U.S. High Technology Gets A Foreign Accent

A sagging stock market and the lagging dollar have only served to add allure to overseas venture capital Ask any United States biotech executive about the industry’s problems and you’ll probably get a rousing speech on the dangers of offshore competition—especially from Japan. The U.S., you’ll be told, could lose out on biotechnology’s biggest payoffs. But nationalism sometimes bows to financial realism. At least, that was the case back in 1985 when Thousand Oaks, Calif. based Arogen Inc. teamed up with Tokyo’s Kirin Breweries to commercialize erythropoietin, known in the business as EPO. The protein regulates the production of red blood cells; its market is nearly 200,000 sufferers of severe anemia around the world. Estimates on potential salesof EPO range as high as $350 million a year in the U.S. alone. Given those numbers, and given the deeply ingrained U.S. biotech executive’s fear of “losing out” to Japan, why would Amgen, which was—and still is—a global front-runner in EPO commercialization, opt to share its know-how with a major potential competitor? Money. “We had tried to raise funds for EPO and other products through several prospective U.S. partners, mostly pharmaceutical companies,” explains Amgen treasurer Lowell E. Sears. “But most of them tended to downgrade our technology and seemed to be looking for contract research in return for a modest royalty. Kim wanted to deal—we signed the agreement after only four months of talking.” That was in May 11985. The quid pro quo: Amgen contributed its technology plus $4 million to the joint venture (called Kirin-Amgen), and retains U.S. rights to EPO. Kim chipped in $12 million in exchange for Japanese rights. Today, only three years later, EPO is under review by the Food and Drug Administration and could be approved for U.S. marketing by year-end, says Sears. Approval in Japan is expected by 1989 or 1990. No doubt U.S. zenophobes would be shocked and hurt by this tale, but few technology analysts would be surprised by it. Over the past five years, according to Venture Economics in Wellesley Hills, Mass., Japan’s direct venture capital investments in a wide range of U.S. technology companies have climbed steadily, rocketing from $7 million in 1983 to $42 million in 1985 to $136 million in 1987. And European investors are nearly as aggressive, says Venture Economics vice president Mark L. Radtke. Although hard numbers are scarce, Radtke estimates that Europe now accounts for about 62% of the number of direct foreign investments in U.S. venture capital-backed companies (though Japan has contributed far more cash). Why the current wave of offshore investments in emerging U.S. technologies? One obvious reason is last October’s market crash, which discouraged the public market from investing in biotech startups. “Last year there were a lot of companies planning to go public in 1988,” says Radtke. “Many of them had second thoughts after the crash and either went back to their initial investors or started looking for a corporate partner.” According to the Securities and Exchange Commission in Washington, the number of initial public offerings during the first five months of 1988 dropped about 22% from the same 1987 period, from 880 (valued at $16.2 billion) to 691 (at $11.5 billion) —and the number of initial public offerings for biotech firms plummeted to zero (see story page 1). Throw in the weak dollar—and a seemingly bottomless supply of pounds, yen, and francs—and the result is a wide selection of U.S. startups available to foreign investors seeking long-term equity positions. But the spending spree started long before last fall. For much of the decade, many large Japanese and European companies have been under pressure from their governments to expand into rapid-growth fields. Indeed, Kim and most other Japanese food-products companies readily acknowledge their need to move beyond conventional markets into emerging biotech fields. Not only does it make good business sense to apply their expertise in the fermentation and other food science and pharmaceutical areas to new problems in biotechnology, but such ventures fall in line with the Japanese government’s goal to become the global leader in biotech nology by 1991. “Japan is particularly interested in medical technology, and recognizes that the U.S. has a real edge here,” says Esther Sharp, vice president of Burr, Egan, Deleage & Co. in Boston. In Europe, meanwhile, the thirst for new markets has led virtually every major company to nail down joint ventures or marketing agreements with small, strategically placed U.S. partners. In genetic engineering and other young technologies, “the big companies that dominate Europe recognize they’re behind the U.S., and that makes them very willing to deal,” explains Thomas G. Sanders, manager of business development for seven-year-old Chiron Corp., an Emeryville, Calif. biotech firm. That’s how Chiron became a multinational startup. Chiron’s European partners today include Sweden’s Pharmacia (recombinant pharmaceutical enzymes) and Holland’s Gist-Brocades (industrial enzymes). “Our strategy,” says Sanders, “is to get as many products in the pipeline as possible by finding partners with experience in marketing and regulatory affairs.” And the foreign giants jump at linkages with innovative, but cash-starved U.S. biotech, CAD/CAM, and artificial intelligence ventures because they can get, as Radtke puts it, “more leverage than putting the same money into their own R&D.” In exchange, adds Radtke, “They also tend to pay more for American technological know-how than a U.S. investor would, possibly because they’re not always aware of its real value.” But however big the price tag, chances are it will be one of the best buys in town. In some cases, these small firms’turn out to have a patented lock on a vital technological niche. In almost all cases, Radtke points out, they were conceived in the nation’s universities or publicly funded labs. Thus, a Japanese company that invests $5 million or $10 million could actually get $100 million worth of research. How do small high-tech U.S. entrepreneurial efforts meet large high-tech transnational corporations? Offshore investors often scout the landscape by teaming up with one or more U.S. venture capital funds. Some even launch a U.S. venture capital subsidiary; for example, Nomura Securities in New York reportedly makes about five joint-venture or merger deals a year at an average price of $5 million to $15 million each. “That puts them in a good position to watch for new opportunities,” says George Kalan, managing general partner at New Canaan, Conn.-based Orien Ventures. Entrepreneurs who want to do the initiating with a potential foreign partner, as Chiron did, usually hire a financial middleman. Both Kalan and Sharp, for instance, do some international matchmaking for U.S. clients. “Our role,” says Sharp, “is to help the U.S. company make sure it is getting a good deal.” And unless you know what you are doing, raw deals are not too hard to come by. Sharp points to one case in which a Japanese company violated the initial agreement by marketing a joint product in the U.S. To sure, working with an offshore investor has both advantages and disadvantages. On the plus side, says Amgen's Sears, “the Japanese aren’t burdened with the quarterly-report syndrome; they look at what’s best for long-term development. Moreover, Kirin has a strong process-development group and performed all the toxicology work. We learn from each other.” Chiron’s Sanders echoes that view, noting that unlike many large U.S. companies, “our European partners don’t hesitate to take the necessary risks associated with downstream payoffs. They’re comfortable with a long-range view of biotechnology.” And at seven-year-old Genetics Institute in Cambridge, Mass., Scott Greer, manager of business development, explains why the company assigned North American and Japanese EPO marketing rights to Japan’s Chugai Pharmaceutical Co. in 1985 in exchange for undisclosed funding. “At the time, we had limited resources in marketing, distribution, and regulatory affairs. We met with several companies, but Chugai offered the best technical, marketing, manufacturing, and financial package.” The downside, of course, includes the danger of giving away too much U.S. know-how. Of even greater concern, especially to a hungry startup company, is the loss of marketing revenue that could be needed to finance new growth during the 1990s—a bitter pill that many U.S. execs who bought into foreign venture capital in years past are now struggling to swallow. “Licensing your technology [to off-shore investors] is a quick hit for up-front money,” says Orien’s Kalan, “but U.S. entrepreneurs [who can afford to] are getting away from that. They want to keep as much expertise as possible.” Genetics Institute’s Greer concurs, noting that in future deals the company will retain North American marketing rights. For now, though, most companies in need of cash are willing to bite all the bullets necessary to get their products to market. And the mood is accordingly philosophical. “It’s hard to know if you made the right decision,” shrugs Greer. “If your product is a success, you’ll probably regret licensing it. But if it flops, you’ll end up looking pretty smart.” H. Garrett DeYoung is a Hingham, Mass.-based freelance writer specializing in international business and technology issues.

U.S. High Technology Gets A Foreign Accent

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