Francesco De Rubertis, Index Ventures, discusses biotech business models that work




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Video title: Francesco De Rubertis, Index Ventures, discusses biotech business models that work
Released on: March 02, 2011. © PharmaTelevision Ltd
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In this episode of PharmaTelevision News Review, Fintan Walton talks to Francesco De Rubertis, Life Sciences Partner at Index Ventures
Types of funds, investments and business model
Fintan Walton:
Hello and welcome to PharmaTelevision News Review here in Munich at BIO-Europe 2010. On this show I have Francesco De Rubertis, who is a Partner at Index Ventures , welcome to the show.
Francesco De Rubertis:
Thank you, nice to be here.
Fintan Walton:
Nice to have you here. Index Ventures , obviously a venture capital firm, tell us about what funds you have obviously you were founded back in the mid 1990's tell us about the types of funds you've got and which ones are actually active right now?
Francesco De Rubertis:
Right, and so we've got a number of funds all of them are mixed funds, so we invest both in biotechnology life sciences and information technologies and actually I would say that information technology is a bigger share of the whole equation. And every fund has got an early venture, early stage venture capital strategy so we go in really very early stage you know seeds financing, early stage series A financing and then since couple of years we have also started a second line of the business which we call Index Growth which has raised the fund, the first fund Index Growth one that we raised back in 2008 with a strategy both in information technology and life sciences for investing in mature companies, mature companies can be public companies, can be late stage private companies, can be companies that are generating a cash flow so companies more in the services businesses, in the medical device businesses, but if you know the definition of late stage and we've been active across Europe and the US, and I would say historically we've been 80% Europe focused, 20% US focused and probably over time we are increasing the trend towards the US to be balanced a little bit better.
Fintan Walton:
So over the years Index Ventures has have been obviously active, has the character of the types of companies you invest in changed?
Francesco De Rubertis:
Yes that's a great question actually, absolutely you know our business model very fundamental, the business model that we think is now has got a chance of success is really the one that adapts to the environment, so we started up you know many years ago with, and I am talking of course only of the biotech part of the equation of our investments with business models that would carry the company throughout the long run so starting the company with the big vision, big ambitions many products potentially, fully completed management team and actually out of that initial class of investing style or focus Genmab has been clearly the company that has gone the farthest along, over the last few years of course a couple of things have happened cost of capital has clearly changed so the later stage rounds of financing the co-investors scene has been evolving around us and so you cannot really discuss in a vacuum or you cannot really think about business models in a vacuum, but you have to cope with the environment and the ecosystem which is around you. So over the last few years we have really alongside those kind of fully shaped companies which however have to be based upon disruptive platform technologies otherwise this is difficult really to build them for the long-term alongside those disruptive platforms then we are really focusing on more embryonic companies which are reset along one single asset or a couple of assets so we have changed the vision or the investing model of vision based investing model into asset based investing model we get idea that after we do know that indeed the asset that we have decided to back with a different kind of investment much more focused then on the project with a variable cost ratio to fix cost which is very different from the first generation investment model that we were going after, once we know that asset indeed is a real value driver then we always have two choices that we can make, either we go and revert into the full build out model that we were doing in the beginning, but now with an asset that represents a tool to build cost of capital is lower you can attract the management team that can run the show for the long-term you can even go public. So that is one option that the asset companies have got after while or simply once the asset is at a maturity level which already can attract the attention of the big pharma, big pharma guys then it's also an option that we have at that stage of exiting the company at that stage. So that has been the evolution of our business model from fully shaped from day one into an asset model on day one with the option of going full development only you know at the early Phase I, Phase II stage that has been the evolution of our business model. At this point however I would like to emphasize that still when we see companies at the very beginning on day one that are based upon a disruptive technology value proposition that represents the internal edge of risk, so those companies are companies that we would love to find, but (indiscernable) them find those companies every six months or a year. So probably I would say of the 100% of our investment portfolio that is probably 20%, 15%, 20% which is in those long-term winning companies we hope in winning companies. And the 70, 60, 70% in single asset companies that you know half of which will evolve into fully developed companies and half of which would be exited earlier taking out their failures of course their technology failures.
Fintan Walton:
Yes, so you've talked about the character of the companies themselves and you've talked about the environment of course venture capital firms themselves have changed and how important, I suppose it's always important, but how important is it today to get in alongside the right venture capital firm alongside you, because one thing we all know is that all the backers need to be aligned if you gone misalignment amongst them amongst the investors you can end up with problems?
Francesco De Rubertis:
Very, very important there you are totally right. It's very, very important and not even the type of investor so you know we know who are the investors that have been there for long time that have got the experience of dealing companies, but it's also very important at which stage in their life cycle they are in their funds, if I am aligning with another investor in going and backing a company but I am in the early years of my funds life and the other investor is in the late years of this fund life obviously there is something which is going to cause misalignment of agendas couple of years down the road so even there, so it's even beyond the right firms you know as part of the DNA of the start-up company or of the company but it's also the right firms at the right moment that, and in Europe we are facing a difficulty of the ecosystem which is that is probably you know between 5 and 10 VC's which are really very active in the biotech space, very active with the experience of 10, 15-years of investing experience but that's it it's 5, 10 of them.
Fintan Walton:
So it's a small club?
Francesco De Rubertis:
A very small club, and from a certain standpoint you know it's good because you are in a middle of a platform that see most of what happens in Europe, but it is a limitation though because of course when you need to support the company the extra mile or when you need to raise funds for another of your companies there is only so many people that you can revert to, will see if the US guys come more and more into Europe there are a couple of funds that are quite active here in Europe and there are more that are showing their interest in Europe, but at the current stage it's a very small group of people that really are balanced and equipped to make a venture capital investing in European biotech.
Corporate Venture groups and changes in terms of investments
Fintan Walton:
Right, now of course the other thing that's changed over the last few years is the number of corporate venture groups often major pharmaceutical companies and it's more or less now like every pharmaceutical company has to have at least one venture arm, how much has that changed things for yourselves in terms of investment, and what do you see as positive much you see is negative as a result of those firms coming in?
Francesco De Rubertis:
So actually I think that it's a great thing the fact that these corporate venture funds have come into the loop especially in Europe because of what I was saying before, so in the 10, 15 funds that you know that I was referring to before I also included 2 or 3 major corporate venture funds that have been active for a while, they've got really key role in the system, they have a key role first of all of course the access to due diligence that they can provide to the syndicate that is obviously a very important asset for us, the downside of having these corporate venture funds potentially is always a fact that there is always a civil lining right between strategic interest and just pure financial interest which is aligned with the existing venture capitalist, so those are things that need to be clarified really very well in the beginning at the corporate governance standpoint in terms of access to information and voting mechanisms, but the key thing is that those tools can be put in place to make sure that there are no issues and we have greater relationship with two or three corporate venture funds which are in our companies you know the GSK, the Johnson & Johnson(indiscernable) with whom we have been working a lot and we hopefully are going to keep on working going forward, and so hopefully we can only desire that these funds will become more and more active in Europe because they have a real role to play even more so now that there is a partial vacuum in Europe.
Fintan Walton:
And these funds are also being used alongside options that they may have in certain licensing opportunities particularly when it comes back to these platform technology based companies so we are seeing more of that, so corporate venture funds coming in alongside yourselves, but on the back of a potential deal that could happen downstream is that type of deal the dream deal for you guys?
Francesco De Rubertis:
I am not sure, I mean I really like the corporate venture fund guys to come in with an equity interest on the basis of their excitement for their technology and their excitement of course is not entity of the interest that the pharmaceutical company will have at home, but we feel and we really Index Ventures feels that this option deals with pharma naturally there are some pharmaceutical companies that have clearly set up funds with option links to other venture capitalis can become pretty dilutive to the growth of the company, now there can be downside scenario coverage kind of tools but in terms of upside there is a comprise on the upside, so if there is a reason why to comprise on the upside sure that can be strategic but in principle when we invite corporate venture funds to invest in the companies that we are looking at or that we are investing in we really like them to come along with exactly the same tools and agenda where if possible then we have bringing to a different level the discussions with the corporate mother companies and we have a couple a companies Molecular Partners for example is a company in which we have Johnson & Johnson as part of the genotype of the company and we are very happy with their relationship there is a very clear separation of intent between the JJDC (Johnson & Johnson Development Corporation)and the mother company but it's great to have Johnson & Johnson as part of the genotype because they can help us a lot strategically think how to grow the company in a way that is compatible with today's pharmaceutical environment.
Fintan Walton:
And then the other thing of course is that pharma companies will buy biotech companies, so and that's probably the only real exit these days for you guys, because obviously the IPO market is more or less gone may be some residue of play out there, but so these corporations are very, very important for your returns?
Francesco De Rubertis:
Well absolutely, I mean that is really very strategic for us to make sure that we understand as well we can possibly understand how these corporations think, what are their urgencies and when you discuss with pharmaceutical companies everything or you know many things can be of interest for pharmaceutical company, the question is really making sure that we understand what are really the priorities and the urgencies for these pharmaceutical company. So yes I mean we spent really most of our time and our lives trying to interface with pharmaceutical executives to really try to understand how their companies and organizations are evolving and so how we need to adapt you know we need to adapt our companies to where the market is our investing models to what kind of companies can be built, and you know since the beginning of time of course success in biotechnologies has been associated really with capacity of adaptation and evolution morphing more than being right in the first time. If you look at the biggest companies on NASDAQ on Biotech NASDAQ if you back track them on day one of their history most of them were very different companies than what drove their success afterwards. So adapting, and evolving, and the morphing is the key game and this is too not only for pharmaceutical company but for venture capitalist as well, so may be in a few years we will still be doing different kind of investments, today we are focusing on this kind of investments differently from how we were focused 10-years ago.
Fintan Walton:
So you are taking less risk?
Francesco De Rubertis:
I don't know that we are taking less risk, but we are investing less cash in the high risk assets, but I would say we are doing a bigger chunk of our investments in high risk assets but with less capital exposure in those high risk assets. In other words we have increased we hope we will see over the next few years, but we've increased the leverage that we have on those investments so that the positive outcome should deliver us much bigger returns and the negative outcomes should eat much less cash out of our funds. We've really have rebalanced the cash at risk more than avoiding the risk, the risk is really why venture capital exists right I mean this is really where we have our reason of being where we have a value proposition where we can help creating companies after all 70% of the public companies in Europe have been sided by venture capitalist, so there is a function for venture capitalist, but manage risk before big milestones or before really you know that you have an asset that is really where we have changed our strategy and finetuned our approach.
Fintan Walton:
Right, now traditionally venture capital look for at least five times return on their investment that's what you hear about, would you say that expectation has been lowered in biotech?
Francesco De Rubertis:
No I don't think so. Actually thanks to pharma that is buying companies more aggressively than it was buying before those can still be estimates that can be you know real and hopeful. The companies that you build, the company that you really want to drive independent ally through major public markets and growth phase and see the company 15-years out that distance of cash because cost of capital is so high clearly takes away the possibility in our opinion and you know as it seems right now to really plan for 5, 6, 7x you really need to plan therefore two, three exits when things go well but on a bit larger amount of capitals, so it's a balance between small amount at higher multiples and larger amounts at lower multiples.
IPO market for biotech companies
Fintan Walton:
Right, so the IPO market, we've talked about the IPO market more or less dried up, but when we look back at the IPO market even you know five, six-years ago when it was active it was not going well most shares went down post IPO, does that mean that because people are being burnt by IPOs that the chances of an IPO market ever coming back for biotech companies may be for mature cash flow companies which is very predictable in term of more predictable that we will never really see a return because in the end it's to IPOs, because in the end isn't much better when a corporation comes and buys the shares of the company, you don't have to worry about the shares after the buyout?
Francesco De Rubertis:
Yes that's true, you are right now depends on the ambition of the management team so there are management teams that they decide on day one when they get together to create a company that they are going to create the next big company and you know there are some of them that are going to become the next big companies. So for those kind of ambitions the IPO is necessary is on the critical path, now the question you are right probably even in 2006 when there were IPOs there was a class of companies that was you know that had been starved for the previous few years, so anything even very early it came out on the market and those are the companies which are more prone to failure right after and so share price goes down. So probably IPO, IPOs are going to be more selective and you need to be a more mature company probably to you know to go public even though there is always exceptions right I mean there is the early stage and the earlier stage asset that is specifically uniquely derisked as a fraction of many correlated markets that could probably be safe enough to be presented to the IPO markets, but you are right that by strategy the IPO cannot be used as a building tool early in the story of building you need to plan for may be 50 to $100 million of private financing before the company, before the uplink can come to a certain height which is high enough to fly on the public markets, so it is changing you are right.
Francesco De Rubertis's view on future of biotech industry in Europe
Fintan Walton:
Okay, now finally just looking at the health of the biotech industry, we are all aware that you know funding is less available and even your own strategy means change in strategy means that some of these companies are not going to get funded at least by Index Ventures so for somebody who has been in that game for a time like yourself what is your prediction for the future? What sort of landscape can we expect for biotech, let's say just here in Europe?
Francesco De Rubertis:
Yes, so I think there is one consideration which is the unmet needs unfortunately because this is diseases that they are there they are not going to go anywhere right unfortunately so because that is the you know the ultimate reason why the biotech industry exists that there will still be the need and the incentivization to really discover new drugs, now how that discovery of new drugs is going to happen that is difficult to predict, what you know my feeling which derives from the trend that we are observing is that the very high risk early stage discovery of drugs which is really the one that can move the frontier of the unmet needs away is happening less and less inside the biotech industry as you've highlighted. So I think, it's right that I am seeing is that academia is getting closer to pharma with creation of departments which are more early stage analysis of mode of actions which are clearly interesting from a medical standpoint and so you know applied pharmacology, applied translational medicine university which does not leave on a straight lines so even risky mode of actions even if it takes three-years longer than planned inside the biotech company it can be disastrous, but inside an academic environment it can be more buffered by the organizational system. So I think universities may play a bigger and bigger role in that incubating phase of new drugs and that link would probably become a stronger link with pharma, so the biotech industry in itself would be under pressure I think in between the university and the pharma even though of course universities now really well suited to interface with pharma, so biotech could become a sort of interface infrastructural system between university and pharma as it should be already today, but even more so to really finance early stage of discovery inside academic environments, so that could be one way in which it could go.
Fintan Walton:
Francesco De Rubertis, thank you very much indeed for coming on the show.
Francesco De Rubertis:
Thank you very much.
Fintan Walton
Dr.Fintan Walton is the Founder and CEO of PharmaVentures. After completing his doctoral research on the genetics of cell proliferation at the University of Michigan( US )and Trinity College (Dublin, Ireland ), Dr Walton gained broad commercial experience in biotechnology in management positions at Bass and Celltech plc(1982-1992).
Francesco De Rubertis
Partner
Francesco De Rubertis is a Partner in the firm's life sciences practice. He joined Index Ventures in 1998 and has served on the board of numerous companies including Genmab, Bioxell, Addex, Parallele, 7TM and Pangenetics. Prior to joining Index Ventures , Francesco De Rubertis was involved in post-doctoral research in genetics at the Whitehead Institute, Massachusetts Institute of Technology (MIT). He is also the author of several publications in international scientific journals. Francesco De Rubertis has a BA in Genetics and Microbiology from the University of Pavia and a PhD in Molecular Biology from the University of Geneva. He is also a CFA charter holder.
PharmaVentures
PharmaVentures is a corporate finance and transactions advisory firm that has served hundreds of clients worldwide in relation to their strategic deal making in the pharmaceutical, life science and healthcare sectors. Our key offerings include: Transactions / deal negotiations; Product / technology valuations; Deal term advice; Due diligence & expert reports; Strategy formulation; Alliance management; and Expert opinion for litigation/arbitration cases. PharmaVentures provides the global expertise to ensure our clients generate the highest possible return on investment from all their deal making activities. We have experience of all therapeutic areas and can offer advice on both product and technology commercialisation.
Index Ventures
Index Ventures is a leading global venture capital firm active in technology venture investing since 1996. The firm is dedicated to helping top entrepreneurial teams in the Information Technology, Clean Technology and Life Science sectors build their companies into market defining global leaders. The firm has offices in Geneva, London and Jersey and focuses on investments from seed through growth stage companies. In the life sciences field, Index Ventures invests in companies with disruptive platform technologies capable of growing into global leaders. It has also pioneered the asset-centric investment model, focused on investing in single assets with the potential to be first or best in class. More recently it has expanded its focus into the diagnostic/medical device areas. Current portfolio companies include Aegerion, Cellzome, Cyrenaic, Funxional Therapeutics, Micromet, Molecular Partners, Mind-NRG, NormOxys, Novocure and Sequenta. Exits of note include Addex Pharma (ADXN), Genmab (GEN), PanGenetics (Abbott) and ParAllele Bioscience (Affymetrix).