Next Phase Newsletter

By Michael Quigley, Research Manager, LSN

The Medtech space has had a painfully slow start to 2013. With venture financing remaining scarce, a serious dip in FDA approvals, and the value of M&A activity at pace to be at a 10-year low, slow may be an understatement. Many of the larger companies in the space have been shedding segments of their business in order to specialize and become more efficient. The implementation of this slimming down will undoubtedly have a negative impact in the number of smaller device company acquisitions by Big Pharma. The drivers of this lackluster performance include the 2.3% medical device tax implemented in the beginning of 2013 by the JOBS act, heightened criteria used by the FDA to gain pre-market approval, downward pricing pressures on devices, and the underlying general economic uncertainty around the globe.

            While the FDA has long been attempting to increase its efficiency in getting good products on the market, I wouldn’t expect anything more than a slight relaxation of criteria for approval in the 2^nd half of 2013. As capital continues to pour overseas and the bottleneck in the FDA gets larger and larger, a more serious change in the approval process may be needed for American device manufacturers to compete. On the bright side, as time goes by, and more investors become accustomed to the impact that the medical device tax has on their potential investments, I see investment interest in all stages having at least a slight rebound in the near future.

What early stage companies need to do to succeed in this kind of capital-dry and regulation-burdened system is twofold. First is to make innovation and comparative advantage ingrained in the company’s brand. Investors aren’t interested in minor tweaks of existing technologies anymore because the FDA has raised the bar. For years, medtech companies have been able to realize large revenue streams from incremental innovation, but over the years, those returns have been diminishing. Whenever dealing with potential sources of funding, having the advantage that your product holds over the current market needs to be paramount.

Secondly, companies need to look to alternative sources of funding (as well as traditional ones) to develop a target list of potential investors. Building a list and establishing relationships and meetings with a myriad of potential partners is crucial in this type of investment environment, regardless of your company’s stage of development and level of innovation. Forming these bonds early and continuing to build on them going forward is seemingly the only way to get though the extremely capital-intensive process of getting a device on the market.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Vishal Chinchwadkar, Research Analyst, LSN

Can a novel financing tool be the answer to cure some of mankind’s greatest medical challenges? Andrew W. Lo, a hedge fund manager and a finance professor at MIT, recently proposed a revolutionary idea to promote research for cancer. Mr. Lo has suggested the creation of a $30 billion “megafund” targeted at the singular goal of maximizing cancer therapy development. The concept aims to create a diversified portfolio in a single broad indication to mitigate risk by diversifying the fund’s portfolio. At the most basic level, it allows a single large investment entity to tolerate early stage risk by diversifying its allocations along the entire pipeline. This is critical in an indication that affects millions, but remains a major therapeutic challenge (largely due to funding gaps).

Private partnership structures, such as those used by venture capital funds, can’t justify the creation of a diversified portfolio because of the timeline associated with the full development cycle of a therapeutic. Thus they often focus on a specific development stage and hope to pass their investment off to another entity further down the line. The megafund structure is different in that it has enough capital to tolerate the broad diversification of capital across the entire therapeutic development landscape.

Even more interestingly, the megafund structure is organized in such a way that It could draw on capital (at least in part) via the public capital markets via securitization. Securitization is a common financing tool in which capital is obtained from a diverse group of investors by means of equity and debt in order to have claims in the biomedical research. It may seem naïve that so much capital could be raised in a generally poor economic climate, but given the low-interest rate environment, the timing may be ideal for issuing long-term debt.

The megafund concept signifies a paradigm shift in how capital could be allocated to major diseases in the future through a broad-based investor audience, but allocated by experts. Having a skilled management team in control of a portfolio, is a major factor. The public market capitalization of such a fund allows universal participation (like crowdfunding), but keeps experts in control of the vetting of technologies. Within a single portfolio, the open sharing of data, knowledge, and resources across hundreds of research projects can be of great benefit to scientists, investors, and society as a whole. Megafunds might just be the biggest shift in how companies are funded in the life sciences arena moving forward.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Danielle Silva, Director of Research, LSN

Time after time, I’ve noticed that many brilliant scientists continue to deliver the wrong kind of pitch to investors. The most common blunder that life science entrepreneurs make when raising capital is delivering an overly technical presentation to potential investors. Although this is usually the most frequent mistake that scientists make, another common issue some entrepreneurs run into is misunderstanding who their audience is and actually not digging deeper into the technology. So now you’re probably thinking the solution is to have your presentation lay somewhere in between. The answer, however is not as simple as one might think. If you are a life science entrepreneur who is raising funds, the key to pitching to an investor is understanding who the investor is.

Pitching to Venture Philanthropy Firms/Family Offices

The first fallacy I mentioned (getting too technical during a presentation) often occurs when firms pitch to family offices and venture philanthropy firms. These investors are often times indication oriented, meaning that their specific mandate focuses on the disease that the technology is targeting, and these investors are typically agnostic in terms of the mode of delivery. Therefore, when pitching to these investor groups, life science entrepreneurs should stress the indication their product is targeting as well as any subindications that may be applicable. Since both of these groups focus on philanthropy as a part of their mandate, the entrepreneur should focus on the social return on investment.

Pitching to PE, VC, and Hedge Funds

Firms will also often focus too much on their technology when they are presenting to private equity groups, venture capital firms, and hedge funds. In terms of how in-depth you cover the science behind your product, your pitch to these firms should lay somewhere in between your pitch to family offices/venture philanthropy firms and big pharma – a happy medium if you will (I discuss the pitch to big pharma/corporate VCs in the next section).

These investors are very hands-on, so stressing that you have a great management team is more important to them than the science that goes behind your technology. Side note: for more on this topic see my article from last week’s issue What Qualities Investors Look for in Founding CEOs. Where this does not apply is when you are speaking to a venture partner at a venture capital firm, or an entrepreneur-in-residence at a private equity or venture capital firm. Individuals in these roles are typically industry veterans who are ex-CEOs or current executives of biotech firms themselves who often times hold PhDs. Thus if you are presenting to these individuals, it is appropriate and necessary to take a deeper dive into the technology than you normally would with other individuals at a VC firm, PE group, or hedge fund.

Pitching to Big Pharma/Corporate Venture Capital Firms

Scientists for the most part get it right when they are pitching to big pharma and corporate venture capital firms. These groups of investors are looking for a highly technical overview of the product that you are developing. What they want to see is an in-depth overview of the mode of delivery, and generally the indication is important as well but it is the former that is most important to stress. What some scientists do forget though is that it is still important to stress the management team in presentations to big pharma and corporate VCs as well, as these types of investors often work very closely with the companies they invest in.

At the end of the day, what is most important is to do your due diligence on an investor before giving your presentation. Find out who specifically at the firm you will be presenting to – and what their background is – before you start putting together your pitch. There is no one-size-fits all presentation that your firm can create to tailor to every audience, each investor is unique, and consequently, you should never delivery the exact same presentation twice.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Dennis Ford, CEO, LSN

Recently, I have been interacting with a lot of startup incubators and accelerators, revolving around fund raising boot camps that LSN teaches for scientists.  Basically, LSN’s “Discovery to Distribution Boot Camp” stays away from the strategic and concentrates on the tactical aspects of commercializing and raising capital. The marketing task is all about doing the research and finding a list of investors that are a fit for your products or services. It’s really a marketing 101 exercise: the first step is LSN helps them identify all the companies on the planet that look like their firm. In marketing parlance, this is identifying and sizing the competitive landscape.

Why is this important? This exercise – when done properly – will not only include most of the look-alike companies, but also the look-alike-companies and their lead and co-investors that have invested in the past and present. This über list of investors is quite valuable, as we know that these investors will understand the company, the market and the product, service or technology. I refer to this list as the global target list, and the reason is that these investors are a fit.

The next aspect is finding even more investors that are a fit based on present mandates to invest in the future. These investors have dry powder (investable capital), and are looking to allocate. When done properly, LSN can help them aggregate a list of relevant investor targets in their orbit that have shown a distinct past, present or future investment interest. Sounds simple enough, but here is where the world of the scientist collides with the world of the generic sales and marketing.

Time and time again when we put on these boot camps, the inevitable questions arise. The list is great, but am I allowed to call these investors? I hear that if someone doesn’t refer you, investors won’t talk to you. Can you prove to me or give me a reference of someone that has actually called an investor cold? I want proof that getting a list of investors that are a fit is how entrepreneurs actually raise money. On and on, the skeptical scientists create a thousand reasons why getting a list of investors that are a fit for their particular market segment or indication won’t work, and how in the past it worked like this (the old, outdated map). Enter the sequel to the Valley of Death version 2.0: The Chasm of Skepticism.

I make no bones about who I am and where I come from; I am genetically a sales person. I have been selling for decades, I am a selling CEO, I am an entrepreneur with 8 startups under my belt. Of the 8 startups I have been involved with, I have been part of the executive management team, the CEO or the founder. I have been part of 2 IPO’s and 4 acquisitions, with 2 more in the wings (I hope). So please imagine my reaction having spent my life in sales, marketing and business development when I have to debate whether a person who is a startup entrepreneur is allowed to make an outbound phone call to a complete stranger to move his/her company along.

What is even more chilling is this ethos is passed around in the life science marketplace as some sort of rule. Entrepreneurs shun rules. Entrepreneurs break rules. Entrepreneurs don’t listen to the status quo out-of-date dictums, and they don’t use old antiquated maps! They create new ones they do whatever they have to do. They jettison their comfort zone. They embark on hideously uncomfortable journeys. They do whatever it takes and making a blind cold call to a complete strangers who are a known fits for their product or service isn’t even the ante into the game. So here is how to get across the chasm of skepticism: get a list of investors that are a fit for your firm, do an email introduction, and then call and set up an intro meeting, then rinse and repeat.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Danielle Silva, Director of Research and Innovation, LSN

Many entrepreneurs make the assumption that investors are solely looking at their technology when they consider taking a stake in their firm. However, this is typically very far from the truth; at the end of the day most investors are investing in the individual and the management team – not the entrepreneur’s technology. This is why almost all investors require a number of face-to-face meetings prior to making an investment. As traditional sources of capital in the life science space continue to dry up, it is becoming more and more important for CEOs to stand out and show investors both their personality and the qualities that will make them a successful founder.

One of the most important things investors look for is a clearly defined vision. A startup’s CEO needs to not only have knowledge of their target market, but also needs to fully understand the individual customer’s problem and how to tackle it. The biggest turn-off for an investor is the “panacea presentation” that details the 27 indications a pre-clinical asset has the potential to cure. You need to have a targeted and focused concept of exactly where you are headed in the market. This vision is especially important because as the company scales, the founder needs to ensure that the company does not stray away from it’s core competency and mission, and that everyone in the firm is aware of the CEO’s vision. Nobody wants to invest in a schizophrenic business.

Founding CEOs also need to have the ability to surround themselves with strategic partners that are not necessarily investors in the firm. Forming these strategic relationships early on can be invaluable down the road. Founders should, however, also seek advisors that are willing to put skin in the game, because advisors who have a stake in the company will represent a vote of confidence in the eyes of other potential investors. Furthermore, founders need to be able to both find and retain talented individuals to help them build their companies, not only give advice. Networking with talented people that have a passion around your target indication or technology can help CEOs identify senior professionals that they can bring in later in the development of the company to fill roles necessary for growth. This is vital because, at the end of the day, the investor is investing in people.

So what does this all mean for founding CEOs? If you do not possess these qualities, find someone who does! The business side of advancing your technology should be managed by someone who can manage the networking role and show investors a focus on getting to market above all else. You should always embrace the opportunity to meet investors in person, but make sure you are prepared to do so. Also, you will always be more compelling in a one-on-one meeting where you can start a real dialogue, rather than lecturing to a room of potential investors. Speaking with (not at) investors at length about your company and your vision will not only help you demonstrate these qualities to the investors, but will also help you determine if the investor posses traits that will help you both work together in the future.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Max Klietmann, VP of Research, LSN

LSN research spends a lot of time speaking with investors in the life sciences space. As such, I wanted to share some insights gleaned from medical device investors over the past several weeks; specifically, I’d like to highlight two major investor interest trends in the device space that follow a common theme: cost reduction. As medical costs have risen over the past few years, hospitals and care providers are under increased pressure to reduce costs while improving outcomes. This has created a high demand for devices that can not only make an improvement in a patient’s condition, but also make a business case for a hospital’s bottom line. Here are the areas of the highest interest:

Infection Control

Hospital acquired infections (HAI) such as MRSA constitute a major issue for care providers, as these (usually preventable) conditions can massively protract hospital stays and drive up costs, due to complications and the need to treat a secondary indication. Tools and systems that can aid in early detection or prevention of these infections are in high demand, and are a compelling investment opportunity for investors in the space.

Home Care/Remote

Getting patients out of the hospital as quickly as possible is a primary way of reducing hospital cost. One way to safely accomplish this is via remote monitoring and other ways to allow a patient to continue receiving medical care from home earlier than usual. Furthermore, the less time spent in a hospital, the lower the risk of secondary complications such as HAI, further reducing the risk of incremental cost. Finally, remote monitoring often pairs existing technologies (heart monitors and wifi, for example), and can have a relatively inexpensive R&D process – all good things for an investor seeking fast time to market and proven demand.

Though these concepts may be intuitive at first glance, most entrepreneurs in the device space are too heavily focused on an improvement in patient outcomes at any cost. However, at the end of the day the improvement needs to make sense from the standpoint of a hospital’s investment and the likelihood of insurance reimbursement. Device entrepreneurs should consider how strong their business case is to the end-user, and in doing so, can be better aligned with investors’ critical need for return.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Dennis Ford, CEO, LSN

I spend a lot of time observing and analyzing early stage investment trends in the life science industry. The product of this research has led me to identify the biggest trend in recent years: that new categories of investors are surfacing to fill in the void left by the lack of VC funding.

Part and parcel to the new investor group’s trend is a bevy of new entities that are spending time and money vetting and grooming biotech and medtech start-ups.  They range from world renowned hospitals, research clinics, academic tech transfer offices, patient groups, foundations, both private and public sector initiatives all morphing into different forms of life science incubators pushing scientists and their innovative technologies to commercialization.  The essential idea is that there is enough general domain knowledge to pick the likely candidates for success based on their own sector or indication expertise. This is a great concept and is still getting off the ground. However, what most of these initiatives fail to grok is that “the last three feet” of the fundraising/commercialization is the actual going out into the market and finding the channel partner or investor and getting a deal done!

I have met and interviewed countless graduates and winners from these entrepreneurial programs. They graduate with eager smiles and hearts full of enthusiasm, take a deep breath, and then say…now what?

It was Edward R. Murrow who said, “It has always seemed to me the real art is not so much moving information or guidance or policy 5 or 10,000 miles. The real art is to move it the last three feet in face to face conversation.” Although he was speaking about international exchange, I think the quote is wholly applicable to the life sciences.

This last three feet is exactly where LSN staff spends most of their time. At the end of the day, where the real failure lies for many of these initiatives is in that scientist-entrepreneurs remain unprepared for the reality of how difficult the process is for connecting with a partner in the market place. Everybody understands their marching orders, but hardly anybody has been given the training and tools to carry out the mission.

What I am talking about specifically is the basic, tactical sales and marketing 101 skillset (the training) to go out and fundamentally execute a partnering campaign. This has to do with using databases to gather and vet lists of targets to go after, and identifying the low-cost, cloud infrastructure applications (the tools) that will enable and support the endeavor. For example, once you have gathered together the targets that are a good fit for your partnering initiative, you have a list – and the associated tasks – that you will have to manage. Most scientists will go right after the color-coded Excel spreadsheet to do this, which may as well be the kiss of death.

Cloud applications like SalesForce.com can provide you with a fabulous automated list, as well as task-management capability for a small monthly fee. Email applications such as iContact are a necessary tool for your outbound partnering campaigns, and you get a lot of compelling reporting for a low-cost monthly fee that will provide insight into who is clicking and interacting with your emails and outbound marketing. Newsletters, blogging and whitepapers are another excellent way to reach out to targets to either start a dialogue (or continue a dialogue) with multiple clients. These Cloud apps have created an affordable, easy-to-use campaign management infrastructure that just wasn’t here a few years ago. These applications are the picks and shovels for the gold the entrepreneur is trying to mine.

My point here is that there is not a lot going on tactically in teaching the last three feet – how to find and start a dialogue with investors, how to arrange a meeting, schedule a roadshow, run a meeting, and nurture & cultivate an ongoing relationship with your prospective partners. All the aforementioned criteria are critical in finishing what has been started with the scientist-entrepreneurs. After all the pie-in-the-sky strategy and perfect pitch role-playing is done, you still have to go that last three feet, stick out your hand and introduce yourself.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital