By Max Klietmann, VP of Research, LSN

I recently had the opportunity to speak with a CRO business development executive who wanted to know more about the emerging investor categories outside of venture capital that LSN tracks. I asked if his firm was seeking financing, and he told me that they weren’t; like many others in his field, rather, the CRO was seeking strategic sources of future business for his firm. Many service providers in the life sciences are increasingly becoming aware of the critical importance of including investors as a key group in their business development activities on an ongoing basis.

Historically, a few major CROs maintained relationships with the big life science venture firms as a source of business by way of portfolio companies. However, in recent history, as many of the established VCs have ceased to invest early (where it’s easy for a CRO to establish a position with a biotech), this source of business has dried up. Savvy CROs have recognized that in order to maintain a competitive edge, they need to seek out the new categories of investors that have emerged to fill this gap. Strategic partnerships with hedge funds, family offices, foundations, and venture philanthropy groups can all be highly productive sources of CRO deal flow. These organizations all recognize strong CRO partners as a means to help portfolio companies and grant recipients be more capital-efficient by getting product to market faster, so why aren’t CRO’s across the board taking advantage of this opportunity?

Basically, it comes down to a question of finding the right partners and building a relationship. In an industry that is defined by fit, it is critical for service providers to know who is actively investing in companies reflecting their area of expertise. LSN is specialized in sourcing these emerging opportunities, and increasingly, CROs are showing an interest in tracking this information. Forging alliances with the right investors early is the straightest route to sustained future business, and identifying those entities will define the winners (and losers) in the CRO space in the future.

 

By Michael Quigley, Research Analyst, LSN

It is no secret that more and more hospitals in the US and across the globe are beginning to store their patient records electronically: One of the biggest drivers of this trend in the US is the HITECH Act of 2009, which allocated nearly $30 billion to increase the use of electronic health record systems (EHR), primarily though incentive programs. Currently, under this act, hospitals that have not implemented the most basic form of EHR by July 1st, 2014, will face monetary fines that will increase over time. Furthermore, some institutions – such as the Patient-Centered Outcomes Research Institute (PCORI) – are working to develop a national, patient-centered network for clinical research that will work on improving both the quantity and quality of patient provided data.

This increase of electronic patient data is great news for companies in the health industry for a variety of reasons, but especially when applied to clinical trials: Currently, screening for clinical trials (as well as the trials themselves) often omit numerous significant factors of a participant’s health profile. With this data becoming readily available and standardized, companies will be able to dilate their inclusion criteria for candidates in their trials based on a myriad of different variables, including age, weight, race, gender, lifestyle, and perhaps most importantly, genomic data. By understanding these variables, research organizations will be able to more effectively understand how their products effects different patient types, while avoiding screening patients for trials that they do not want.

Take cancer, for example, most patients are over the age of 65 and have some sort of chronic health condition. However, in clinical testing conditions, most candidates around the age of 50 are pre-selected to only have cancer. What ends up happening is that you develop a product that will be used on a market that it has not been sufficiently tested on. Having more easily available patient data could greatly reduce this dilemma and enhance the potential benefit of personalized medicine. Also once clinical trials are completed, as it currently stands, the connection between the research organization and the patient comes to an end. But with the continued uploading of patient data, whenever they visit a doctor, more long-term effects could be evaluated as well. (1)

As more data is continually made available, the resulting increase in the efficiency of clinical trials is great news for established and emerging companies, as it may chop away at the daunting $1b number that is often associated with getting a drug on the market. This data doesn’t just have the potential to lower the cost of trials; it also gives companies greater visibility as to potential reasons for why their product did or didn’t work, and what they could alter to make it more effective, thus increasing the effectiveness of drug production process on an even larger scale. So what does it mean for the industry at large? CRO’s in the trial space should adapt and find an edge in this arena to compete for the myriad of trials due to come from emerging biotech firms. Investors should re-evalute their investment timelines due to potential shortening of time to market, and emerging biotechs should focus on more niche opportunities for treating specific subpopulations within indications.

1. Mearian, Lucas. “How Big Data Will save Your Life.” Computerworld. Computerworld, 25 Apr. 2013. Web. 11 July 2013.

By Jack Fuller, Business Development, LSN

LSN has written extensively about the repurposing of drugs, virtual pharmaceutical companies, and the benefits of developing products that have a well-defined pharmacological profile. This trend continues with basic research at established companies often gets squeezed out by small, short-term projects, which promise an incremental improvement or a patent extension. Conversely, it is the goal of every emerging biotech and medtech company to develop the next great technological innovation and secure the capital financing to bring the product to commercialization. This sentiment was recently summed up by a panelist on emerging trends in neurological diseases: “the investment follows the scientific breakthrough,” he said. This got me thinking about the ways in which investors qualify potential opportunities for investment; while the quality of science is a major factor, many fundraisers neglect or downplay other factors that can easily make or break a deal.

LSN often engages both investors and capital seekers, and has seen several trends and common mistakes when talking to investors. This is by no means a complete list or a guide to fundraising, but rather some key observations and comments. Each type of investor and each individual presents a different challenge and requires a high level of finesse, tact, and persistence.

The life science investor landscape has fragmented in the last five years, but often times even experienced fund raisers are stuck trying to raise capital the same way they did before 2008. If you are reading this, you might recognize that updating your fundraising strategy and understanding the current investor landscape is one of the most important and certainly the first step in raising capital today. It does not matter how experienced a fundraiser you are, everyone needs to understand the current investment landscape and how it is changing.

If you are fundraising for a company, you are actively engaged in an outbound marketing campaign. Congratulations! Every PhD, MD, MBA, and individual in your company must know the message you are sending to investors. This should be reflected the information you release to the public, as well as in what you tell investors. When was the last time you updated your website? An investor will look at a company’s website and will make an instant, if sometimes unconscious, decision as the legitimacy of the company and management. The message of a company must be clear, concise, and uniform among all public and private forms of communication with an investor.

Investors can go from interested to apathetic over the course of a single sentence. This can take several forms; the most common we have seen is the tendency to stray from the primary asset under discussion, trying to oversell an asset, or anything that would put into question the dedication of the management team. Many times, people will be working on multiple projects, assets, or even companies. Similarly, a product may have several possible applications beyond the focused indication currently in development. Bringing attention to either of these can immediately sour an investor, as they want the undivided attention and focus of all aspects of the management team. Investors need to know the technology is breakthrough, and the team behind the product is utterly and completely dedicated to its success.

The points highlighted above are only a small cross section of the total package required to run a successful fundraising campaign. Most people in the fundraising process are acutely aware that an investment will never happen if the science is not well-presented. Unfortunately, many people neglect some of the basic marketing and presentation aspects that can just as quickly sink a prospective deal. However, these pitfalls are easily avoidable with a little bit of foresight in the form of a legitimate, calculated marketing effort.

By Max Klietmann, VP of Research, LSN

LSN is a major proponent of the importance of finding exact fits. In an industry that is becoming more complex, granular, and specialized, finding exact matches is key to success – whether it is a matter of finding prospective clients, investment targets, strategic partners, or investors. LSN discussed this recently in the context of niche specification among CROs, and how it is more critical than ever to be able to source highly qualified leads.

In light of this, LSN is delighted to announce a new feature in the LSN Companies database: Search by therapeutic sub-sectors has been implemented, allowing users to search for specific indications. For example, searching for specific cancer indications such as gastric cancer, leukemia,  pancreatic cancer, and 45 other sub-indications of cancer is now possible.  This search feature has been implemented for all indications for “Companies” and “Products.”

What makes this so powerful is that it allows users to enhance their search granularity even more, shortening the time required to qualify leads, and to make outbound campaigns even more effective. LSN continues to watch industry trends and incorporate client suggestions into its platforms. In doing so, LSN products are a direct reflection of what the industry needs today and will require going forward to effectively meet and exceed its goals. Stay tuned for more announcements coming soon!

By Max Klietmann, VP of Research, LSN

We are all aware that the IPO market has been less than stellar in recent history. This lack of exit opportunities has been particularly troubling for companies in the life sciences space due to the long time to market and considerable regulatory risk associated with drug development. Logically, M&A exits via strategic buyers has become the predominant exit route for many emerging biotech and medtech companies. M&A is of course not a new phenomeneon, however there is a significant trend in how these deals are being structured. Increasingly, M&A activity in the industry has been characterized by “acquisition via earn-out.”

Earn-outs are essentially pre-defined payments based on specific milestones. As an example, a strategic buyer would buy out an early-stage company (or asset) at phase IIa for a relatively small amount. Then, as the asset hits specific milestones (typically regulatory milestones), payments are triggered. One can think of it almost as a risk-adjusted buyout over time.

The advantage to this deal structure of course is that strategic buyers can afford to engage in more buyouts without putting too much capital at risk in the event of a failed trial. This is good for entrepreneurs and corporate buyers alike, who can diversify their bets on a myriad of assets.

This has overwhelmingly become the model for buyouts in recent time, and will likely become the standard. Moreover, the proportion of money in the upfront payment-versus-milestone payments is shifting as well. This means that entrepreneurs in the space seeking to exit via a strategic partner are likely to see an uptick in exit opportunities via this type of deal model. In turn, patients will see more drugs make it to market, and investors will see a significantly less volatile industry. All-in-all, this is a trend that is bound to solidify its position as an industry standard.

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.