Corporate Venture Capital

Merck KGaA recently launched a corporate venture capital fund called Merck Serono Ventures. The fund intends to invest $54 million in biotechnology startups over the next five years. Even Google's new venture arm plans to invest in biotechnology companies. It's a bit of a surprising move; most life sciences corporate venture groups have not fared well. Merck Capital Ventures, for example, was shut down last year. Fred Wilson has some great comments on the inherent conflicts of corporate venture capital arms on his blog, A VC. Nonetheless, this is good news for startups trying to raise capital in a very challenging environment.

What Are Genetech Scientists Going To Do?

Now that the Roche acquisition of Genentech has been completed, a lot of Genentech scientists will have to decide whether to stay with Roche or not. Roche management has said that they will not do anything to change Genentech's scientist-friendly culture, but I believe that a lot will depend on what former Genentech CEO, Art Levinson, will ultimately end up doing. Art, himself a former scientist at Genentech, is much beloved by all of Genentech, not just R&D. If his role is diminished or if he leaves, many of the scientists will probably take their money and leave. In the not too distant future, there might be a lot of top research talent available for smaller biotechnology companies to pick up.

Allergan: Going, Going...

Allergan (AGN) stock spiked recently on speculation that GlaxoSmithKline (GSK) would acquire the specialty pharmaceuticals company. I've thought for a long time that GSK would make a play for AGN. Allergan's valuation is significantly lower than before given the current market conditions. Ophthalmology assets have been very popular, e.g. Alcon and AMO acquisitions. The companies already have a strategic partnership. Assuming that GSK has even made an offer for AGN, the big question is price - AGN CEO, David Pyott, has always maintained that he's not interested in selling the company, but everyone has a price. Price will greatly depend on whether GSK believes Botox for migraine will receive FDA approval. Botox would be a great addition to GSK's migraine franchise. Botox for overactive bladder, if it gets approved, would benefit GSK's urology franchise. If GSK believes that the economy will recover soon and that AGN's aesthetic business will eventually rebound, the timing may be right for an acquisition. I could be wrong, but I don't believe there are any other potential suitors for AGN, so I don't think there will be any competitive bids. J&J already bought Mentor, Novartis acquired Alcon, Abbott purchased AMO, and Pfizer is busy with Wyeth. Again, it all comes down to price. Wachovia analyst, Larry Biegelsen, thinks that Allergan shares are worth $60 or more. I wonder if AGN's board thinks the same; they could easily reject GSK's offer if it's not high enough.

Disclaimer: I own Allergan stock; I have owned the stock for a number of years. Investment decisions based on potential acquisitions are highly speculative and risky. There is absolutely no evidence that GSK has made an offer to acquire AGN.

Strategic Investors Can Be White Knights

Despite the current financing crisis, strategic investors are still doing deals. Eli Lilly and Amylin recently entered into a licensing agreement for the rights to Altea Therapeutics' exenatide transdermal patch technology. The deal includes an upfront licensing payment, regulatory and sales milestones of up to $46 million, and royalties. Lilly and Amylin also made an equity investment in Altea. My friends in business development at biopharma and medical device companies have said that they are still looking to do deals, but they also know that valuations are lower and it's a buyers market. No point in rushing into a deal when they know that a startup doesn't have too many alternatives to financing.

With Adversity Comes Opportunity

As mentioned in a previous post, the financing environment for pre-revenue life science companies is challenging. The IPO window is closed, and venture capitalists have become more stingy about deploying capital. Unfortunately, some start-ups will be unable to find financing and will fold. According to BIO, ten biotech companies have already gone bankrupt since November of last year. About a third of publicly traded biotech firms have less than 6 months of cash on their balance sheets. I hate to encourage taking advantage of others misfortune, but for those who survive and have cash, opportunities to pick up valuable assets for very little may abound. Keep an eye on bankruptcy filings. Unfortunately, the DowJones Bankruptcy Review requires a subscription, but the WSJ Bankruptcy Beat might be viable a free alternative.

The Impact of Big Pharma Consolidation on VC

M&A deal flow has generally declined given the current economic conditions, but not so for the drug industry. Analysts have been predicting for a while that the drug industry would consolidate; big pharma companies are cash-rich, have shrinking pipelines, and face an oncoming "generic" cliff. Merck recently announced a merger with Schering-Plough -- the deal may be complicated by J&J. Earlier this year, Pfizer announced its plans to acquire Wyeth. And the Roche acquisition of Genentech looks like it may finally come to a close. With all of these mega-deals occurring, some VC's have raised concerns about whether any smaller, venture-baked deals will take place. Integration of large companies is painful, but I doubt that good business development people will let valuable assets fall into the hands of competitors just because their company is busy with a merger.

Where's the R&D?

Traditionally, R&D has been considered a core asset for drug companies, both large and small. But commercial drug companies now appear to be reconsidering the value of their R&D organizations. Both Sanofi-Aventis and Valeant Pharmaceuticals recently announced cutting their R&D budgets in half. The moves are not entirely surprising. R&D productivity has been declining over the past several years, and internally developed compounds have a lower rate of success when compared to licensed compounds (Leerink Swann, March 4, 2009). As the risks and costs of drug development increase, more drug companies will likely reduce internal programs and essentially "outsource" R&D, so that management can focus resources on commercial development. One thing is for certain: look for licensing/partnering activity to expand significantly.

VC Financing in the New World

It should be no surprise that the current financial crisis is negatively impacting VC financing. Limited partners are having problems making capital calls, and IPOs are no longer an option for an exit. Cooley Godward Kronish LLP recently released its report on venture capital financing terms for 2008. As expected, valuations significantly deteriorated in Q4. How does the new financing environment impact life sciences investments? According to VentureSource, investment in U.S. health care companies decreased by 42% in Q4 compared to the same quarter in 2007. An article in the February edition of Nature Biotechnology summarizes some of the negative consequences, especially for early-stage health care startups. As VCs become more risk-averse and as valuations come down, later-stage investments will probably be more favored, and terms will be more onerous for the entrepreneurs.