Novartis Venture Funds: How the Funding Model Works




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Video title: Novartis Venture Funds: How the Funding Model Works
Released on: April 12, 2010. © PharmaVentures Ltd
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In this episode of PharmaTelevision News Review, Fintan Walton talks with Anja König, Managing Director at Novartis Venture Funds. Filmed at Bio-Europe Spring 2010 in Barcelona, Spain, they discuss:

• The history and structure of the funds

• The Novartis Option Fund

• MPM Capital's involvement in the funds

• Working on a syndicated basis

• The level at which Novartis Venture Funds tends to invest

• When the fund typically liquidates its assets

• Recent success

• Working with other venture funds

• Advantages to pharma companies working alongside investors as an investment model

• Biotech's struggle during the fincancial crisis
The history and structure of the funds.
Fintan Walton:
Hello and welcome to PharmaTelevision News Review here in Barcelona at BioEurope. On this show I have Anja Konig, who is Managing Director at Novartis Venture Fund based in Basel, Switzerland. Welcome to the show.
Anja Konig:
Thanks very much.
Fintan Walton:
Anja Konig, the first thing we should do is to help the audience or remind the audience how Novartis Venture Fund has structured it's various funds because you have a number of financial instruments basically by which you invest into biotech, could you describe those various funds first of all?
Anja Konig:
Alright, well may be it helps if I go a little bit into the history of the funds, essentially the Novartis Venture Fund started up at the merger of Ciba-Geigy and Sandoz, [PharmaDeals ID = 218] now 13-years ago and at that point Novartis Venture Fund as a company set aside a 100 million Francs in order to fund start-ups and spin out that came out of resources and staff that were essentially obsolete after the merger and the idea was that with the 100 million Swiss Francs that would be at essential what happened is that the fund made early investments that were very successful and it was structured as an ever green fund so the fund got to reinvest the returns and subsequently this private equity fund grew to what's currently about $550 million on the management out of their own returns. So this is the core and the nucleus of what the Novartis Venture Fund was and even is today. This fund is structured like I said as an ever green fund it is driven primarily, it's actually driven purely by financial return. So it's a financial vehicle that reports up into corporate finance.
Fintan Walton:
Within Novartis Venture Fund ?
Anja Konig:
Within Novartis Venture Fund . So this is the one vehicle and this is the core of what we do.
The Novartis Option Fund.
Fintan Walton:
Right and then there is a side fund which is with MPM Capital in Boston?
Anja Konig:
Well it's then an addition actually reporting also into corporate finance is the Novartis Option Fund. The Novartis Option Fund is a fund that contains an equity instrument just like the Novartis Venture Fund and in addition it contains an option agreement. The investment decision for both of those financial vehicles is made exactly the same way in a partnership of Managing Directors out of an office in Basel and Cambridge and we all decide together which investments we want to make, so that's the equity part and then because we are purely financially driven fund we you know started thinking about what is actually the strategic benefit to a company like Novartis our LP that we could deliver and we took this question and we isolated the strategic intent into the option instrument. So an option deal out of the Novartis Option Fund the investment decisions made by us with our Scientific Advisory Board and when it comes to defining the optionable program we work with Novartis Research in trying to define a program that is most attractive to Novartis and the important thing about the option is that the option is never taken on the main value driver of the company it is taken on a program that is sort of like an extra shot on goal is how we have to imagine it. So it expands the possibilities for the invested company to take on an additional program that's attractive to Novartis.
Fintan Walton:
Right.
Anja Konig:
And we are always very careful that in case Novartis does not exercise the option the program the right on the program reverts back to the company and it's then free to go out and partner with anybody else.
MPM Capital's involvement in the funds.
Fintan Walton:
Sure and then MPM Capital, tell us a little bit about the relationship with MPM Capital how it came?
Anja Konig:
Okay, so those two funds are managed by this partnership that I've spoken to you about out of Boston and Cambridge reports into corporate finance. It's financially driven, it's an evergreen fund in total across the two vehicles it has 750 million under management now and that's sort of the Novartis Venture Fund where we all work. In addition to this there is a separate fund which is actually administered by MPM Capital together with Novartis BD&L under Tony Rosenberg, which is entirely a strategic vehicle and this is an equity investment plus an option frequently it is actually done much later stage so Phase II assets or clinical assets at a minimum and it has to go through all the approval to through most of the approval processes that are typical for a Novartis BD&L deals. So it's a separate intend and it's a separate process to reflect that strategic intent.
Working on a syndicated basis.
Fintan Walton:
Right. Thank you Anja Konig this is very clear now. Just go back to your normal function within the Novartis Venture Fund again describe to us how the fund actually operates in terms of investing presumably you always work on a syndicated basis, is that correct?
Anja Konig:
We work pretty much always on a syndicated basis sometimes there will be unique cases where we start up a new company and we might go in alone initially working with management to secure IP put a little bit of money down working with Tech Transfer Office at universities. We did this for example in 2007 when we started the company Covagen out of the ETH Zurich.
Fintan Walton:
Right, okay. So when you syndicate you will also lead and co-lead? Tell us little bit about that?
Anja Konig:
Yes, we typically lead or co-lead and we typically take a board seat on the company.
Fintan Walton:
Right and you are sitting on one of those companies and exist on the boards of number of biotech companies.
Anja Konig:
Yes, that's right.
The level at which Novartis Venture Fund tends to invest.
Fintan Walton:
So then okay at what level do you invest? Are you at the seed level? Are you at Series A, B? Tell us little more about where you prefer to and what stage you prefer to invest?
Anja Konig:
Yes, we invest up at stage agnostic. But since we are an ever green fund so we don't have a fund time line. I think we are one of the few funds that are perhaps more open to doing more early stage investments, but (indiscernable) is high and it has to be something that you really really love and wanna put the work in and wanna put those early dollars to work.
When the fund typically liquidates its assets.
Fintan Walton:
Sure. But I suppose the other thing if it's an ever green fund it has to liquidate it's assets at some point, so how is that actually managed? Do you set although there is now defined time as it would be in a normal fund you must set certain limits to when you want to get out of a particular investment?
Anja Konig:
There are really no formal limits but we are driven by all the financial parameters that everybody else is driven by, cash and cash return, IRR multiple and so of course you want to get out at a high multiple as soon as possible.
Fintan Walton:
Do you think that the fact that the way the fund is structured makes it a more successful fund than the normal venture fund?
Anja Konig:
Historically we have been top performers and I don't know what that's to do with the structure.
Fintan Walton:
Or just the genius of the partners in the fund?
Anja Konig:
Perhaps.
Fintan Walton:
Spotting a good one, yes?
Anja Konig:
It's been a good, we've been around actually with liquidity during favorable investment environments. For example 2009 was actually a very good year to do new deals. We also actually had a number of exits in 2009 which is great.
Fintan Walton:
And those exists were presumably through acquisition from trade sale?
Anja Konig:
Absolutely and there were medical device there were number of medical devices exits that we had as well as ESBATech [PharmaDeals ID = 25260] which was a antibody scaffold company.
Recent success.
Fintan Walton:
Right. So again when you invest into a biotech company or a medical device company you come in you said you are agnostic about what level you come in at but presumably did you there is always going to be another round of investment.
Anja Konig:
Yes.
Fintan Walton:
Are you more likely to go into the next round of investment or have you in the past said look we are not investing any more money in this into this in this company not going to be a continuous supplier of cash each round?
Anja Konig:
We typically plan to support the company through its life if it's successful and meets the milestones, of course you know if there is failure then at some point we have to pull the plug. But the intent is to invest about 10 to 20 million over the life time of the deal and we always follow on if the company is successful.
Working with other venture funds.
Fintan Walton:
Right and working with the other venture funds what is the relationship with other funds is there an importance perceived by the other funds that Novartis Venture Fund is actually investing that although you are independent and you are from the overall strategic games of Novartis the fact that you are a fund originating from Novartis does that have an influence on the way the other funds when it is in syndicated round would behave or could behave?
Anja Konig:
Sometimes as a perception that the due diligence is perhaps more thorough, I wouldn't say that you know that totally depends on each fund individual and there is independent funds who do wonderful thorough due diligence and are known for that. So it's really very much it really very much depends. I don't think that one can generalize across corporate venture funds in terms of the due diligence they do or even to what extent they are strategic or not, everyone is kind of a different case.
Advantages to pharma companies working alongside investors as an investment model.
Fintan Walton:
Okay. Right, let's just look at the option fund you know you articulated it very well about how the option fund works, there are effectively two different types of decisions being made.
Anja Konig:
Right.
Fintan Walton:
One is an investment decision on a multiple return hopefully on the investments?
Anja Konig:
That's exactly what it is, there are two different negotiations there are two different decisions.
Fintan Walton:
Exactly and then you've got the option component which is the strategic component, do you think that type of structure is the way biotech has to go forward where by a pharmaceutical company works along side in this case it's with the Novartis Venture Fund with where a pharmaceutical company works alongside an investor in making some decisions around both the investment that's going to be made and the placement of an option which allows a strategic component to come in, in other words a fund is working much closer with a pharmaceutical company in their overall strategic aims of making sure that everybody gets a return on their money?
Anja Konig:
The model has a lot of advantages you know there is an advantage of on risk sharing and in a lot of deals both at the beginning of an investment or an engagement of as a pharma company as well as at the exit you see much greater tendencies for risk sharing, so in that sense it might benefit both partners to engage an option kind of deal and it doesn't even have to come with an equity investment necessarily.
Fintan Walton:
Right.
Anja Konig:
So, but you could achieve the same purpose through other kinds of deal structures.
Fintan Walton:
But the fact that you have an option coming in that means that there is some additional due diligence?
Anja Konig:
That's correct.
Fintan Walton:
Being done by the pharmaceutical company in this case between Novartis itself and it's not just the due diligence and saying and making sure that the patents are intact and there is some clinical integrity in the program but also strategically you know this is a strategically important group of assets.
Anja Konig:
Exactly.
Fintan Walton:
So that strengthens the relationship automatically?
Anja Konig:
This is true and this is the way that we think about it. We think about it as an extra shot on goal because we can add on a program there is some additional sources of non-diluted funding through the option fee which makes a big difference in an early stage in a company and this additional due diligence that comes from engaging a pharmaceutical company in this case Novartis in the discussion which program would be the most attractive for that option.
Fintan Walton:
Yes.
Anja Konig:
That's valuable feedback for the biotech company.
Biotech's struggle during the financial crisis.
Fintan Walton:
Okay and then just finally on your with regard to what's going on we are 2010, we've just gone through 2009 it was a pretty tough year for biotech companies, what are your general observations as an investor? Is it still a good time to be a biotech?
Anja Konig:
To be a biotech company? I think for biotech company is probably pretty comparable even now the IPOs you've seen were fewer than anticipated. The pricing was little bit less bullish and perhaps we wanted.
Fintan Walton:
Yes.
Anja Konig:
So I don't think we are seeing an opening of the IPO window quite yet which is always a problem for biotech companies to have only the one option of an M&A exit, slowly things will improve as funds raise money especially across Europe. But it's still going to be relatively tougher in 2010 I think than it was before the crisis.
Fintan Walton:
Right, but there are still some from your perspective good companies to invest in?
Anja Konig:
Absolutely.
Fintan Walton:
Anja Konig, thank you very much indeed for coming on the show.
Anja Konig:
Thank you too.
Anja Konig
Managing Director
Anja Konig is a Managing Director at the Novartis Venture Fund in the Basel office. She is active in Switzerland and Europe and also manages a $20m fund in Korea. Anja Konig serves on the board of directors for Nabriva, Heptares, Covagen, Diagnoplex, and Bicycle Therapeutics. Before her appointment to the Novartis Venture Fund she held the position of assistant to the Chairman and CEO of Novartis. Prior to joining NovartisAnja Konig was an Associate Partner at McKinsey and Company in New York City, a global consultancy, where she was a leader in McKinsey's North American Pharmaceutical Practice and a knowledge expert on pharmaceutical research and drug discovery. Dr. Anja Konig has experience working in the US, Europe and Emerging Markets. Anja Konig is a scientist by training and holds a PhD in physics from Cornell University.
Novartis Venture Funds
Novartis Venture Fund (NVF) currently manages more than USD 650M across all their funds and have expanded the investment teams in their two locations Switzerland and USA. In 2008 their portfolio increased by seven new investments and now comprises over 50 companies, making the Novartis Venture Fund one of the world's largest corporate biotech venture funds. Including the commitment of the investors, about USD 2B is currently invested in total into Novartis Venture Fund portfolio companies. The demonstrated significant liquidity events over the past decade continued this year and they are confident in their purpose and their ability to provide value beyond their investment dollars. Their primary focus will remain on the development of novel therapeutics and platforms. They balance the therapeutics focus with investments in medical devices, diagnostics or drug delivery systems. In their investments they look for unmet need and clinical impact, novel proprietary science and understanding of mechanism, management and board experience and capital efficiency in the program.