Next Phase Newsletter

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

An increasing number of innovative entrepreneurs are finding capital, development partners, and distribution channels outside of their geographic region. Who is investing outside of their geographic regions? What are their motivations? What are the benefits and risks when working with cross-border investors? Six experts from prominent VC funds and corporations gathered at the Redefining Early Stage Investments (RESI) conference in Boston on September 16 to address these questions.

Moderated by Lisa Rhoads, Managing Director, Easton Capital, the panel featured:

• Christopher Kim, Managing Partner, Korea-Seoul Life Science Fund
• Luis Barros, Managing Partner, Leading Business Ventures & Venture Partner, Portugal Capital Ventures
• Winston Town, Vice President, Diamond BioFund
• Weiyong Sun, Senior Director, External Scientific Affairs, Daiichi Sankyo Group
• V. Kadir Kadhiresan, Vice President, Venture Investments, Johnson & Johnson Innovation – JJDC

Emerging economies entrepreneurs: aiming for the global market

Many emerging countries have recognized the potential of biotech industries to enhance their own economy. Given the limited size of their domestic markets, startup companies from these countries tend to be valued based on their capability to do business on a global scale.

Several bioclusters have made impressive achievements in terms of scientific discoveries and patent filings. For example, Korea Advanced Institute of Science and Technology (KAIST) is one of the top 10 universities in the world with the highest number of IP. However, bottlenecks exist, especially on the operations side.

The panelists emphasized the three components to build a successful biotech business: innovative science, capital, and the operation team. The panelists recalled some challenges they faced when recruiting the right operation talents for their domestic portfolio companies. Operation, development, and commercialization expertise is sorely needed.

Several models are being employed, from entrepreneurship training sessions to entrepreneurs in residence (EIR). The panelists stressed the importance of cross-border collaborations that can allow businesses to leverage non-dilutive funding from local sources and gain access to strategic markets.

Developed economies entrepreneurs: finding strategic partners

The Asia-Pacific region has attracted attention in recent years due to its sheer market size. A growing number of investors from this region are looking into North America and Europe for advanced technology and strong financial return.

A panelist noted that “[t]he value of a syndication is financial and strategic, and a good co-investor comes in the form of both.” The panelists discussed their experience in co-investing with Asia-Pacific investors.

In one case, Asia-Pacific co-investors were less sensitive to valuation but were focused on specific rights in their domestic market. In another case, Asia-Pacific co-investors were able to utilize their domestic hospital network to aid in clinical development. For early stage ventures focused in developed economies, this created a win-win situation.

Intellectual property is now considered one of the most important piece of value for early stage life science companies. The panelists exchanged their views on intellectual property and addressed the fear of reverse engineering and copyright theft. The panelists emphasized that emerging markets have made significant progress in IP protection over the years. However, partnering with a trustworthy local patent office is still strongly encouraged.

Big pharma: scouting globally, acting locally

The pharmaceutical sector is a global game. Top pharmaceutical corporations in the world are operating and making collaborations on a global scale, whether they are headquartered in the US, Switzerland, or Japan.

Around 15 years ago, strategic financing might account for only 7% of all pharmaceutical deals. Now it hovers at the 35-40% range. As few VCs are willing to take on clinical and regulatory risks, corporate strategics are becoming critical for early stage life sciences.

Big pharma has a plethora of investment vehicles to secure a collaboration, from corporate venture capital funds to joint ventures. When entering a new market, big pharma often partners with local VC to help them acclimate to local culture and oversee the growing business. Entrepreneurs should carefully navigate the changing landscape to choose the right strategic partner.

Tips from Global Investors

How should entrepreneurs go about interacting with global investors? The panelists gave the following tips:

• Good cross-border investors can bring in both strategic and financial value for early stage companies. In-depth understanding of cultural differences and identifying the potential “fit” are key to successful cross-border deals.
• Entrepreneurs should be capital efficient and meticulously manage their assets by focusing on derisking activities along milestones. Early stage cross-border PI collaborations are highly valuable as they open doors to non-dilutive funding.
• Early stage companies should protect their intellectual property in key markets. Local attorneys familiar with regulations and stakeholders in the region can be extremely beneficial in patent filing and litigation.

By Michael Quigley, Director of Research, LSN

This September, LSN’s research staff managed to speak with and get mandates from 96 life science and healthcare investors from 15 countries all around the globe. As we have grown in the space over the past 3 years we are continuing to see more and more investors, particular from Asian countries like China (especially Hong Kong) and Taiwan with interests in investing in healthcare outside of their region. Figure 1 shows a breakdown of the countries where the investors we spoke with last month are based:

Interestingly 75% of the mandates from Asia-based investors are looking for emerging technologies either globally, or to the US in addition to their local geographies. This is a trend that we have commented on in the past, and are seeing continue to grow and materialize as we speak with more and more investors.

In addition to the geographic breakdown of investors LSN’s research team spoke with last month, there was also diversity in the types of investors contacted.

This spread of investor types highlights an ongoing theme expressed by LSN; reaching out to one or a few types of investors is going to greatly limit your chances of receiving an allocation. As we have said time and time again, fundraising is a numbers game. You want to start with a wide net and work your way through a target list to ensure you leave no stone unturned.

The spread of sectors these investors LSN’s research team spoke with in September are looking to invest in was fairly even, with medical technology, diagnostic and healthcare IT outpacing therapeutics by around 20%. This is a result of many investors including a number of large tech firms that we speak with that simply do not have the expertise or appetite to invest in the complex and time intensive realm of therapeutics yet still want exposure to healthcare innovation.

LSN’s Research team focus on finding and speaking with investors looking for early stage companies. Interestingly across devices, diagnostics and therapeutics, investors seem to be most interested in companies that are obtaining their first-in-man data. These assets often see large spikes in valuation at the end of their first clinical studies or when showing early signs of efficacy in humans, so it’s logical that early stage investors target their allocations at this particular development point.

While this roundup provides an overview of the information we have recently gathered regarding investor interest, we collect many other details that help us identify suitable opportunities for each investor, including which indication areas and technological approaches the investor focuses on, and what kind of financing rounds the investor is open to participating in. These details are invaluable to a life science company looking to find the right investor fit. We look forward to speaking with more life science investors and continuing to share our findings with our readership.

By Lucy Parkinson, Senior Research Manager, LSN

LSN Research keeps in regular ongoing dialogue with 900 active life science investors and tracks an additional 4000 global investors. Those conversations often bring to light new trends that are on the minds of investors as they identify their mandate priorities. Recently, we’ve heard several investors express an interest in companies that could potentially use their asset as part of a combination therapy.

Combination therapies are currently a hot topic in biotech, although the approach has long been borne out in some disease areas, such as HIV HAART combinations and many cancer treatments. By using two drugs that interact favorably, one can affect a disease via multiple routes that may produce a powerful effect when combined. However, in the past these combinations have often been uncovered after a drug has been developed; by uncovering potential combination uses for an asset earlier in the development process, a biotech startup can increase the value of their asset. Investors are taking notice of this opportunity to add extra value to their portfolios.

A broad range of investors have expressed interest in this trend, and many have been creative in their approaches to combination therapy investment.

For a large pharma company looking to in-license new assets, the situation is relatively straightforward: they look for early stage therapeutics that they can combine with a drug from their own portfolio in order to make a more powerful therapy. This widens the market for their own assets, and in some cases may extend the patent life of an older drug by allowing the firm to register a new combined drug.

If you’re a biotech entrepreneur looking for a major strategic partner, you may wish to consider this angle when pitching to pharma companies. Look at the firm’s portfolio and pipeline to see if there’s an asset that would fit into a combination alongside your own. If the potential is clear, a large pharma company may be interested in performing a trial to assess the strength of the combination; if successful, a combination approach could increase the value of a partnership for both sides.

Outside of the pharma world, we have heard from investment funds that are highly interested in the combination potential of early stage biotechs. Combinations are particularly of interest to virtual pharma investment funds that focus on assets rather than on equity rounds. These investors may be interested in aggregating early stage assets in a particular indication area and exploring potential combinations within their portfolio. However, as combination uses add value to an asset, if you’re pitching to any investment fund it’s worth being aware of what else is in their portfolio and highlighting any combination opportunities that you see.

LSN has also heard from philanthropic groups involved in this trend, particularly in the cancer space. One cancer foundation that we’ve spoken to uses a nondilutive approach to funding combination research; if an entrepreneur approaches the foundation regarding an asset that has combination potential, the foundation’s oncology experts will select another drug that may make a promising combination with the asset, and will then finance a trial to gauge the efficacy of the combination. Foundations may be very hands-on in this regard and typically favor assets that have already obtained human proof of concept data; by funding combinations of these derisked later stage assets, a foundation can have a near-term impact on patient care.

Why is this varied group of investors converging on combination strategies? It’s a highly impactful approach, particularly in oncology, where a combination dose might target two different pathways to fight the same tumor. Initial tests to validate a combination may be relatively inexpensive, if the asset has already been validated alone. Whether the investor is motivated by impact, strategic needs, or return on investment, discovering a combination will help them realize value.

If you can see combination potential in your asset, do your homework on the portfolio of each investor you meet with and work this strategy into your pitch.

By Christine A. Wu, Research Analyst, LSN

At our RESI Boston two weeks ago, Preclinical/Phase I stage investors joined us on a panel discussing their approach in seeking new early-stage deals, what they look for, and their process and advice for entrepreneurs.

Moderated by Steven Gullans, Managing Director, Excel Venture Management, our panelists include:

• Arjun Goyal, Associate, 5AM Ventures
• Sam Hall, Principal, Apple Tree Partners
• Isai Peimer, Managing Director, MedImmune Ventures
• Jayson Punwani, Principal, Pappas Ventures

The panel opened up saying that the industry is built on trust. Trust in partnering within their network, along with trust in developing relationships with their portfolio companies in terms of their management teams, their quality of science, and their clinical regulatory pathway potential.

Trust in Networking & Partnering—

Listing a target range of 2-6 deals per year for early-stage ventures, the panelists emphasized that a number of deals are done with each other with waves of requests in September after Labor Day, January after JP Morgan, and May.

There is a particular attractiveness to partnering with corporate venture capital firms, as the partnership would acquire benefits from their capabilities. When looking at big pharma, it is valuable to see what applies to them as they generally have large portfolios and companies can never be sure of how the project is prioritized. However, panelists highlight the existence of an asymmetry in partnership with pharmaceutical companies, in which they learn about assets in what the small company is doing in the space, but are reluctant to share what they’re doing and what they have learned.

Networking becomes incredibly essential when it comes to presenting a deal. The panelists emphasize how much more attractive the deal looks if it had come through someone they trust within their network.

Trust in Management Teams –

The panelists emphasize the positive asset in building the relationship between the investor and the company management team. Even after deciding in making the investment, it can take up to eight months to coach through and build a relationship to a point of comfort in the investment decision. This build of trust is particularly important with an early stage (series A) investment.

Trust in the Quality of Science –

Panelists emphasize clinical validation and the importance of presenting constructive data to show its ability to execute the process of development. The clinical asset sweet spot is a reliable and predictable animal model with the only exception being a completely novel breakthrough modality.

Another sweet spot is the company’s therapeutic strategy, which can be even earlier than the animal model. A company’s strategy, for example, may be identification of a new neuronal receptor as a pain target, and in order to test the hypothesis is to analyze medicinal chemistry.

In an area of science that has been around for a long time, the company should have a new twist in their modality. For a peptide molecule, for example, there must be a novel application in the operating space that is protectable and reliable. Companies should have the ability to rebrand technology with marginal potential.

In single-asset versus platform technologies, the panelists emphasize the value, and challenge, of understanding the “first” versus the “second” drug in the clinic. Generally 95% percent of a valuation rests on the lead asset, while the rest of the pipeline constitutes 5% of the value.

Trust in Clinical Regulatory Pathway –

Panelists stressed that they look for the company to have a clear path with a clear and thorough plan to prove that they know what lies ahead. Along with seeing a solid clinical process, the attractive preclinical time range is from 2 to 4 years in R&D. Panelists provided additional advice to have a pre-IND meeting to build a clinical path and plan for both the entrepreneur and capitalist to see the road ahead.

For preclinical to phase I companies, here is your overall advice –

• Network! Come through with someone in the investors’ trusted network
• Increase your credibility by reaching out to patient foundations for scientific advisory boards to support you. This will get investors to acknowledge that your product is important.
• Build your relationships, and most importantly, build that trust.

By Dennis Ford, Founder & CEO, LSN 

Five years ago, the universally accepted investment path was to write a proposal for grants, hit up a list of friends and family, and canvass the local regional angel groups to help get you on your way to commercialization. After the first wave of funding, the second wave was to canvass the venture capital entities or find strategic partners, each coming with their own unique set of challenges and outcomes.

The good news is the investor landscape has morphed and the goal of enlightened scientist entrepreneur should be to find the investors that are a fit for his or her technologies sector and stage of development. This entails putting aside some of the old dictums regarding fundraising and separating the facts from fiction as it applies to fundraising today. Let’s dispel some of the out-of-date notions regarding fundraising and commercializing technology. Below are some of the old myths that circle in and out of the conversations around funding updated for how the reality has changed. A lot of these items below setback scientists before they even have a chance to get into the game.

The old myths

The funding choices are limited to SBIR grants, friends & family, angels, VCs and strategics.

• Update: There are 10 categories of investors to go after.

You must limit yourself to regional players.

• Update:It’s a global marketplace and once you get past the regional angels and VCs, its global.

The average fundraising process takes 6-9 months.

• Update:After interviewing more than 300 firms, LSN has uncovered that it generally takes 9-18 months from start to finish.

It is not necessary to understand how each category of investor works, just go after them all.

• Update:Each investor category has its own personality, strategy, and motivations. Knowing the nuances and subtleties of each is imperative.

The science/technology is the only thing that matters to healthcare investors. You can convince or finesse an experienced investor with your science.

• Update: Investors buy you, your team, and your technology. It is imperative to showcase you and your team in your marketing materials as well as your technology.

Scientist entrepreneurs are smart people; therefore you should scale based on your technical knowhow and prowess (founder blindness).

• Update:Basic marketing and sales skill-sets are needed.

A scientist’s empirical training should augment and compliment the overall effort when moving into the commercial arena.

• Update:Some capability translates but you need to augment your knowledge with experienced professionals to build a well-rounded team.

Science is the hard part and it is easy to learn the business side.

• Update:Both science and business are complex disciplines that need to be learned.

You need to be referred to an investor in order to get a meeting.

• Update:Investors care about fit for their investment mandates. Referrals help, however being a fit for what the investor is looking for is crucial and enough to get meeting.

Scientists are the rock stars and don’t need the business executive on the team.

• Update:Having a business person with the technology mavens creates a well rounded team.

The major revelation to understand is that when you step out of the laboratory, you have entered a world that does not necessarily play by the rules of the scientific method or basic and applied research. You are entering a fuzzy world where learning to create dialogue and foster relationships are as important as having replicable data. You leave the analytic domain and head into the world of the” buyer”— potential investors and partners — and the “seller”—you. Like it or not when you are raising capital you have to start by marketing your product, your team, and your company. When you are sitting across the table from a potential investor you are selling yourself. Welcome to fundraising 101!

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

Life Science Nation is calling on innovative early stage companies to present at the next Redefining Early Stage Investments (RESI) conference. RESI will bring together over 200 active early stage investors for a one day partnering event and is accepting applications from emerging companies developing therapeutics, diagnostics, medical devices, and healthcare IT products to participate in a technology showcase on January 12, 2016.

If you are one of the 30 companies selected by our in house scientific evaluation team, you will be given full-day exposure to investors and potential partners in the exhibit hall, through a poster display, allowing for the creation of meaningful dialogues. Unlike traditional 5- to 15-minute pitch presentations that do not allow any real one-on-one interaction and provide no actionable feedback from investors, the RESI Innovation Challenge enables executives to pitch directly to attendees, which can generate more in-depth and frequent conversations with investors throughout the event.

The RESI Innovation Challenge winners are declared by accumulating “RESI Cash” votes. Each attendee receives “RESI Cash” to “invest” in the Innovation Challenge companies with the most exciting technologies. If you are a fundraising entrepreneur work with therapeutics, medical devices, diagnostics or healthcare IT and you think you have what it takes, apply now.

By Christine A. Wu, Research Analyst, LSN

What defining elements make a diagnostic company stand out? What do diagnostic investors look for and why should the healthcare marketplace care about diagnostics? What should these companies do to get their foot in the door of these investors? These are the types of questions our Diagnostic Investors panel answered at our RESI Conference in Boston last week.

Moderated by Parker Cassidy, Executive in Residence, RA Capital, the audience got to hear from:

• Joe Cunningham, Managing Director, Santé Ventures
• John Steuart, Venture Partner, Prolog Ventures
• Andrew Summers, Corporate Development, Illumina
• Rob Williams, VP of Business Development & Innovation, Bracco Diagnostics

The panel revealed the key elements they seek when evaluating a diagnostic company and the reasons behind them. Together they discussed four main criteria—the impact in the healthcare delivery marketplace, the regulatory and reimbursement pathway, the “push” and “pull” from investors and clinicians, and the ability to prove positive patient impact with the tests results—before closing with advice for fundraising companies.

Diagnostic companies can get their product on the market faster, according to Steuart. The attractiveness of diagnostics is that they “capture a disease before it gets bad and expensive.” Cunningham further explains the general desire in healthcare to invest in huge pain points, yet the difficulty of finding diagnostic opportunities that directly address those pain points and really drive change. There is a big explosion in testing in oncology now, in which predicting difficult cancers early while they are still treatable is huge and will continue to grow in the diagnostics space. The argument of course will always be whether finding certain cancers earlier will improve chances of length of survival, Cunningham points out.

Diagnostic investors look at every obstacle to a successful product. Williams explains that regulatory and reimbursement bodies are not subsiding as much in the diagnostics space, and as an entrepreneur that needs to be expected. Because of the tough reimbursement landscape, investors want to know if the technology will take money out of the system or drive cost. “If the payer thinks it will open a bunch more people up to confirmatory procedures they are going to pay for, then that’s a mountain to climb over,” Cunningham explains.

Then there is the push and pull dynamic, the final hurdle that a company faces that is often overlooked but can actually be the most costly. Companies and their investors push their technologies through reimbursements and regulatory approvals. Yet the “pull” from the clinician that will be administering the test is a keystone to the strategy. “Just because you get the ‘push,’ doesn’t mean the clinicians will ‘pull,’” Williams describes. Williams has worked with a number of companies that have spent far more money on getting key opinion leaders (KOLs) to pull products than on the development of the technology. “If you can get the key opinion leaders and physicians on board, you are golden.”

Summer finishes that among it all, investing in the diagnostics space is all worth it. Companies just have to know how to prove the impact of its worth. Steuart provided the example of Genomic Health, a diagnostic company with an assay that paved its way via studies and endorsements with KOLs that by the time they went to CMS, they had a pharmaco-economic study to prove that they were worth millions of dollars.

To close, here are two pieces of advice from our panelists’ when fundraising:

Come prepared – You must completely understand and follow the money: who owns the patient, who is getting the benefit, and who is paying for the benefit. You cannot just come with better patient outcomes. Once you reach a certain threshold, you need to come prepared with friends, such as clinical advisors and KOLs. Practice your pitch with people who you will never invest in you, then once you’ve mastered it, pitch to those who will actually invest in you.

Most importantly, tell a story – Cunningham describes (followed by applause), “For any of us, you have a few minutes to capture our attention. You must inspire vision and tell the story to get people to see the vision and follow it. I want to go on that journey with you.”