The Meytav Newsletter
Issue no. 23 – October 2007
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
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
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
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
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.
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.
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
$ Upfront Total
No. of Transactions
$500 No. of Deals 15
2001 2002 2003 2004 2005 2006
:And, on the lighter side – the VC Go/No Go decision making process