Next Phase Newsletter

By Lucy Parkinson, Director of Research, LSN

Earlier this year, we offered an in-depth exploration of foundations that provide funding to startup companies. Many foundations and patient groups are now interested in working with startup companies to fund projects that further their mission, and while many life science companies could benefit from approaching foundations for funding, there are certain criteria that foundations typically have to follow in order to bring their support for startup companies in line with their broader mission.

While each foundation is unique, here are a few criteria that we’ve repeatedly seen raised by foundations. If you’re pitching to a foundation for funding, you may wish to keep the following considerations in mind.

Will your company commit to supporting the foundation’s mission?

One fear shared by several foundations that we’ve spoken with is that they’ll provide capital to a startup company and that capital will then not be used in a way that benefits the foundation’s mission. For example, a foundation might provide financing to trial an asset in a specific indication area, but the startup may later pursue a different primary indication in order to access a more attractive market opportunity. This can be a particular frustration for foundations focused on rare diseases with few or no current treatment options. Similar situations may arise for foundations that have broader missions, such as supporting regional economic development or improving access to healthcare.

For this reason, foundations that support startups are often concerned about their ability to provide direction to a company, as well as financing. The foundation may wish to take a board seat, or to acquire rights to an asset they’ve funded in order to have a say in its future development process. To win the support of a foundation, it’s essential to demonstrate a commitment to their goals.

Can the asset be de-risked with a low-cost study?

As we reported previously, foundations generally focus on funding preclinical studies; when working with a startup company, the foundation’s goal is generally to produce evidence that will make the asset more attractive to financially motivated investors, who can then fund further development. If it’s possible to produce compelling proof of concept data with an exploratory study, a foundation may be very interested in your work.

Is the company developing a sustainable solution?

In the past, foundations have generally focused on basic research; if a foundation is interested in working with startups, it’s because they want to see the discoveries they’ve funded turned into cures that can be used by patients. However, in order to bring a product to market, it’s essential that the startup have the ability to become a sustainable business over the long term. While a VC might just be looking for one or two home runs in a broad portfolio of life science assets spread across different indications, a foundation wants every dollar to count in the fight against a rare disease. Therefore foundations sometimes fear that startup funding may be wasted due to the startup becoming reliant on philanthropic support, or failing to raise follow-on financing.

In addition to asking the kind of due diligence questions that you might expect from a financially motivated investor, the foundation might have concerns that include the ability of patients to access the product, and the willingness of other investors to finance the later stages of clinical trials.

Does this investment fit in with the foundation’s other programs?

While some foundations solely focus on funding medical research, many have a broader mission to care for patients with a particular disease; for these foundations, funding may be split between advancing medical knowledge and providing care to patients in the present. Foundations are often concerned about balancing these two goals when working with a startup company. Can the startup’s long-term financing needs be addressed without conflicting with the foundation’s other programs? Some foundations are wary of the conflicting demands of an investment that may generate ROI and their broader, purely charitable programs.

LSN has often stressed that CEOs will have to pitch in different ways to different types of investors; if you’re applying to a foundation for funding, the above points will guide you in positioning your company. Foundations often have significant value add as investors, with access to patients, key opinion leaders, and deep expertise in their fields; it’s important to understand what they will need from you in return for their support.

By Nicholas Civitarese, Research Analyst, LSN

Keeping up with the trends and changes of the investor landscape is no easy task. For fundraising companies, however, being familiar with the rules and regulations of raising capital is an important component of the process. On March 25, 2015, the Securities and Exchange Commission adopted a significant amendment to Regulation A in accordance with Section 401(a) of the JOBS Act. Having been largely ignored by most fundraising companies, with these changes Regulation A could become a viable alternative for those who can’t meet the costs or size requirements of an IPO.

Here’s what you need to know about the updated law.

Previously, fundraising companies could raise no more than $5 million in a 12-month period and were forced to comply with each individual state’s “blue sky laws.” These laws are designed to protect investors against securities fraud and require issuers to verify their financial data and register their offerings with each state in which the company is looking to raise funds. However, because each state has its own small but equally important stipulations, this can be a confusing, expensive, and time-consuming process for companies raising funds across multiple states.

Unlike Regulation D, which provides companies with a uniform code to follow because the securities are backed by the National Securities Markets Improvement Act, Regulation A relies on state regulators. State regulators are geographically close (and therefore accessible) to these investors and are also familiar with local economic factors. Thus, they’re considered to be in a better position than the SEC to protect investors when dealing with these types of offerings.

Previously, the low limit of funds ($5 million) that could be raised, in combination with having to adhere to each state’s unique laws, made Regulation A widely unpopular. But the updated version, or “Regulation A+” as it is frequently called, has been expanded to include two different tiers and reduces the involvement of state regulators.

Regulation A+ now allows issuers to sell securities to an unlimited number of non-accredited investors, provided they abide by a few stipulations. These stipulations vary depending on which tier the issuer chooses. Tier 1 is similar to the old Regulation A, while Tier 2 is the expanded offering. The changes have been summarized below.

Both Tiers

• Issuers are no longer limited to accredited investors – friends, family, and everyone in between is allowed to invest. Tier 2 prevents an investor from contributing more than 10% of their net worth.
• There is no longer a limit to the number of people that can make investments – therefore opening up the market to people of all income levels and creating the potential for many smaller investments.
• Unlike Rule 506(c) under the JOBS Act, Investors (not issuers) are now able to self-certify their net worth for the purposes of investment limits. Documentation is no longer required.
• Issuers are allowed to advertise and solicit their offering in any manner they see fit. This includes demo days, television commercials, social media, radio, or word of mouth.
• The issuer must file a disclosure document and their financials with the SEC and have them approved prior to making any sales. This “offering circular” will receive the same level of scrutiny as a Form S-1 in an IPO.
• Issuers are allowed to “test the waters” and see if there is an interest or market for their offering. This is useful for those who are afraid to gamble on fundraising expenses, such as the legal and accounting fees needed to create an “offering circular.”
• All securities issued are unrestricted and freely transferable; however, some issuers may choose to impose contractual limits to these transfers.
• Investment companies are NOT allowed to use Regulation A to raise capital.

Tier 1 – Similar to the old Regulation A

• Tier 1 issuers are still subject to state registration and qualification.
• They may raise up to $20,000,000 in a 12-month period.
• There can be no more than $6 million in secondary sales by affiliates, and they are limited to less than 30% of the total offerings for the first 12 months.
• The issuer must have their financials reviewed (not audited) by the SEC, in combination with the “offering circular.”

Tier 2

• May raise up to $50,000,000 in a 12-month period.
• Secondary sales by affiliates are limited to $15 million and to less than 30% of the total offerings for the first 12 months.
• Individual, non-accredited investors can only invest a maximum 10% of their net worth per Regulation A offering.
• The issuer is required to provide two years of AUDITED financial statements to the SEC, in combination with the “offering circular.”
• The issuer is required to create an annual disclosure filing, a semi-annual report, and a current report. These reports will require ongoing audited financials and are toned-down versions of a Form 10-K, Form 10-Q, and Form 8-K. The issuer is allowed to terminate these disclosures if the shareholder count drops below 300.
• The issuer is NOT required to abide by a state’s blue sky laws. This is a major advantage over Tier 1 because those issuers are required to register their securities in every state where they make an offer or sale. This benefit may be extended to Tier 1 in the future, depending on a review by the North American Securities Administrators Association.

With possible investments coming from a multitude of sources—such as venture capital, angel investors, and family offices—the changes made to Regulation A could make this one more tool in the toolbox for raising capital. LSN looks forward to updating our readership on further developments in the life science fundraising landscape.

By Shaoyu Chang, MD, MPH,  Senior Research Analyst, LSN

When LSN first began a dialogue with life science investors three years ago, we encountered the common perception that diagnostics is a challenging area due to regulatory, reimbursement, and adoption issues. However, as LSN has tracked the diagnostic investment landscape over the last year, the mood change among investors has been significant. A large portion of their optimism is attributable to the promises of precision medicine.

Precision medicine, as defined by the National Institutes of Health, is an emerging approach for disease prevention and treatment that takes into account people’s individual variations in genes, environment, and lifestyle. This year precision medicine has emerged as a vital sector of the industry, as evidence by a few healthy signs. A US-based private genomic company successfully closed another round with new investments from a Chinese internet giant. A molecular diagnostic company had a high-profile IPO. And a large multinational pharmaceutical announced plan to pay up to $425 million to acquire an antibiotics diagnostic company.

What are the factors fueling investors’ optimism? What are the emerging opportunities for entrepreneurs in this field? Here are the trends that LSN has observed:

• Large scale initiatives and collaborations advancing science (government and academia)

The US National Institutes of Health has recently laid out a plan to launch a $130 million national, large-scale precision medicine research cohort. The project would enroll 1 million participants in 2-4 years. In the cancer research community, seven major medical centers in North America and Europe have led the initiative to pool patients’ data with the hope to push forward the field of cancer research. As large scale collaborations are creating unprecedented large data sets, based on our interviews, several VC funds of healthcare providers and payers have expressed high interest in accessing new analytic technologies that can help them turn data into actionable information.

• Liquid biopsy changing the cancer diagnostics game (VC)

The development of biomarkers and sequencing technology has given rise to liquid biopsy- non-invasive blood tests that detect circulating tumor cells (CTCs) and fragments of tumor DNA from the primary tumor and from metastatic sites. This technology allows early detection of cancer in high-risk individuals, monitoring of cancer recurrence in previously treated patients, and identification of patient sub-populations that would respond to a specific treatment. This field has attracted much attention in recent years with new startups and major companies as well commercializing liquid biopsy products and services. Investors are taking notice of this growing trend. For example, in a recent interview a California-based VC fund with AUM of $2.8 billion told us that traditionally they look for therapeutic assets, but the fund now starts to emphasize on personalized medicine and molecular diagnostics.

• Companion diagnostics and adaptive trials (pharma)

An increasing number of targeted therapies are approved every year, and more are in pharma’s pipeline. As these drugs are designed to treat subsets of patients, in many cases based on molecular biomarkers, companion diagnostics are often required as a condition of FDA approval. In addition, the acceptance and implementation of adaptive trials is on the rise. Adaptive trials utilize companion diagnostics to stratify patients and adjust trial design based on patients’ reaction to the investigational product. Budget-sensitive pharmaceuticals are eagerly exploring this novel trial design to make drug development more efficient. One interviewee from a multinational pharmaceutical told us they are interested in precision medicine tools that can work with their therapeutic products in neuroscience, respiratory, autoimmune, and infectious diseases.

• Genomics and population health (tech and healthcare companies)

As genomics helps researchers understand genetic background of disease, the rise of mHealth and monitoring devices creates large potential for phenotyping human health and disease. The intersection between genomics and population health holds the promise of identifying environmental and lifestyle risk factors and developing new approaches to disease prevention and treatment. This field of precision medicine has therefore attracted interest from traditional technology companies. For example, a leading US computer corporation has recently joined forces with a genomic analytic company and an e-commerce giant from China to develop a precision medicine platform.

We have spoken to a number of corporate VC funds set up by healthcare payers, pharmaceuticals, and tech companies. In one conversation, the fund manager stated a clear interest in precision medicine tools that can enhance clinical awareness & decision support, quality of care & performance improvement, and provider & patient engagement.

While precision medicine continue to shape the healthcare industry, entrepreneurs working in this field are encouraged to follow the trend and identify their niche in the global marketplace. The LSN team will bring you the latest updates as we keep monitoring the investment landscape.