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.

September 16, 2013, 60 State Street, 33rd Floor, Boston, MA

By Dennis Ford, CEO, LSN

After attending a dozen or so investor conferences over the last year, I was amazed at how lopsided the attendance is. Presenters at these conferences – the folks looking to raise capital – are typically totally disproportionate to the actual “real live” investors with mandates to invest. In some cases, it’s astonishing; recently, I was at a three-day conference that had one 45 minute panel of VCs – and that was it! Even worse, most of these investor conferences are just a mosh pit of 3rd party service providers seeking funded startups to sell their products to.

Like any entrepreneur, I couldn’t help but think that there has to be a better way of matching early stage science with early stage investors. In light of that, LSN is pleased to announce Redefining Early Stage Investments, an ongoing global conference series focused on creating and maintaining a dialogue between emerging therapeutic, diagnostic, and medtech companies, and early stage life science investors.

As the name implies, this conference series aims to present the new landscape of early stage investments in life sciences, a rapidly shifting arena in which yesterday’s rules are no longer in effect. The traditional path to raise capital has been through friends & family, angels, government grants, and venture capital. Government sequestration and VCs with limited mandates has made the pool for capital in those two venues tenuous. However, new investors have entered the arena, and Redefining Early Stage Investments seeks to map out the new landscape.

So how is Redefining Early Stage Investments different? It seeks to fill the void left by traditional investors by identifying and actively including new categories of investors, including venture philanthropy, patient groups, corporate development, and virtual pharma. Previously, large institutional investors, family offices and wealth mangers would fund the VC channel, but subpar returns over the last decade have forced these entities to rethink past money manager-centric strategies, and now they invest directly themselves. These new direct investment players such as family offices, endowments, foundations, and pension funds are in it to win it, along with the other new active life science investor groups – hedge funds, mid-level private equity and angel syndicates. All the aforementioned entities have changed the life science investment landscape, and LSN wants to feature & connect these new players to the new innovators.

The conference will feature an exclusive partnering pavilion solely dedicated to early stage entrepreneurs and life science investors. Service providers will be there as sponsors, and there will be plenty of opportunities to meet with them as well. However, this investor conference is meant to be different in that it creates & facilitates meetings based on a common fit, which promotes compelling conversations and the development of qualified investor relationships.

The conference is an all-day event, set in the heart of Boston, the global hub of life sciences. It will feature eight unique early stage investor panels that will provide the latest perspective on the state of investments in the industry. These sessions will run concurrently with presentations featuring some of the hottest biotech & medtech startups in the life science arena.

Who should attend? Redefining Early Stage Investments is ideally suited towards emerging biotech & medtech companies seeking to raise capital or out-license technologies, early stage life science investors, companies seeking to in license emerging technologies, and organizations that sell products & services to emerging companies. Click here to register now!

By Max Klietmann, VP of Research, LSN

LSN has been covering the impact of personalized medicine as it becomes increasingly feasible for implementation in a variety of clinical areas. This convergence of big data, genomics, proteomics, and bioinformatics is fundamentally reshaping the treatment paradigm. One particularly interesting effect of the proliferation of these technologies is the way it is impacting early stage research and development. The trend that the industry is leaning towards is the development of therapeutics designed for highly specific patient groups with a particular make-up of factors correlated to treatment efficacy. Essentially, drug developers are creating niche products in anticipation of an age of niche treatments and a totally different competitive landscape.

In the wake of healthcare reform, the question of treatment efficacy has become a critical factor in determining the future success of a product (considering the tightening of reimbursement guidelines). However, the ability to determine the factors related to positive outcomes on the genetic level allows for the development of more effective treatments for specific patient subgroups.

Many emerging biotechs have recognized this reality, and are thus beginning to focus more in effective treatments for small populations, leveraging the power of genomics technology, which is rapidly becoming more and more affordable. LSN closely tracks emerging biotech companies globally, and the trend is clear – it is becoming increasingly common to see emerging companies in the preclinical stage targeting so-called micro-indication areas, rather than blockbuster disease categories.

This strategy is also compelling for investors, who are able to now target major indication areas with a strategy similar to that of an orphan disease company. The result is more compelling trial data, a higher likelihood of approval, and diminished risk. Essentially, the trend is becoming one of smaller, more secure plays rather than the macro plays of past decades. It means a more stable industry, more predictable returns for investors, and better care for patients. However, it also means that fit is more critical than ever when finding the right partners in terms of investors and suppliers, as the industry as a whole becomes more granular and targeted.