US investment bank Burrill & Co. CEO Steven Burrill is a close friend of Compugen (Nasdaq: CGEN) chairman and CFO Martin Gerstel. They first met at ALZA Corporation (Nasdaq: AZA), and have been in touch ever since. Their relationship is the background to the announcement issued this week that Life Sciences Transaction Support, a biotechnology subsidiary of Kesselman & Kesselman, the Israeli branch of the PricewaterhouseCoopers accounting chain, will henceforth represent Burrill & Co., which specializes in the life sciences. The two firms are joining forces to initiate and assist strategic cooperation between Israeli and international companies in the field.
”You have stunning technology here in Israel,” Burrill said in a telephone interview. He provides some interesting numbers – out of 500 current publicly traded biotechnology companies, over half are outside the US. He explains that 2-3 years ago, the the partnership put the US at the undisputed center of its market. Today, however, the partnership is based on interesting products and technology.
This is probably what made Burrill answer a telephone call from Life Sciences Transaction Support CEO Avner Lushi, whose company manages capital raising for the life sciences. The company decided it wouldn’t hurt to recruit a partner for creating strategic partnerships.
Out of step partners
Burrill & Co. manages investments in several life science fields. The firm runs venture capital funds with $350 million, organizes strategic cooperation for companies in the field amounting to $1 billion to date, and executes both spin-outs and spin-ins. “We’ve learned things around the world about how to build a company’s science, manpower, and so forth, that also apply to Israel,” Burrill says. “Cooperation is another way of doing it. A company can use cooperation both to sharpen its focus and as an alternative to outsourcing.”
According to Burrill’s figures, the 350-400 biotechnology companies located in the US have signed 400-500 strategic cooperation deals in the past decade, an astounding figure by any measure.
Burrill & Co. director Richard Haiduck explains this statistic: “The capital markets were always the industry’s umbilical cord. Unlike other high-tech sectors, which survived because their customers liked the product, the biotechnology industry relies on large investors, which gave it a chance to reach the customers.
”The industry is capital-intensive, and cooperation is a form of leveraging. The capital from cooperation was always as important as the investment capital. The problem is that the partners don’t really match. Cooperation deals are still being signed between very large and very small companies, not between equal partners. This is a very abnormal situation; it’s not clear who’s selling and who’s buying.”
Since it takes an average of 17 months to complete an agreement of cooperation, every company feels it has to sign such deals as quickly as possible. Haiduck says the connections are a very important factor in this.
Burrill says, “The key criterion is whether we believe it is possible to cooperate regarding the product, and whether people will want it. This also involves the company’s understanding, what it’s looking for, and a review of its science. Even very young companies with superb technology can make wonderful deals, although later is better. We take care to stay close to the purchasers and ask them what they want.”
Haiduck: ”Big pharma companies have to reach biotechnology companies at an early stage. There are 5,000-6,000 small companies around the world that want to cooperate with big pharma companies, and hundreds of larger ones that are actively looking. It’s a very inefficient process. Our function is to block out the noise.”
”Globes”: How have cooperation deals changed over time?
Burrill: ”A large company used to get more money or a bigger market share from the small company. The larger ones are now becoming a little more equal to the small ones. In some of the deals, the division of the product ownership and the resultant profit is almost 50-50, despite the disproportionate sizes of the companies. When the capital markets are flowing, it doesn’t happen. Today’s capital market, however, is tough, and the ability of a small company to use it is more limited. On the other hand, the smaller companies need more today. When the market was strong, the small companies didn’t care about cooperation. Now it’s all they want to do. It’s a cyclical process. Today companies need both a partner and financing all along the way.”
Haiduck: ”The big pharma companies have changed in recent years. The biotechnology companies always wanted to cooperate, because they can’t develop their products completely independently. The big companies are now more desperate than ever for entrepreneurship, whether because of pipeline delays or patent expiration. Both sides now want to cooperate; the problem is to turn this into real agreements. The process is aimed at the main information, the core of both parties, and constructing a deal between them as if they were equal, even though they’re not. This isn’t computerized dating; a theoretical match between the parties isn’t enough.”
Between the greedy and the miserly
Haiduck says the life sciences market is especially crowded and noisy now, and adds that this serves as an incentive for companies to reach cooperation agreements more quickly. “Mapping the human genome has shortened the process of developing and discovering drugs. Thousands of companies have been created around the world, which can make this process more efficient. The problem for the big firms is that they are now suddenly being flooded by leads and targets, while the cost of discovery is rising, not falling.
”In the technologies important for the discovery process, companies have toolboxes. Unfortunately, big pharma sells drugs, not tools. They want to make deals linked to a product or a platform. They are now faced with thousands of companies waving their hands and shouting that they can solve big pharma’s problems, shorten processes, and work effectively. The question for the big firms is how to distinguish and recognize value. Here is where we try to mediate between the two sides.”
Burrill: ”In the early stage of tools and development process techniques, there is discrimination. When you want to guarantee that a company will stand out in a crowded market, it has to have a technological advantage.” He adds, “They don’t pay us for a process, but for its result,” so Burrill also has to discriminate, preferably on the same basis.
Haiduck admits, “It’s interesting that there isn’t a big industry of people doing what we’re doing. Investment bankers do mergers, capital deals, sales, and purchases. They help finance and raise money. What professionals make a living from cooperation? There are none.”
Did you prevent any deals? Did you decide not to work for certain companies?
Burrill: ”We reject those who do not show clear scientific progress.”
Haiduck: ”There are several reasons why deals aren’t made. Sometimes the large company is dissatisfied with the smaller one’s intellectual property – it’s not strong or wide enough to provide protection. You always have to make sure what the intellectual property is, and that’s a lot more than simply registering a patent.
”Another thing that stops many deals is the value equation. If a small company is too greedy, or a large one too stingy, doing business is very difficult. Sometimes in the end, after the dating game is over, they decide not to like or trust each other. In the end, people do business with people they like and trust. It’s a little like reminding people who are dating to fall in love and get married. Here, though, we plan the marriage and the divorce at the same time. Problems in planning the divorce mean the marriage doesn’t take place at all. In addition, the bride and groom have to prepare alternatives and try to improve the terms for the rest of the time.”
How far do you want to go with your activity in Israel?
Haiduck: ”We want to complete a dozen deals within a year, but it will be measured by the results.”
Published by Globes [online] - www.globes.co.il - on October 17, 2002