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Creating a Target List of Qualified Investors

29 Jan

By Brian Gajewski, VP of Sales, LSN

Many firms that are looking to raise capital in the life sciences arena have the difficult problem of finding a place to start – that is, figuring out how to gather a list of potential investor candidates to reach out to. As with most firms, the first pass at raising capital is with friends, family, and industry colleagues. This is a great category for the first couple million, but moving past this stage becomes a difficult task for many firms because of their lack of experience in raising capital.

Once a firm has exhausted the investments from that first stage of capital raising, the next step is to create a complete list of qualified investor leads that they can then begin reaching out to. LSN refers to this as a Global Target List (GTL). The fact that the life science arena is a global marketplace justifies getting past the regional mentality for fund raising efforts.

One of the first ways to start collecting investors is to target those that have invested in companies similar to yours over the past 5-10 years of financing rounds (another reason for the global approach). For that reason, it is very important to take the appropriate amount of time in performing research.  One best practice is to start by finding firms that are look-alikes, which are firms that have similar profiles to yours. This allows you to identify major investors in the space that have invested in similar firms based on therapeutic or device indication. For example, within the LSN platform, our clients are able to search through the past 12 years of financing in the life science industry by filtering the series & type of financing, as well as the date, sector, and phase of the product.

The next step in creating your Global Target List of investors is to create a list of foundations that might have an interest in your area of development. Foundations are a key investor in the life science industry because it fills two of their investment mandates – one being capital preservation, and the other, their philanthropic portfolio of investments. What is more interesting is that the donor lists to these foundations are in the public domain. The astute marketer can peruse this list and hopefully parse the high dollar donors and find a few nuggets that would be worth researching for an introductory call or meeting. The premise of this exercise is to remember that donors to foundations have a desire to move the science along for treatments and cures. Foundations are great vehicles to help move science along, despite being held back by process and bureaucracy. However, for some donors investing directly, companies that are moving the science along may be just as compelling.

It is important to remember that when your firm is raising capital, you are not just selling to people, but you are also selling to them a way to potentially affect the world. The most powerful reason for investors to allocate capital is that you are developing a cure for a disease that has affected them, their family or their people in their orbit.

Not only do you want to target foundations that might have an interest in your target indication, but also the major contributors to those same foundations. We are finding that more and more families are becoming interested in investing directly with a life science company.

Finally, you have to think globally, and create a Global Target List, but you must act locally – meaning, draw that two-hour road trip circuit, and figure out how many investors on your GTL are a short trip away. This is an excellent way to start to learn who your good targets are, and to give you the practice you need to make your presentations more compelling.

Now that you have a list of investors that have a specific interest in your type of company, it’s time to make sure you have the bandwidth to begin reaching out to them and tracking your success.

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Validating the Family Office Life Science Investment Strategy

22 Jan

By Max Klietmann, VP of Research, LSN

Anyone following my articles on investor trends in the life sciences arena knows that I am particularly interested in the emerging trend of family offices investing direct in life sciences companies. My interest in this space is that while family offices have a reputation of being very private and opaque, they compose an extremely important investor category. Aside from the findings aggregated by my research time via intensive web research and phone interviews, I try as often as possible to sit with wealth advisors and consultants to family offices to discuss trends we see and compare notes.

I recently had the opportunity to spend some time speaking with a managing director at a multi-billion dollar global wealth management firm focused exclusively on advisory services for family offices and ultra-high net worth private clients. We had a lengthy and involved conversation about the fundamental dynamics that are driving family offices to invest directly in companies, and in particular, life sciences. I wanted to validate two important trends that we have been following at LSN: That family offices are recruiting top wall-street talent and internalizing the due diligence process with institutional operations quality, and that family offices are moving heavily towards making direct placements into private companies, especially in life sciences. We reached a few conclusions based on trends we’ve seen in the market that shed some light on how this category of investors is behaving in the space today.

The trend of family offices broadly beginning to make direct investments began to really accelerate in the wake of the recession; investors became disillusioned with highly non-transparent alternatives funds losing substantial amounts of capital, while still taking a hefty management fee. My conversation partner mentioned that he began to see a heavy trend in recent years of family offices withdrawing their allocations to these asset classes. However, this is not happening because family offices don’t believe in private investment; rather, they want the ability to transparently control allocations. In order to do this in a sophisticated way, they need the operational diligence that was traditionally only reserved for large funds and banks. In recent years, however, it has certainly become a trend that a larger family office will bring this expertise in-house by recruiting top talent (at a premium in terms of wall-street compensation, but for a bargain relative to the fees charged by fund managers).

According to my conversation partner, he has seen a trend of family offices recruiting top-notch institutional operations talent and due diligence capabilities from Wall Street. This allows them to make placements directly in companies in order to have consistent insight and a more compelling return profile. It is primarily the large family offices with total assets above $100 million that are able to justify this sort of institutional approach to allocating their own capital on a consistent basis. This is a key demarcation line, as it is really only above this threshold that a family office can afford to consistently allocate capital on a regular basis towards investments in a substantial way (above angel-sized contributions).

This type of activity has recently seen a substantial increase in several industries, but especially in the life sciences sector. What makes this investor class so appealing to CEOs in the space is that the way in which family offices operate is very much unlike other private investment categories; typically, family offices seek to fulfill a philanthropic mission alongside their efforts towards capital-preservation. This makes direct investment in life sciences a particularly compelling opportunity, because it offers family offices the ability to make a targeted allocation with substantial financial and philanthropic upside.

More importantly, for CEO’s looking to raise capital, family office allocations in life sciences are often heavily motivated by a connection to a particular indication, meaning that they are strategic investors with an emotional motivation to help a therapeutic succeed in coming to market. This attitude was confirmed by our discussion, and it is likely that in a macro-sense this will be an increasingly important piece of family offices’ investment focus, as chronic diseases linked to old age become more prevalent in the coming years. These are not exit-oriented investments by any means, and it is typically the success of the therapeutic that constitutes the most important aspect of the investment.

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Investor Series: Selecting the Right Kind of PE Partner for your Life Science Firm – Part 2: Growth Capital

22 Jan

By Danielle Silva, Director of Research, LSN

Life science firms may often times find it difficult to select the right kind of private equity fund to partner with during their fundraising process. In order to pinpoint the right private equity group (PEG) to work with, the individuals tasked with fundraising at a life science firm must first gain an understanding of each private equity strategy. Last week, LSN offered an in-depth profile on buyout funds. This week, we shift the focus of our investor series, and take a deep dive into growth equity funds.

Growth equity funds, as their name suggests, supply an injection of capital into firms who are looking to expand or grow their businesses. Life science companies may be seeking this kind of capital in order to finance a major merger & acquisition, partner with a firm that has operational expertise, reduce personal guarantees on loans, or enter into new markets.

So why would a life sciences firm partner with a growth equity fund? Usually, because their business plans have been halted due to lack of available capital. As an added benefit, growth equity funds provide guidance at the board level. This means that one or more members of the private equity group will sit on the management board of their portfolio companies. Furthermore, growth capital funds usually take a non-controlling minority stake in firms, taking up to a 40% equity stake in a firm. This is because they prefer that the current management team continues to run the business.

Growth capital firms sometimes act like venture capital by providing companies with capital that helps them to accelerate the firm’s growth. However, unlike venture capital funds, growth equity funds only invest in established companies that have recurring, predictable revenue streams. For this reason, growth equity funds will not invest in an early stage, pre-revenue company. In the life sciences space, for example, a growth equity fund would invest in a medtech firm that already has one or more devices on the market. On the other hand, they would not invest in a medtech company, for instance, who has a prototype of their product, but does not have any products on the market.

Growth equity funds also vary greatly from buyout funds. Buyout PEGs typically generate revenue through restructuring a business, while growth capital investors hope to achieve returns by growing the business. Buyout funds also sometimes fully buyout a business owner, and thus do not prefer to keep the majority of the management team, whereas growth equity funds typically prefer that the current manager does stay with the firm and run the company.

Growth equity funds also have a much shorter-term holding period for their portfolio companies than both buyout and venture capital funds. Typically, growth equity funds will only hold a portfolio company long enough for their growth plans to be executed, and will then sell the business shortly after this expansion starts generating revenue.

Conversely, private equity funds typically hold businesses for longer time periods because it frequently takes longer for cost-cutting or restructuring measures to make firms increase their profitability. A venture capital fund typically has a longer time horizon than a growth fund because the firm is investing in an early stage company, and it tends to take a long period of time for these firms to become cash-flow positive, especially in the case of firms that are investing in pre-revenue companies.

Growth capital funds often focus due diligence efforts on forecasting the feasibility of the expansion that they are financing, rather than looking at the long-term attractiveness of the company as a whole. The expectation is that profits will be generated through the expansion of the company, and these profits will be used to return the capital that was provided by the fund.

When profits from the company’s expansion are not able to cover the capital that was provided by the growth equity fund, growth equity funds will employ an add-on strategy (similar to buyout funds) which will involve the acquisition of a smaller company, thus making the firm a larger player in their respective industry, with a larger market share. The cash flow that is generated from the company that is acquired can then either be used to increase the percentage of the fund’s equity stake in the parent company, or can be used to return capital to the fund.

Growth capital funds typically exit a company through a merger, or through an initial public offering (IPO). Therefore, because these funds seek to make exits through M&A or through an IPO, they typically work with larger and more established firms. Growth equity funds in the life science sector then, for example, would work with a biotech therapeutics company that currently has at least one product on the market, but would most likely not invest in a company that only has one product that is going through the clinical development process. Growth capital funds, consequently, can be very valuable partners for life science companies that are seeking to retain their current management team and are cash-flow-positive, providing these firms with the capital necessary to grow and expand their operations.

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Emerging Trends in the CMO World

22 Jan

By Alejandro Zamorano, VP of Business Development, LSN

Competition among the CMO world is at an all-time high. With one of the largest electronic providers in the world recently announcing that it would be spending an additional $2b to expand its operation in Seoul, some are left wondering when the arms race will stop.

Since 2004, CMO’s have seen strong growth as the industry has shifted to contract organizations to complete non-core functions. Despite the recession and a dwindling amount of investment in the biotech field in recent years, CMO’s have remained resilient. The CMO space is a crucial component in the biotech world today, and below are four emerging trends that will bear fruit in 2013:

  • Patent expiry of blockbuster drugs will force the industry to become increasingly price-competitive. Because of this, CMO’s will see lower margins, but higher volume, as manufactures increase production capacity to build economies of scale. [1]
  • Big pharma will continue to outsource non-core functions as they become leaner organizations. In the next couple of years, big pharma will begin to form strategic partnerships with CMO’s and CRO’s as they become increasingly reliant on their services. [1]
  • The CMO industry will see strong growth in emerging markets where skilled labor is considerably lower. China and India will see the strongest growth in the space for the next five years. [1]
  • The CMO space will see vertical consolidation as major players try to increase service offering. The next generation of “CMOs” will also specialize in drug discovery, toxicology, clinical research & development, and manufacturing.

The CMO industry is expected to grow at an annualized rate of 12.5% for the next three years, making the industry worth around $40b by 2015. Despite the optimism, the CMO industry is starting to suffer from increased competition and lower margins. The next generation of CMO’s will need to grow quickly and leverage their relationship with their existing customers in order to maintain a competitive edge. [2]

 

[1] Downey, William. “Bio-CMO Industry Trends – Contract Pharma.” Pharmaceutical and Biopharmaceutical Contract Servicing & Outsourcing – Contract Pharma. N.p., n.d. Web. 21 Jan. 2013. <http://www.contractpharma.com/issues/2012-05/view_features/bio-cmo-industry-trends/&gt;.

[2] Auerbach, Mike. “Contract Manufacturing Trends.” Pharmaceutical Processing. N.p., n.d. Web. 21 Jan. 2013. <http://www.pharmpro.com/articles/2011/02/business-Contract-Manufacturing-Trends/&gt;.

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Branding, Messaging & Identifying Investor Targets in the Life Science Sector

15 Jan

By Dennis Ford, CEO, LSN

The Importance of Marketing Collateral

When it comes to fundraising in the life science arena, your commitment to marketing collateral must be central to your campaign. This is because it is essential that your firm presents itself in a professional manner – everything from your logo and tagline, to your brochures and e-mail canvassing is a direct reflection of your life science firm. Investors want firms to demonstrate that they are savvy and understand that every aspect of their outward identity will be intensely scrutinized. For this reason, the professionalism of your firm’s marketing material is every bit as important as your concept and your business model. There are several areas of marketing that are pivotal to focus on in the life science arena, and therefore, these aspects of marketing must be addressed when launching a fundraising campaign in the space.

Positioning

Many life science firms face a dilemma; they have one compelling technology that simply has too many marketable uses. Positioning is the idea that only one application of your product is the most important; you need to pick one and stick with it, even if there are other practical uses. This does not mean that you have to abandon the other applications a product may have, but you cannot lead with three main product applications.

Positioning also has to be simple. Your product is a novel treatment, an orphan drug candidate, a better device – in a word, it has to be easy to understand. You can’t just mix-and-match products and markets on the fly. This leads to confusion, and dilutes your product’s marketability. The idea here is to make yourself relevant; using old tactics will yield familiar results. You must be competitive and self-aware in order to transcend the noise of a crowded marketplace.

Branding

When branding your firm, the value of simplicity cannot be overstated. For this reason, it is essential to adopt one simple, easy-to-understand message that encompasses your firm as a whole. Have you revolutionized a time-tested treatment? Your message is how. Did your firm develop a cheaper alternative to a prohibitively expensive drug? This should be the focus of your marketing campaign. Although this is a seemingly intuitive concept, as with positioning, the idea is to choose that main identifying factor and build your image around it, and it can be easy to lose sight of that. At the end of the day, you, your team, your message, and your company are a brand, and you must develop them well. This starts with a simple message.

As important as a central tagline is to delivering your message to the right people quickly, investors are necessarily going to want more information, and it is just as important to get these things right. However, this does not mean your firm should hinge itself on being thorough – simplicity is still the most important tool in marketing. As such, all life science firms should aim to have the following things in their branding portfolio:

  • An elevator pitch: 3 to 5 sentences describing who you are, and what you do
  • An executive summary: 1 to 2 pages tops
  • A power point presentation: 10 to 12 pages tops

Your tagline gets you in the door; these tools help make sure you stay inside. And their importance cannot be understated. Any marketing effort must be well rounded.

Creating a Global Target List

An important part of having a well-rounded strategy is to focus on the right targets. Marketers often make the mistake of attempting to reach out to as many investors as possible. However, this is usually not the best course of action. By adressing a wide audience of investors during the fundraising process, your firm is taking time and resources away from targeting a smaller number of investors who will ultimately end up being a better fit.

One way to concentrate your efforts is to create a global target list (GTL). A GTL is a list of all prospective investors that are a good fit for a life science firm, either created by your firm’s internal research team, or by a dedicated third party marketing firm. With a GTL, your fundraising team can roughly gauge the types of investors that would be most interested in your product based on its stage of the development process.

It is important to note that when using a concerted marketing strategy such as a GTL, life science CEOs should focus outbound fundraising efforts not only on the investor base that is a good fit for current capital raising efforts, but also those that will be a good fit two or three capital raises further down the line. Thus although your firm will be targeting a large list of investors, the return on the time you invest in reaching out to these investors will be much greater than typical brute-force canvassing. By establishing a concise dialogue surrounding your product early on, you can effectively streamline the financing of your life science organization, reducing the amount of effort and resources ultimately required over the organizational lifecycle.

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Investor Series: Selecting the Right Kind of PE Partner for your Life Science Firm

15 Jan

Introduction:

Identifying the right kind of investor to partner with can often be an arduous task for many life science firms. Private Equity Groups as of late have emerged as major players in the life science space, filling the funding gap that was created by many Venture Capital funds halting investments in the sector. Private equity funds typically have a long-term investment horizon, and because of their appetite for longer-term investments, they have recently been investing in younger firms in the life science space than they have in the past.

There are a number of different strategies that private equity groups employ; because of this, determining what strategy would be the best fit for your life science firm can be a daunting endeavor.  For this reason, Life Science Nation’s Newsletter will be running a series over the next three weeks written by LSN’s Director of Research Danielle Silva that will give in-depth insight into three of the most common private equity fund strategies, and will provide insight into what types of funds are best for life science firms depending on the firm’s financial situation and management team. The three–part series will run on the following dates:

  • Buyout & Recapitalization: 1/15/2013
  • Growth Equity: 1/22/2013
  • Mezzanine: 1/29/2013

Part 1: Buyout & Recapitalization Funds

For life science companies looking to raise capital, identifying the correct type of private equity (PE) group to partner with can often times be a challenging task. One of the first steps a life science company must take in order to select the right kind of private equity group to partner with is to gain an understanding of the different kind of PE fund strategies. Some of the most common private equity fund strategies include buyout, growth equity, mezzanine, distressed/turnaround, and special situations.

A buyout transaction is the most commonly used strategy amongst private equity funds. Buyout funds will typically purchase a company and hold them for four to six years[1]. Because buyout funds are long-term investors, many funds with this strategy have started to invest in younger companies in the life science sector, which traditionally have longer-term investment horizons. Additionally, there are more opportunities in the space due to many VC funds halting investments in the sector, with the remaining few opting to invest in later stage opportunities. For this reason, buyout funds may be a good fit for earlier-stage firms – for example, pre-revenue therapeutics companies that are seeking additional funding to get the firm’s product through the clinical development process.

Buyout funds usually buy companies through a leveraged buyout, meaning the private equity group will finance a portion of the purchase price using equity, and will use debt to fund the remainder of the transaction. The private equity group will pay back this debt by using the operating cash flow of the firm that was acquired by the fund. The firm will also increase the acquisition’s future valuation by reducing costs, increasing sales, and making strategic acquisitions (which are sometimes referred to as an “add-on” or “tuck-under”).

The term buyout, however, is almost counterintuitive because the fund does not necessarily buyout the firm’s stakeholders entirely. Some funds will entirely buy out a firm’s stakeholders. However, many firms use a technique known as a recapitalization (“recap”), which is a transaction where debt and equity is reallocated in the capital structure of a company. In a recap, a private equity group will take a majority stake in the business by buying out most (50% or more) of the business owner’s stake in their firm. A complete, 100% buyout would best suited for life science business owners who are looking to retire from the business. However, a recapitalization may be a better structure if the life science firm’s owner would like to remain involved.

In a recap, the owner has the chance to have an upfront liquidity event for the equity that is bought, as well as the opportunity to stay involved in the business with their remaining equity stake. This way, they can also have a second liquidity event after the private equity group sells the business. If the investment goes well, this structure should give the owner a larger total payday. This is an attractive option for life science business owners who may not want to retire, but have put up a large amount of personal guarantees to grow the business, or just need additional capital expenditures and management support to take their business to the next level. An example of this would be a business owner in the biotech therapeutics space who has been able to finance the discovery and lead optimization phases for the product they are developing, but needs further capital in order to fund the clinical trial portion of the development process. This structure is often also favorable for private equity groups as it is often the owner who has the technical knowledge or management skills that have been able to develop the product and grow the business to where it stands currently. Having that owner stay with the company with the incentive of growing their equity stake can help the private equity group ensure that the owner will continue to have an interest in growing the business.

Therefore, for life science business owners, a fund that uses a complete majority buyout strategy (i.e. a 100% buyout) may be an attractive option for an owner who wants to retire, or would like to move on to a different venture. A buyout fund that employs a recapitalization strategy, on the other hand, may be a fitting option for a life science firm owner who has taken on a significant amount of personal debt in order to grow the business, and needs further capital to cultivate their firm and their product or service to the next level. A recap thus would be most suitable for owners in the life sciences space who wish to still be involved in the firm’s management but doesn’t have enough capital to grow the company or feels it would be unwise to take on greater financial risk. Thus private equity buyout funds can prove to be an invaluable partner for many different kinds of life sciences firms, whether the owner is looking to retire, start a new venture, or wishes to remain involved in the business that they have built.

[1] Ribet, Michael B. “Understanding the Private Equity Recapitalization Opportunity.” Focus Capital Advisors Accessed January 14, 2013. http://www.fcateam.com/Portals/0/Recapitalize_your_Business.pdf

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Medtech Firms Expand R&D Effort via Acquisitions

15 Jan

By Max Klietmann, VP of Research, LSN

Medical devices and med-tech have become an increasingly attractive space for investment over the past several years due to the relatively short time to reach the market and diminished regulatory risk vis-à-vis therapeutics. As competition amongst investors for medical device investments and acquisitions have increased, several of the major industry players such as Medtronic and Boston Scientific have begun to make decisive moves towards investing in companies at earlier stages, and often seeding emerging device companies.

For large medical device firms sitting on massive stockpiles of cash, investment in younger startups makes a lot of strategic sense, as it affords them an easy way to diversify their R&D portfolio without having to take on the full risk of building out full-scale research operations in house. Deals between emerging medical device companies and large established corporations in this space are typically structured with some form of option or warrant to acquire the company at a given price further down the line. It is precisely this type of deal structure that reflects the mentality driving many large device firms to invest in startups in the space early. It allows them to place multiple bets with a secured option to acquire the most promising technologies further down the road, effectively letting them hedge against their own R&D risk. We have seen similar activity among large pharmaceutical and biotechnology companies, and it is undeniable that the corporate venture arms of large corporations are increasingly becoming a major source for early stage funding.

This is an important trend for CEO’s in the med-tech space who may not have previously realized that their early-stage product was a candidate for investment from a major player at such an early stage. Historically, these firms made tactical M&A moves, targeting companies with either a commercialized product, or one in the late pre-market stages. This has ceased to be the case, and corporate venture is now driving a large portion of early stage investments in devices. These firms are not just secure sources of financing – they also make excellent strategic partners for a variety of reasons, including a willingness and capability to share resources & know-how, as well as their established distribution networks. Moreover, there is a long-term incentive for these firms to acquire quality companies for their portfolios – as these firms are not exit-oriented investors looking for a quick return.

These changes in the medical device and med-tech investing space represent a paradigm shift as well as a resurgence of capital for early-stage companies in the space. This trend will likely continue throughout 2013 and beyond, and CEO’s looking to raise capital should focus on raising capital from these companies due to their multiple advantages as investors and partners.

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