4Bioengineering.com

The revival of interest in health care among venture capital firms is attracting corporate investors as well.

Medical products companies like Johnson & Johnson Co. and pharmaceutical giants like SmithKline Beecham (now GlaxoSmithKline) have been investing in smaller companies for years. But now they have far more company in the field than ever before.

The newcomers are entering the health care investment arena with at least one of three basic goals:

• To add to their own line of products. Cytyc Corp., for example, the developer of a new means of doing pap smears, has set up a venture unit to invest in companies that likewise are striving to create technologies for diagnosing cancer, or treating women.

• To assist their own customers. Quintiles Transnational Corp., which provides services to help biotech and pharmaceutical companies do a more efficient job tips of developing and launching products, established a venture program in October. The aim, said Ron Wooten, the unit’s president, is to bring a more “disciplined approach to how it puts dollars to work.” Quintiles intends to use some of the allotted capital to help customers that may have difficulty meeting the costs of clinical trials.

• To invest in companies capable of improving the efficiencies of their own business. Merck & Co. and Eli Lilly & Co., for example, both created venture programs to back companies that can speed drug development. Merck Capital Ventures just invested in one such company, Acurian Inc., which uses the Internet as a tool for recruiting patients and physicians for clinical trials.

But it is not just health care and pharmaceutical companies that have launched venture programs of relevance to health care VCs. Companies such as IBM Corp., Motorola Inc., and Compaq Computer Co. are investing in both life sciences start-ups and venture funds largely as a means to create demand among genomics companies for their computer hardware.

Likewise, Intel Corp., perhaps the most active of all corporate investors, is said to have an interest in life sciences companies using computers in their research.

The most effective investors, of course, may be those companies that know the health care industry because they’re part of it.

Cytyc, for example, has been through the rigors of getting a medical product to market; its FDA-approved diagnostic product, according to the Boxborough, Mass., company, is “significantly more effective” than traditional pap smears. Now Cytyc has allocated an undisclosed amount of capital to Cytyc Healthcare Ventures LLC for backing “companies and/or technologies that are of strategic interest to us, and our development,” said Cytyc CEO and President Patrick J. Sullivan.

Mr.Sullivan, who has served as Cytyc’s chief executive since 1994, will oversee the venture program. Cytyc Healthcare Ventures, he said, will invest at all stages and make “substantial” commitments alongside venture capital firms. The corporation, which as of late March had $88 million in cash on hand, expects to make a couple of deals per year, Mr. Sullivan said.

Although Cytyc is new to venture investing itself, the company received ample backing from venture firms before going public in 1996. Among its investors were Norwest Venture Partners, BancBoston Ventures, Advanced Technology Ventures, and Patricof & Co. Ventures Inc.

For Quintiles Transnational, PharmaBio Development, its formal corporate venturing program, grew out of the Durham, N.C., company’s practice of investing in life sciences venture capital funds.

Quintiles has made commitments of up to $9 million to the funds of six firms: A.M. Pappas & Associates, Durham; EuclidSR Partners, New York; Cardinal Partners, Princeton, N.J.; Thompson Clive & Partners Ltd., London; and Acacia Venture Partners and Alta Partners, both of San Francisco.

According to Mr. Wooten, the president of PharmaBio Development, Quintiles backed the venture firms in order to get a better look at companies with technology to expedite drug development.

PharmaBio Development already had made five direct investments of its own. Among its portfolio companies are Meristem Therapeutics, a French developer of recombinant protein technology, and Icagen Inc., a Durham drug discovery company that uses ion channel modulation.

The sizes of Quintiles’ investments generally are in the $2 million to $5 million range, Mr. Wooten said. All told, Mr. Wooten expects Quintiles to invest approximately $150 million over the next few years directly in companies as well as in venture funds.

PharmaBio Development aims both to increase Quintiles’ margins and to help to support companies with technologies that could be of use to its clients. Because it takes a lot of capital to launch a new drug in the marketplace, Quintiles will, in some cases, absorb a percentage of the cost of launching the product, and take a royalty fee on revenue generated by the product, as well as warrants.

In the case of Scios Inc., PharmaBio will provide $35 million in funding toward the commercialization of the Sunnyvale, Calif., company’s main product, which is designed to treat congestive heart failure.

Mr. Wooten said Quintiles is footing 30 percent of the cost of the launch of the product, in exchange for revenue from sales, as well as warrants. “We will take risks with some products in order to get higher margins,” he said.

Perhaps Merck and Eli Lilly are diverging the farthest from their core business. Unlike S.R. One Ltd., the venture arm of GlaxoSmithKline and one of the first corporate venturing programs created, Merck Capital Partners and e.Lilly won’t invest in companies making new drugs.

Instead, like IBM and other computer-industry companies, both pharmaceutical giants are concentrating on businesses that can use information technology to streamline drug development.