VC firm moves on after Fraud Office enquiry

01 Aug 2006 | News | Update from University of Warwick
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Merlin Biosciences has been under the cloud of an investigation by the UK's Serious Fraud Office. Now founder Chris Evans says the firm is planning new investments.

Chris Evans of Merlin Biosciences

One of Europe’s leading biotechnology investors has been under the cloud of an investigation by the UK’s Serious Fraud Office. Now Chris Evans, founder of Merlin Biosciences, says the firm is moving on with plans for new investments, raising a new fund, and finding opportunities in India.

The news that Merlin Biosciences was subject to an investigation by the UK’s Serious Fraud Office (SFO) broke in September 2005. The firm’s founder Chris Evans, one of Europe’s most prominent biotech entrepreneurs, says the enquiry has no substance and he has cooperated fully with the SFO.

Merlin Biosciences has raised three funds since it was founded in 1996


Merlin Fund (Fund I)

Merlin raised the €62 million Merlin Fund in 1997. Fund I was the first major seed fund set up to invest in early stage UK biotechnology companies, holding each investment for five to seven years. The fund is fully committed. The portfolio includes 8 companies with equity investments of €8-€10 million in each.

Merlin Biosciences Fund (Fund II)

The €247 million Merlin Biosciences Fund is one of the largest dedicated healthcare venture capital funds in Europe. Its objective is pan-European investing in mid-stage and late-stage biotechnology companies, with a bias toward marketable drugs. Its intended hold period for each investment is four to five years. Fund II closed for subscription in August 2000 and is fully committed. It has a portfolio of 21 biotechnology companies and 2 medical device companies. Its average equity investment is €8-€10 million in each company. 49% of Fund II’s investments are in UK companies and 51% are in European and US companies.

Merlin Biosciences Fund III (Fund III)

The Merlin Biosciences Fund III is a pan-European fund with an intended hold period of three to five years. Fund III completed its third close in 2004 and is making investments of up to €10 million in life science companies developing human healthcare products. The Fund has made 11 investments to date.

The firm took the decision to put investment activities on hold to devote all attention to cooperating with the investigation. “There was an internal decision to try and get the enquiries out of the way as completely and quickly as possible,” says a spokesman. “They believe they have complied with all the requirements and are now back to business.”

This will include making one or two new investments from Merlin’s Fund III, and getting going by the end of the year on raising a new fund.

Merlin was founded in 1996 and launched its first fund in 1997 to make investments in early stage biotech companies in the UK. In 2000 the firm began investing in more developed companies throughout Europe through its second fund. The third fund, Fund III completed its third close in 2004 and is making investments of up to €10 million in life science companies across Europe.

Overall, Merlin is one of the largest investors in the European bioscience market and has raised more than  €1 billion in syndicated finance for its portfolio companies. Evans told  Thomas Lau, news editor at Science|Business, about his forward plans.

Q: Is Merlin’s FUND III close to being fully committed? Is there any possibility of a new fund soon?

A: Merlin Fund III is almost fully committed, with 10 investments to date. We anticipate that there could be one or two additional investments from Fund III before we close it.

In terms of new fundraising, this is always on the agenda. Our previous funds have provided some healthy returns for our investors and they are keen to continue our successful partnership. Commencement on fundraising for Fund IV will probably start at the end of 2006.

Q: How would you characterise the investment environment in 2006 so far in Europe? And what’s your prediction for the rest of the year?

A: The investment environment so far in 2006 seems to be quite positive. Several VC firms have closed funds recently, so we are optimistic for the rest of the year.

As the IPO market and M&A activity in Europe has been quite buoyant recently, this will allow VCs to exit and provide returns. We would hope that these returns are significant enough to encourage reinvestment in the sector.

Recent major transactions involving Merlin companies

Mar 2004 Ark Therapeutics raises £55 million on London Stock Exchange

Jun 2004 Vectura raises £20 million on Alternative Investment Market

Sep 2004 Graffinity merges with MyoContract to form Santhera

Jan 2005 Amedis acquired by Paradigm

Mar 2005 Ardana raises £21 million on LSE

Mar 2005 Plethora Solutions raises £10 million on AIM

Mar 2005 Cambridge Biotechnology acquired by Biovitrum

Jun 2005 Oxford Newtech acquired by Zi Medical

Jun 2005 Microscience acquired by Emergent BioSolutions

Jul 2005 Arakis acquired by Sosei

Aug 2005 ReNeuron raises £9.5 million on AIM

Dec 2005 Morphochem acquired by Biovertis

Jan 2006 EpiCept completes reverse merger with Maxim Pharmaceuticals to list on Nasdaq

Feb 2006 Intercytex raises £15 million on AIM

Mar 2006 Cyclacel completes reverse merger with Xcyte to list on Nasdaq

Merlin has been very successful in the past year or so, with several IPOs, M&A deals and exits. This includes the IPOs of Intercytex, Vectura and Plethora; and the sale of Arakis to Sosei and of Cambridge Biotechnology to Biovitrum.

Q: What criteria does Merlin have for new investments in Europe?

A: We look for companies that are developing groundbreaking products, or technology that offers a significant benefit compared to anything that is currently available. The second key ingredient to the mix is people. We look for strong management, particularly with a proven track record. We have a long, successful track record and often uncover opportunities in areas overlooked by other VCs.

Lately, our focus has increasingly been on medtech, specialty pharma and unique healthcare companies, rather than just pure biotech. In Europe, these types of companies offer a much better risk/reward ratio.

Q: How much money does Merlin typically invest in these companies?

A: We do not disclose precise amounts that we invest in companies but are looking to invest up to €10 million in total in companies from Fund III. We work closely with management to ensure that overall financing needs are met and often bring co-investors to the table.

Q: What is Merlin’s view on university spin-out companies? Is Merlin supportive of them?

A: Merlin has always traditionally been a supporter of university spin-outs. In fact, 20 of our current portfolio have their origins as university spin outs.

Universities have finally come to realise the inherent value of their research and have made significant progress in trying to reap the rewards. However, in doing so, perhaps too many companies, with too little to offer, were created too quickly.

After all, once the company has been formed, it faces the same financing challenges that all companies face. We have found that the best, most successful spin outs have been those with a strong management and boards that set and implemented a solid business strategy from the start.

Q: Is Merlin looking to Asia for opportunities?  It seems like that’s where all the hype is coming from.

A: We are continuously looking to expand our horizons. Yes, there certainly has been a lot of hype about opportunities in Asia, particularly China and India. Again, we tend not to follow what is “trendy” at a particular time and seek out our own path. However, I can say that we will likely be pursuing specific opportunities in India during 2007.

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