Corporate venturing can spread the cost of R&D.
Research at the high-tech end of industry is now so fraught with risk that even the largest companies dare not go it alone. Glaxo's £9 billion acquisition of Wellcome was the latest in what promises to be a continuing series of mammoth mergers in the pharmaceutical field. Even so, Glaxo Wellcome's chief executive Sir Richard Sykes is quoted as saying that, 'We will form partnerships and alliances to maximise our capabilities in all parts of the business. We cannot hope to do all the R&D on our own.' The cost is too great, the scope too broad, and the consequences of missing some blockbusting breakthrough too awful.
Frequently the partners are small research-oriented biotechnology firms from which the pharmaceutical houses commission specific tasks. Frequently, too, the pharmaceutical groups safeguard this work by taking minority stakes in the ever cash-hungry biotech sector, thus becoming engaged in a form of 'corporate venturing'.
'Corporate venturing should be actively considered in those sectors with high levels of R&D expenditure and those where UK levels of R&D lag behind the rest of the world,' argues Tim Stocks, head of corporate finance at the City-based law firm Withers. Venturing, according to Withers, provides the corporate investor with a 'cost-effective adjunct to its own R&D'. For the investee it offers an injection, not only of early development stage capital, but of 'superior marketing and management capabilities' along with 'the possibility of a congenial exit' via a trade sale to the corporate investor.
The big corporation could hardly buy out its tiny associate in the opening stages, of course, since the latter will have no assets other than brainpower, and acquisitive behaviour would very likely kill the golden goose stone dead. 'We tend to keep a fairly arm's length relationship,' says a Glaxo spokesman. With few exceptions, Glaxo does not own its collaborators' equity. Zeneca has 20% of Sugen, a US biotech company with which it has a five-year collaborative research project, but few comparable stakes. However Zeneca intends to invest in several smaller companies in support of its ambition to be 'number one in cancer treatment' by the end of the decade. 'The demerger (from ICI) created an environment which made this course much more attractive,' explains research director Peter Doyle.
SmithKline Beecham already has 130 or more collaboration agreements, over 30 of which involve equity investment through the group's own venture capital subsidiary. The initial approach, explains SB's CFO Hugh Collum, invariably comes from the biotech venture. If this can show achievement in an area potentially profitable to SB, then equity funding could be forthcoming. But the group is unlikely to acquire its associate. If a venture succeeds, flotation will probably follow and the stock market will provide an exit in due course. Nor do the biotech companies themselves seem keen on joining up with a single big group. Xenova, a rare UK example founded in the late '80s - to seek out active compounds in micro-organisms - is currently in partnership with four larger companies, two of which are also shareholders.
What about venturing beyond the medical sphere? There's not a great deal, even in sectors like engineering and computers which should not neglect their R&D. Software firms are constantly investing in each other, but they generally go the whole hog and integrate the acquisition next day. GEC claims to have given backing to inventors - on occasion - but not in order to make the R&D spend go further. However the publishing world offers one interesting example. Until a very few years ago Pearson had a small portfolio of shares in private companies exploring new forms of media, including video. 'Most of them didn't do very well,' admits Mark Burrell, Pearson's development director who masterminded the scheme. But it did serve a purpose, in getting print-based businesses to realise what was happening round about them. Burrell sums up Pearson's view of venturing: 'Yes it can be useful - but to a limited extent.'.