| 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 ?
- Focused R&D on products for human therapy (not
selling „informatics“ or provide services).
- Proof-of-principle in several animal experiments.
Significance levels and prognosis of model for later
human trials should be addressed.
- A strong intellectual property position (Freedom-to-operate,
Utility, Uniqueness).
- A market (“Unfulfilled need”) easily quantified
& addressed/serviced.
- A competitive edge over other players (Positioning).
- 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).
- 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.
- 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).
- 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.
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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.
- Identifies the value drivers for the specific company.
- 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.
- Establishes strategic plans for each step of growth
of the company (considers: Patents, animal & clinical
trials, Licensing, Exits).
- Identifies & recruits competent Board and Management
members.
- Identifies & establishes financing syndicates
for later financing.
- Monitors the competition.
- Make introductions to technology-collaboration partners
through network.
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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).
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.
- Affinity and avidity in vitro experiments.
- Animal model (in several species) proof-of-principle.
- ADMET data achieved.
- Competent management recruited.
- Financing from third party (large dedicated investor).
- Development/marketing agreement achieved with large
pharmaceutical company entailing up-front milestones.
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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.
- Call the investor and ask if you could send a businessplan.
If he agrees - do it fast (the investor will remember).
- 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.
- 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.
- Give all available information (do not hide anything)
to the investor - of course under a confidentiality
agreement.
- Show that you know each critical development stage
for the company over the next 3 years.
- Have a list of 10 crucial milestones ready.
- List all competitors and describe why the project
has a chance to succeed despite these threats (make
a SWOT analysis).
- Break down & show the value of the company -
why is it worth X mEUR (pre-money value).
- Discuss the future financing of the project - not
only this round of financing.
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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.
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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! |
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