JJDC has more experience than any healthcare corporate venturing division, with a legacy that stretches back to 1973. Its prominence has continued into 2018, with approximately 40 new and follow-on investments and more than $450m supplied globally, making it the leading healthcare CVC unit for disclosed investments over the past 12 months, according to deals database PitchBook.
The unit relies on a 13-person investment team spread throughout locations in New Jersey and Tel Aviv and the four Johnson & Johnson Innovation Centres in London, Boston, California and Shanghai. It has a portfolio consisting of more than 100 companies.
Johnson & Johnson has accrued significant experience as a strategic investor compared with many of its peers. Do you believe Johnson & Johnson Innovation benefits from its reputation when engaging with potential portfolio companies, and if so how?
Xavier: From the point of view of JJDC, we are a value-added investor. In addition to the capital we provide, we bring J&J’s resources to the deal. For instance, we can provide advice to biopharmaceutical companies on preclinical matters and clinical trial design and execution. On the medical device side, JJDC, via a business relationship, can provide marketing and distribution in markets where the portfolio company has no capabilities.
Feld: I would like to echo the specific point – as a value-added strategic investor we can provide the best of the financial rigour of a VC with the strategic value of a corporate. From a consumer health perspective, when we approach companies through strategic investment, they are often attracted to J&J for our brand equity and global expertise. Considering the scale of J&J, there very few companies that play right across the spectrum in that way, providing particular capabilities to each portfolio company and also access to our business partners from the sectors.
Above: Asish Xavier
Have dynamics of external innovation in healthcare changed in recent times?
Feld: I would say the identity of investment partners is changing as consumer healthcare converges with the traditional healthcare system, offering new technologies and solutions to consumers and patients. We are increasingly competing and investing with tech VCs as well as corporate VCs from tech, retail and healthcare.
From a consumer health perspective, there is also a greater focus on digital product and our portfolio broadly reflects that, going beyond physical assets such as branded consumer products, to include digital platforms and consumer devices that enable digital connectivity engagement. The nature of these changes in technology and healthcare solutions moving to new tech and capabilities can also help drive investment opportunities.
Ryan: The global nature of investment has changed innovation. While being stage and cheque-size agnostic are hallmarks of JJDC, it is fair to say we are also geographically agnostic. Much of our advantage is still focused on the US and Europe whereas we are still coming from behind in Asia, where medical devices are still being leapfrogged by biotech.
Xavier: From the biotech side following the recession, the most significant change is the role of CVCs in biotech investing, particularly in the US and Europe. Some 15% to 20% of capital for biotech companies comes from CVCs. We have also witnessed the longest-running IPO market since 2013, with more than 300 IPOs in the US market, providing a significant infusion of capital for the biotech sector.
There is now greater scope to create companies earlier with new technology or biology breakthroughs. Early-stage investing had dried up from 2008 to 2012 as capital deserted the sector during and after the recession. Also, the infusion of Chinese capital from VCs and corporations, mainly in the US but also somewhat in other markets, including Canada, Europe and Israel, has resulted in a new dynamic.
Feld: I would like to add from a consumer health perspective it seems we are at an earlier-stage of this cycle, where there is not yet a consistent level of acceptance [of CVC participation] as with biopharma, but there is still advantage from our sustained presence in the VC market along with continued growth in the consumer healthcare market.
How does J&J view the relationship between corporate venturing and the other main devices of innovation – in-house R&D and M&A deals?
Xavier: We see a broad continuum providing opportunity for J&J throughout the product development cycle, that is, providing access to external innovation at all stages – from university research, through our four J&J Innovation Centres and venture investing from JJDC – which gives us the ability to help companies mature and derisk their assets through to business development and M&A.
J&J has business development teams, including M&A within each of the three sectors, which generally take over from JJDC at milestones specific to the sector, for instance that may be where the product has proof of concept in humans for biotech, or market-readiness in Europe and start of pivotal trials in the US for medical devices. For consumer products, it may be once the business model has demonstrated early revenue visibility.
Ryan: Especially important is that we have a quarterly review where the M&A and internal R&D priorities are strategically layered in with the JJDC venture investments so that we have a comprehensive view on our innovation pipeline.
Feld: We have a similar process from a consumer perspective, with quarterly reviews, so that we consistently integrate perspectives including early-stage investment, consumer R&D, the innovation centres, external innovation and business development. Then we have the flexibility to pursue an investment when it fits the strategic points [of the wider company], and if it does not fit we have other innovation tools available [to form the right relationship].
Above: Stacy Feld
What are the most promising trends in emerging healthcare applications?
Xavier: In my view there have been three trends on the biotech side. First, technologies invented in the 1990s are being translated into clinical products in areas such as gene therapy and RNAi, as well as oncology such as Car-T and TCR, and these technologies are driving the formation of many companies.
The second trend is data-centred artificial intelligence, which is improving our ability to find therapeutic targets. Rather than relying on trial and error, we can segment patients on the likelihood of treatments being appropriate for them. Last, there has been greater activity and a resurgence in areas previously neglected by VCs, such as non-alcoholic fatty liver disease and fibrotic lung, liver and kidney conditions.
Feld: On consumer health, the state of healthcare is changing as more solutions emerge focused on self care. There has been an emergence of consumer devices from the professional channel, with many home-use consumer devices, as well as digital products. Over the past two years, healthcare companies have also modernised how they are bringing products to market, and we have developed a greater focus on business model innovation and diversifying our go-to-market strategies to drive greater consumer engagement.
Ryan: For J&J, most of our medical device business involves surgical devices and we see the future of surgery clearly in the realm of digital surgery. To that end, we created a collaboration with Google’s Verily Life Sciences four and a half years ago, called Verb Surgical. The needs of a digital surgery platform require capabilities and talents much beyond the traditional biomedical engineering and leverage the tech capabilities in robotics, artificial intelligence and software.
One huge opportunity is access to essential surgery. There are 7 billion people in the world of which only 2 billion have access to surgery. Platforms such as Verb Surgical have to address not just the surgical procedures, but opportunities in surgeon training and engaging the broader community.
Above: Renee Ryan
What are the main ways in which CVC investments in healthcare differ among subsegments?
Xavier: It is true that the nature of CVC involvement within the three sectors J&J covers is quite different. In biotech, the two oldest CVCs are JJDC, started in 1973, and then SR One, which was formed in the mid-1980s. But there has been a significant increase over the past 10 years, and now almost every pharma and big biotech company has a CVC arm.
There remains a big difference in biotech in the role of CVCs and traditional VCs. New company formation remains primarily in the domain of financial investors. What has become more common among CVCs in biotech is an increased acknowledgement of strategic motivation. More investments are about long-term strategy and finding assets for the development pipeline.
CVCs have also become more active investors. They are taking board seats more often but there are only a few active enough to be a lead in most of their deals. A large number do not have the capacity to lead compared with the biggest players.
Ryan: Biopharma has by comparison a more robust slate of CVCs. However, many of those are financial, whereas medical devices have a much shorter list of CVC investors which are mainly strategic. In biopharma there are many different angles and capabilities complementing each other, but in medical devices there tends to be more wrangling between corporates to become a sole CVC investor in an investment round.
Feld: Consumer products are probably somewhere in the middle of the two. But what I would like to stress here is the wider strength of the company. JJDC can invest in areas that are relevant across J&J. For example, we led a financing in a smoking cessation digital health platform in Redwood City, California, called Carrot, which is a digital multidisciplinary platform designed to get smokers to become quitters and then sustain their cessation of the habit.
The platform is aligned with our consumer smoking cessation franchise, but it also ties in with J&J’s enterprise focus on “world without disease” and specifically on preventing lung cancer within our Lung Cancer Initiative, in providing holistic solutions to the problem.
That enables not just interest from the consumer products sector, but also cross-sector involvement and interest from enterprises. That is the power of the JJDC model, and the motivation is being able to work with entrepreneurs so that there is a greater likelihood of their products or solutions reaching the market. While obviously securing a financial return is great, I personally get even more satisfaction when J&J helps a company achieve its mission and the product or solution reaches the market and touches patients and consumers.