Being a CVC - A perspective on Novartis Venture Fund's investment (& exit) strategy

If anything, the recent news of Novartis agreeing to sell its vaccine & veterinary businesses while simultaneously acquiring oncology assets from GSK consolidates my earlier view/ observation that the investment philosophy of a corporate’s venture arm seldom reflects the strategic goals pursued by the corporation itself - effectively meaning that there’s hardly any difference between a CVC and a VC as far as the ‘intention behind the investment’ goes – the intent in this context being a tangible ROI.

There is albeit a definitive difference between a CVC & VC as far as the ‘intelligence behind the investment’ goes – the intelligence in this context being the insider-edge the CVC enjoys when it comes to identifying, qualifying and investing in a promising enterprise, an edge seemingly acknowledged by the VC & angel community given the sheer number of fundraising rounds led by the likes of Google, Intel & Novartis compared to than those led by non-CVC brave-hearts – This propensity of the investing junta to look up to the CVCs to take lead is demonstrated once again by the quantum of followers the likes of Kevin Rose (Google Ventures) & Jerry Yang (Yahoo) command on AngelList, the new age pit-stop of investors & enterprises alike.

I realize though that compared to the regular VC, an average CVC can afford to be lot more adventurous/ less-conservative since the LP, which is the corporate itself, has a far less looming presence given the non-financial nature of the corporation.  This context of less-intense LP scrutiny thus affords a CVC greater liberty & hence their investment strategy may not be that de-risked after all & this isn’t saying anything.

With no prejudice whatsoever on the relative merits of a CVC vis-à-vis a VC & going merely by the data, I think Novartis Venture Funds (NVF) is what one could refer as the ‘Google Ventures of pharmaceutical innovation’, a yard-stick, if not a bench-mark other VCs could use within the pharmaceutical domain. With this premise, I went about analyzing the NVF’s investments data, of both current & exited portfolio, the key takeaways of which I have discussed below;

DUALITY OF VISION

A quick comparison of NVF investment focus & Novartis business focus;

  

INVEST SMALL – EXIST FAST

When it comes to making small molecule therapeutics work both as a business strategy & investment focus, few seem to be able to bend it like Novartis. Despite Small molecule therapeutics being a mere 20% of the total invested value, this segment is a star performer at 63% when it comes to exits. This performance is consistent in both the major exit types of IPO (69%) and Acquisition (59%) – the relatively higher contribution of IPO as an exit also seems to suggest that the chances of an IPO are higher for an enterprise developing small molecules & that going public isn’t an easy game for a company developing biologicals.

No wonder then that the current portfolio of NVF once again is dominated by enterprises pursuing small molecule therapeutic dreams (53%). However the marginally higher percentage share of biologic therapeutics in the current investments indicates NVF is cautiously optimistic about these living herbs!  

ATTITUDE, IT’S THERAPEUTIC

The NVF investment spread across therapeutics is nothing counter intuitive & is expectedly skewed towards oncology. What’s interesting is the sentiment/ attitude driving these investments in different disease segments.

Looking at the interplay of number v/s value of investments, NVF’s investor attitude can be summarised as follows for a few key segments;

Oncology           -->          Casting the net far & wide

Hematology      -->          Betting high

Cardiology         -->          Upping the stakes

Allergy               -->          Risking it big

Infection            -->          Seeding a promise

EXIT THROUGH ACQUISITION THAN IPO

With companies having FIC assets making up 60% of the total current investments & since FIC assets are typically more attractive acquisition targets, it can be surmised that NVF is not counting on IPO as the primary exit path.

BULLISH ON EARLY & BEARISH ABOUT LATE-PHASE ASSETS

Perhaps this is more of an alert to enterprises seeking venture funding than other VCs – the date clearly shows NVFs reluctance to risk its green-backs on the very volatile PIII assets – this once again underscores the primal premise that for NVF’s vision is limited to supporting viable clinical assets and NOT in seeing them through to the market.

The message hence for the biotech is - knock at the doors of NVF after your IND is filed & count on their support till end of Phase II & showcase the potential of your clinical asset to get acquired even as it is still in PI or PII.

SLOWER, LONGER & BIGGER – NVF’s NEW MOTTO?

VC is more a patient fund than earlier & NVF seemingly realizes that – that’s what the numbers say at least

Despite the now apparent & clear segregation of objectives of a corporate & of its venture fund, a CVC seemingly still employs the insider-edge in making its investment & exit decisions.

Meray Chaaraaney.

Funds-on-Tap is passé & Drip-Funding is the new reality.

It’s probably been true for IT/ ITES (particularly for e-commerce and social media & app-developers) much longer, but for the drug discovery start-ups hitherto unaccustomed to expecting anything under a mio given their rather pricey research, the writing on the wall is abundantly clear - Funds-on-Tap is a pipe dream & Drip-Funding is the new reality.

Over the past year, more and more VCs have started to unveil & employ their own versions of a ‘return-maximizing, risk-mitigated investment model’ that typically involves multiplying the early-stage portfolio & bringing down the average-size of seed-investment while maintaining the overall seed-stage investment at no greater levels than earlier - A case-in-study being the recent Seed-class of Atlas Ventures & equally demonstrated by Index Ventures developing its proprietary version of MonteCarlo simulation for optimally distributing precious funds across its portfolio of biotechs' with assets across different phases of clinic.

This holds largely true for the increasingly active Pharma CVCs too that not only are mimicking the VCs in increasing their early-asset portfolio, but have taken derisking a notch higher with their joining forces* with other CVCs (competing pharma) in funding rounds, quite apparently compromising on the eventual ownership of the commercial potential &/or IP generated in the bargain.

* OPSONA (Novartis, Roche, Baxter among other VCs) AILERON (Novartis, Roche & Lilly among other VCs); MERUS (Novartis, J&J & Pfizer among other VCs)

While this may sound like life sciences venture funding is slowly turning into a mere statistical exercise (venture-farming…?), a la the stock market, knowing what it takes to separate wheat from the chaff in the complex world of drug discovery, the users of these models will surely need a lot more than a practical knowledge of the probability theory – which even a cursory read of the above posts again will make it very evident. Just may be, a biotech VC can still showcase ‘proprietary deal-flow’ as a core-strength while making a pitch to the LPs.

Now how does this lean-funding scenario impact the development strategy of the start-up? – while a few indicators of change are already out there like the CROs being encouraged (~arm-twisted) to share risk with the biotech while providing services, I believe this'll trigger bigger changes & hopefully nudge the drug-discovery towards an innovation pathway that’s a lot more rational & predictable – but then this is something Drug Baron should talk about.

The start-up investing winds, they are a-Changing OR are they?

In his latest, 'SuperLP' Chris Douvos  writes about the fears of an impending VC apocalypse....., okay to start with, in silicon valley primarily triggered by the capital deployment in start-ups far outpacing funds raised by venture capital firms, essentially affecting that someone else is gaming the system rather than VCs themselves..

Given they appear only once in a blue moon, I couldn't really let go a SuperLP article without a comment... here goes what I posted on his article 'Scents in the Air'

My comment
---------------------------------------------------------------------------------------------
Comments

I am wondering if the issue with "capital raised by VC's increasingly falling short of capital invested into start-ups" is about true of all start-up hubs & not just Silicon-valley AND, that probably in general it’s true of all VC activity across the globe (tho' i do understand this data is of NVCA and for USA)

Out of the entities you mentioned, I see the following two as the key contributors to this skewed ratio;

1) CVC: The emerging aggression of CVCs whose enthusiasm to invest is in equal measure helped/ influenced by not having a limitation of capital to deploy AND by their necessity to shortening the product introduction cycle in face of an increasingly unproductive in-house innovation (think... a top-10 pharma major investing in start-up biotech with just one pre-clinical asset....)

2) Angel: The recent market regulatory changes indicate (JOBS et al) that the government is attempting to bring down the dependence of start-ups on the VC's - primarily by way of increasing the available angel base & encouraging HNWIs to risk their money a lot more freely than before.

Surely the above aspects do suggest why there's a scent of fear in the winds blowing through VC quarters.

I personally feel that these newer sources of capital need to establish their longevity & consistency before the start-ups can forget about serenading the VC for funds – particularly given that non-financial companies tend to be a lot more impatient with IRR cycle-times and HNWIs a lot more prone to gravitate towards less complex and shorter-term alternative investment options.

Essentially, IMHO what goes around comes around & VC as a source of start-up capital would remain a lot more relevant in the long-term

Posted by: Murali Apparaju | July 22, 2013 at 01:20 AM

Cipla Ventures - What's the real story Gen-3?

Greed for quality & comprehension makes one less effective & less productive.........
........... Stash away those cudgels people, this is NOT about pharmaceutical manufacturing, this IS about my realization after a month of sub-par blogging that resulted in my number of posts going low (just one article to be precise in June 2013!) and the number of views I get per a month hitting the nadir! - A promise to myself... will try to type out a few "casually turned out" articles every now n then, instead of generating it through my oft employed time-consuming approach of Mull-it-over-for-a-week-Type-it-on-Word-Edit-it-as-though-HBR-were-publishing-it-and-finally-Paste-it-on-the-blog....... Spontaneity ain't dead yet!

Now the REAL topic...

The recent news of Cipla charting new course to achieve a $5 billion revenue in next ten years caught my attention & got me thinking.... Not because a 10 year objective as this is anything novel, but the simultaneous creation of a dedicated investing arm Cipla Ventures, towards this vision, is what interests me. 

Now again, what's so novel about corporate venture capital? its's been around for some time and the trend is bound to catch-on with whichever company that's sitting on surplus cash reserves jumping into the fray if not anything else, as someone said (Super LP??) for the blood & gore and the adrenalin rush that venture investing & enterprise incubation gives.

What interests me is.... 

........ the brief agenda of this arm of Cipla, as reported by Economic times, that says will "weigh the prospect of investing in companies from start-up hubs like Boston and London among other places, in areas such as biotechnology, medical devices and new chemical entity

What interests me is.... 

....... the expansive & prophetic way in which the new CEO Subhanu Saxena says "Out of the five or six bets I place, only two or three need to pay off"

What interests me is.... 

....... what is this "pay off" for which Cipla is ready to take "sensible risk", a novel term for a generic Indian company that has taken the traditionally low risk option of staying close to the home turf?

What interests me is.... 

...... what key takeaway Saxena is walking away with from Novartis & bringing to Cipla?

Let me be clear, I am not insinuating anything unethical here nor I am attaching ulterior motives to a darn-clear writing-on-the-wall business opportunity, all I am doing is trying to get to the heart of matter as to what will Cipla gain eventually through these investments..

Two theories that strike me right away are as follows;

i) TOOL FOR NEGOTIATION:  

The multiple niche stakes & thereby the 'possible' control on the licensing /sale of the pipeline candidates & technologies of the portfolio companies in the NCE, Biotechnology & Diagnostic space will potentially help Cipla negotiate/ barter generic deals with the big pharma companies whose drugs Cipla is/ will/ would aggressively pursue to market in the US & European markets

Will this fly...? despite the generous window of hit-miss offered by Saxena, this is an opportunity completely out in the ether & my guess is as good as Cipla's :-)

ii) EXIT PREPPING OF FOUNDER PROMOTERS: 

Before I am clobbered for suggesting India's most nationalistic  private pharmaceutical company would sell-out, let me remind that no one's above liquidity & no company is unattainable in this corporate game. Let's also remember that the new leadership of Cipla is, surprise, surprise.... of all places, from Novartis, the bête noire of Cipla in many a litigation?? - Let's also remember that the new leadership of Cipla in US & EU is Ex-Teva... the generic behemoth that can make big-ticket acquisitions every now and then (read: $6.5 billion Cephalon; $7.5 billion Barr et al..)

Will this fly...? Of course it'll - the lure is the access to a 1.24 billion strong Indian market.

Anymore theories? 

Will Mylan's acquisition of Agila benefit Accel Partners?

Okay, the story goes like this....

Way back in 2007, Accel partners committed to invest & invested over the next three years 1.5mio USD in a Bangalore based start-up called Inbiopro. This investment turned into ~10% shareholding (guestimate) when Strides Arcolab acquired 70% stake in Inbiopro in 2010. It’ll be useful to slip-in here that somewhere in 2011/12 Strides separated out Inbiopro from Agila as a separate business entity called Agila Biotech.

Now, post the Mylan deal, Strides Arcolab committed to invest USD100mio into Agila Biotech, Given this impetus if Agila Biotech vigorously pursues the commercialization of its pipeline of 8 biosimilars, its valuation could go up to anywhere between USD200-500mio** in the next five years, depending upon how many registrations are successful. At which time if Strides again succeeds in finding a buyer for Agila Biotech (Mylan again, given its Biosimilar ambitions?), it is likely this will turn out into a USD20-50 million exit for Accel Partners, i.e from a decent 13x to a good 33x ROI.

My take away from this is, scout around for start-ups that have chosen 'quicker to market innovations' as their research focus, invest in them early on & work closely on the selection of a local partner & monetize during the multinational acquisition - Not a bad mantra for a decent-value exit in a market like India :-)

**The valuation guestimates are based on the expected worth of approvals (EU/ NA) which are primary assets in this context. 

What could VCs learn from the recent pharma deals involving biotechs with very early-assets?

My response on the blog post "Preclinical Biotech Structured Deals: Reflections on 2013′s Solid Start" by Bruce Booth - posted on 01/Mar/2013
---------------------------------------------------------------------------------------------

The news of structured-deals/ buy-outs of ‘tight/ single-EARLY-asset’ biotechs both pleases & scares me… pleases, as I feel this will trigger a healthy change in the way start-ups choose their programs & scary because I (CRO/ CMO) will now start losing clients/ programs much before the conventional PIIA - read-on…..

While I totally agree with the points you’ve raised & the surmises made, I’d like to add the following;

• This in some fashion is an endorsement of the importance of early venture seeding by the very same stakeholders that typically enable the high value exits for VCs, viz., the mid-sized/ big pharma companies.
• As you say, there seems to be a promise of reward for innovative organizations that know their science – however I’m not sure if there’s any message about preference for a single asset/ tight set of assets, It is rather a niche focus/ platform & this aspect I’d think always mattered to the investors.
• Do I also see some de-risking in the form of going in for companies who’s lead/ pipeline candidates are inherently safer (recombinant proteins; antimicrobials et al) & hence highly likely to breeze through Phase-I
• Interestingly, though the indications are rare/ orphan, the therapies themselves seem to be more maintenance than curative & hence more attractive to the investing company
• This lure of an early alliance/ deal may now encourage the new enterprises to come up with more compelling technologies rather than me-toos… & thus help put drug discovery enterprise model on a correction course
• Is this the emerging new avatar of the CVC? - CVC 2.0? (Perdona, Baron.... :-))

Now, having seen a lot of my clients getting lapped up by mid/ big pharma & their programs either killed, shelved in favour of the larger companies competing pipeline, I would be a little cynical till I see the next instalment is released/ option executed.

Finally I would like to ask if there is a message in here for the VCs? – towards an opportunity, a need to structure the initial funding deals differently so that they could still keep an option to enhance their share whenever such early alliances crop-up eliminating  avenue of series-B funding?

Post Thought:

Quite a coincidence that I was just reading an article in HBR (Mar 2013) titled “How Competition Strengthens Start-ups” by Andrew Burke and Stephanie Hussels of Cranfield University.  The authors postulate that exposure to competition in the early stages of a firm’s life increases its long-term survival prospects – competition in this context including competing against a lean-funding scenario & hence learning to stay creative, efficient & productive – Since for all four companies here the early pressure is almost eliminated of by the reasonable/ comfortable funds received (upfront instalment OR buy-out), I was wondering if that makes these companies less long-term in light of the above study.

Of course I do understand that it’d be foolhardy to apply an academic study arbitrarily to any context, particularly in life sciences, where the author’s themselves have made a provision indirectly through their statement “Of course, early competition has a downside: Some new businesses fail before they have time to build up the immunity we describe” which sure sounds like the business of designing drugs.

Pfizer Venture Investments (PVI) - a quick analysis of portfolio companies, categories

Trying to understand the driving factors behind the trends of life science investments in 2012, I was wondering if VC & CVCs behave differently or if one determines the trend & other follows it largely - which I realize is putting it too simplistically and perhaps the VC operates as one organism.

However, I believe that, with the genericization troubles looming large, the big pharma started to rationalize the product development strategies by taking into account parameters which hitherto were not given a serious thought.... foremost of which I'd guess is consumer behavior - This new diligence I expect will translate into the way big pharma CVCs have been building their portfolios over past 3+ years. 

Based on this premise, I tried to analyse the PVI portfolio & see if the data throws-up any tangible trend. Since I was unable to find the exact value of the funding in most cases (the funding rounds involved more than one VC, hence), I stayed with number of investments & hopefully the trend will still make some sense; 

A snap-shot of investment across innovation categories:

Some trends:

• Medical Diagnostic investments equal Drug Discovery numbers (& not in all cases it is merely companion diagnostics related investment)
• Enthusiasm for Medical devices & equipment is much lower than the overall average in 2012 (~50%) - However this I feel is still significant, as logic says a medcines company would be more interested drugs than devices
• Interesting appearance of investments into companies that'd contribute to research /business/ operational advantages for the investing big pharma - surely pro-logical, but interesting nonetheless & showcases the emerging realities in sustaining business
• Drug discovery at 30% only marginally higher than the 23% overall in 2012

Within the drug discovery investment, the innovation sub-categories point to a definite preference to go after platform technologies that'd generate leads in multiple therapeutic domains/ indications;

Overall, very interesting & I will hopefully continue this line of thought with another post or two.

Comments?

Is the LP bias against investment into life-sciences contra-logical?

17 January 2013

Early Stage Biotech Showing Positive Signs of Scaling Its Wall of Worry by Bruce Booth on Forbes

http://www.forbes.com/sites/brucebooth/2013/01/15/early-stage-biotech-showing-positive-signs-of-scaling-its-wall-of-worry/ goback=%2Egmr_38263%2Eamf_38263_16107339%2Egde_38263_member_205146678

Despite the apparent consensus opinion at JPM that innovative new start-ups are continuing to attract capital, I wonder if in reality the venture funding, particularly from big-pharma CVCs, is mostly channeled into development/ acquisition of potential clinical candidates - THIS anomaly of an 'uncharacteristic aversion of domain biggies themselves towards investing into early innovation that'd feed their own pipelines' is WHAT I feel is the primary reason for a strong bias in the LP universe against investment into Life Sciences......