This week’s Big Deal analysis looks at why ArmaGen Technologies, a US-based life sciences company known as Neurogene Technologies until 2004, decided to pick four overseas corporations to fill its $17m series A round.
The deal, therefore, showcases a number of important trends in healthcare: no venture capital (VC) firms were invited to invest, how far a company can get without selling equity and that while the investor universe has globalized all roads still often lead to the US.
Boehringer Ingelheim Venture Fund, the corporate venturing unit of the eponymous Germany-based healthcare company, led the A round syndicate, which also included drug peers Shire from Ireland and Japan-based Takeda’s venturing units, and Japan-based financial conglomerate Mitsui’s Global Investment division.
There are a couple of theories why VC firms did not join. First, there are fewer VCs willing to back US-based healthcare deals, which forces corporate venturing units to fill their prospective innovation pipelines.
US life sciences investment for the first three quarters was down 19% in dollars and 12% in deals from the same time period in 2011, according to the MoneyTree Report by accountants PricewaterhouseCoopers and local trade body National Venture Capital Association (NVCA) based on data from Thomson Reuters.
“Mark Heesen, NVCA president, said: “Life sciences investment remains low, reflecting ongoing concerns regarding regulatory uncertainty, capital intensity and investment time horizons in the space.”
A number of VCs, most recently Mohr Davidow Ventures, have pulled back from healthcare.
As Emily Levy said on the Global Corporate Venturing LinkedIn page: “For the life science space, the annual review may want to highlight their [corporate venturing’s] increased importance to the entrepreneurial ecosystem, especially as it continues to be challenging for VCs to raise funds.”
Alternatively, VCs were not part of ArmaGen’s round as the company did not apparently need them.
The portfolio company has been built on the lifetime research by its founder and chief scientist, William Pardridge, professor at Californian university UCLA. ArmaGen holds the exclusive licenses from UCLA for the patented technology that allows drugs to cross the blood-brain barrier.
By being paid by the university and using $20m in grants from the US government, Dandridge has built ArmaGen over the past eight years without needing to sell equity until now. The US’s Small Business Innovation Research (SBIR) programme, which provided $14.6m of ArmaGen’s grants in two phases, is hugely underrated as a source of sophisticated early-stage innovation funding.
Without taking VCs’ money, ArmaGen also can potentially have more time to develop its technology without having shareholders looking for an exit. All three of the drugs companies in the round are notable for having relatively clear strategic mandates and flexibility to hold over a longer time period than traditional VCs with 10-year funds.
Given the strong patent portfolio underpinning ArmaGen’s technology – the latest three were issued 12 months ago – and their broad potential application to a wide range of diseases, the company could become an important supplier to drugs companies wanting a way to make their treatments more effective.
Bringing in three important pharmaceutical companies as investors also prevents the company relying on just one partner – the company could be too valuable to sell too early or risk being squashed inside a large player.
The pharma groups, however, get the inside track on the technology and opportunity to develop their drugs on it.
That the three pharma groups are headquartered outside the US reflects how global the healthcare industry has become. But the investment teams of Takeda, Shire and Mitsui have strong and well-respected corporate venturing teams in the US, while Boehringer has five sites in America, indicating how important the country remains for innovation.