Archive | October, 2013

Device Companies Set Their Sights on China

31 Oct

By Danielle Silva, VP of Business Development, LSN

In recent time, many emerging life science companies have begun to turn towards emerging markets for both capital and potential distribution opportunities. China has been a central figure in the discussion, and rightfully so: the nation boasts a large amount of new wealth (prospective investors), a lack of domestic innovation and a rapidly growing middle class requiring better healthcare (demand), and a government with the capacity to selectively accelerate industries via central planning (infrastructure). Though China presents opportunities across the board, it has become particularly attractive to a growing number of medical device companies.

A primary reason for this is that the demand for devices in China will almost certainly outpace developed regions like the US and Europe in coming years. This is a reflection of the increasing incomes of the emergent middle class (who want quality care and can pay for it) and the stated intent of the Chinese government to improve access to care. More hospitals and more consumer demand for care translates into a huge opportunity for companies and investors alike.

More importantly, China’s health system is developing in sync with several major device innovations that could be solutions for major diseases in the Chinese market. One example is the high rate of diabetes in China intersecting the proliferation of home-use devices such as glucose monitoring systems and insulin patch pumps. For Chinese consumers, this translates to time and travel reduction (and potentially lower costs), while for the Chinese healthcare system it means reduced strain on hospitals, clinics, and doctors.

However, there are several items that entrepreneurs should consider aside from the obvious cultural and language gaps: one primary challenge for companies looking towards China is the protection of IP in a market that is notorious for a lack of legal enforcement around technology. A strategy to protect against IP theft must be in place to enter the Chinese marketplace. Another major issue is price. Companies will likely need to follow a low-cost strategy to effectively capture the large opportunity, and it is a question of making the economics work. This puts cost reduction-oriented devices at a major strategic advantage, and will likely make them the subject of a great deal of investor interest. At this point, the full potential of the Chinese market has yet to be recognized, but one thing is sure – the opportunity is huge.

Microbiome – A New Class of Therapy

31 Oct

By Max Klietmann, VP of Marketing, LSN

There has been a lot of buzz in the translational research arena as of late on the subject of microbiome technology. This field is still emerging, but much of the data coming out of academic research shows that this could be one of the most disruptive developments in the life science space in recent time. The concept changes the way that we look at the human body – not as a single entity, but as a community of bacteria that reside in (for example) the bowels. With cheap genomic testing, it could soon become feasible to create custom diagnostics and therapies relevant to the specific bacterial populations within a patient.

This technology is being referred to as metagenomics – essentially, the mapping of a bacterial community’s collective genome within a single patient’s microbiome. The most obvious consequence of the commercialization of this technology is the massive expansion of potential target sites for therapeutics. I’ve anecdotally heard estimates that this could potentially double the potential therapeutic angles available for pharmaceutical compounds.

The implications are huge for many major disease areas. Of course there is immediate relevance to IBD and digestive ailments, but there is also the potential for hyper-targeted antibiotics which could redefine the treatment of infectious diseases, and in turn help to reduce the risk of MRSA and other antibiotic-resistant disease outbreaks. Type II diabetes and cancers are also indication areas that could benefit greatly from this new field.

This research is still in its early stages, and no one really knows exactly what is going to emerge. Is this be another fad, or could it be the next monoclonal antibody and revolutionize our industry? The fallout is yet to come, but there is no question that a lot of potential investors, pharma, and translational researchers are excited and interested in seeing what happens next.

Capital from the Crowd

31 Oct

By Lucy Parkinson, Research Analyst, LSN

LSN has been diligently tracking the evolution of the crowdfunding story as the JOBS act passes through the regulatory gauntlet. On October 23rd, the SEC announced interim rules for Title III of the JOBS Act, which covers securities crowdfunding. In summary, the proposed rules are as follows:

  • A company may raise a maximum of $1 million via crowdfunding in any 12-month period.
  • An individual may invest a maximum 10 percent of annual income or net worth (income greater than $100,000 anually) or either $2,000 or 5 percent of annual income or net worth, whichever is greater (income less than $100,000 anually). This is a total annual limit for each individual investor.
  • Equity crowdfunding may only be conducted via a registered broker-dealer or registered “funding portal.”
  • Crowdfunding requires an SEC filing 21 days prior to first sale, and requires scaled financial disclosure, including audited financial statements for raises of more than $500,000.
  • Annual reports and possibly more frequent reports (depending on final SEC rulemaking) must be filed with the SEC by any company that completes a crowdfunding round.

So, emerging life science companies could stand to benefit from this new avenue of funding, but it’s shaping up to be both narrowly limited and highly regulated.

In addition to creating opportunities for millions of new potential investors, the new legislation has also introduced a new channel for this capital – the funding portal. Registered brokers will be able to act as funding portals, but we may see many new entities taking advantage of the new, less costly option of registering with FINRA as a funding portal. The new regulations state that a company can only crowdfund via one broker or funding portal each year, and as these portals tend to charge fundraising companies for use (typically by charging either a listing subscription or per-transaction fees) while letting investors use the sites for free, we should see intense competition between funding portals to sign companies up as users.  The portals will list investment opportunities and act as issuers of stock for liability purposes, but aren’t allowed to offer advice to investors about which companies to back, nor are they permitted to invest in the companies they list. (1)

Also, as mentioned above, the cap on fundraising is $1 million per year. That’s a hard limit. $1 million in new capital would be a boon to early-stage life science development looking to get of the ground, but in the highly capital intensive later stages, it’s unlikely to be a cure-all to fundraising challenges; a million dollars won’t pay for a Phase III trial. In addition, there is the regulatory/compliance challenge of dealing with potentially hundreds of new concerned investors who have to be provided with disclosures and regular financial statements regarding your firm.  This is a huge cost burden for a startup company to bear. And as crowdfunded equity can only be resold to accredited investors (an unaccredited crowdfunder can’t sell their stock to another unaccredited investor while the company remains privately held), these are likely to be long-term relationships unless the early stage crowdfunders are bought out by an institutional-type investor down the line.

The life science sector ought to fare better than most in the new world of crowdfunding; many people will want to invest in a cure for a disease that’s touched themselves or their families, and many more would like the opportunity to try out direct investing with a low barrier to entry and high potential returns.  But the reality of the life science industry means that many of these nascent cures will fail to reach the market, and we can’t know how new investors will react to these inevitable losses. This could be the start of a new era, but the proof will be in the pudding.

(1) Crowdfunding Regulations Summary by Kevin Laws of AngelList

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