independent group filing to raise a $500m fund, according to news provider In Vivo.
Quintiles will be a minority investor in the fund alongside five others, In Vivo said, and NovaQuest subsequently expanded its team under Ron Wooten with Daisuke Makino and Manabu Ikegami joining as principals earlier this year on secondment from Mitsui, a Japanese financial services firm that is also an investor in its new fund.
An alternative approach, and one that has helped Cleveland Clinic Innovations to rise into the top 10 most influential corporate venturing units, is to collaborate more formally with peers. Non-profit hospital chain Cleveland Clinic has used its innovations team to strike an alliance with peer MedStar Health, which has hospitals in Maryland and Washington DC, to help the MedStar Institute for Innovation bring inventions to market (see profile in related content).
The global nature and complexity of the healthcare industry have led to a broader range of partnerships between different types of institution than any other sector. Alongside Cleveland Clinic Innovations in the top 10 are endowments Wellcome Trust and Novo, which owns a majority of Novo Nordisk and runs a separate venturing unit investing $300m per year with 57 portfolio companies.
Danny Truell, chief investment officer (CIO) at Wellcome and a keynote speaker at the symposium last month, said it had invested $10bn in private corporate investments since 1994, split equally between buyouts, and venture and growth, and with a 15% net annual rate of return.
He added: "We are likely to continue to invest over $1bn a year, directly and indirectly," having invested $5bn in the past six years since he became CIO. In its annual report for its most recent financial year, Wellcome said direct interests in private and illiquid companies, especially in the energy, financial, healthcare and knowledge sectors, almost doubled from £260m to £515m, as new investments were supplemented by higher valuations.
Changing models
Wellcome used its returns to provide £678m in charitable expenditure, such as providing $5m to a professor at the University of Queensland to help him modify an antibiotic (see related content on venture philanthropy).
Last year, infectious diseases killed more people than cancer, according to figures from the World Health Organisation’s Global Health Observatory Database, and resistant strains of bacteria, so-called superbugs, have emerged as the number of new antibiotics has declined to a quarter of those launched in the 1980s.
Industry trade body the European Federation of Pharmaceutical Industries and Associations, said the pursuit of profits through high sales volumes had undermined the effectiveness of antibiotics by helping spread disease resistance. The federation said there should be new business models to promote appropriate rather than excessive numbers of antibiotic prescriptions paid for by tax credits, prizes and patent extensions and collaboration between companies and academics. The UK government has encouraged this approach by announcing a patent box regime that would give tax breaks on research.
This helped lead SR One to set up a £50m corporate venturing fund for the country. SR One’s parent, GSK, has also set up a flexible form of partnership with academics, such as Prof Mark Pepys, head of medicine at the Royal Free and University College Medical School in London, so the institution can research treatments while the drug company provides facilities, funding and performance fees in return for an exclusive licence on the patents filed.
This changing business model for drug companies to one based on appropriate use of treatments built on collaboration and innovation, and often diagnosed and provided remotely, would be a shift for a sector built on the economies of scale of manufacturing, the petrochemical industries and a tied distribution network of doctors.
Ian Read, chief executive of Pfizer, told news provider Wall Street Journal: "Historically, big pharma was driven by manufacturing and very often they put manufacturing sites up on rivers because there was fermentation involved and they needed access [to water]. Now, I think you need to be in centres of innovation and hubs of innovation that are represented by La Jolla, California; Boston, Massachusetts; and also in the UK, in Cambridge."
Big pharma is also under pressure from the sale of generic drugs, with Pfizer’s $6bn blockbuster Lipitor due to come out of patent in November. The IMS Institute for Healthcare Informatics said: "Over 80% of a brand’sprescription volume is replaced by generics within six months of patent loss."
It is a change in approach that is encouraging competition from consumer goods firms that can promote the beneficial aspects of foods or use their marketing skills to educate an audience. At the start of the year, Switzerlandbasedchocolate maker Nestlé set up its health sciences division as a $1bn turnover group built in part from deals struck by its Inventages corporate venturing team and other sources, such as Prometheus Labs.
And given the reliance on technology to sift molecules for potential new drugs or pathways to treat categories of illness, a number of computer companies, such as Intel and IBM, are using their venture groups to invest directly or indirectly in businesses that can affect healthcare.
The IBM SmartCamp, which puts start-up firms together with venture capitalists and industry leaders to provide coaching and support, in Texas this year had three of the five finalists focused on empowering patient-driven healthcare.
Drew Clark, director of strategy for IBM Venture Capital Group, told news provider HealthcareIT News that empowering patients to take control of their own health improvement was a "trend we are starting to see from the top down" from US president Barack Obama’s administration.
The flotation of Pacific Bioscience, a US-based gene sequencing company, in October showed the range of syndicate members a technology group can have. Pacific’s peer Gen-Probe had invested $50m, more than $20m came from both Intel Capital, the corporate venturing unit of semiconductor company Intel, and Wellcome Trust.
Agriculture company Monsanto was the final strategic backer, and the financial investors were Mohr Davidow Ventures, Kleiner Perkins Caufield and Byers, Maverick Capital, Alloy Ventures, Blackstone Cleantech Venture Partners, Deerfield Management, Sutter Hill Ventures, Morgan Stanley, Redmile Group, T Rowe Price, Alliance- Bernstein, DAG Ventures and Teachers’ Private Capital.
This diversity has been called a melting pot for creativity and provides the basis of optimism for corporate venturers.
Francis Waldvogel, chairman of the Novartis Venture Fund, said in the fund’s annual report: "Medical sciences have indeed never been as creative, diversified, and dynamic as today, emerging from a real melting pot where physics, material sciences, chemistry, biology, genetics, informatics and robotics converge.
"Miniaturisation and nanoscale developments also move into the field. We believe, therefore, that this is a time for great opportunities to develop novel diagnostic tools, therapeutic agents and medical devices for unmet patients’ needs, and that a diversified, multidisciplinary team is a must to develop these opportunities."