BioCrossroads, the life sciences initiative responsible for raising the $73 million Indiana Future Fund and the $6 million Indiana Seed Fund, is in early discussions on a new capital-formation effort.
The focus this time around: biotech services businesses.
“This is very much a work in progress,” said BioCrossroads CEO David Johnson. “But we believe and acknowledge this is an area that needs our attention and our active involvement.”
Next year, Johnson hopes to focus at least $25 million to $30 million on Indiana’s life sciences services sector. That could mean forming informal networks of like-minded angel investors. It might require a creative attempt to cobble private-sector resources together with the government’s. Or it might even lead BioCrossroads to raise a new fund.
“It’s not unlike the early days of the Indiana Future Fund,” Johnson said. “We weren’t looking to raise a fund. We were looking to make sure if there was a need, it was being met by the market. That’s where we are with this.”
Formed in 2002, BioCrossroads created the IFF a year later as a solution for Indiana’s lack of life-sciences-focused venture capital. The IFF divided its $73 million among six professional venture capital firms. In turn, those firms have speculated on five promising Indiana biotech companies. BioCrossroads’ seed fund invests in extremely early-stage startups-two so far.
But venture capitalists tend to gravitate toward companies that aim to produce tangible products, Johnson said. In the life sciences sector, that usually means pharmaceutical compounds or medical devices. If successful developing patented technology, product producers can provide explosive returns for their investors.
Service companies are just as important a segment of the life sciences sector, Johnson said, but they aren’t as attractive to venture capitalists. Between the cost of equipment and talent, they’re often expensive to organize.
And while they can be quite profitable, they’re seldom spectacularly so. According to Dow Jones Venture One, a venture capital research firm, just $466 million of the $7.3 billion invested in private U.S. biotech firms last year went to services businesses.
Pete Kissinger, chairman of the West Lafayette-based contract-research firm Bioanalytical Systems Inc., knows the dilemma well.
It’s the same reason venture capitalists seldom invest in law firms or accounting partnerships. Yet biotech services companies can grow to significant size. Bioanalytical Systems, founded in 1974, has 370 employees and is publicly traded on NASDAQ.
“If you’re doing contract research, you’re working on other people’s products. You don’t have intellectual property of your own,” Kissinger said.
“Drugs we once worked on in our company are now selling $17 billion a year, and our royalty stream is zero. [Likewise], Ice Miller and Baker and Daniels don’t get royalties on patents they file. They get us bad enough in other ways.”
Consider the challenges Indianapolisbased Anaclim LLC has faced since it formed in late 2004.
A contract researcher focusing on clinical trials involving ethnic minorities, Anaclim was founded by Eli Lilly and Co.’s retired chief medical officer, Alfonso J. Alanis. Despite his decades of experience in the field, Alanis couldn’t attract much attention from potential investors.
When Alanis approached banks for traditional loans, they asked him to provide personal collateral for the entire amount of the loan. Instead, he and a partner ended up providing all of Anaclim’s cash out of their own pockets.
“The bottom line is, if we had not had the resources to do this, put our personal savings on the line, there’s just no way we could have had this operation,” Alanis said.
“People tell me it’s relatively easy, and there’s all kinds of funding available,” he said. “At least for the kind of business we’re doing here, I’d like to see more done.”
Indiana Venture Center President Jim Eifert said the key to helping biotech services firms may be to identify investors willing to accept lower returns in exchange for greater stability. Life sciences product companies are notoriously prone to failure.
“Most VC investors have chosen the strategy of investing in a portfolio of early-stage companies with the thought that, out of 10, one or two will produce all the meaningful returns,” Eifert said. “An alternate strategy is to make a similar number of investments in lower-rate-ofreturn but less-risky businesses.”