Tempting life science: Jeremie 3 launches in October
The first two Jeremie Funds’ running time has not even ended yet, and the European Union is already launching a new venture capital fund. The latest Joint European Resources for Micro to Medium Enterprises initiative (Jeremie 3) will provide a solid opportunity for at least seven innovative enterprises active in biotechnology.
One of Jeremie 1’s venture fund managers, PortfoLion has already accomplished its first exit: 21 months after its investment into a small medical startup, it has realized a 69% internal rate of return.
“Since Jeremie 1 was launched (in 2009), the Hungarian venture capital sector has gone through a great amount of development,” Marcell Veidner, managing director of R&D investment consulting company Bionity told the Budapest Business Journal. Although he says there is no venture fund yet specialized in biotechnology, three big fund managers from Jeremie 1 have already gained ample experience of investment in life sciences.
According to Veidner, their target companies have developed as well. Their management has become more professional and more sensitive to the investment environment. “Most companies suitable for us to invest into offer services to big pharmaceutical companies which develop medications,” Veidner said. For example, they offer to speed up the pre-clinical phase, or they promise to shorten the duration of in vitro, or even in vivo, examinations.
Classic drug developers, however, are still lacking. “To my knowledge, at the moment there is only one company waiting for capital investment that wishes to launch its own big molecule on the path of pre-clinical testing,” Veidner said. “We will know more only after the commencement of Jeremie 3 in October, when the entire spectrum of biotech companies will appear on the scene. The financial outcome of Jeremie 1 so far looks rather promising,” he added.
The physiology of success: the Cryo investment
PortfoLion, as a major Hungarian fund manager of the EU’s (Jeremie) Holding Fund (Jeremie 1), has purchased non-decisive stakes in 12 innovative Hungarian startups, a quarter of which are in the biotech sector. It is probably not by chance that Cryo, the first company ripe for exit/divestment, was among them.
In June 2010 PortfoLion’s board decided to invest in Cryo Management, a small startup engaged in human infertility treatment, also providing various related services concerning assisted reproductive technologies. PortfoLion, OTP’s Venture Capital Fund, raised HUF 220 million (almost €772,000) of capital, gaining a 35% ownership share in the target company.
“We strongly believed that Cryo had huge potential to expand internationally, which has always been an important criterion for the fund regarding investment decisions,” Péter Oszkó, CEO of PortfoLion explained. “We also recognized that Cryo’s scientific team was committed to bringing their project to a business success.”
PortfoLion’s team worked together with Cryo’s founders for almost two years. “During this time, the company’s business practices and organizational structure became more and more professional, and Cryo was consistently able to accomplish pre-determined strategic goals,” PortfoLion deputy CEO András Molnár told the BBJ. From 2010 to 2011, the number of employees increased from the original seven to 21, while revenues soared from €182,000 to more than €821,000.
In 2012 VitroLife, a Swedish biotechnology corporation listed on the Stockholm Stock Exchange, submitted an offer to buy the entire time-lapse microscope division of Cryo. “Their bid included Cryo’s management as well, which granted us the opportunity to perform a full exit,” recalls Molnár.
VitroLife intends to keep Cryo's operations, especially production and development, in Hungary, even after the transaction. “For a strategic investor, VitroLife has the potential to realize synergies together with Cryo,” explained Molnár. “Furthermore, it will also be able to support Cryo in achieving extensive growth in the future.”
The purchase price of Cryo will be between €5 million and €9 million, depending on certain milestones that have been set for the coming three years regarding development and sales. “According to this earn-out structure included in the share purchase agreement, we expect the final purchase price to be three-fold compared to the capital that was invested in Cryo by the fund,” said Molnár. This amounts to an IRR (internal rate of return) of 69% considering PortfoLion’s investment period of 21 months.
The purchase price that was agreed upon in the exit does not include the properties of the HHP hydrostatic pressure stress treatment division. As a result, PortfoLion has the opportunity to operate and develop this division by establishing a new company with new management, with additional capital investments if needed. “With this, we hope to increase the return on our initial investment even further,” Molnár explained.
The moral of the story
“The biggest problem with innovative companies in Hungary is that they do not have complete teams of managers,” Molnár told the BBJ. Management is basically made up of researchers, who are ignorant of the international environment of investment.
“They think that the value of their company is identical with the invested scientific input, and not with its commercial potential,” Molnár said, adding that Hungarian scientists still have a kind of ‘help us, but stay away’ attitude toward investors: “Researchers in Hungary still have not realized that the investor is not a creditor but a partner who brings capital, business expertise, and personal connections into the company.” It is a peculiar problem that scientists in Hungary are difficult to convince about the importance of formal legal documentation that meets all medicines’ regulation criteria, Molnár said.
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