The Meytav Newsletter
Issue no. 23 – October 2007

Dear All.

We continue our effort to highlight issues that are interes...
funds to nine; and BD Ventures LLC (Becton, Dickinson and Co.'s venture fund) has
invested in four fledgling firms.

But -...
The typical "sweet spot" is up to $2 million per round, and no more than $5 million
total per company. Within these bounds...
Please see the attached data from Windhover: Big Pharma is doing more and more
                deals, with bigger upfront ...
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NewsLetter 23 - October 2007


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NewsLetter 23 - October 2007

  1. 1. The Meytav Newsletter Issue no. 23 – October 2007 Dear All. We continue our effort to highlight issues that are interesting and relevant to our portfolio companies – and to biotechnology companies in general. We have recently covered regulatory changes, reimbursement and Intellectual property trends – and would like to return to the financial environment – and discuss sources of financing that are applicable to early stage biotech and medical device companies. In Israel - this is a tough challenge. On one hand, we have the "classic" VC's – deep pockets, industry expertise and contacts – but no much willingness to take on high levels of risk. Let me know if you have heard this before: "Looks great – call us when you have phase II clinical data, and we will be happy to talk". Will the company really need a VC investment at that point? I am not so sure. Other issues with most VCs are timing and deal size (see the strip towards the end of page 4…) – they take more time and invest larger amounts than an early stage company needs – at the cost of dilution and tough terms (no-shop, no sale etc. etc.) On the other hand – there are private, "angel" investors. Here things definitely happen faster – private money can move with no committees and partner meetings, the sums are more appropriate, but some of these investors lack initial, basic understanding of the field of life sciences – time, risk, regulation and other key parameters. Make no mistake – their $$$ are just as good as others, but working with these investors on a daily basis can be sometimes challenging. In this edition we will try to highlight another alternative – Corporate VC Funds. Large pharma, biotech and medical device companies have come to realize that there is a great way to connect to the innovative cutting-edge research, next- generation drug discovery technology and product opportunities. Theses large, multi-national companies have created venture capital arms to invest in startups - and they invest early, long before these startups are even mature enough to sign a partnering deal. We will look at 2 in particular – Elli Lilly Ventures and JJDC (from Johnson & Johnson) – both with strong ties and contacts to Israel. There's no question that these corporate VCs are in serious pursuit of their goals, either. Since January 2001, the Novartis Venture Fund and the Novartis BioVenture Fund together have invested in 18 startups; GlaxoSmithKline affiliates S.R. One Ltd. and EuclidSR Partners have put money into 13; Johnson & Johnson Development Corp. has invested in 12; Novo Nordisk's investment arm Novo A/S has contributed 1
  2. 2. funds to nine; and BD Ventures LLC (Becton, Dickinson and Co.'s venture fund) has invested in four fledgling firms. But - corporate VCs need to be careful - even though their portfolio companies are developing products and technologies that will fit neatly with each pharma's long- term strategic goals, the VC function must remain independent of those goals. Most of these corporate venture funds are run independently from the parent corporation, yet their capital infusion comes from the parent. The companies in which they invest are not automatically tied to the parent organization, yet by identifying and funding promising technologies, the venture funds lay the groundwork for future relationships. Corporate venture funds will tend to support companies whose technologies or products are closely aligned with the parent corporation's own franchises and strategic goals, the chances of partnering are fairly high - but not a necessary consequence. In fact, it can be a big disadvantage for a portfolio company to commit to a big pharma too early in its life, for doing so might "scare away" other investors, who could envision the corporate partnership as prelude to an acquisition - a situation that limits the exit strategies for traditional VCs. And rarely will a corporate VC carry a financing round by itself, preferring instead to participate as part of a group (syndicate). It needs those other investors and their financial capabilities. One of the relatively new additions to the biotech corporate venture crowd emphasizes collaborations between entrepreneurs at start-up firms and the big pharma's research staff. However, as with many other corporate funds, Lilly BioVentures, a $75 million fund launched by Eli Lilly and Co. in 2001, is designed to give Lilly scientific and strategic insight into up-and-coming technologies. "Traditional" VC's like to co-investing with corporations. They get leverage, apply the resources of a large corporation and extend the capabilities of their investment. This also a huge help on due diligence, and most important – can reduce time to market. Unlike conventional myth, if needed - corporations have ways to move things along more quickly. There's another advantage to having corporate limited partners: they often have interests that are complemented by the portfolio companies. Over time, a number of different partnerships can develop between our portfolio companies and the corporate partners. Big companies like to control the markets, small companies focus on entering the market. They have complementary missions and can help each other through cross-licensing, manufacturing, distribution etc. The main goal, according to the pharma partner, is get insight into technology developments and exposure to innovative processes. Some will make the distinction: between two types of investments : one is pure financing like every other VC fund, the other is to invest in companies whose technology, product or market niche is relevant to the parents long-term strategic interest. 2
  3. 3. The typical "sweet spot" is up to $2 million per round, and no more than $5 million total per company. Within these bounds, they don't have to go back to the parent company for approval. They also have the required long term view, investing early and planning to hold stakes for three to seven years. Johnson & Johnson Development Corp. (JJDC), which was formed in 1973, operates as an independent venture capital company within the J&J family of companies. They will sometimes even buy stock in public companies in which J&J has an interest ($ 45 M in Amylin Shares). Examples of JJDC's involvement in the pharma's biotech partnerships are too many to list here, but they include J&J's 1995 CRF receptor antagonist collaboration with Neurocrine Biosciences Inc. (in which JJDC bought $5 million in equity); the 1996 lisofylline alliance with Cell Therapeutics Inc. ($5 million); and J&J's 1998 influenza collaboration with BioCryst Pharmaceuticals Inc. ($6 million). Interestingly, of the nearly 30 deals with public biotech's that Johnson & Johnson and/or its affiliated companies have signed in the last four years or so, none has an equity component. Whether this reflects the evolution of deal structures and terms between biotech companies and pharmaceutical houses, is a basic shift in J&J's strategy, or is just a coincidence is unclear. And, like most corporate VCs, JJDC makes minority equity investments in startups (from seed to mezzanine round) with technologies and products of potential longer- term strategic interest to J&J. Investments are made at arms length, on the same terms as those of other venture investors and with no additional rights attached – this makes them a very welcome partner. In summary - Big pharma is paying much more attention to what's going on externally than it did 10 years ago, and the shift towards earlier stage projects and companies is clear. Not only is it willing to pay for late-stage compounds as always, but also - through corporate venture capital investments - big pharma is getting very involved in early-stage companies. There's recognition by the large companies that small firms can be a tremendous source of innovation. By venture capital investing, they open up possibilities outside their own internal R&D. If you require any additional information – please feel free to call. Until the next time, The Meytav Team. 3
  4. 4. Please see the attached data from Windhover: Big Pharma is doing more and more deals, with bigger upfront payments with biotech companies at earlier stages – Phase I and Phase II. True, these are licensing and partnering deals, and not investments by the corporate VC's, but if these shift to an earlier stage, no doubt the investment by the corporate VC will happen at an even earlier stage. Phase I / II Deals $700 20 $ Upfront Total No. of Transactions $600 $500 No. of Deals 15 $ Millions $400 10 $300 $200 5 $100 $0 0 2001 2002 2003 2004 2005 2006 :And, on the lighter side – the VC Go/No Go decision making process 4