Strategic Overview

Innovations is developing a long-term sustainable position with the Group reporting a profit of £5.3 million and realising £3.9 million net cash from the sale of equity holdings. The Group closed the year with cash and short term liquidity investments of £30.7 million and a strong balance sheet with a broad portfolio of holdings that have the potential to deliver good returns.

In October 2008, following the change in the economic climate the Board implemented a detailed review of the Group’s portfolio and business activity. It reflected on the strength of the pipeline, the Group’s strong cash resources and proven ability to attract management talent. The outcome was that Innovations’ strategic focus is on a select group of companies where the ingredients of management, technology and market opportunity, can be matched with funding to ensure the optimum chance of success. The Group is now making fewer but larger investments in companies and focusing on areas where higher returns are possible. The Group is also increasingly active in managing its portfolio, leading investment rounds and working closely with founder entrepreneurs.

As a result of this focus, the top six companies, each with considerable potential, have made good progress. Furthermore, in the next 10 companies we have put together combinations of experienced management teams and ground breaking technology and promising developments have materialised. The Group considers that the quality of each company’s management is pivotal to success and this year has attracted eight new chairman and six chief executives into the businesses.

This year the first major exit was achieved with the sale of Thiakis to Wyeth Pharmaceuticals. In addition there were several smaller exits. The Group’s financial model aims to complete at least one large exit every year as well as a number of smaller ones.

Throughout the economic downturn, the Group continued to create new companies and provide seed funding. These companies were closely incubated in a capital efficient manner using the offices and facilities of the Imperial Incubator. The Group has maintained a high quality threshold level.

The Group’s licensing activity has continued with the same focus on technologies that have the potential for scale and are clearly meeting industrial needs.

As part of the strategic review, the Group’s cost base was cut by an annualised amount of £0.8million. The Group has also implemented a tight cost control and cash management approach in its portfolio companies.

Realisations

The Group’s largest single transaction was the disposal of its 23.7% holding in Thiakis. This business was sold to Wyeth Pharmaceuticals in December 2008 for a potential price of £99.4 million, subject to certain milestones. The initial payment was £19.6 million, of which the Group received £2.9 million, net of revenue-sharing payments to Imperial College London. If Thiakis meets its performance targets, the deal could generate up to £16.1 million for the Group and £6.1 million in revenue share for Imperial College London and other contributors to the intellectual property.

Thiakis is developing treatments for obesity, including the amelioration of diseases associated with excess weight such as type 2 diabetes and cardiovascular disease. It is a good example of Innovations’ business model, the Group having helped founders Professor Stephen Bloom and Dr John Burt to create the company, and then supporting it with £1.5 million investment as well as licensing certain intellectual property rights to it.

Other notable transactions included the sale of Heliswirl tubing technology to the French company Technip and the trade sale of Inforsense, which realised £0.9 million for the Group.

Licensing

Innovations generated £1.2 million (2008: £0.9 million) of royalties, a 33% increase from the portfolio of licences and IP agreements. Although the economic climate has slowed down licensing activity with many partners being unwilling to pay substantial up-front fees, the subsequent royalty component from licence agreements has a much greater impact than the receipt of up-front payments. The priority is to find the right partners for technologies and conclude agreements with them.

The Group has been successful in securing (in partnership with Imperial College London) proof-of-concept and development funding from a variety of grant and government sources including Wellcome Trust, MRC and WRAP. This funding has helped to progress a number of ideas closer to commercialisation, so enhancing the chance of successful licensing.

New intellectual property transactions signed included those to:

  • Astellas - the Group entered into a licence agreement with the second largest Japanese pharmaceutical company, for software code used for modelling how drug molecules bind to receptors inside the body.
  • Servier - the Group licensed a clinical trials database for high blood pressure in the elderly to Servier, the second largest French pharmaceuticals company. High blood pressure is very common, especially in elderly people.
  • PSE - the Group licensed a virtual modelling tool allowing engineers to predict the properties of liquids and gases to considerably speed up the design of new process plants.
  • Syngene - the Group supplied a strain of bacteria for development of a novel class of antibacterial substances that do not kill the bacteria but disarm them and render them harmless.
  • Novartis Institutes for Biomedical Research - The Group licensed a kidney disease related research tool.
  • The Group entered into a licence with a major chemical company for the separation of single-walled carbon nanotubes (SWNTs) based on their electrical properties.
  • The Group signed an option agreement with an oil and gas company for tube risers used for field exploration.

There have also been a number of additional IP related transactions with the Group’s spin-out companies. For example with BioCeramic Therapeutics, Membrane Extraction Technology, MyAction, CVIS, Photobiotics, Navion, Cortexica, Deltadot, Medermica and Novacem.

Innovations’ royalty income is expected to be modest in the medium term. However, royalty income could increase substantially if, for example, a major therapeutic product, such as the Thiakis obesity drug, should prove a notable success. The Thiakis program could result in royalties as early as 2014.

Investments

The Group invested £14.4m across 20 companies, including:

  • In February, leading a £10.0 million fund raising for Nexeon with the Group investing £4 million alongside Invesco Perpetual and Partnerships UK, resulting in the Group holding a 35.0% stake in the company. Nexeon develops high-performance silicon anodes for lithium-ion batteries.
  • In January and July, increased its stake in OSspray to 40.0% by investing a further £1.0 million, alongside NESTA and The Capital Fund. OSspray has developed a new dental technology application, using bioactive glass as a desensitising and cleaning agent for air polishing teeth.
  • In April and July, investing a further £2.5 million in Veryan Medical to increase the Group’s stake to 37.6%. The additional investment will fund pivotal trials of Veryan’s stent technology which is designed to reduce the formation of disease in arteries and be stronger than existing stents
  • In September 2008, investing £1 million in Evo Electric. The Group’s stake is 37.6%. Evo Electric develops and manufactures advanced electric machines, hybrid drive trains and generators for a wide range of transportation and power.
  • In June, making a further investment of £0.9 million in Respivert, which is developing a new generation of inhaled drugs for treatment of lung disease. In total, Respivert raised £6 million of second-tranche funding, with Advent, Fidelity and Schroder Life Science Ventures investing alongside the Group.

Other companies with significant funding rounds supported by the Group included Acrobot (the Group invested £0.2 million taking its stake to 19.6%), CellMedica (£0.4 million and 32.1%), Quantasol (£1.0 million and 37.8%), Myotec (£0.6 million and 38.8%), and Molecular Vision (£1.0 million and 57.2%).

Management of portfolio

There are 80 companies in the Group’s portfolio. It is well segmented and appropriately resourced with three types of companies: accelerated growth, organic growth and smaller investments.

There are 31 companies termed “accelerated growth”, of which 20 are post-Series A funding (12 life science and eight engineering) and 11 are pre-Series A funding (five life science and six engineering). These are businesses expected to follow an equity funded/venture capital type of financing strategy with a start up phase of investment losses whilst development work is carried out, but with the potential for significant upside. The Group plays an active role in these companies, often being represented on the Board, and particularly encourages the development of a high-calibre management team.

At the start of the year, facing the impact on co-investors of the global recession and liquidity restrictions, the investment policy for these “accelerated growth” companies was reviewed. The portfolio was segmented based on the stage of development of the company, its financing requirements, strength of the management team, the technology and market potential and likely time to break-even or exit. Significant time has been invested in ensuring that those companies reaching a more mature stage have top quality boards and management teams and are funded to deliver.

Seventeen company holdings are termed “organic growth” – growing from their own resources, with a flexible approach to funding and preferring to generate revenue from customers (often through a mixed product and service business model) than to raise external equity capital. They may also secure commercial partners and grants to keep external capital to a minimum. These companies may adapt their funding strategy at a later stage. The Group provides the organic growth companies with access to its industrial network and an efficient company formation process.

Thirty-two holdings are termed “smaller assets” and represent investments that are small and/or in established businesses where no further investment is expected.

Portfolio Operational Update

Several portfolio companies in the accelerated growth segment and closely supported by the Group, made significant operational progress during the year. These companies are now well funded, with quality management teams in place, and are rapidly maturing as standalone businesses. The following notable events occurred during the year:

  • CellMedica, a cell therapy company working on new techniques harnessing and enhancing the power of the immune system to fight human disease, commenced its Cytomegalovirus impact clinical study, a large clinical trial funded by the Wellcome Trust.
  • Circassia, a biopharmaceutical company developing medicines to control immune system responses, initiated three Phase-2 trials, two for its cat allergy product and one for ragweed allergy.
  • Molecular Vision, a company developing a low-cost diagnostic device for use in the doctor’s surgery and in the home, appointed Peter Woodford as non-executive chairman. Peter was previously at Roche Diagnostics.
  • Nexeon proved the viability of its battery technology in terms of capacity and cycle life. It also established a fully operational pilot plant producing sufficient material to produce high daily volumes of cells. Following a round of funding in February (see above), the company recruited Scott Brown as CEO with assistance from Innovations. Scott previously held senior management roles at Cambridge Display Technology and Sumation.
  • OSspray signed distribution arrangements for its Sylc dental whitening product with Optident for the UK and with White Cross GmbH in Germany.
  • Polytherics, a precision chemistry company for optimisation of proteins as biopharmaceutical products, signed an exclusive licence with Celtic Pharma to develop and commercialise its first novel biotherapeutic, and achieved a European patent grant for its core technology platform.

Detailed case studies on a selection of companies are available on our investor relations website at http://www.imperialinnovations.co.uk/investor

Incubation

The Group continues to refine and enhance its approach to the creation of New Ventures. In addition to being offered facilities in the Group’s “incubator”, New Ventures are actively managed as “start up projects”, typically for a 12-18 month period.

The Technology team investigates the technology and IP opportunities for new companies, while the New Ventures team looks at routes to market, competitive positioning and sustainability. The formal launch of a new company occurs only when the Group is confident that seed funding will be available and that the right management team is in place. The effect of this more thorough approach is to reduce the number of newly formed companies but significantly increase their probability of success. The Group is capital efficient with its New Ventures, using grants to get through proof of concept stage, stretching seed funding by managing costs and leveraging grant funding sources. However, when businesses are ready for accelerated growth then the Group does not hold back from fully capitalising them.

This year six companies were seed funded: Cortexica Vision Systems, Myotec, Navion, Novacem, Plaxica and Smart Surgical Appliances. The New Ventures team has concentrated on de-risking and building value in these companies, working towards demonstration of technologies, product development and marketing to customers and partners. For example:

  • Novacem, a company aiming to combat global warming with carbon-negative cement, closed a £1 million funding round with the London Technology Fund and the Royal Society as co-investors.
  • Cortexica, which is developing technology to replicate human vision, launched its first product, BrandTrack, to monitor the appearance of logos and brands on television and video streams.

During the year 31 company projects were incubated. These projects were selected from three sources: invention disclosures during the year (328 inventions were identified), entrepreneurs in residence, and identification of market opportunities through our industrial and management network.

Pipeline Development

The Group continues to develop and comercialise a pipeline of promising technologies, and to support them with managerial and commercial expertise. Imperial College London, led by Sir Roy Anderson, has provided a unique and steady source of quality deal flow. The support the Group receives from the College’s senior management and departments is one of its unique strengths.

The Group has also successfully identified and developed technologies emanating from Imperial College Healthcare NHS Trust (combining Charing Cross, St Marys and Hammersmith hospitals) which together with Imperial College’s Medical School combines to form one of the UK’s first 5 Academic Health Science Centres. The close association between the Group, Imperial College London and the Trust enables the Group to accelerate the adoption of new technologies by the healthcare system.

Beyond the College, the Group’s Commercialisation Services team manages an incubation contract for the Waste Resources and Action Programme (WRAP), and contracts with the National Physical Laboratories and Cranfield University on the commercialisation of inventions. This provides a focus for engaging with partners and brokering technologies.

Internationally, i2india, co-founded with entrepreneur Christopher Mathias, the business’s management and TATA sons, has now established its operations in Bangalore and itself has a pipeline of technologies from various Indian research organisations. This gives the Group exposure and access to the Indian market as potential customers and partners for its technologies.

Summary

The year was one of good performance and real progress substantiating the business model. At the same time the portfolio efforts have been focused on more efficient commercialisation of high-value technologies. The Group is well positioned to deliver further exits from the portfolio.

Susan Searle
Chief Executive Officer