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The do’s and don’ts when talking to
representatives of Venture Capital Funds
New concepts for Venture Capital backed companies“
Nov 28th, 2013
Dr. Axel Polack
General Partner
TVM Capital
Confidential
Questions
Do you think about creating a biotech
company?
How are these companies created and
financed?
How do they operate?
Investment strategies in Life sciences (LS)
from an investor„s view point?
How do you address a VC company for
financing?
2
Confidential
Agenda
TVM Capital
Venture Capital
The ecosystem: pharma – biotech finance
Investment strategies in LS
Introduction to the “Project focused
company” (PFC) model
3
Confidential
TVM Capital – 30 years in the Business
... today a global player in life science and healthcare investments
TVM Capital History and Track Record

A life science and healthcare investment firm with global reach

Life science VC with offices in Montreal (HQ), Munich and in Dubai (HQ; healthcare
PE for emerging markets activities)

Numerous awards, including Red Herring Top VC list worldwide

TVM Capital founded in Germany by Siemens AG in 1983

From early generalist focus in the 1980s to highly focused investment strategy
in IT and life science (since early 1990s), healthcare PE in emerging markets
added in 2010, from 2013 onwards firm is solely focused on life science and
healthcare

Life Science
•
First LS deal: Qiagen (50x multiple on investment)
•
Total of $1.8 bn raised in seven fund generations, of which US$1.2bn for LS
•
More than 120 LS venture and growth investments, 87 total exits
•
43 IPOs on NASDAQ, London, Frankfurt, Zurich and Vienna Exchanges,
25 significant M&A transactions
•
Life Science VC: Investing from 7th fund generation out of Montreal and Munich,
8 investment professionals, 30 portfolio companies, 30+ advisors
•
Unrivalled deal flow; about 650 deals per year reviewed
Source: TVM Capital
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Confidential
Agenda
Venture Capital
The ecosystem: pharma – biotech finance
Investment strategies in LS
Introduction to the “Project focused
company” (PFC) model
5
Confidential
VC fundamentals: how to start?
How to start a (biotech) company?
• Business idea + intellectual property
+ management and work force, +
money
• Business model dictates financing
needs:
– service company: less €
– mixed models: €€
– development company: €€€€
• Sources of capital:
–
–
–
–
Shareholders:
Founders
+ investors
Board
C- level executives
VPs
Employees
savings
Business angels
Subsidies from government or EU
Corporate partners
– Venture capital
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Confidential
Fundamentals of the VC business
< 5 Y.
Company with
commercially
viable technology
or drug discovery
project
Company
revenues +/a „derisked“
development
candidate
Holding period
+ investment
E
X
I
T
Public
market
Big
Pharma
Biotech
6
x
•
•
Investment
amount: 5 – 15 M€
No of investments:
10 - 30
VC
company
Probability
of success
VC investor
(LP)
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Confidential
Business model of VC: revenue expectations
350
If a 3 x on the fund level is expected:
300
250
Minimum three
Winners (> 5X)
needed to balance
non-performers
and losses
M
200
€
150
Invest 10x
10Me in
10 companies
100
50
0
investment
Gain from the
investments
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Confidential
Example of an „ideal“ VC investment in „biotech“
Myogen
33x
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Confidential
Benchmarking: „returns of >230 VC funds“ reported by US LPs
Keep in mind:
• This is one set of data
• There is no claim for
completeness!
• Received + remaining /
committed = incomplete
data set
Source: http://www.sib.wa.gov/financial/pdfs/quarterly/ir093008.pdf; Calpers; SERS;
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Confidential
Fundraising by VC funds: stabilized!
Fundraising by VC funds (NVCA data)
300
40000,0
Number of
Funds
($M)
250
35000,0
200
25000,0
150
20000,0
$M
Number of funds
30000,0
15000,0
100
10000,0
50
5000,0
0
0,0
year / quarter
Source: NVCA (USA)
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Confidential
Markets out of Sync: EU versus US IPOs
European biotechnology IPOs by year
Number of IPOs by year
Pre-crisis
Post-crisis
Source: Ernst & Young, Capital IQ, Biocentury, Medtrack and Venture Source. 2013 data from Elsevier Business Intelligence.
TVM„s IPOs in 2013
• Enanta
• Bluebird Bio
European biotechnology IPOs
by year
US biotechnology IPOs
by year
US biotechnology IPOs
by year
Source: Ernst & Young, Capital IQ, Biocentury, Medtrack and Venture Source, Elsevier
Business Intelligence.
2013 figures correspond to data available until October 31st.
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Confidential
Agenda
The ecosystem: pharma – biotech finance
Investment strategies in LS
Introduction to the “Project focused
company” (PFC) model
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Confidential
Pharma Sales: Driven by External Product Sourcing
… more than 50% expected to come from young biotech companies
Combined global sales
for the top 50 pharmaceutical
companies
Source of products:
today
700
Prescription pharma sales ($bn)
600
Co-development
In-licensed
500
>50%
400
Acquired through M&A
300
200
Internally generated
100
0
03
04
05
Internal
06
M&A
07
08
In-licensed
09
10
Co-developed
11f
12f
13f
Acquired product
14f
15f
Other external
f = Datamonitor forecast
Source: Datamonitor, PharmaVitae Explorer, May 2012; company-reported information
16f
Pharma companies will
grow only through
aggressive M&A and inlicensing strategies!
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Confidential
Situation analysis – 2013
The fundamentals have not changed:
 Our Customer Big Pharma aggressively looks for innovation, while
o facing the „three-headed monster” of patent expiries, insufficient internal R&D
productivity and increasing difficult political and regulatory environment
o
getting involved early through options: early-stage option deals shift risk onto
biotechs but also give access to non-dilutive capital and a clear exit perspective.
o
Preferring license deals instead of acquisitions
 Our Supplier Academia
o continues to produce highly innovative science waiting to be translated
o recognizes the need to take their innovation one step further to ensure successful tech
transfer
 Venture Capital
o has not delivered (yet) as an industry according to the expectations raised 10 years ago
o has to re-focus and adapt to the changing environment
o the recent IPO window might help to change this!
New business and financing models are needed !
Source: TVM Capital
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Confidential
Research Spending Per New Drug
Number of drugs
approved
5
10
8
11
14
R&D Spending Per
Drug ($Mil)
11,790.93
8,170.81
7,909.26
7,803.77
7,727.03
Total R&D Spending
1997-2011 ($Mil)
58,955
81,708
63,274
85,841
108,178
Johnson & Johnson
Eli Lilly & Co.
15
11
5,885.65
4,577.04
88,285
50,347
Abbott Laboratories
Merck & Co Inc
8
16
4,496.21
4,209.99
35,970
67,360
Bristol-Myers Squibb
11
4,152.26
45,675
Novartis AG
Amgen Inc.
21
9
3,983.13
3,692.14
83,646
33,229
Company
AstraZeneca
GlaxoSmithKline
Sanofi
Roche Holding AG
Pfizer Inc.
Sources: InnoThink Center For Research In Biomedical Innovation; Thomson Reuters
Fundamentals via FactSet Research Systems from Forbes Magazine 2_2012
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Confidential
Externalization has become the mainstay of R&D
Proportion (%) of drug candidates in clinical
development that are externally-sourced, 2007 vs.
2011
100
Externalization of clinical pipeline (%)
90
80%
80
70
65%
59%
60
50%
50
44%
40
30
21%
17%
20
9%
10
0
Roche
AstraZeneca
2007 2011
17
Source: Datamonitor, PharmaVitae Explorer, May 2012; company-reported information
Pfizer
Sanofi
Confidential
Agenda
Investment strategies in LS
- Drug discovery process
- Business models to finance this
process
- Introduction to the “Project focused
company” (PFC) model
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Confidential
Time and cost of the different stages of drug discovery and
development
Target
to
hit
Science
Duration
of
phase (a)
Time (y)
Hit
to
lead
Lead
Optim.
Preclinical Stage
Preclin
PhI
Clinical Stage
Cost
of
phase M ($)
Source: Paul et al. Nature Reviews 9: 203
II
III
S
Market
14 Y
263 M$
> 90% of total cost!
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Confidential
R & D productivity: 24 programs have to be started in
order to get one product to the market
160
30
140
Cost M($)
25
No.
120
20
100
m ($) 80
15
n
60
10
40
5
20
0
0
Target to hit
Hit ot lead
Lead opt.
Preclin.
PhI
PhII
PhIII
Submission
The blue squares indicate the number of programs per stage and
The grey bars the average cost per program per stage.
Source:
Paul et al. Nature Reviews 9: 203
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Confidential
Agenda
Investment strategies in LS
- Drug discovery process
- Business models to finance this
process
- Introduction to the “Project focused
company” (PFC) model
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Confidential
VC backed business models
Platforms
Project focused
Companies (PFCs)!
•
•
•
•
• Expensive
• „brick and mortar“
• If successful Incredible
profitable
Small, fast
Lean and mean and virtual
Low investment
High multiple!
Products: development candidates,
medtech, diagnostic, technologies, lab
supply, ….
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Confidential
Platform Technologies (“early stage”)
Definition
• Disruptive, highly IP protected technology that allows the development of
multiple product opportunities
• Full-fledged company with management team & facility
• Minimal outsourcing
• Strong investor syndicates with „deep pockets‟ to ensure maturation of
platform as well as critical PoC.
Success Factors
• Strong business development resulting in multiple partnerships which facilitate
stepwise validation and application of the concept
• Balance between in house proprietary projects and partnered programs
• Exit: IPO or trade sale
Examples from the TVM portfolio
• Direvo, Sirna, Sirtris, Intercell, Coley, Bluebird Bio, Enanta
Source
• Academia and biotechnology visionaries
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Confidential
Potential for optimisation: where and when to play?
Target
to
hit
Science
Duration
of
phase (a)
Time (y)
Hit
to
lead
Lead
Optim.
Preclinical Stage
5 years
Difficult
Value creation
(except…!)
Feedback from LPs:
Investment periods are too long!!
Source: Paul et al. Nature Reviews 9: 203
Preclin
PhI
II
Clinical Stage
III
S
Market
14 Y
5 years
„too much cost“!
Ideal space to be!
Less cost, maximal
value creation!
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Confidential
Project focused companies (PFCs): a new model?
Science
Target
to
hit
Hit
to
lead
Lead
Optim.
Preclin
PhI
II
III
S
Market
FIBPCO, e.g. Genentech or Genzyme
Academia
Public Markets
VC financed
THE NEW WAY:
Pharma
PFCs!
Academia
Source:
TVM Capital
-
Exit through
acquisition by the
originator!
One investor (max 2)
One asset
Virtual set up: externalized R&D
Focus on No-go-decision points!
FIBPCO: fully integrated biopharmaceutical company
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Confidential
Take home messages “do’s and don’ts”
•Megatrends
– Pharma needs products from the biotech industry
– Pipelines are increasingly externalized
– The investor universe is changing: VC – Pharma partnerships, corporate VC, family
offices looking for direct investments
– IPOs: possible in the US, not (yet?) in Europe.
•Funding of high growth / high tech companies at the premarketing stage:
– Less money for start up companies than in the past
– Why: mediocre returns, mediocre performance by the VC industry
– blocked IPO path (EU!)
•Consequences for the entrepreneurs?
Do„s:
– Find out what the VC you are addressing is interested in!
– Listen! (VCs, Pharma, experts, …)
– Tune the business model to lower capital intensity!
– Stay longer within universities, Partner early; Use all subsidies
– Be exit minded from the beginning
Don‟ts:
– burn your business model too early!
– Bet only on success (attrition hits all!!)
– Empire building
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Thank you for your attention
www.tvm-capital.com