Venture Capital Funding: An Insider’s View

Jeroen Bakker, Associate Healthcare
Cheryl Zimberlin, Associate Healthcare
Merck Ventures BV, Amsterdam, the Netherlands, a
subsidiary of Merck KGaA, Darmstadt, Germany
An Insider's View
Venture Capital
Funding

Emerging Biotech Webinar | 10.10.2017
The life science business of
Merck KGaA, Darmstadt, Germany
operates as MilliporeSigma
in the U.S. and Canada.

The ABCs of Venture Capital
Venture Capital – Everything you wanted to know about Venture Capital
Corporate Venturing – The in’s and out’s of a Corporate Venture Capital
To invest or not to invest? – How we look at opportunities

A poll will now occur

Every type of funding aligns with the content and goals
An overview of the funding environment
Fundamental
Research
Applied Research
Translational
Research
Drug Discovery Drug Development
Research Grants
Translational Grants
F&F, Venture Capital
License, Sale, IPO
Consider the following!
• Your intention
• Ownership
• Timelines/governance
• Expectations

What is Venture Capital precisely?
Definition: Venture capital is financing that investors provide to start-up companies
and small businesses that are believed to have long-term growth potential.
Annual revenues
of ~$10 billion
Development costs
of ~$2.5 billion
?

LPs, GPs, fund life and exits & the difference between a VC and CVC
The VC Business Model: Simplified
$10m
Company A
$4m
Company B
$8m
Company C
$7m
Company D
$100m
Venture Capital Fund
(General Partner)
$25m
Investor I
$25m
Investor II
$50m
Investor III
$100m
IPO
$100m
Acquisition
$450m
Option deal
Companies
XYZ… $
$
Venture
Capital Firm
(Management
firm)
Limited Partners (Investors in the fund)

How much money flowed into the system?
Despite a decrease in funding amount, VC is still on the rise!
$-
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
$70.0
$80.0
$90.0
$100.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
$billionraised
Venture ($ billion) IPO ($ billion) Follow-on ($ billion) Other ($ billion)
$-
$2
$4
$6
$8
$10
$12
0
50
100
150
200
250
300
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Numberofrounds
Volumeoffinancings($billion)
Europe U.S. Europe U.S.
Money raised by biopharma VC financings of EU and US biopharma
Source: BCIQ: BioCentury Online Intelligence. Data as of 25-4-2017; internal analysis

One way of creating a return for shareholders
The IPO window is still open for all of us
0
10
20
30
40
50
60
70
$-
$1.00
$2.00
$3.00
$4.00
$5.00
$6.00
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
#ofdeals
Dealvolume($billion)
Europe U.S. Europe U.S.
0
10
20
30
40
50
60
70
80
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
No.ofIPOs
Discovery Preclinical Phase I Phase II Phase III Registration Marketed
IPO activity in EU and US IPO activity by development stage
Source: BCIQ: BioCentury Online Intelligence. Data as of 25-4-2017; internal analysis

Going public is not the only route to a return
Tradesales offer a lucrative exit besides an IPO
218
147
313
202
332
373 376
475
658
881
185
94
119
97
201
141
190
306
272
439
72
38
62 54 73 62 53 54 55 66
0
100
200
300
400
500
600
700
800
900
1000
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
AverageValues($m)
Average Total Transaction Value
Average Upfront Transaction Value
Average Invested Capital
$4.4 $2.4 $1.8 $2.3 $4.0 $2.8 $3.4 $5.1 $7.4 $9.8
$5.2
$3.6
$4.7 $4.7
$6.7
$7.4 $6.8
$8.4
$18.9
$20.0
31
25
18
28 27 28
23
25
36 35
$0.0
$2.0
$4.0
$6.0
$8.0
$10.0
$12.0
$14.0
$16.0
$18.0
$20.0
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
#Tradesales
Transactionvalue($bn)
Upfront value Overall value Companies sold
Tradesales of VC-backed companies Deal metrics of tradesales
Source: HBM Pharma/Biotech M&A Report 2017, internal analysis

The ABCs of Venture Capital
Venture Capital – Everything you also wanted to know about Venture Capital
Corporate Venturing – The in’s and out’s of Corporate Venture Capital
To invest or not to invest? – How we look at opportunities

A poll will now occur.

Know the investor!
The Venture Capital cuisine has different flavours
Institutional VC
Corporate VC
Sauces
Company creation
Early Stage
Late Stage
Sides
Geography
Therapeutic Area
Technology
For 2 or more
Syndicate
Lead, co-investor

Corporate VCs focuses more and more on early stage financings
11 20 17 23 18 18 20
31 35
58 52
86
99 94 99 94 118 107
82 117
77 9611%
17% 15%
19%
16%
13%
16%
27%
23%
43%
35%
0
50
100
150
200
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Without CVC in syndicate
With CVC in syndicate
OverallVCfinancingSeed&SeriesA
Source: Pitchbook & BioCentury BCIQ, internal analysis
 CVC investments in
biotech doubled from
8% (2005) to 17%
(2015)
 In Seed and Series A
financings, CVC
participation tripled
from 11% (2005) to
35% (2015)
 Early stage financings is
the ideal playing ground
for CVCs
Number of Financings Dollars Invested
The role of CVCs is evolving

Why do Corporate VCs focus on early stage financings?
Biotech is highly suitable for high risk projects
15
 Biotech is able to go from
Hit Discovery to IND at a
much lower cost and higher
efficiency than pharma
does
 Capital spend on R&D
through a CVC is much
more efficient, i.e. it is
leveraged with external
capital
 CVC playing ground ideal
for high risk projects

Corporate VC is an important tool for pharma
• Most pharma and some larger biotechs have a CVC arm
• Tool in reaching strategic goals, and, potentially profitable business unit
Early involvement is ideal playing ground for Corporate VCs
• Enables first access to novel technologies at a limited cost
• Develop good understanding of technologies through close involvement
Early alignment with pharma expectations for data package
• Product development strategy informed by what pharma wants (built-to-buy)
• Potential to educate to prepare for deal making
Corporate VC investment seen as ‘stamp of approval’
The what and why of Corporate Venture Capital
Corporate venture
funds in pharma since
1973:
Johnson & Johnson,
Pfizer, Lilly, GSK (SR
One), Novartis, Amgen,
Roche, Novo, Amgen,
Boehringer Ingelheim,
Astellas, MSD,
Medimmune

CVC participation translates to increased value creation
The numbers backing up the story
17
Objectives of CVCs
20%
50%
15%
15%
Strategic objectives are essential
investment objectives for 85% of CVCs
CVCs have proven to create higher likelihood of an exit while the
majority of CVCs pursues strategic objectives
Primarily financial,
strategic value
is a requirement
Primarily strategic,
financial return
is a requirement
Strategic value only
Financial return only
Trends in VC-backed financings
& exit events (2001-2015)
VC-backed companies with CVC
participation (2001-2015)
Biotech with CVC participation creates
relatively more exits
Increase in exit potential is a
sustained trend for the past 15 years
Source: BCIQ: BioCentury Online Intelligence; internal analysis

An example of a
Corporate
Venture Capital
fund

How do we add value?
Pharma-quality focus but with biotech creativity and speed
• Design ‘killer’ experiments
• Emphasis on business development
• Top tier investment syndicates
• Through network management, board & SAB
• Hands-on board support
• Interim C-level/executive support
P
A
R
E
N
T
 Leverage R&D expertise for “wet due diligence”
 Nurture assets: active R&D, BD, commercial involvement
 Offer access to manufacturing, screening capabilities, etc. in exchange for equity
 Early front-row seat, early due diligence, preferred relationship
 Catalyze exchange and creation of novel ideas
 Foster corporate entrepreneurship with the mother company
P
O
R
T
F
O
L
I
O

Decision making process
22 Emerging Biotech Webinar | 10.10.2017

What are we looking for?
Building an investment bottom-up with good science
23
Co-
investors
Financing
need
Best team
Clear development plan
Sound experimental data,
validated MoA & good IP
Cutting-edge science with
innovative angle in strategic TA
Value when we sell the company
Financing need
Value before investing
Cost-effective
development plan
Best team
IP, data
OR

Selecting the best 0.5%
Our investment process
24
Sources for deal flow
Investor conferences, Advisory firms, Other Venture Capital firms,
Academic Technology Transfer Offices, Websites
Due diligence activities
• Scientific/IP/financial diligence, Site visit, Internal/external KOL
consults, Potential syndicate discussions
Portfolio company
• We actively manages investment: board seat/C-roles, Ongoing
non-conf discussions with divisional R&D/BD
Further exploration consists of
Literature research, Call/meeting with management, Non-conf.
discussion with divisional R&D
~1000
new investment proposals
per year
~300
investment proposals
further explored
5-10
due diligence
4-6

Why are you different from the other 99.5%?
• Check the underlying biology. Does it
make sense against what has been
shown before?
• Is the observed effect actually
therapeutically relevant?
• What analysis has been used and,
how many times was the study
actually replicated?
• Is the scale of the y-axis consistent?
• Was there a positive control used in
the study?
• Do the reagents actually do what is
they meant to be doing?
What’s the problem and is this the best solution? Does your data back-up your story?

Who’s going to drive the project?
 Youngest driver in Formula 1
 Seen as upcoming talent
 Able to get funding for Formula 1
 Won a race in his first year
 Oldest driver in MotoGP
 Won 9 titles
 Best-earning MotoGP driver
 Last title from 2009

What exactly do you own as a start-up?
But also…
Can/is your final product (be) protected by
patents (with sufficient time horizon and
broad claims)?
What patent applications do you have, and
what is their likelihood of being granted?
Hard IP (patents) is clearly preferred,
although trade secrets can be sufficient in
some cases (reverse engineering risk of cell
therapy product vs. small molecule).
For an early stage company, most of the
company value for a VC is in the patent
portfolio.
Do you have freedom to operate for the final
product you envisage?
If not…
• Can you design around the FTO
hurdle?
• Can you obtain a license from the party whose
IP you are infringing
• Can we take the risk? (not if the IP belongs to a
big company)

Selling is good but keep it real
28
“Lowering COGS of mAbs in the
ONC field significantly”
“We see no side effects at all”
“This mechanism is unique,
biologically”
“My professor has been working
on this for 20 years”“We can significantly reduce the
risks of drug development”
“We have a highly specific siRNA,
just need to solve delivery”
“We‘re the only ones in the
world, there is no competition”

Check the boxes that apply to you
(Medical) need  Yes  No
Proprietary  Yes  No
Differentiation  Yes  No
People Personality Track Record Incentives
Potential Market size Competition Pricing / margin
Timing Time to market Penetration rate Exclusivity
Risk Development Regulatory Market
Cost structure Development Inflection points Commercial

You will only have one first impression…
Come up with a strong, to the point plan (20-25 slides),
containing your:
• Concept
• In-house data
• Competitive positioning
• Development plan
• Team
• Use of Proceeds
Think big but also target the right investor with the right idea!

You miss 100% of the shots you don’t take
You jump of a cliff and you
assemble an airplane on the
way down.
- Reid Hoffman, Founder of LinkedIn

+31 (0)6 2322 5556
Cheryl.Zimberlin@ms-ventures.com
+31 (0)6 2270 1495
Jeroen.Bakker@ms-ventures.com
Cheryl Zimberlin
Jeroen Bakker
Contact Us
© 2017 Merck KGaA, Darmstadt, Germany and/or its affiliates. All Rights Reserved.
All other trademarks are the property of their respective owners. Detailed information on trademarks is available via
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Venture Capital Funding: An Insider’s View

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