By Jack Fuller, Business Development, LSN

The dramatic increase in cost-to-market for drugs over the last decade has put increasing pressure on drug discovery efforts to do more with less; accordingly, several different models have cropped up in the last few years. One strategy that has been gaining popularity with drug developers is the rescue and repurposing of drugs, often times by virtual pharma companies. A virtual pharmaceutical company typically in-licenses an asset, then out-sources all phases of research and manufacturing, while maintaining core executive and project management individuals.

Virtual pharma teams are generally made up of individuals with several decades of drug development experience, who recognize that it is not always necessary to take a candidate from square one. Many drugs are developed through IND enabling studies, only to fail in clinical trials due to poor bioavailability, off-target effects, or a lack of efficacy for a particular indication. At this point, several things can happen.

In a small- to medium-sized biotech company, often times the only option is to close up shop and sell off the company’s assets – including the failed drug candidate – in order to exit the investors without more loss. A savvy virtual pharma executive sees this as an opportunity to then rescue this failed drug for an indication not necessarily thought of previously. Similarly, just because a drug candidate is developed for a particular biological target, does not mean that it is the best or sole possible use of the drug. Repurposing is where a drug that is currently being sold for one indication is redeveloped and tested for use in an alternate indication – often times for a rare or orphan indication.

The US government is also getting involved in discovering new uses for existing molecules, as the National Center for Advancing Translational Sciences (NCATS) launched a program in 2012, in which several large pharmaceutical companies contributed 58 existing compounds to academic researchers in order to help re-engineer the research pipeline. These strategies are an attractive alternative to reduce the enormous average cost – $900 Million – and time – around 13 years – that it takes to develop a drug from start to finish.

Small biotech companies will always have a place in the market, as they are the ones translating the next generation of scientific discoveries into the next generation of revolutionary therapies. Rescuing and repurposing has become another example of the adaptability of the life science sector. In this case it is the formation of a niche market that experienced drug development teams are filling with alternative vehicles – such as Virtual Pharma companies – to provide the marketplace with a steady stream of therapeutics.

By Michael Quigley, Research Analyst, LSN

The CRO space is currently going through a restructuring that is driving CROs in one of two directions if they wish to remain competitive. The shift involves a group of global “giant” CROs holding exclusive, high profile partnerships, which have been eating away at the market share for mid-tier CROs, who rely on smaller deal structures to generate profits (since they cannot compete with the resources of their larger counterparts).

These mid-tier firms are also being pressured by smaller, more specialized boutique CROs who focus their efforts on particular diseases / technologies, and are capable of tailoring more client-specific arrangements. The growth of these niche organizations is being driven by the increase in companies developing specialized medicines that are capable of proving efficacy in clinical trials more clearly. As a result of the growth in these two extremes of the space, what is emerging is a group of CROs that are effectively stuck in the middle, and losing market share. (1)

Enter Private Equity

CROs are becoming increasingly attractive to PE firms as everyone from emerging biotechs to big pharma continue to push for strong pipelines of drug candidates, creating a steady demand for clinical testing. One opportunity that several PE firms are taking advantage of is making acquisitions of multiple medium-sized CROs in order to merge their resources, thus making them competitive with the “giants” in the space. Several of these deals have already taken place this past year, and some PE firms are positioning themselves for more. Other PEs are preforming massive buyouts of the “giant” CROs in order to provide them with the resources required to further expand. (2)

Implications for Emerging Life Science Companies

The increasingly competitive nature in the CRO space is an optimal situation for emerging companies interested in their services; both the large and the niche CROs of the world compete for the business of emerging companies. However, they offer different benefits. The larger group offers competitive pricing, as well as the proper expertise and resources required to perform clinical testing of a product in multiple markets around the globe. Alternatively, the niche group competes by offering a higher level of customer service and interaction, as well as a vast knowledge of the technology, and the specific regulatory hurdles that come with it.

One attribute shared by both groups, however, which will be paramount to their success, is their ability to find and contact emerging companies to set up contracts before their competition. These two groups competing for the business of emerging biotech and medtech companies will ultimately benefit the emerging companies as well as their investors, as the CROs will have to offer cheaper prices or better service to remain competitive.

1. Ha, Kimberly. “Mid-tier CROs Face Pressures Staying Independent as Consolidation Wave Intensifies, Bankers Say.” Financial Times. Financial Times, 28 May 2013. Web. 26 June 2013.

(2) Garde, Damian. “Top-heavy Market Makes times Tough for Mid-size CROs.” FierceCRO. FierceCRO, 3 June 2013. Web. 26 June 2013.

By Max Klietmann, VP of Research, LSN

The NIH has been faced with considerable difficulties as of late in terms of finding the required means to continue moving science forward at the early stage. However, the group recently announced a commitment of $12.7 million to a novel project – funding further research on assets that have been cast-off by big pharma in key indication areas that represent a significant unmet medical need (e.g. Alzheimers, Duchenne, etc.). The initiative has been fittingly named Discovering New Therapeutic Uses for Existing Molecules, and it may be a groundbreaking solution to several problems facing drug development today. These include reducing time to market, alleviating early stage investment risk, and creating even more incentive for research scientists to orient themselves towards commercialization of research.

Shortening time to market

The Discovering New Therapeutic Uses for Existing Molecules program’s single greatest benefit to the market is that it drastically reduces time to market. Rather than starting from scratch when developing compounds, researchers affiliated with the program are granted access to abandoned drug candidates owned by big pharmaceutical companies. These drugs may have been abandoned for a variety of reasons, and are now stagnant IP, sitting in a filing cabinet. This program puts them back to good use – One can think of it as subsidized out-licensing back to academia. The key is that these drug candidates have already undergone human safety trials. With this piece of the puzzle already taken care of, researchers have a much better shot of bringing them to market rapidly.

Investment risk reduction

Another big advantage to the program is that these assets have a reduced risk profile for investors seeking to capitalize on the opportunity. The NIH program will support the research for up to three years, allowing reasonable time to complete Phase IIa trials, at which point the projects will need to find other sources of financing. This gives investors an opportunity to invest in assets with a strong pedigree and minimal equity dilution risk, quite far down the pipeline.

So what does it all mean? At the most basic level, this pilot project represents a willingness on the part of the NIH to get creative. This program is very different from traditional research grants, and it shows that the agency is thinking within the context of the industry as a whole. This translates to a more attractive environment for investors, better deal terms for entrepreneurs, and more products making it to market. Keep your eyes on this program, as it will be a good indicator of how the NIH may be orienting itself on a larger scale moving forward.

1. “Discovering New Therapeutic Uses for Existing Molecules.” Discovering New Therapeutic Uses for Existing Molecules. NIH, n.d. Web. 20 June 2013.

By Michael Quigley, Research Analyst, LSN

The Supreme Courts ruled last week that naturally occurring genes are no longer patentable. The case was brought to the Supreme Court by the American Civil Liberties Union against Myriad Genetics Inc. for their patents on the BRCA1 and BRCA2 genes (two genes strongly correlated with breast and ovarian cancer) on behalf of researchers, doctors and cancer patients. For many, this ruling was seen as long overdue, as the idea of owning something that nature produces on its own is counter-intuitive. However, prior to this ruling, various companies had patented approximately 20% of the human genome, some of which they held for as long as 30 years. (1)

The largest benefactors of this ruling include diagnostic services companies, who can now test patients for previously patented genes that have a known association with a disease or disorder. Patents will also benefit now that companies are no longer able to have monopolies on the tests for these genes; the prices of these tests for patients – which, for certain indications, can cost more than $3,000 and aren’t always covered by insurance – are already dropping dramatically. (2)

With a likely surge of patients getting tested for the presence of these genes, bioinformatics companies will see a boost in amounts usable patient data for their software programs. Combining that with the fact that screening and sequencing costs are dropping at a rate faster than Moore’s Law for molecules, as well as an increasing number of hospitals going digital with their data, many early-stage investors are looking at health informatics as a potential “megatrend” in the drug discovery and diagnostics space. (3) The idea that software and informatics could be a serious player in the development of novel advancement in this industry is not new. However, with this ruling in place, it seems to be a much more a viable theory.

The opposition to this ruling this stems in part from the fact that without the ability to patent genes, funding for companies that are actively searching for genes correlated to diseases will pull back farther than it already has. With companies unable to patent the genes they discover, these discoveries become much less profitable, and therefore, less attractive to investors. However, the ruling also states that synthetic genes (cDNA) that are derived from natural genes but made synthetically still can be patented. These synthetic genes are often honed versions of their natural counterparts, and are used frequently in therapeutics. The ruling that these synthetics can be patented will actually be an attribute for companies working with them in terms of gathering funding, as investors finally have closure in an issue previously clouded in uncertainty.

It seems obvious that something produced naturally should not be patentable. But if having patents exist encourages investors to fund and push the science forward, the decision becomes more ambiguous. In the end this decision will aid millions by providing them will more affordable medical tests, and further down the road, more personalized treatments as a result of the increased inflow of patient data.

1. Cutler, Kim-Mai. “Supreme Court Ruling On Gene Patenting May Be A Boon For Biotech Startups.” TechCrunch RSS. TechCrunch, 17 June 2013. Web. 19 June 2013.

2. Than, Ker. “7 Takeaways From Supreme Court’s Gene Patent Decision.” National Geographic. National Geographic Society, 14 June 2013. Web. 19 June 2013.

3. Cutler, Kim-Mai. “SV Angel Says Health Informatics Is One Of Its New “Megatrends”.” TechCrunch RSS. TechCrunch, 25 Apr. 2013. Web. 19 June 2013.

By Danielle Silva, Director of Research, LSN

In the US, there are two states that are known for being hubs for life science firms: Massachusetts and California. For this reason, the two states have logically become capitals for investors in the sector; some of the most well known private equity, venture capital, and angel firms that invest solely in the biotech space are based in either Massachusetts or California. But what happens if your firm is based outside of these two states? Will it be more difficult for your company to raise capital? The answer depends largely on what investor groups your firm is targeting.

Angel groups, for instance, are associations made up of high net-worth individuals that pool their money together in order to make investments in early-stage companies. These groups tend to focus on regional investments. Typically, an angel group’s investment goal will be to help stimulate economic development in a particular region. While some groups may focus on other types of investment themes (for example, investing only in female-owned businesses), most of these firms are regionally focused.

Another reason angels are usually regionally focused is because they tend to have no budget outside of the capital they put aside for investments. These groups also have limited full time staff for the same reason. Because of this, it is very difficult for angel groups to visit companies that are outside of their state. Even if the group does visit a company that is located outside of their state, it would be hard for them to have a company in their portfolio that is located far from their headquarters. Furthermore, angel firms have limited deal flow, and often times will not actually source a good number of deals outside of their state.

Private equity firms and venture capital firms lean towards a more opportunistic approach compared to angels in terms of where firms are located. Both groups certainly have larger budgets, and thus partners are able to travel more to visit attractive investment targets. Many of these groups, however, are operationally focused. Accordingly, many of these firms will favor deals that are close to their company’s headquarters so they can check in on the company and make sure everything is running smoothly. Many venture capital firms now will even act as quasi-incubators, maintaining additional office space for their portfolio companies at their headquarters. This is not only to help their portfolio firms that cannot afford to pay high rent, but also allows investors the ability to offer office space that is close to their own company so they check in on the company more often than they normally would be able to.

So does this mean you have to relocate your firm to Massachusetts or California to be successful? Of course not. Although there are undoubtedly more life science investors in both Massachusetts and California, there are certainly a number of investors located outside of those areas. What firms should do is make a target list of all investors that are located within their general region that invest in life sciences firms. These will be the low-hanging fruit, which a firm raising capital should be reaching out to first to begin with. Also, if the company raising capital is located in an unfavorable area in terms of investor concentration, there is still no need to worry. If the product or service is compelling enough, most investors will be willing to literally step outside of their typical geographical investment mandate and start a dialogue with the company.

By Jack Fuller, Business Development, LSN

LSN is a big proponent of the importance of finding the right fit in potential partners. This is true for companies looking to develop assets together, finding the right CROs to outsource drug development, and especially in finding investment partners to help raise capital. Last week, I attended the Massachusetts Life Science Innovation (MALSI) Day, and I was incredibly pleased to hear that sentiment echoed by speakers and entrepreneurs throughout the day.

What we mean by fit is the list of criteria defined by a company/firm’s mandate. For example, with investors, a specific firm’s investment mandate may be to only invest in two or three companies in the next 12 months, targeting companies in the medical diagnostics field who also have a usable prototype. Any company that reaches out that does not fit these criteria has no chance of being funded, regardless of their value proposition. With this in mind, understanding an investor’s mandate is the most important factor when deciding whom to go after.

At the conference, I attended a panel where an Angel and a VC each lauded the importance of having a fit before the even reaching out to an investor. The question was then posed, “in the last 12 months, how many meetings have you had with people who reached out to you cold?” Both answered the same: “zero!” However, they were quick to point out that of all the people who reach out to them cold, the chances of them being a fit for their specific investment mandate hovers somewhere around 1%.

Needless to say, the audience (which was largely made up of emerging life science companies seeking capital) was outraged by this. Here is a room full of life science entrepreneurs, attending a panel about financing in the life sciences, and the panel tells them they have no chance of reaching out successfully. Just before a riot started, they explained the concept of fit. Investors in the life sciences are continually inundated with unsolicited business proposals that have less than a 1% chance of satisfying their specific investment mandate. They don’t have time to look at this unfiltered list, so they summarily dismiss everyone that hasn’t been filtered. The problem with the life science community is that the only real filter they currently have is through personal introductions or partner relationships.

Recently, LSN ran a boot camp at a local Boston incubator to explain to early stage scientists that part of doing a dedicated successful outbound marketing campaign is to take the time to research your look-alike companies and determine who has invested in them in the past. This uber investor list is paramount because they know your type of company, your marketplace and technology. Most importantly though, they have already pulled the trigger with similar companies. Next you want a list of investors who have self-declared “present or future mandate” to invest in a company in your arena or orbit.  This is more difficult but something in which we here at LSN specialize. This is particularly important when reaching out cold to investors.  For example, when emailing an investor you know has a mandate for small molecule cardiovascular therapeutics, it is incredibly impactful to have a subject header “CEO of cardiovascular small molecule company – in town next week – meeting request: First Attempt”  LSN has found that outbound campaigns to investors with whom there is a recognized fit results in a 15-20% open rate!

These two panelists were adamant that they are not opposed to people reaching out to them. However, the current method of blindly reaching out to every VC or Angel on the planet is not helping anyone find prospective deals. The old model of raising funds is being replaced with greater focus on connecting people who need to be in the same room together. LSN was founded on this principle, and is why LSN research spends so much time in dialogue with the investor marketplace. As a more efficient dialogue is created between companies seeking capital and investors looking for opportunities, the speed of product development increases, which in turn leads to a more robust industry with better patient outcomes.

By Danielle Silva, Director of Research, LSN

As any emerging life science entrepreneur knows, just getting on an investor’s radar is an extremely arduous task. What many biotech firms do not realize, however, is that initiating a dialogue is only the beginning of a relationship that must be managed and maintained over time, and there are still many things that can cause a prospective deal to go south. To help prevent future headache, or even losing a deal during negotiations with potential investors, entrepreneurs should make a concerted effort to avoid some critical errors from the very start.

One thing that often raises a red flag for investors is an issuing company’s capital structure. Are the existing investors difficult to deal with? Is there risk associated with unfavorable terms from previous financings? How much risk of dilution is there due to existing convertible loans, etc.? Some key ways that entrepreneurs can avoid sabotaging future deals is by thinking strategically about how and from whom you raise your first seed capital. Make sure your investors are partners that will be easy to work with past the check-writing stage, and that the terms won’t deter future investors.

One effective method of ensuring a more favorable set of deal terms from the onset is via a non-participating liquidation preference. Here’s a hypothetical situation: If an angel investor invests $1 million in a company and negotiates a simple 1X non-participating liquidation preference, and then the firm is sold for $4 million, the angel investor will get $1 million and the remaining $3 million will be divided amongst the firm’s common shareholders. Obviously, some investors may have a higher multiple preferences, but negotiating non-participating liquidation preference with early investors can mitigate the risk that more institutional investors will not invest due to concerns over a firm’s equity dilution.

Another important component of a company’s capital structure is the capitalization table. A capitalization table is a cash-on-cash analysis of the percentage of ownership for investors and founders, the value of equity for each round of investment, and equity dilution. Some firms may have a large number of small investors that could cause issues for the companies owners or investors down the line. This is one of the issues that crowdfunding can cause, as it can attract large numbers of “unsophisticated” investors. If the entrepreneur should ever go down the road of “herding cats,” it is important to show prospective investors a clear strategy to repurchase as much equity from these “micro-investors” as possible, and convert any of the remaining preferred equity holders to common stock. Often just having a clear answer to an investor concern is helpful in itself.

Showing potential investors that you are business savvy and strategically-minded can be just as important as illustrating how compelling your product is. Avoiding these missteps proves to investors that you not only benefit yourself and the other stakeholders of your firm, but also that you have the ability to run a business.

These mistakes should be avoided at all costs when going through the due diligence process with investors. If you are an entrepreneur who is in the due diligence process with an investor, and do happen to have such setbacks, don’t be alarmed. Acknowledging that you have made these mistakes and speaking with your potential investor about how to resolve these issues will help show them that they are not just making an investment, they are forming a partnership, and that you are doing everything possible to generate a return on investment for themselves and future investors.