What links sugar company Tate & Lyle, oil major BP, a South Korean steel maker and General Electric, one of the world’s largest conglomerates?
They have all recently taken strategic stakes in healthcare and life sciences companies through their corporate venturing units and thereby created the potential for disruptive new businesses and technologies to emerge for the established pharmaceutical, biotechnology and medical technology and services groups.
BP’s decision to be the only strategic investor in Synthetic Genomics has begun to pay off as the US-based biotech last month said it had created synthetic life. Arthur Caplan, bioethics professor at the University of Pennsyl- vania, said in the Financial Times: “This makes it one of the most important scientific achievements in the history of mankind.”
BP’s interest in Synthetic Genomics, founded by Craig Venter, a pioneer in reading the human genome, is in the application of breeding organisms to make biofuels or capture carbon from coal. This was the reason behind BP’s deal to buy an undisclosed stake in 2007 and join Synthetic Genomics’ venture capital backers: Biotechonomy, Draper Fisher Jurvetson, Plenus and Meteor Group.
But, just as a previous generation of chemical companies, such as ICI and Celanese, developed large pharmaceutical operations in the 19th and 20th centuries, so the potential for companies in other sectors to become involved increases as the biosciences and technology continue to develop, which is why South Korean steel maker Posco set up its BioVentures fund in 2002 with $50m.
And a month after BP backed Synthetic Genomics, Tate & Lyle, through its £25m ($36.2m) corporate venturing fund, invested in Aquapharm’s £4m first round of funding. In March, Aquapharm closed its subsequent £4.2m series B round to “build a marine-derived compound library containing small molecule and peptide compounds with the size and structural characteristics of potential new drugs [and] build on existing interest from pharmaceutical and biotechnology companies to enter into discovery and development alliances”.
Companies, therefore, are preparing to cross sectors and boundaries in the search for financial returns, new business lines and methods to improve operational efficiency through workplace productivity. Taking an innova- tive approach to improving business, UK-based E Rejuvenation Centre has found through its leadership programme for small business owners and directors to rejuvenate participants’ energy there was a 26-fold return on investment in sales and profitability. Sarah McCrum, director of E Rejuvenation, said: “If you want to grow your business you need to increase your energy. Our clients consistently report to us that they are more focused and much more productive, as well as sleeping better as a result of the programme. And this results in surprisingly fast business growth.”
Research into the life sciences by Global Corporate Venturing has uncovered for the first time how extensive these units are in taking minority stakes in third parties. As ranked by Global Corporate Venturing, the top 10 have programmes of more than $5bn disclosed. The value of assets and commitments by nearly 100 others tracked in the first comprehensive way by this magazine highlights the breadth and extent of programmes stretching back decades and in some cases to the origins of the independent venture capital industry itself.
From the 1960s until the oil shock of 1973, more than a quarter of Fortune 500 companies set up divisions that mimicked independent venture capital firms, according to Harvard’s Professor Richard Hamermesh, before the number shrank with tighter economic conditions and then recovered with economic fortunes to the last cyclical high in 1999 to 2000. US corporate venturing has shrunk from 350 units investing $16bn in 2000, 16% of the total venture capital that year, to $1.3bn in the first six months of 2007, 8% of the total, according to PricewaterhouseCoopers/US National Venture Capital Association MoneyTree Report and Thomson Reuters.
Switzerland-based pharmaceuticals company Novartis, however, was the most active venture capital investor last year, backing 28 companies with $215.3m, according to VentureXpert. The 28 companies in which Novartis invested last year were more than half the 52 it struck over the three-year period to the end of 2009, according to VentureXpert.
Novartis also invested more in 2009 than any disclosed independent life sciences VC in a significant ramping up of its involvement following its decision to set up an option fund in 2007 as well as commit to a larger, broader ventures fund. This increased commitment, long-term track record and innovation in creating its option fund to provide entrepreneurs with a choice of funding vehicle and access to Novartis scientists meant it was ranked first in the inaugural Global Corporate Venturing study of the sector.
Novartis’s clarity of funding structures has been followed by peers, such as General Electric, which in October set up its $250m Healthymagination fund to pull together its minority investments in healthcare, Boehringer Ingelheim’s €100m ($123m) Global Venture fund launched in March, and potentially others, such as Shire, which said it was currently considering its structure.
Novartis was just ahead of Johnson & Johnson Development Corporation, the oldest corporate venturing unit in life sciences and med-tech, having been founded in 1973, a year after the doyen of independent VC, Kleiner Perkins Caufield & Byers, was set up. JJDC is run by its president, Roy Davis, after David Holveck left to be chief executive of US-listed Endo Pharmaceuticals, and has since become less active, according to independent VCs and VentureXpert data.
JJDC declined to comment for this article but remains the most active corporate venture unit over three years by investing $600.4m in 42 companies but $45m in 14 last year, according to VentureXpert. However, its long-term track record has kept it ahead of two of the largest and most innovative investors in life science companies – Wellcome Trust in the UK and Denmark’s Novo.
Both Wellcome and Novo are in the grey area for corporate venturing as they are philanthropic, but money originally came from companies and in Novo’s case it is called corporate venturing. However, other VC- style operations backed by families who crystallised wealth from life sciences companies, such as Ernest Bertarelli, who sold Serono to Merck KGaA, or Henri Miller, former chief financial officer at Roche, are not included in the GCV top-75 ranking.
What is undisputed about Wellcome and Novo, however, is the size and pace at which they are increasing their venture investing, with Novo looking to invest $300m a year and Wellcome with £260m in direct investments and a further £829m in VC funds as at the end of September. Wellcome’s chief investment officer Danny Truell manages its investments after the foundation cashed in some of its shares in what is now called GlaxoSmithKline.
GSK’s own main corporate venturing unit, SR One, is expected to undergo some change after Christoph Westphal took over from Russell Greig as president in April, while Shelagh Wilson continues to manage its early-stage development fund, Ceedd. Turnover in corporate ventures remains a significant issue and one that firms are tackling through potentially significant changes to their structures.
Eli Lilly, which has one of the most respected venture teams under Darren Carroll, has moved its unit to an independent fund struc- ture where the team, excluding himself, can earn performance fees on its deals. But relying on just one limited partner as a corporate venturing division’s source of funds remains one of the industry’s greatest strengths as well as a potential weakness.
While independent VCs are subject to changes in strategy or remit – such as Atlas Ventures closing its European office to new deals in the region, or a firm moving away from early-stage venture or into other parts of life sciences away from biotech – corporate venturers are vulnerable to shifts in the senior hierarchy at the company or full mergers and acquisitions.
The most recent Global Corporate Venture Capital Survey 2008-09 by accountants Ernst & Young found “securing business unit sponsorship for investments” was their top operational challenge, followed by determining a path to exit from investments.
The HBM Pharma/Biotech M&A Survey 2005-2009, published in April by Miller’s VC operation HBM Partners, found the two issues were effectively related. The relative paucity of flotations means the outlook for venture-backed biopharma companies depends on trade sales, which in turn is affected by the M&A strategy of the larger businesses. Last year was a record for US, Canadian and European trade sales, with $174bn of deals.
The HBM survey said over the next one to two years, some of the traditional large pharma buyers would continue to be distracted by post-merger integrations, such as Pfizer buying Wyeth, Merck & Co acquiring Schering-Plough and Roche integrating Genentech, and expansion into emerging markets generics, including Novartis and Sanofi-Aventis. Pfizer had been the most active buyer of VC-backed companies over the five-year period, acquiring eight com- panies, while US-based Merck & Co, which is independ- ent of Germany’s Merck KGaA, and Roche each acquired three.
These deals, increasingly structured with a smaller amount of upfront cash and greater proportion of payments after milestones have been reached, are still lucrative for investors, including corporate venturing funds, with an average multiple of 4.8 times total value to capital investment. HBM’s analysis, however, found there was no clear cor- relation between corporate involvement in VC companies and the parent’s eventual acquisition of the business.
But corporate venturing units’ involvement was more likely to lead to a company’s successful exit and at a higher valuation – an average $173m as against $119m for companies without a corporate investor, according to HBM. This is significant as the average VC fund has struggled to make money over the past decade, although in health- care the returns are more positive, according to consultancy Cambridge Associates’ analysis from 1997 to the end of 2009.
The report by Ulrich Geilinger and Chandra Leo at HBM said the choice of target was changing. They said in their report: “As the time of major patent expirations approaches, many buyers will focus on assets that are commercial or close to approval.
“Companies with such late-stage assets will be in the best position to achieve good exit values, also because they will have more options for generating liquidity (including initial public offerings or mergers).
“Companies with truly unique earlier-stage assets or platforms will still be able to command attractive prices, but the deal structures with contingent payments are probably here to stay.
“In the medium and longer term, we see two develop- ments that will strengthen the position of VC-backed bio-pharma companies: on the one hand, big pharma will continue to ‘outsource’ its discovery and early development activities to the biotech industry. This trend is accelerated by the wave of research and development job cuts recently announced by the likes of AstraZeneca, GSK and Pfizer. This means that the dependence of pharma companies on in-licensing compounds from biotech firms will further increase.
“On the other hand, regulatory and reimbursement hurdles will be raised further, increasing the premium on product differentiation. This environment will favour drugs with novel mechanisms of action or those based on novel chemistries or biological scaffolds – areas in which biotech companies have been particularly successful in the past.”
The need to look outside internal R&D will encourage the trend towards setting up and building corporate venturing units, according to industry figures. Michel Pairet, head of Boehringer Ingelheim’s venture fund, said: “The strategic orientation for the fund is we want to create opportunities for new partnerships and new business. We have developed a complementary triumvirate approach: efficient drug discovery in-house, such as having found five compounds over two years, five to 10-year licence and business partnering, and now to search for external innovation from our corporate venturing funds.
“From our Global Ventures fund we prefer to invest in early-stage entrepreneurs as Boehringer Ingelheim’s immediate future is secure from our pipeline, but having an in- house fund is about looking 15 years into the future. Corporate venturing is a response to the shrinking independent VC market as innovative entrepreneurial projects are still present but lack financing. So the fund is part philanthropic and part for the benefit of BI, as it is our preferred strategy to see portfolio companies grow and develop to enter strategic partnerships or acquisitions with us.”
Andrew Gaule, founder of the H-I Network of senior executives fostering innovation, growth and operational excellence, said corporate venturing units had a challenge in how to get the balance between strategic and financial returns over 10 years.
He said: “We are seeing organisations that have become very good at leveraging the VC approaches and the links to the corporate to make a return on the fund. The opportunity comes when you can help the corporate grow and scale the ventures and the network the fund creates. However, you do not stay strategic for long if you do not make a financial return.”
Graeme Martin, head of the Takeda Research Investment (TRI), the venture arm of the Japanese drug company, said: “Ultimately we are judged by the number of trans- actions we introduce to the company that result in a joint venture. “The other half of our remit is in competitive intelligence that comes from observing emerging technologies and sci- ence so the internal structure at Takeda can capitalise on it as well as be warned of potential threats. “It is a drugs company’s pipeline that drives value, so since 2001 TRI has had a different mandate to be ears and eyes on strategic innovation outside Japan and build external relations if necessary though investment.”