BankInvest Biomedical Venture

Publiceret April 2002

Resumé

BankInvest Biomedical Venture (BBV) invests globally in biotech start-up/growth companies with the purpose of bringing new human therapies to the market and simultaneously achieving a return on invested capital for the investors in the three BBV funds. To date BBV has invested 193 mEUR in 36 companies worldwide. Although some magnificent Danish companies have seen their rise from an idea to a stock exchange-quoted company or as major trade sale, it is our (BBV) experience from that the majority of Danish biotech entrepreneurs could gain from a deeper understanding of the financial context of biotech venture investments. The text below focuses on some of these issues.

History of BankInvest Biomedical Venture

BankInvest was founded in 1969 by 46 smaller, local Danish banks (e.g. Amagerbanken) who saw the need for their own asset management house to administer mutual fund investments in stock-exchange quoted companies. Due to the nature of the mutual funds - with the private citizens buying certificates of the funds and the funds themselves being stock-exchange quoted - a larger back-office was needed. This business has today grown into the administration of 25 mutual funds of a total of approx. 4,5 bEUR invested in over 1000 companies worldwide and has expanded the owners of the BankInvest Group (of which BBV is wholly owned) to 49 local banks. Please refer to www.bankinvest.com for further information.

In 1988 BankInvest started its first biotech dedicated mutual funds investing solely in biotech companies - of which Amgen was one of the first examples. Since then a second mutual fund - dedicated to investment in the larger health care sector - was created. Currently, the assets under management in mutual funds are 160 mEUR and have achieved a return of 18% per anuum the last 5 years.

In 1998 BankInvest decided - based on its established know-how in investing in quoted companies mainly in the US - to start venture investment in Scandinavia, i.e. investment in companies not yet liquid (not quoted on a stock exchange). As this entailed major risk (but also a major potential upside), the BankInvest Biomedical Venture (BBV) Advisory Board and Asset Management Team was expanded to the currently 6 members of the Advisory Board and 6 members of the Asset Management Team - headed by the Managing Director, Prof. Jesper Zeuthen (www.biventure.com). Currently BBV has invested 193 mEUR in 36 companies and is able to invest a further 120 mEUR from fund BBV III.

The current climate of Danish biotechnology

The Danish biotechnology scene has been presented by two major biotech successes in which BBV has been an investor from the start: Genmab A/S (www.genmab.com) and Profound Pharma A/S (now: Maxygen Inc.; www.maxygen.dk). Both of these companies were established and achieved so-called "exits" (i.e. when the entrepreneurs and investors receive tradable stock) before the downturn of the biotech stock-market in 2001.

Currently, the situation for biotech start-ups in Denmark is difficult. Although a major number of biotech-dedicated venture investors have announced their presence in Denmark, the demand for both high-quality fundamentals (e.g. good products under development) and fair valuations has only risen. This puts extra demand on the biotech entrepreneur who has to live up to a certain standard in order to receive financing. Please see Box 1 for qualities that the dedicated biotech investors look for.

Box 1. What does a dedicated biotech investor look for in a project ?
  1. Focused R&D on products for human therapy (not selling "informatics" or provide services).
  2. Proof-of-principle in several animal experiments. Significance levels and prognosis of model for later human trials should be addressed.
  3. A strong intellectual property position (Freedom-to-operate, Utility, Uniqueness).
  4. A market ("Unfulfilled need") easily quantified & addressed/serviced.
  5. A competitive edge over other players (Positioning).
  6. Development & risk is quantifiable and can be handled by small, incremental steps in a reasonable timescale at reasonable expense. Are fall-back options identified if projects fail. Can projects be out-licensed at many different phases (diversifies risk).
  7. Step-up in valuation of the entity through time is fair and modest - then it is feasable to raise finance in the future in a sustained fashion. Does both the current owners and the future investors receive the same comparable return over time  and adjusted for risk.
  8. The most important: Management has built successful companies before - and will do it again. Competencies needed are identified and connected to identified people (who does what & when with what degree of responsability/accountability).
  9. And finally: is there a storyline connecting all parts into an enticing case, i.e. is the investment proposition attractive despite limited information. Can the story be developed over time - ultimately into a plausible Initial Public Offering at a reputable stock exchange.

    What does a biotech venture investor do?

    Venture investors live in a competitive world just like the entrepreneurs. The investor must therefore become value-adding himself to be able to invest in the best biotech projects. The essential characteristics of a competent venture investor are multi-faceted, non-comprehensive list is presented in Box 2.

    Box 2. How a dedicated biotech venture investor adds value to a project.
    1. Identifies the value drivers for the specific company.
    2. Builds operational milestones - in cooperation with the entrepreneur - that are achievable and will increase the value of the project in the eyes of other dedicated biotech investors.
    3. Establishes strategic plans for each step of growth of the company (considers: Patents, animal & clinical trials, Licensing, Exits).
    4. Identifies & recruits competent Board and Management members.
    5. Identifies & establishes financing syndicates for later financing.
    6. Monitors the competition.
    7. Make introductions to technology-collaboration partners through network.

      All of the above in Box 2 is done at cost to the biotech venture investor but is performed to increase & leverage the value in Box 1. Thus, before an entrepreneur meets a possible biotech venture investor, the entrepreneur realistically identifies areas of weakness. And this is the opportunity for the investor to help in specific areas (other than just allocating capital).

      The Zeuthen-plan

      To bring together the needs described in Box 1 and the resources described in Box 2, BBV invented (by the initiative of Prof. Jesper Zeuthen) an instrument to a) focus the goals of the biotech project, b) give the entrepreneurs value when milestones were met, and c) lower the risk of the biotech venture investor. This instrument is called the Zeuthen-plan and has its source in an idea by Prof. Roger Fisher of Harvard Business School: To negotiate on the merits. Instead of the head-to.head negotiations about price, discussions are focused on how to grow the project into a large company with products on the market.

      The Zeuthen plan is best described by a simple example (see Figure 1).  The entrepreneur needs cash and a detailed plan for developing value in the company without diluting his ownership to an unacceptable level. The biotech venture investor needs return on the invested capital through time. The Zeuthen-plan brings these two issues together by initially letting the biotech investor invest a large sum at a small value of the project (the so-called pre-money value).

      2002_2 zeuthen_1sm
      Figure 1. An example of the Zeuthen-plan. 2 mEUR form the biotech venture investor is invested at a pre-money value (of the entrepreneurial project) of 0,5 mEUR, thereby giving the entrepreneur 20% ownership and the investor 80% ownership. As milestones are reached, the entrepreneur achieves higher ownership (up to 50%) by diluting the investor (down to 50%). But as the value has risen to 10 mEUR - through the milestones achieved - both the entrepreneur (1000% Return) and the biotech investor (250 % Return) gains by this. It is a win-win situation, but due the to milestones, the entrepreneur receives 4 times (=1000%/250%) higher return on investment than the venture investor! View a larger version

      But as time (and work) goes by, the entrepreneur can increase ownership by reaching milestones (using the financial resources and leveraging his own capabilities) thereby increasing the pre-money valuation as the "proof-of-value" is presented. The crucial issues are therefore the milestones. In the Zeuthen-plan, each milestone (typically 10 - encompassing all of a companies key R&D programs & corporate activities; see box 3 for examples) is mutually agreed upon before the investment is done. To be able to build these milestones and connect them to value (ownership) an exquisite know-how is needed. A know-how that encompasses the precise financial value of scientific results and how these scientific results are achieved. And this can only be done in a merit-based discussion between the biotech entrepreneur and venture investor about the project and financial climate at hand.

      Box 3. Possible areas from which milestones can be identified in a start-up biotech venture.
      1. Affinity and avidity in vitro experiments.
      2. Animal model (in several species) proof-of-principle.
      3. ADMET data achieved.
      4. Competent management recruited.
      5. Financing from third party (large dedicated investor).
      6. Development/marketing agreement achieved with large pharmaceutical company entailing up-front milestones.

        How to approach a biotech venture investor

        How should a biotech entrepreneur behave when meeting a biotech venture investor? There are no simple answers, but after reviewing 380 biotech projects during the last 4 years some advice can be given - see box 4.

        Box 4. A few pieces of advice when meeting a biotech venture investor.
        1. Call the investor and ask if you could send a businessplan. If he agrees - do it fast (the investor will remember).
        2. Before any meeting, ask the investor what he believes is value in a biotech project (Box 1) - and then incorporate/address this in the businessplan & presentation.
        3. After 1 week ask the investor if you could present the company during 1 hour only (you should be able to do it the way of the ?Silicon Valley elevator pitch?). Send handouts of the presentation to the investor at least 1 week before the presentation takes place.
        4. Give all available information (do not hide anything) to the investor - of course under a confidentiality agreement.
        5. Show that you know each critical development stage for the company over the next 3 years.
        6. Have a list of 10 crucial milestones ready.
        7. List all competitors and describe why the project has a chance to succeed despite these threats (make a SWOT analysis).
        8. Break down & show the value of the company - why is it worth X mEUR (pre-money value).
        9. Discuss the future financing of the project - not only this round of financing.

          Conclusion

          The motto of this article is: Demand value-adding support from the biotech investor! A biotech entrepreneur should use the biotech venture investor as his personal management consultant to achieve the highest possible value in the shortest possible time for the project. This will only be achieved if truly value-adding products are being developed. To secure this, an intimate cooperation between the parties will have to be established and must be based on the merits of the project instead of focusing on the value alone.

          For more information: visit www.biventure.com or contact our colleague Mrs. Anne Marie Astrupgaard, tel. +45 77 30 91 74 or ama@bankinvest.dk.