Next Phase Newsletter

By Jacob Setterbo, Director of Grants, HIREtech

Startups can now benefit from both grants and R&D Tax Credits

The R&D Tax Credit was created by Congress to encourage R&D investment within the United States. In the past, however, R&D credits were only available to companies that are profitable, as companies that have yet to turn a profit had no tax burden to be reduced by the credits. It seemed unfair that life science startups, which primarily perform R&D but typically pay no income tax for years, could not benefit from the R&D Tax Credit (FIGURE 1).

FIGURE 1: In the 2015 tax year, there is limited eligibility for the R&D Tax Credit.

This disparity between profitable companies and startups has finally been resolved, and startups can finally benefit from R&D Tax Credits. The gap was closed by the PATH Act, signed on December 18, 2015 (FIGURE 2). In addition to making the R&D Tax Credit permanent and allowing it to be applied against the Alternative Minimum Tax (AMT), the PATH Act allows startups to use the R&D Tax Credit to offset payroll taxes for up to 5 years. This change is particularly beneficial for life science startups, because it often takes several years before their income exceeds their expenses. Plus, everyone has to pay payroll taxes!

FIGURE 2: In the 2016 tax year and beyond, even startups are eligible for the R&D Tax Credit.

Grants and tax credits are similar in that they are non-dilutive (you don’t lose equity) and you don’t have to pay them back. Their main difference is that grants are forward-looking whereas tax credits are backward-looking. For grants, you have to convince reviewers (often professors) that your proposed future project is significant, innovative, and will have a great impact on public health. The national “success rate” for SBIR/STTRs is typically somewhere around 15-20%. For tax credits, you just have to be able to prove that you performed R&D the previous year. While you must confirm your eligibility, understand what is considered “qualified research expenditures,” and know how to calculate the credit, I can assure you that the “success rate” for R&D Tax Credits is near 100% if you follow the rules.

As a life science entrepreneur, it is in your best interest to seek various funding sources. Grants are an excellent source of non-dilutive funding that can push your project forward, but, as noted on www.sbir.gov, they are “highly competitive.” Fortunately for startups, the new R&D Tax Credit rules allow you to offset your payroll taxes if you perform R&D in 2016. Like grants, these tax credits are non-dilutive, but, unlike grants, they are nearly a sure bet when calculated correctly.

Jacob will be presenting an upcoming RESI Workshop on R&D Tax Credits at RESI@TMCx in Houston on April 11. View the full RESI agenda here.

By Dennis Ford, Founder & CEO, LSN

The challenge with life science partnering and investor conferences is that it is extremely difficult to recruit investors and partners. At LSN, we often say that we are “in the middle of the middle of the middle”. We have 8 researchers who have been in dialogue with the global early stage investor community for 4 years as a result of curating the LSN Investor Platform. Additionally, LSN has 8 business development staff who have been driving relationships with scientist entrepreneurs, Pharma players and service providers. These two outreach teams have created a loosely affiliated global network of the key buyers and sellers. LSN founded the Redefining Early Stage Investments conference (RESI) because we believed we could bring a greater quantity of early stage investors than we’d seen at other events. At many events, it’s easier to meet later stage players: LSN staff attended events billed as partnering conferences that produced lots of phase III partners but not a lot for preclinical, phase I and phase II. Early stage is where LSN found its niche, and that’s why RESI @ JPM attracted 350 investor and partner registrations out of a total of almost 800 registrants. LSN knows what it takes to bring this many early stage life science players under one roof.

LSN has broken the code of delivering investors to our early stage investor conferences because we pour a huge amount of human resources into recruiting investors to RESI. LSN Research staff focus their efforts into personally recruiting investors attendees to each event. LSN can do this because as a company we interact with all the right players as part of our everyday working environment. The 16 early stage investor panels are a core part of every RESI, and serve as proof of what we can deliver. In the panel sessions, investors explain to the audience of fundraising CEOs how their investor silo works, and cover the do’s and don’ts related to how they find, vet and engage in dialogue with investment candidates. The panels provide information and education to RESI’s audience. LSN’s unique position in the early stage life science world gives us access to high level speakers with deep expertise to share.

Take a look at the RESI@TMCx agenda for an overview of the next event at the Texas Medical Center accelerator, April 11, in Houston Texas.

Of course, investors and strategic players will only attend a partnering event if they’re confident that they’ll meet high quality life science startups. So on the other side of the table, the RESI Innovation Challenge provides investors with access to exciting breakthrough technologies. LSN invites fundraising CEOs and scientist-entrepreneurs to submit their technologies to the Innovation Challenge. Typically, over 100 companies apply for 30 spots; LSN’s scientific review board “stack ranks” the applicants using a proprietary algorithm that LSN has developed which determines how investable a company is from the science, market, team, data and competitive landscape.

Bringing the best of the early stage investor world and the best of the life science startup world together takes an intensive effort, but that’s what makes RESI such a powerful venue for dialogue. If you’d like to join us for RESI@TMCx on April 11th,  you can register online now.

By Lucy Parkinson, Director of Research, LSN

Here’s a situation we’ve seen many times. An LSN client finds that they’re a very close fit for an investor’s mandate, and reaches out to that investor to start a dialogue. The investor responds, and over a couple of meetings or phone calls a relationship starts to develop. However, in spite of the mutual interest from both the startup and the investor, the timing isn’t right. Perhaps your company is too early to fit the investor’s criteria, or the investor is currently focused on exiting one of their existing portfolio companies. Either way, they’re interested in you, but can’t allocate right now.

So what happens next?

Sad to say, many startups would let this situation become a missed opportunity. Even if an investor encouraged the company to touch base again when a particular milestone was reached, this crucial information may slip through the cracks in the company’s fundraising architecture. The missing element in these cases is relationship management.

LSN strongly encourages our clients to implement a customer relationship management (CRM) system to keep track of every contact they make with potential investors and strategic partners. CRM systems are typically cloud-based, accessible from anywhere, and inexpensive (about $5-25/month). We recommend Salesforce.com (LSN has no relationship with Salesforce), but there are many options out there. What’s key is that the whole fundraising team commits to using CRM as a hub for all the information and important dates and progress markers for the entire fundraising campaign.

As the term ‘relationship management’ indicates, allocations don’t happen spontaneously; even if you’ve spoken to an investor who’s a perfect fit on a technical level, it takes months of relationship building to reach the allocation. It’s important to note down every phone call, email and face to face meeting; if you had a positive dialogue with an investor but haven’t checked in with them in a while, it’s probably time to touch base again with an update on your company’s progress.

Consider again the aforementioned scenario; a very interested investor who simply can’t allocate right now. If you use your CRM system to make a note of the investor’s conditions and to set a follow-up date for a future touch-base, you can keep the relationship progressing. For example, if the investor wants to see the final results of a certain study, you might touch base a couple of times while the study is ongoing, then request another meeting once the study is complete. If you’re raising an A-round and speak to an interested investor that can only invest in B or C rounds, you could provide them with regular progress updates as you bring together the A-round, then circle back for a meeting once the B-round begins.

It’s these deferred, delayed and slow-to-develop opportunities that prove how vital it is to manage your campaign professionally. The most important investor relationships often take some time to reach fruition, and without CRM, those vital opportunities can be lost.

By Dennis Ford, Founder & CEO, LSN

Sourcing quality assets is the key conundrum for life science investors. Using the LSN Company Platform, investors and strategic players can get visibility on 30,000 global early stage products. Many pharma scouting groups use this and other data tools to identify assets and vet the competitive landscape. The LSN Company Platform is a compelling tool, and LSN has also developed other tools and tactics to surface compelling life science technologies.

LSN’s quarterly Redefining Early Stage Investments (RESI) Conference series features the RESI Innovation Challenge, which provides LSN a unique view into hundreds of companies every year that are actively seeking capital. These applicants virtually qualify themselves as being in the game, as the first great metric for investment is whether the team has decided to raise funds and can adequately pitch their product.

Additionally, R&D facilities and incubators can be important strategic partners when it comes to sourcing technologies. Two of the RESI conferences are held at two of the largest R&D centers in North America:

• Texas Medical Center’s new accelerator, TMCx, couples the resources of the world’s largest medical center with the innovative spark of entrepreneurs. TMCx facilitates the development of early stage digital health and medical device companies and, unlike most accelerators, does not charge membership fees or require equity from companies.
• MaRS Discovery District in Toronto is one of the world’s largest urban innovation hubs. MaRS cultivates high-impact ventures and equips innovators to drive economic and societal prosperity. MaRS provides expert advice and market research, and makes connections to talent, customers, and capital. MaRS startup ventures have created 6,500 jobs, and, in the last three years alone, they have raised $1 billion in capital and generated $500 million in revenue.

The other two RESI conferences are held in Boston and San Francisco; these two life science hubs also give us great opportunities to connect with key early stage players.

At the end of the day, sourcing technology involves two facets: you must be able to ferret out what you are seeking, but you must also create a beacon that attracts the technology you seek to you . High visibility within the life science investment world can make it a lot easier for an investor or pharma firm to find high quality assets. A multipronged approach is the best path to investment success.

By Lucy Parkinson, Director of Research, LSN

On June 23rd, LSN will partner with MaRS Discovery District to create the first international Redefining Early Stage Investments event, RESI On MaRS in Toronto.

With MaRS on our horizon, it’s time for Next Phase to take a look at where Canada’s life science strengths lie.  Using the LSN Company Platform, we took a look at a sample of almost 500 therapeutic assets under development in Canada.

While we found life science innovation in almost every corner of Canada, the startup companies in our sample were concentrated in Ontario, Quebec and British Columbia.  These assets were spread across the full range of developmental phases, but with a noticeable skew toward early stage assets.  As assets mature through the development process, it’s possible that some are acquired by pharma companies based outside Canada before entering Phase III.

In terms of indication areas, oncology is by far the largest field.  Canada also has significant pipelines in CNS disorders, infectious diseases, and metabolic diseases.

One question we often get asked at LSN is whether investors that are interested in US deals will also consider opportunities in Canada.  LSN Research specifically asks this question when we reach out to investors.  After interviewing hundreds of investors actively looking for opportunities in the US, what we’ve found is that over 50% will also look at startups in Canada.  This includes far-reaching global investors, US-based investors who are keeping an eye to the north, and also local Canadian investors who look at both Canadian and US opportunities.  (There’s also a few early stage investors who are focused on Canada alone).  Let’s take a look at the types of investors who are open to dealflow from Canada:

Note that as many major pharma or medtech firms looking at Canada as there are venture capital firms; these strategic players are typically global players, interested in cutting edge technology wherever it can be found.  With RESI on MaRS, we hope to turn the eyes of this full spectrum of investors on to innnovation in Canada.

By Christine A. Wu, Research Analyst, LSN

On January 12, LSN gathered a panel of large medical device manufacturers at the RESI@JPM San Francisco Conference. Moderated by Greg Fleming, Investment Director of ALIAD, panelists from Becton Dickinson, Siemens Venture Capital, Abbott Ventures, and Johnson & Johnson discussed how they evaluate and engage with early stage medtech companies, their strategic approach to working with companies, and how early stage companies should approach them.

       For all medtech companies, here is your final advice:

1. Have an understanding of what the strategic firm is looking for. Albert Lauritano (Director of Business Development, Becton Dickinson) stressed the necessity of doing your homework, while Bill Welch (Senior Director, Abbott Ventures) further advised that “you need to help make it apparent to us how you see [your product] fitting in.”

2. Work through the accelerators and innovation centers. Lauritano and Charles Bridges (VP, J&J) emphasized that reaching out to them through their centers may be the best way to determine quickly whether the technology matches their interests. Furthermore, these accelerators may be an avenue of great support—both strategically and financially—for the entrepreneur. Often, there are cross-expertise transfers, where if you have the idea but not the manufacturing facilities, the center can provide for your needs, allowing both you and the center to benefit synergistically. “If you have a company and you want a place to target and grow it,” Bridges explained, “[the innovation center] is a great opportunity.”

3. Summarize the differentiating key elements: the team, the IP, the business model, and the regulatory pathway. All panelists stressed the importance of covering these key components in 4-5 bullet points in your pitch deck and material. According to Fleming, these points should answer why the team is well suited to develop the product; what the business model is; what IP and IP potential you have; and the overall regulatory process. “I should very quickly find out what you do and how,” Andrew Jay (Investment Partner of Siemens Venture Capital) noted. “Make it relatively short and to the point,” Bridges added.

4. Have a good website. “70-80% of people who are thinking about a company check out their website,” stated Jay.

5. Keep in mind that strategics are generally not financially driven. According to Welch, rather than focusing primarily on ROIs and the timeline to reach the next round, strategics focus more on making good decisions, creating good data, and producing good engineering to come out with a robust product. “Time horizons are as long as it takes to get done,” Welch said. “We do require timeline and budgets, but we know things happen, especially when these are high-risk propositions.” While providing the strategic support, medtech strategics oftentimes work with financially-driven VCs as well. “We do want to see we’re not the only ones that believe in the company,” Fleming concluded.

To hear more from this panel, check out this RESI video recap.