The world of healthcare is rapidly embracing the open innovation model and, by extension, corporate venturing.
This trend, which has been developing for a long time, was underlined by open innovation’s best-known thinker, Harvard academic Henry Chesbrough, who told last month’s Nature magazine how open innovation in life sci- ences had initially been treated with scepticism but had now taken more of a hold due to open innovation successes at biotech companies such as Genzyme and Millennium.
Research and development (R&D) spending in health- care is still increasing slightly, with more than $70bn spent by the 10 biggest companies in the sector in 2012, accord- ing to news provider Fierce Biotech.
Yet smaller companies are taking a growing share of R&D – Fierce Biotech said the 10 largest biotech compa- nies spent $11.8bn on research in 2012, up 15%, while some companies, such as Anglo-Dutch AstraZeneca, US-based Pfizer and Japan-based Astellas, are scaling research back.
As R&D levels off, many are turning to corporate venturing. New entrants since 2010 include US-based health- care company Merck’s Global Health Innovation Fund, now $500m in size, US and UK-listed Shire Pharmaceuticals, US-based Baxter International, China-based Wuxi Pharmatech, Germany-based Boehringer Ingelheim and New York-listed Teva Pharmaceutical Industries.
Many believe this change in the structure of research, plus wider changes to the US healthcare system under President Barack Obama, make it a very interesting time to be in healthcare venturing. Matt Hermann, manag- ing director at Ascension Health Ventures (AHV), which invests on behalf of numerous Roman Catholic healthcare facilities, including hospital Ascension Health, said: “This is the most exciting time to be part of the healthcare venture business as the strategic impact of what we are doing is so high. We believe our LPs [limited partners – investors] enable us to offer unique insights.”
He said entrepreneurs and other venture and private equity firms were appreciative of the strategic value Ascen- sion Health Ventures brought to its portfolio companies.Chris Coburn, outgoing executive director of US-based Cleve- land Clinic Innovations, said: “This is a great time to be a big com- pany with investable resources. The arithmetic in the venture com- munity means large players are able to get relatively better value for investments.”
People in the sector welcome the move towards venture. Her- mann said: “I believe hospitals and healthcare systems have in the past underinvested in innovation and AHV helps its limited partners become more aware of additional innovations that reduce costs, improve outcomes and enhance the experience of patients and caregivers, as AHV’s limited part- ners look to transform healthcare.”
Coburn added: “I would say the innovation alliance has reached a crescendo nationally, both finan- cially and clinically. It is only going to go up from here after 13 years of hard work.”
Funds
Pharmaceutical groups continue to back venture firms regularly. Last month Amgen and Novartis teamed up with Atlas Venture to explore biotechnology investment opportunities. Last year pharmaceutical company Eli Lilly helped venture firm TVM raise $150m for its latest fund TVM Life Science Ventures VII, which attracted a $65m commitment from fund of funds Teralys Capital.Corporates also made big commitments to their venturing units.
Last year Merck’s Global Health Innovation Fund was boosted by another $250m and will look outside the US for the next tranche of investment. The additional commitment came after the fund had invested nearly all its first tranche over the previous two years in healthcare start-ups outside Merck’s core sectors of pharmaceuticals, vaccines, con- sumer products and animal health businesses.
William Taranto, managing director of the fund, said at the time: “We have deployed a majority of the first $250m tranche and expect to have 20 investments by the end of the year. Merck is committed to venture capital and has approved another $250m to be deployed starting in Janu- ary 2013.”
Other corporate venturing-like units also continue tobe active. In January, the UK’s Wellcome Trust launched Syncona Partners as a £200m ($300m) healthcare investment fund, run by five executives – Martin Murphy, Iraj Ali, John Bradshaw, Chris Hollowood and James Peach.
People
Coburn, quoted earlier, is moving from Cleveland Clinic Innovations (CCI) to non-profit peer Partners HealthCare to be vice-president of research ventures and licensing.
Coburn founded Cleveland Clinic’s innovations unit in 2000 and it now has a team of 70 dedicated to com- mercialising the centere’s $300m annual research budget through licensing and spin-offs. Since its inception, CCI’s 55 spin-offs have raised nearly $700m. Coburn also pio- neered CCI’s national “innovation alliance”, through which the clinic manages innovation for providers throughout the US.
IIluminOss Medical, a developer of pho- todynamic orthopedic implants backed by SR One, GlaxoSmithKline’s corporate venturing unit, appointed Dirk Kuyper as chief executive. Kuyper came to IlluminOss, which raised $28m in series C funding last year, from healthcare company Alphatec Spine where he was also chief executive.
PhaseBio Pharmaceuticals, a bio- technology company, has recruited Jonathan Mow, formerly of Amylin Pharmaceuticals, as its chief business officer.
Deals
Global Corporate Venturing tracked 175 investments totalling $3.3bn by corporate venturing units in healthcare companies in the year to the end of April 2013, compared with 210 investments worth $4.7bn in the same period a year earlier. There were 21 exits from corporate venturing- backed companies worth $2.8bn in the period to the end of April 2013, compared with 24 worth $4.4bn a year earlier.
The largest exit was that of China-based medical device company Kanghui, backed by IDG-Accel, a corporate ven- turing unit of International Data Group also backed by ven- ture firm Accel Partners and international alternative asset fund manager CDH Investment. Kanghui which was sold to Medtronic for $816m.
Other big sales included Proximagen, a UK-based maker of therapies for the central nervous system backed by IP Group, a UK-based intellectual property commercialisation company. Proximagen was sold at £3.20 a share to USL Pharma International UK, a subsidiary of Upsher-Smith Laboratories, for up to £356.8m.
Healthcare company Allergan acquired SkinMedica, a developer of aesthetic medicine products, for $350m plus a bonus of up to $25m if the company meets sales targets. SkinMedica was backed by EuclidSR Partners, a corpo- rate venturing fund linked to pharmaceutical conglomerate GlaxoSmithKline through its corporate venturing unit, SR One.
Takeda Pharmaceutical, a Japan-based drugs company, agreed to buy Envoy Therapeutics, a portfolio company of its corporate venturing unit, Takeda Ventures, for up to $140m.
The largest investment in the period was the $210m round raised by Intarcia, backed by hedge funds Baupost Group and Farallon Capital Management. This deal was followed by the $150m round raised by Australia-based Mesoblast, which is backed by Teva, and the $130m round raised by Ireland’s Neotope, a spin-off from Ireland- based drug developer Elan.
Other exits have included the sale of patient engagement company GetWellNetwork, backed by Johnson & Johnson Devel- opment Corporation, to private equity firm Welsh, Carson, Anderson & Stowe, for an undisclosed sum. Investments also included health- care company AbbVie entering into a celiac disease drug deal with an initial payment of $70m for an exclusive option to acquire either the assets or the equity of Alvine Pharmaceuticals, previously backed by its corporate venturing unit AbbVie Biotech Ventures.
Biopharmaceutical company Sutro Biopharma raised a $16.5m second tranche of series C financing. This financing was backed by Lilly Ventures, the corporate ven- turing unit of US based healthcare company Eli Lilly, and Amgen Ventures, the corporate venturing unit of US-based healthcare com- pany Amgen. The Sutro round was led by venture firm Skyline Ventures and included participation by venture firms SV Life Sciences and Alta Partners. Sutro has raised almost $60m since its founding in 2003.
Sickle cell treatment company HemaQuest Pharmaceuticals, a biotechnology company focused on devel- oping small molecule therapeutics to treat haemoglobin disorders, raised $13m in series B financing, backed by Lilly Ventures and venture firms Aberdare Ventures, De Novo Ventures, Forward Ventures and Latterell Venture Partners.
Johnson & Johnson Development Corporation led an $18m C round for Aquinox Pharmaceuticals, which is developing treatments for inflammatory diseases. This round was also backed by Pfizer Venture Investments, the corporate venturing unit of Pfizer, and included investment firm Augment Investments and venture firms Ventures West Capital and Baker Brothers Investments.