US-based healthcare group Johnson & Johnson (J&J) has an "outsized place" in corporate venturing as it enters its 40th year since the creation of Johnson & Johnson Development Corporation (JJDC) in 1973.
Although J&J had been making venture investments since the 1960s, the creation of JJDC and its unbroken history of taking minority equity stakes in third-party entrepreneurs marks it as one of the oldest and most consistent investors – perhaps only surpassed by mutual fund manager Fidelity.
As Chris Coburn, chief executive of Cleveland Clinic Innovations, the US-based medical centre’s corporate venturing unit, said: "JJDC itself is one of a relatively small group of leaders in medical innovation and at the top rung; it is the Kleiner Perkins [Caufield & Byers, a top-tier venture capital firm founded a year earlier in 1972] of corporate venturing.
"It [JJDC] has an outsized place in the community of corporate venture capital and is a case study for other large organisations in how they invest and develop entrepreneurialism."
This is no mean achievement given in the past four decades J&J has grown into a conglomerate with $65bn in annual revenues from its 250 subsidiaries selling healthcare items from drugs to baby powder to joint replacements across 60 countries.
But this multiplicity of products, broadly divided into three divisions – pharmaceuticals, medical devices and consumer – has been seen as an advantage when it has come to supporting JJDC and the company’s broader business development units. This advantage comes because the company has developed sophisticated processes for buying and selling and calculating present values of entrepreneurial assets through due diligence.
In an article listing J&J’s dealmaking to acquire research talent or products with sales potential, such as the purchase of Crucell for $2.4bn in 2010 or the licensing of hepatitis C drug Telaprevir in 2006, trade newspaper Fierce Biotech in part concluded: "It is clear that J&J understands deal-making. And they are good at it."
As one insider confirmed: "J&J sees the world from a portfolio approach – how to get [profitable growth] through mergers and acquisitions, licensing, corporate venturing, academia and early-stage startups, as well as internal innovation."
And Roy Davis, the former president of JJDC, said: "J&J provides several factors that enhance the success of its venture capital arm (JJDC). Not only does J&J have enormous depth of expertise for diligence but its strong balance sheet allows it to be a good long-term partner to emergent companies, and top management’s view to shaping healthcare for the long term allows for the patience required to succeed in new business creation. Over the years it has truly proven to be a very successful equation for J&J, JJDC and the companies under investment."
In return, JJDC looks to bring in at least one product or company to the parent each year, such as the 2010 purchase of Acclarent for $785m after JJDC backed its $26m venture round the year before.
While JJDC insiders said the unit had been "material" for J&J over its history, the company’s annual reports do not break out the corporate venturing unit’s performance apart from a standard line of undisclosed gains or writedowns in its other expenses section.
In the short term, however, J&J can be more affected by larger transactions, such as the $21.3bn purchase of medical devices company Synthes that is near to passing all required regulatory clearances before being closed. JJDC, however, has been evolving what it does with the money and its objectives over the past four decades while the parent company is also developing its broader business development strategy to encourage innovation.
There has been a shift from financial to more strategic objectives for JJDC over the years, as J&J has preferred a strategy for growing business over purely financial returns, according to insiders.
Brad Vale, who replaced Davis as head of JJDC from the end of December, has in the past said its overall plan was to enter into investments for strategic reasons, to create strategic options, then manage the deals for the best strategic and financial results.
But there had been a focusing of JJDC’s portfolio under Davis’s four-year presidency. He said: "JJDC has narrowed its number of investments by 35% over the past four years [to still more than 50 investments] and with new investments tried to focus [on] strategic areas, not a broad scatter.
"J&J has many mechanisms for growth, one of which is its venture component. Our vision is to generate new, high-growth businesses on a regular basis, at least one per year, and so J&J created a mechanism to invest and link portfolio companies to the company.
"These links might mean the sale of a JJDC portfolio company to the parent, and over the past four years we have tried to be more predictive of J&J strategy and invest into white space as well as areas J&J’s main operating sectors are interested in."
In the 12 months to the end of May, JJDC has publicly backed 11 companies, raising about $230m in later-stage deals, according to Global Corporate Venturing research (see table).
While the portfolio has been consolidated over the past few years, JJDC has been investing broadly the same amount each year as there are fewer exits, and a consolidation of independent venture capital firms in healthcare – from 236 to fewer than 100 over the decade to 2010 – means the cost of investing is increasing.
While there are few flotations – JJDC listed one portfolio company, GI, in Australia last year rather than the US as an indication – trade buyers are also looking at whether a deal might boost its margins and have longer term value potential.
In a presentation at the Rocky Mountain Life Science Investor & Partnering Conference in September, Davis said there were a number of macro-headwinds in healthcare and buyers were being cautious. He said: "The current environment favours strong value propositions with early-stage risks. [The] profit and loss impact [on an acquirer] is currently a bigger driver of the purchase decision than the balance sheet."
While JJDC seems to have moved later-stage and more strategic in orientation, J&J has been diversifying its innovation strategy over the past few years and more change is expected to come as part of a management shake-up.
In February, Alex Gorsky was named successor to William Weldon as chief executive (CEO) of J&J, having previously run its medical devices unit, thereby becoming only the ninth leader in the company’s 126-year history.
He is expected to work closely with Paul Stoffels, currently chairman of J&J’s pharmaceutical groupresearch and development (R&D) and a former colleague at J&J’s Janssen subsidiary, on innovation. Stoffels is also chairman of the JJDC board of directors and from this summer is expected to help lead a shake-up of the company’s innovation teams effectively to create centres of excellence around the world with the flexibility and resources to invest from early to later stages and work with different types of entrepreneurs – whether from academia, venture capital-backed companies or incubating ideas internally.
Sources close to J&J said it was expected there would be four centres, in California and Boston in the US, in the UK and in Shanghai, China, so the venture team will be "immersed in hot regions", according to sources, and with the flexibility, agility in deal structure and resources to support innovative ideas whether from academia, venture-backed entrepreneurs or internal incubation. J&J declined to comment, although more details could be announced formally as early as next month.
The company has been developing its innovation units and, as one insider said, now has "JJDC, Cosat [Corporate Office of Science and Technology], RedScript Ventures, business unit development under a chief innovation officer, so they are all singing from the same songsheet".
J&J has also committed to independent venture capital funds, including Index Ventures’ $200m Live VI fund where Stoffels joined the advisory board, and has supported new models of innovation, such as the Atlas Venture Development Corporation, which develops drugs from pharmaceutical companies, biotech start-ups and academic centres through proof-of-concept clinical trials and then considers various deal structures to profit from these products.
Cosat has been providing money to research scientists in academia since 1978, including recently funding two research efforts in a Bridging-the-Gap programme to create biomedical start-ups at the University of California.
In January, J&J also turned a wing of its La Jolla, California, drug research centre into an incubator for up to 20 start-ups. Diego Miralles runs the incubator, called Janssen Labs at San Diego, that offers three-month leases and gives J&J no preferential rights on tenants’ work. He is also head of the California Innovation Center, while Patrick Verheyen is head of the London Innovation Center with leaders for Boston and Shanghai yet to be announced.
Davis set up RedScript under Katherine Rielly-Gauvin in 2009 to look at more early-stage deals from internal and external entrepreneurs. RedScript tries to speed up an entrepreneur’s progress by consulting with the startup on anything from clinical trials to the economics of medical devices as well as incubating in-house ventures, setting milestones and determining whether they are worthy of further funding.
As one insider said: "The key is discipline. There is no eureka moment but a process and mindfulness about what we put forward and our resources."
This mindfulness applies more broadly for J&J. As Robert Zivin, senior director of Cosat, put it at the 2009 Open Innovation Summit: "Early-on innovation is parasitic."
Most ideas in business end as failures, which means they only suck away resources and could kill the host if management is careless, he added at the summit.
However, by opening itself to external innovation, J&J gains what insiders said was an "added positive good of helping the parent be aware of external efforts so it can calibrate its internal R&D" that costs far more money.
In its latest annual report, J&J said it had invested nearly $37bn in R&D over the past five years to end-2011 and gained nine major approvals for new pharmaceutical products in the US. If JJDC, RedScript, the innovation centres and Cosat in a combined form lead to even slightly greater efficiencies in R&D through better selection of target areas then the consequences can be significant beyond the more direct returns it might bring.