Today I'm taking a step outside of Texas and looking at the world. Many large pharmaceutical and biotech firms maintain venture capital operations through which they invest in early-stage biomedical companies. I wanted to get a sense of what these biopharma corporate venture capital (CVC) funds are up to. Which companies have CVC funds? How active are they? What are their goals? What are they investing in?
Background: general and sector-specific trends in venture capital
In 2014 venture capital funding in the U.S. hit its highest annual mark since 2001, as investors participated in $47.3 billion across 3,617 deals. Within this trend Life Sciences was the second largest sector (behind only the Media and Entertainment sector) for 2014 in dollar terms with $8.6 billion invested in 789 deals, the highest level since 2007. Corporate venture funding has followed similar trends: 2014 marked the strongest year for CVC activity since 2000 with $5.4 billion invested in U.S.-based companies is 775 deals. Of all venture dollars invested in Life Science companies in 2014, ~12% (or $1.1 billion) came from CVC funds.
Method
To maintain an ability to take a granular look at individual venture investments while not losing sight of the forest for the trees, I chose to focus on VC activity engaged in by the world’s top 10 biopharma companies as measured by 2014 revenues. I also focused on the most current five-year period, from the start of 2010 to the end of 2014. The ten companies and their CVCs (see Table 1 below) were queried in Crunchbase, an open-access crowdsourced database of venture capital activity, to construct a five-year record of their venture capital investment activities (their target startups; what funding rounds they participated in; the nature of the products/services being developed by the target startups). Although the aggregate dollar figure for each funding round is available on Crunchbase, the amount contributed by each individual VC entity is not; because specific dollar figures could not be attributed to individual CVCs, this information was excluded from the analysis.
Information obtained from Crunchbase was captured as a spreadsheet and can be viewed here. The individual CVCs’ websites (see links in Table 1 below) were also queried for additional information.
The Top 10 Biopharma Companies and Their VC Investment Activity
Table 1 lists the ten leading biopharma companies by 2014 revenue, their CVCs, and the year in which each CVC was founded. The CVCs’ ages vary greatly, ranging from 42 years (J&J Development Corp.) to two years (GSK’s Action Potential VC). Abbott Labs has no CVC; this is consistent with the fact that Abbott Labs spun out its research-oriented pharmaceuticals business as AbbVie in 2013 while retaining its mature and less volatile (yet lucrative) business operations in nutritionals, medical devices, diagnostics, and generic pharma products.
Strategic and Financial CVCs - an Even Split
A traditional VC fund has a single objective: to maximize financial returns for its investors. What a CVC’s objective ought to be, in contrast, is not as clear-cut. It can, like a traditional VC fund, pursue maximization of financial returns, thereby creating a stream of non-operating income for its parent firm. Alternatively, it can pursue maximization of strategic value for the CVC’s parent firm, e.g., through cultivation of companies that develop, validate and de-risk potential future products that the parent company can later access through in-licensing or acquisition, development of novel manufacturing or diagnostic methods that synergize with the parent firm’s existing operations, etc. Depending on which of the above two objectives takes precedence, the CVC is classified as either ‘financial’ or ‘strategic.’ The perusal of a CVC’s mission statement (or equivalent text) on its website typically reveals which type of CVC it endeavors to be. Mission statements of our CVCs can be seen in Exhibit 1: they were used to determine the CVC’s type (financial vs. strategic) as indicated in the last column of Table 1. As it turns out, our list consists of an even split of financial and strategic CVCs (5 vs. 5), with one (GSK’s SR One) being difficult to classify (see SR One’s mission statement in Exhibit 1).
VC Investments by the Top 10 Biopharma Companies - Patterns and Trends
Table 2 shows the tally of venture investments made by each company. Several observations can be made:
For the sake of simplicity, further analysis of the data was conducted with all investments made by different arms of a parent company aggregated under the parent company itself (e.g., VC investments made by GSK, SR One, and Action Potential VC were all considered to have been made by GSK, and so on).
In Table 3, VC investments made by the companies were separately tallied by year. This revealed a very strong increase in dealflow over time, consistent with reported cross-sector and sector-specific trends. In aggregate, these companies engaged in 1.8-fold more VC investments in 2014 that they did in 2010 (75 investments vs. 42). Only one out of the nine companies, AstraZeneca (MedImmune Ventures), engaged in fewer VC investments.
In Table 4, investments were separately tallied by the funding round in which they were made. This revealed that, in the aggregate, these companies generally participate in relatively early stage funding rounds, with the highest percentage seen for participation in Round B (29%) and participation in Round A at a close second (22%). No large discrepancies in practice were seen between companies in this regard, although Johnson & Johnson and Eli Lilly appeared to slightly favor later rounds in comparison with others.
Interesting patterns could be discerned once investments were segmented as shown in Table 5 according to types of applications and disease states (“fields”) the funded early-stage companies are working on:
The field segmentation in Table 5 highlighted the unorthodox choices Merck is making in its venture investments. While Merck is by any measure a traditional pharmaceuticals company (with some biologicals) with respect to the makeup of its current product offerings and its pipeline of therapeutics undergoing clinical validation, 61% of its venture investments made through its Merck Global Health Innovation Fund were in digital health/health IT companies and 26% were in diagnostics companies. Of its 21 investments, 14 were in digital health, 6 were in diagnostics, and 1 was in an electroceutical device company (ElectroCore Medical).
As it turns out, Merck operates another CVC named the Merck Research Ventures Fund (MRVF), established in 2011, which solely operates by investing in existing life-science-oriented venture firms as limited partner, most notably in Flagship Ventures. It does not make any direct venture investments to target companies and, as a result, a search for MRVF yields no results in Crunchbase. Taking this approach of forming alliances with external VC firms is becoming increasingly common, with many other examples existing within the biotech/pharma industry.
Merck has also taken yet another alternative approach to generating potential early-stage candidates for its pipeline: the establishment of Calibr, a non-profit translational research-focused institution located in San Diego. It is hoped that Calibr will allow Merck to tap into basic biomedical research while opening up drug-discovery tools to academics.
- Isamu Hartman
Background: general and sector-specific trends in venture capital
In 2014 venture capital funding in the U.S. hit its highest annual mark since 2001, as investors participated in $47.3 billion across 3,617 deals. Within this trend Life Sciences was the second largest sector (behind only the Media and Entertainment sector) for 2014 in dollar terms with $8.6 billion invested in 789 deals, the highest level since 2007. Corporate venture funding has followed similar trends: 2014 marked the strongest year for CVC activity since 2000 with $5.4 billion invested in U.S.-based companies is 775 deals. Of all venture dollars invested in Life Science companies in 2014, ~12% (or $1.1 billion) came from CVC funds.
Method
To maintain an ability to take a granular look at individual venture investments while not losing sight of the forest for the trees, I chose to focus on VC activity engaged in by the world’s top 10 biopharma companies as measured by 2014 revenues. I also focused on the most current five-year period, from the start of 2010 to the end of 2014. The ten companies and their CVCs (see Table 1 below) were queried in Crunchbase, an open-access crowdsourced database of venture capital activity, to construct a five-year record of their venture capital investment activities (their target startups; what funding rounds they participated in; the nature of the products/services being developed by the target startups). Although the aggregate dollar figure for each funding round is available on Crunchbase, the amount contributed by each individual VC entity is not; because specific dollar figures could not be attributed to individual CVCs, this information was excluded from the analysis.
Information obtained from Crunchbase was captured as a spreadsheet and can be viewed here. The individual CVCs’ websites (see links in Table 1 below) were also queried for additional information.
Table 1: CVCs of the Top 10 Biopharma Companies (Ranked by 2014 Revenues)
Parent Company
|
Revenue (2014, $B)
|
CVC Name
|
CVC
Founded
|
CVC Type
| |
1
|
Johnson & Johnson (J&J)
|
71.3
|
1973
|
Strategic
| |
2
|
Novartis
|
60.9
|
1996
|
Financial
| |
3
|
Roche
|
52.4
|
2002
|
Financial
| |
4
|
Pfizer
|
51.6
|
2004
|
Strategic
| |
5
|
Sanofi
|
45.8
|
1981*
|
Strategic
| |
6
|
Merck
|
44
|
2010
|
Strategic
| |
7
|
GlaxoSmithKline (GSK)
|
43.9
|
1985
|
?
| |
2013
|
Strategic
| ||||
8
|
AstraZeneca (AZ)
|
27.2
|
2002
|
Financial
| |
9
|
Eli Lilly (Lilly)
|
23.1
|
Unknown
|
Financial
| |
Unknown
|
Financial
| ||||
10
|
Abbott Labs
|
21.8
|
-
|
-
|
-
|
* Sanofi acquired Genzyme in 2011 and rebranded Genzyme Ventures, originally established in 1981, as Sanofi-Genzyme BioVentures. ** Astrazeneca acquired MedImmune in 2007.
The Top 10 Biopharma Companies and Their VC Investment Activity
Table 1 lists the ten leading biopharma companies by 2014 revenue, their CVCs, and the year in which each CVC was founded. The CVCs’ ages vary greatly, ranging from 42 years (J&J Development Corp.) to two years (GSK’s Action Potential VC). Abbott Labs has no CVC; this is consistent with the fact that Abbott Labs spun out its research-oriented pharmaceuticals business as AbbVie in 2013 while retaining its mature and less volatile (yet lucrative) business operations in nutritionals, medical devices, diagnostics, and generic pharma products.
Strategic and Financial CVCs - an Even Split
A traditional VC fund has a single objective: to maximize financial returns for its investors. What a CVC’s objective ought to be, in contrast, is not as clear-cut. It can, like a traditional VC fund, pursue maximization of financial returns, thereby creating a stream of non-operating income for its parent firm. Alternatively, it can pursue maximization of strategic value for the CVC’s parent firm, e.g., through cultivation of companies that develop, validate and de-risk potential future products that the parent company can later access through in-licensing or acquisition, development of novel manufacturing or diagnostic methods that synergize with the parent firm’s existing operations, etc. Depending on which of the above two objectives takes precedence, the CVC is classified as either ‘financial’ or ‘strategic.’ The perusal of a CVC’s mission statement (or equivalent text) on its website typically reveals which type of CVC it endeavors to be. Mission statements of our CVCs can be seen in Exhibit 1: they were used to determine the CVC’s type (financial vs. strategic) as indicated in the last column of Table 1. As it turns out, our list consists of an even split of financial and strategic CVCs (5 vs. 5), with one (GSK’s SR One) being difficult to classify (see SR One’s mission statement in Exhibit 1).
VC Investments by the Top 10 Biopharma Companies - Patterns and Trends
Table 2 shows the tally of venture investments made by each company. Several observations can be made:
- Companies and their CVCs vary greatly in the number of VC investments they made
- Companies can, and do, make VC investments independently of their CVC.
Table 2: Number of VC Investments Made by Top 10 Biopharma Companies, 2010-2014
Parent Company
|
# VC Investments by Parent Company
|
# VC Investments by CVC and Other Investment Arms
|
Total # VC Invest-
ments
|
# Unique Companies Funded
|
Comparison:
# Acquisitions
by Parent Co. |
J&J
|
-
|
J&J Development Corporation - 52
|
52
|
37
|
4
|
Novartis
|
4
|
Novartis Venture Fund - 57
|
61
|
45
|
1
|
Roche
|
-
|
Roche Venture Fund - 27
Genentech - 2
|
29
|
19
|
10
|
Pfizer
|
3
|
Pfizer Venture Investments - 26
|
29
|
25
|
6
|
Sanofi
|
3
|
Sanofi-Genzyme BioVentures - 2
Genzyme Ventures (pre-merger) - 2
|
7
|
7
|
4
|
Merck
|
2
|
Merck Global
Health Innovation Fund - 21 |
23
|
18
|
6
|
GSK
|
8
|
SR One - 40
Action Potential VC - 1
|
49
|
38
|
2
|
AstraZeneca
|
-
|
MedImmune Ventures - 13
|
13
|
8
|
5
|
Eli Lilly
|
2
|
Lilly Ventures - 16
Lilly Asia Ventures - 2
|
20
|
18
|
3
|
Total (includes overlaps):
|
283
|
215
|
41
| ||
True total (overlaps excluded):
|
237
|
178
|
For the sake of simplicity, further analysis of the data was conducted with all investments made by different arms of a parent company aggregated under the parent company itself (e.g., VC investments made by GSK, SR One, and Action Potential VC were all considered to have been made by GSK, and so on).
Table 3: Number of VC investments made per year, 2010-2014
J & J
|
Novartis
|
Roche
|
Pfizer
|
Sanofi
|
Merck
|
GSK
|
AZ
|
Eli Lilly
|
Total
| |||||||||||
#
|
x
|
#
|
x
|
#
|
x
|
#
|
x
|
#
|
x
|
#
|
x
|
#
|
x
|
#
|
x
|
#
|
x
|
#
|
x
| |
2010
|
9
|
1.0
|
10
|
1.0
|
4
|
1.0
|
7
|
1.0
|
1
|
1.0
|
8
|
1.0
|
3
|
1.0
|
3
|
1.0
|
42
|
1.0
| ||
2011
|
8
|
0.9
|
8
|
0.8
|
4
|
1.0
|
1
|
0.1
|
1
|
1.0
|
3
|
1.0
|
9
|
1.1
|
3
|
1.0
|
2
|
0.7
|
36
|
0.9
|
2012
|
11
|
1.2
|
11
|
1.1
|
6
|
1.5
|
7
|
1.0
|
2
|
2.0
|
5
|
1.7
|
9
|
1.1
|
3
|
1.0
|
4
|
1.3
|
55
|
1.3
|
2013
|
13
|
1.4
|
13
|
1.3
|
8
|
2.0
|
5
|
0.7
|
0.0
|
9
|
3.0
|
11
|
1.4
|
2
|
0.7
|
3
|
1.0
|
62
|
1.5
| |
2014
|
11
|
1.2
|
19
|
1.9
|
7
|
1.8
|
9
|
1.3
|
3
|
3.0
|
6
|
2.0
|
12
|
1.5
|
2
|
0.7
|
8
|
2.7
|
75
|
1.8
|
Total
|
52
|
61
|
29
|
29
|
7
|
23
|
49
|
13
|
20
|
237*
| ||||||||||
Compa-nies
|
37
|
45
|
19
|
25
|
7
|
18
|
38
|
8
|
18
|
178*
| ||||||||||
# = number of investments made; x = fold change relative to 2010
In Table 3, VC investments made by the companies were separately tallied by year. This revealed a very strong increase in dealflow over time, consistent with reported cross-sector and sector-specific trends. In aggregate, these companies engaged in 1.8-fold more VC investments in 2014 that they did in 2010 (75 investments vs. 42). Only one out of the nine companies, AstraZeneca (MedImmune Ventures), engaged in fewer VC investments.
Table 4: VC Investments 2010-2014, Segmentation by Funding Round
J & J
|
Novartis
|
Roche
|
Pfizer
|
Sanofi
|
Merck
|
GSK
|
AZ
|
Eli Lilly
|
Total
| |||||||||||
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
| |
Seed
|
1
|
2
|
0
|
1
|
3
|
1
|
3
|
1
|
14
|
0
|
2
|
4
|
0
|
1
|
5
|
7
|
2
| |||
A
|
4
|
8
|
16
|
26
|
5
|
17
|
9
|
31
|
2
|
29
|
3
|
13
|
14
|
29
|
5
|
38
|
3
|
15
|
61
|
22
|
B
|
14
|
27
|
18
|
30
|
7
|
24
|
8
|
28
|
2
|
29
|
9
|
39
|
17
|
35
|
4
|
31
|
3
|
15
|
82
|
29
|
C
|
14
|
27
|
5
|
8
|
8
|
28
|
4
|
14
|
0
|
3
|
13
|
5
|
10
|
0
|
4
|
20
|
43
|
15
| ||
D
|
5
|
10
|
7
|
11
|
2
|
7
|
1
|
3
|
0
|
2
|
9
|
2
|
4
|
2
|
15
|
5
|
25
|
26
|
9
| |
E
|
2
|
4
|
3
|
5
|
3
|
10
|
1
|
3
|
0
|
0
|
3
|
6
|
0
|
2
|
10
|
14
|
5
| |||
F
|
2
|
4
|
1
|
2
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
3
|
1
| |||||||
Other
|
10
|
19
|
11
|
18
|
3
|
10
|
5
|
17
|
2
|
29
|
6
|
26
|
6
|
12
|
2
|
15
|
2
|
10
|
47
|
17
|
Total
|
52
|
61
|
29
|
29
|
7
|
23
|
49
|
13
|
20
|
283
| ||||||||||
# = number of investments made; % = percent of total. Other = Post-IPO Equity, “Venture” round, or Private Equity.
red = highest percentage (excluding Other); orange = second highest percentage (excluding Other).
In Table 4, investments were separately tallied by the funding round in which they were made. This revealed that, in the aggregate, these companies generally participate in relatively early stage funding rounds, with the highest percentage seen for participation in Round B (29%) and participation in Round A at a close second (22%). No large discrepancies in practice were seen between companies in this regard, although Johnson & Johnson and Eli Lilly appeared to slightly favor later rounds in comparison with others.
Table 5: VC Investments 2010-2014, Segmented by Field
J & J
|
Novartis
|
Roche
|
Pfizer
|
Sanofi
|
Merck
|
GSK
|
AZ
|
Eli Lilly
|
Total
| |||||||||||
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
|
#
|
%
| |
Cancer
|
5
|
10
|
7
|
11
|
4
|
14
|
6
|
21
|
1
|
14
|
1
|
4
|
5
|
10
|
3
|
23
|
3
|
15
|
35
|
12
|
Device
|
14
|
27
|
2
|
3
|
0
|
2
|
7
|
1
|
14
|
1
|
4
|
5
|
10
|
0
|
0
|
25
|
9
| |||
Diabetes/
Metabolism |
3
|
6
|
0
|
0
|
2
|
7
|
0
|
0
|
2
|
4
|
0
|
0
|
7
|
2
| ||||||
Diagnostics
|
12
|
23
|
6
|
10
|
8
|
28
|
4
|
14
|
0
|
6
|
26
|
1
|
2
|
0
|
0
|
37
|
13
| |||
Digital Health
|
0
|
1
|
2
|
0
|
0
|
0
|
14
|
61
|
1
|
2
|
0
|
1
|
5
|
17
|
6
| |||||
Invest. Fund
|
0
|
0
|
1
|
3
|
1
|
3
|
0
|
1
|
4
|
0
|
0
|
0
|
3
|
1
| ||||||
Misc.
|
9
|
17
|
21
|
34
|
13
|
45
|
12
|
41
|
3
|
43
|
0
|
26
|
53
|
4
|
31
|
12
|
60
|
100
|
35
| |
Neurological
|
2
|
4
|
3
|
5
|
1
|
3
|
0
|
1
|
14
|
0
|
3
|
6
|
0
|
1
|
5
|
11
|
4
| |||
Other Diseases
|
4
|
8
|
20
|
33
|
2
|
7
|
2
|
7
|
1
|
14
|
0
|
6
|
12
|
6
|
46
|
3
|
15
|
44
|
16
| |
Vaccines
|
3
|
6
|
1
|
2
|
0
|
0
|
0
|
0
|
0
|
0
|
0
|
4
|
1
| |||||||
Grand Total
|
52
|
61
|
29
|
29
|
7
|
23
|
49
|
13
|
20
|
283
| ||||||||||
Other Diseases = Anemia, Cardiac, Viral, Kidney, Dermatological, Respiratory, Vascular, Immune, Antibiotics
red = highest percentage (excluding Misc.); orange = second highest percentage (excluding Misc.)
Interesting patterns could be discerned once investments were segmented as shown in Table 5 according to types of applications and disease states (“fields”) the funded early-stage companies are working on:
- Miscellaneous (“Misc.”) was the most prevalent category at 35% of all funding events. While compiling the data from Crunchbase I assigned “Misc.” to any company working on a technology without clear application to a defined disease state. Often times these technologies were “platform technologies” with potential application to many diseases, or were early-stage enough so that multiple disease states were still being pursued. This is in consonance with the fact that much of the funding being done by these companies are at early rounds as seen in Table 4, at which point companies are likely still dealing with very early-stage technologies for which clear utility in defined disease states very well may not have been established.
- After “Misc.,” the most prevalent field segment was “Other Diseases,” a category I created specifically as a catch-all for a variety of specific disease states being targeted by the startups, each garnering a very small slice (<10%) of the total set of funding events, e.g., Anemia, Cardiac, Ophthalmic, Dermatological, Viral, etc.
- Cancer was the one standalone disease state that garnered a greater than 10% share of all funding activities in the aggregate (and as such was left as a separate field rather than subsuming it into “Other Diseases”), thereby representing a very “hot” disease state to which VC funding is being directed.
- “Diagnostics” captured 13% of all funding events. This may reflect the rising trend of personalized medicine and the increasing importance of companion diagnostics. In fact, for J&J, Roche, and Merck, >20% of their VC deals were with startups developing novel diagnostic methods.
The field segmentation in Table 5 highlighted the unorthodox choices Merck is making in its venture investments. While Merck is by any measure a traditional pharmaceuticals company (with some biologicals) with respect to the makeup of its current product offerings and its pipeline of therapeutics undergoing clinical validation, 61% of its venture investments made through its Merck Global Health Innovation Fund were in digital health/health IT companies and 26% were in diagnostics companies. Of its 21 investments, 14 were in digital health, 6 were in diagnostics, and 1 was in an electroceutical device company (ElectroCore Medical).
As it turns out, Merck operates another CVC named the Merck Research Ventures Fund (MRVF), established in 2011, which solely operates by investing in existing life-science-oriented venture firms as limited partner, most notably in Flagship Ventures. It does not make any direct venture investments to target companies and, as a result, a search for MRVF yields no results in Crunchbase. Taking this approach of forming alliances with external VC firms is becoming increasingly common, with many other examples existing within the biotech/pharma industry.
Merck has also taken yet another alternative approach to generating potential early-stage candidates for its pipeline: the establishment of Calibr, a non-profit translational research-focused institution located in San Diego. It is hoped that Calibr will allow Merck to tap into basic biomedical research while opening up drug-discovery tools to academics.
- Isamu Hartman
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