iSight - Ambition in healthcare

Expanding horizons

This year 3i’s Venture Capital team has completed a number of significant landmark deals – broadening its focus in healthcare and investing in businesses with the ambition of establishing leadership in their own markets.

In March 2007 3i co-led the largest healthcare fund raising there has been in the European venture capital sector when it backed the significant expansion of specialty pharmaceuticals firm EUSA Pharma. The $175 million deal represented a key milestone for 3i as it develops the focus of the majority of its investment business away from pure research and development-based investment to larger commercially-driven deals.

“We believe we’ve found a sweet spot in the market at the moment, combining deep market knowledge and networks, with an investment capacity that can help drive organic revenue and transactional growth. We’re still investing at the early stage but in that segment we are really looking for exceptional business opportunities and teams to work with,” says 3i partner Andrew Fraser.



An important part of the 3i team’s efforts are devoted to a strategy based on identifying a niche and opportunity in the market, then working with a strong individual manager or team to help build a business within that niche.

The 3i team will invest up to $75 million per deal across the lifetime of an individual company. “We’ve broadly followed that strategy over the last several years but this year we’ve really stepped up our activities,” says Fraser. While there are several reasons for the change, one predominates: “Healthcare companies need to raise significant amounts of capital, and they have to do that from investors who understand and are internationally networked into the dynamics of the sector. We think that 3i is very well positioned to help bring these aspects to the businesses that we work with,” he says.

Several of 3i’s most recent deals have followed a similar model, which is to build a sales and marketing dominated business rather than one based simply upon developing new drugs or devices. The deals with specialty pharmaceutical firm EUSA Pharma, in March this year, and with Healthcare Brands International (HBI), Small Bone Innovations (SBI) and Zonare Medical Systems last year, are pertinent examples – each firm is a commercially-driven business targeting a particular niche.

In the case of EUSA it was Bryan Morton’s ambition to build a transatlantic business selling pharmaceutical products to a select group of specialists in the fields of oncology,
pain and critical care. Bryan Morton, EUSA’s chief executive, had a strong managerial and entrepreneurial reputation and had assembled a business team capable of successfully carrying out that strategy, says Fraser. Morton was previously CEO of Zeneus Pharma, where he purchased Elan’s European business for $110 million, two years later selling the restructured and refocused business for $360 million to Cephalon in 2005.



With California-based Zonare, a leader in compact ultrasound systems, 3i led a major $30 million financing round in 2006 to provide capital for the market launch of Zonare’s z.one product. Since its launch, hundreds of Zonare’s systems have been installed and the company is one of the fastest growing ultrasound businesses in the world. In 2007 Zonare received the Frost & Sullivan Medical Imaging Product Innovation of the Year Award.

In 2006 SBI in the US raised $44 million, the largest venture capital investment ever recorded in the field of orthopaedic devices, to support an acquisitive buy and build strategy. The financing, which was co-led by 3i, underpinned SBI’s focus on the niche markets of the orthopaedic care of arthritis and trauma in small bones and joints.

There are plenty of opportunities, says Fraser, “EUSA, for example, has just made its third acquisition that further expands its product portfolio and sales capability across
Europe. HBI will launch its second product across Europe this winter. The team are finding many examples of OTC brands in the market that are only sold in one country
in Europe, which have the potential for marketing throughout the whole region. Or a brand that is not sold in Europe at all, perhaps just in the US.”

The volatility of early stage assets that has marked recent years, along with the ebbs and flows in the European capital markets for biotechnology are some of the major reasons for 3i’s shift in emphasis to later stage deals, says Fraser. “Across the industry, particularly in Europe, 5 to 10 year historic returns in this asset class haven’t been as hoped for. Instead we’ve been looking to invest in one or two early stage medical device deals each year, with significant clinical need and high market potential.” 3i’s investments in Endosense and Ulthera would be role model examples of this kind of deal.

It is, however, the late stage strategy of building businesses that best plays to 3i’s strengths in terms of sector knowledge and financial backing, says Fraser. “The combination of understanding the sector and being able to deploy a high level of capital is key.”

3i can also bring its international networks to bear. “We’re certainly trying to play that transatlantic card,” says Fraser. Both USbased Zonare and SBI had strong technology
and shareholder links with Europe. Although EUSA and HBI are currently centred on Europe, both have aspirations in the US. One thing that differentiates 3i, he believes, is “a strong depth of execution capability and experience”. The $175 million EUSA fund raising and its recent acquisition of French firm Opi, were both put together very  quickly. The transactions were completed – from start to finish – within seven weeks. In that time 3i were also instrumental in helping to bring other investors into the syndicate. Since then 3i have worked closely with EUSA and HBI’s management, looking at further potential acquisitions and introducing them to companies or products that they might be interested in.

The 3i team works with a network of trusted contacts to help identify new investment opportunities. ”We’d known Barry Clare through 3i’s Chairman Board, where he
worked with us as chairman of German generics business Betapharm, successfully sold to Dr Reddy’s in 2006 for over £300 million,” says Fraser. Clare had an enviable
track record. He had run a £600 million revenue business in the form of Boots Healthcare International and brought with him a team of seasoned managers to HBI. Although there had not been any business relationship previously between 3i and Bryan Morton, the EUSA deal was introduced through former Shire head and EUSA chairman, Rolf Stahel (3i had invested in Shire). “3i were also the largest investor in the recently IPO’d Italian biotech firm Newron Pharmaceuticals, where Stahel is chairman,” says Fraser.

There is now time for new projects and the search is on for a new sector to explore. Where that might be is not yet quite clear. Again the intention would be to start building a business, with “a weighting towards the commercial end of the spectrum,” through acquisition or in-licensing, speculates Fraser. “We have just started to work with Peter Chambré, previously CEO of Cambridge Antibody Technology bought by AstraZeneca for $1.4 billion last year. As a team it’s exciting to pool our resource and skill set with individuals like that.”

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