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What’s New in The Valley of Death?

7 Jan

By Max Klietmann, VP of Research, Life Science Nation

In the world of big pharmaceutical companies, there exists a void that is the transition phase between promising academic laboratory discovery and the validation of a particular compound’s commercial viability – the so-called “Valley of Death.” This gap exists due to the high amount of risk associated with testing the feasibility of a product so early in the pipeline, which naturally places it far from an exit. This gap has long been an issue for the industry at large, because even though many investors don’t wish to invest so early, avoiding it leads to a diminished pool of strong future investment opportunities, and, on a larger scale, limits how many compounds will successfully make it to market. This is not due to shortcomings in trials, but rather, because of a pure shortage in capital. Most of the large pools of capital, especially venture capital, are no longer making allocations in this area. And despite the fact that large pharmaceutical companies are beginning to invest earlier and earlier in the pipeline, they can’t bridge the whole valley on their own.

Fortunately, a novel funding trend within foundations, nonprofits, and other philanthropic organizations is beginning to address this issue. Worried that potentially valuable treatments will be lost due to a dearth of risk-prone investors, funds are recognizing the vital importance of bringing more technologies over this funding gap. As such, many of these organizations are offering grants for specific indications to help increase the odds of new compounds entering the clinical stage. Keep your eyes open for family offices to begin targeting this space with their high-risk or philanthropic allocations as well, as investment momentum begins to accelerate in this area.

Simultaneously, novel for-profit drug development platforms have started to address this gap by in-licensing emerging technologies, developing them past discovery stages and into early clinical trials, and then promptly exiting these assets into pharmaceutical companies now targeting early-stage products. This is mainly a product of large pharma offering a compelling exit for investors in early stage assets as much as a decade earlier than one would traditionally expect.

These trends have massive repercussions throughout the industry, not only for emerging biotechs and investors, but also for service providers such as CRO’s, who will be presented with a rapidly growing population of potential clients. As the “Valley of Death” is bridged, there is an incredibly powerful gearing effect that will help to accelerate the market faster than ever.

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Family Offices Moving to Direct Investments

7 Jan

By Dennis Ford, CEO, Life Science Nation

Historically, single and multi-family offices hired asset managers to help allocate capital adroitly in order to preserve wealth for future generations. The majority of this capital was traditionally placed into the hands of asset managers that focused on conservative holdings. At the same time, however, almost every family office maintains a smaller pool of capital for riskier assets. In the past, this capital was placed into higher-risk vehicles like hedge funds and PE fund with the hope that these investments could offer outsized returns. However, as returns have slowed and, for many funds, turned to heavy losses, it has become unjustifiable for many family offices to keep their capital in an objectively broken asset class. Increasingly, the trend in family offices seems to be heading down the path of direct investment in a variety of industries. These firms are executing this strategy, with the help of trained Wall Street talent, easily plucked from PE and hedge fund firms abound in NYC, London, and Hong Kong.

Arguably, this may make sense for family offices long-term as an investor class, as most family offices are the product of entrepreneurial initiative and investment in what was, at one point, “the next big thing.” This is a documented trend that is picking up traction and may be ready to emerge full force in the near term. Due to the nature of family offices, this is particularly interesting for companies seeking to raise capital; unlike PE firms, family offices can be very quick on their feet and do not have to stick by an investment mandate if they choose not to. Family offices are flexible, and that flexibility can translate to opportunistic investment. Collectively, they are beginning to make waves with large amounts of small investments.

The rate of direct investment is increasing as family offices start to look more and more like PE, VC, and hedge funds. What’s most compelling is that they do not have to pay the “2 & 20” typically garnered by the fund managers who used to manage their money – money managers routinely get a 2% fee of all the assets they manage, and a 20% percent fee of any profit they make. Family offices, then, are doing the math of declining returns – voting with their feet, moving away from the traditional mangers, and taking it all inside (sans fees, of course!) This suggests a trend with momentum and will have some profound effects on the space over the coming years.

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Private Equity vs. Venture Capital: Two Very Different Approaches to Investing in the Life Science Sector

7 Jan

By Danielle Silva, Director of Research, Life Science Nation

Venture capital (VC) and private equity (PE) investments in the life science space differ greatly from the typical private equity and venture capital model in other sectors. Typically, venture capital groups will be earlier stage investors – investors who will consider smaller or even pre-revenue firms – that require a small amount of capital ($750,000-$20 million) in order to get their companies up and running, as well as scale their business. Venture capital funds also tend to focus on firms that have little to no debt.

Private equity groups that invest in areas outside of the life sciences space, on the other hand, usually invest in firms that have a greater amount of debt on their balance sheets, and companies that are more mature and have predictable revenue streams. Typically, private equity groups (PEGs) will make equity investments starting at $2 million to $100 million, and larger groups can write checks that are in the hundreds of millions.

It is also worth noting that VC funds typically invest in a greater number of firms because their typical equity investment is smaller, versus private equity funds, which invest in a smaller number of firms, but write larger checks. VC funds also invest in a larger number of firms for diversification reasons, while private equity groups typically have fewer portfolio companies because they are investing in firms based on their financial statements, which presumably makes an investment less risky.

Recently, venture capital funds have faced a number of challenges; due to lackluster performance, many limited partners (LPs) have pulled their investments from underperforming funds, causing many venture capital groups to collapse. Thus the number of VCs that are operating in the life sciences sector has significantly declined. Accordingly, the percentage of funding the life sciences space has received as a whole from these investors has decreased over the past several years. Additionally, many VC funds have drastically changed their investment strategy in the space. [1]

All this has caused VC funds to have a more risk-averse approach to investing in life sciences firms, generally moving to later stage investing. This in part is due to the firms desiring a shorter-term investment period. And because later-stage investments are more appealing acquisition targets for big pharmaceutical companies, many are also now focusing on drugs that have lower FDA standards in terms of efficacy and safety, such as orphan drugs. Thus, VC funds in the life sciences space are now devising exit strategies prior to the firm even making the initial investment in a company.

Private equity funds take a very different approach in the life sciences space. Some of these funds are now investing in biotech firms as early as the pre-clinical phase of development in order to fill the gap for many life science firms funding needs. One way in which funds have started to invest in life sciences firms earlier is through a process called project financing, in which the private equity group will purchase the rights to one or more lead candidates early on in the development process, and finance the life sciences firm through the end of phase II clinical trials. If the firm has positive data in the clinical II testing, the investor will then have the right to repurchase the candidates. Thus, private equity has adopted more of a growth approach to investing in the life sciences space as of late.

Some private equity funds in the life sciences space are still looking for firms that are generating revenue so that they can eventually sell the firm to larger strategic partners. This is especially true for firms that are investing in CRO’s and medical device companies, as private equity funds will typically acquire these companies when they have around 2-4 products on the market, scale their businesses, and subsequently sell them to the larger strategic partners in the space.

Although venture capital is sometimes categorized as a subsector of the private equity space, these two types of investors could not be more different in terms of their approach to life science investments. Venture capital funds have been forced to become more risk-averse and focused on exit strategy in order to survive as life science investors, while private equity groups are becoming increasingly focused on scaling up these firms, and accordingly, are filling a portion of the void in funding for earlier stage firms.

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[1] Hamilton, Michael D. Trends in Mid-Stage Biotech Financing. Hanover, NH:     Dartmouth, Winter 2011.

 

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Entrepreneurship: The Genealogy of Family Offices

17 Dec

By Life Science Nation CEO, Dennis Ford

Next year will bring tremendous pressure to the venture capital and private equity universe, mainly due to the fact that the fundraising environment will remain sluggish, with the exception of a handful of connected and in-the-know global firms. In an investment atmosphere as dynamic and unpredictable as the last decade, most firms have few performance metrics or market insights to hang their collective hats on. Poor returns mean an inability to raise capital in future rounds, crippling a class of investors. However, the limited partners (LPs) haven’t disappeared from the face of the planet, so what happens when PE and VC cannot preserve capital? Enter the family office, with a lineage and a genetic proclivity to take a shot and win big in nascent markets.  Not a big leap – as this is how the core capital of most family offices was created. These fortunes are primarily the hard-fought spoils of entrepreneurial risk-taking in the past. It’s how they won so big in the first place. This entrepreneurial attitude and willingness to do big things hasn’t disappeared – the apple doesn’t fall far from the tree.

Traditionally, a family office is an organization explicitly charged with the mission of managing a family’s wealth through adroit investment – directly, with fund managers –while sprinkling some philanthropic dollars around as well. The purpose is to preserve a fortune and legacy. This wealth has been accumulated over generations, and the entrepreneurs who garnered this capital were not shrinking violets. And as times have changed, family offices have morphed and partnered with other family offices as well as other high net worth investors. The status today is that these new-age family offices can manage and invest their own capital as well as, if not better than, their once-trusted fund managers. In recent years, family offices are teaming with like-minded brethren and investing right along with them. The fact of the matter is that this tactic aligns and makes perfect sense.

Is it time to put family offices on your global target list of investor candidates? You bet it is! Just as angels have banded together and lead the way on group investing, so goes the new way of the family office groups. Unlike angels who can help get a startup launched, the power of a band of family offices, or multi-family offices with a like-minded investment mandate, is staggering.

This new investment gestalt is actually right in line with how wealth was typically created in the first place, so they know intrinsically how to evaluate a business opportunity and will not get flummoxed by any deal terms. The news here for life science entrepreneurs is that there may be an additional layer or two to get through but at the end of the day, it will be a lot quicker than the processes put in place by the PE and VC firms still trudging away out there. These family offices will have a gate keeper who will do the initial vetting and then if successful, forward you to an in-house evaluator who will in turn bring in the researcher or scientist to look under the hood of an opportunity.

Last but not least is that philanthropy and life science investing are in the same purview and thus compelling to these new investors. When a new drug or medical device gets a hit, it’s a billion dollar hit, and that fact isn’t lost on these new life science investor entities.

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Deal Sourcing in the Life Science Arena

17 Dec

By Max Klietmann, VP of Research, Life Science Nation

Anyone who has spent even a minimal amount of time in the world of private equity deal sourcing knows how heavily labor intensive, inefficient and costly it is to unearth the gems that make a strong investment. When speaking with investors in private companies, the typical number of deals reviewed per investment made is an 80:1 ratio. In the life sciences industry, this ratio becomes even more disheartening. It doesn’t take an expert to understand that that is a very low productivity rate – so why does this problem exist in an industry that is often viewed for its uncanny ability to net things out?

Fundamentally, it is a problem with sourcing the right information from the right places at the right time. Private equity firms typically source deals in the space using a blend of life science databases, industry-centric relationships that run the gamut from academic labs and start-up incubators to brokers and personal network referrals, and screening mountains of regulatory filings and press releases. The process is costly – both in salary and time – and even those private equity funds with industry-leading proactive origination processes often resort to making cold calls into companies produced by web searches. The reason for this inefficient process is that none of these sources are able to give investors an accurate image of the industry landscape as a whole from the precise perspective they need. Moreover, this problem is exacerbated by the dynamic of development in life sciences.

Add to the mix that pharma is now actively targeting products earlier in the pipeline, and in more and more cases it is preclinical investment that is invigorating the new mantra of innovation-through-acquisition. This bodes well for the thousands of emerging biotech’s populating the life science market today – and suggests a strong environment for PE.  But how do investors uncover these opportunities and how do they become visible to the entities they want to be discovered by?

Typically, the art of finding and filtering starts with generating a list of targets to vet. Traditional databases don’t have an edge. Anyone familiar with traditional data providers knows that markets are mapped using a labor-intensive, top-down approach in which company profiles are prioritized according to the percentage of an industry that they represent. Due to this, most companies in these databases need to reach arbitrary financial and employee metrics before they are able to be tracked due to the resources required to do so. The downside to this approach is that it is costly, often inaccurate, and typically fails to include the emerging enterprises that give private equity investors an edge in the industry.  LSN researchers have uncovered and documented close to 2,000 hard-to-find emerging biotech, medtech, and R&D companies to date, and estimate that that represents anywhere to 40-60% of the marketplace.

The closer to where the R&D originates in small and emerging life sciences companies, the harder it is to gather reliable, current data. This forces life science investors to basically go at the process region by region, starting with the well-known geographic life science centers looking for the hidden gems. This of course means all the outlying regions are being overlooked where the real hidden investment pipeline filling gems may be!

In short, other than arduous, tedious, methodical research, there just haven’t been the tools to get a sophisticated investor a thorough picture of the life science investment landscape. Sourcing key emerging players in the global life sciences community will continue to be one of the ongoing challenges that hopefully can be solved by the next generation of life science information providers.

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Top Value Drivers in the Life Sciences Industry

17 Dec

A look at key elements that will help differentiate your company from the competition.

By Dr. Susanne Acklin, September 2011*

Introduction

It is generally agreed among valuation experts that management, market potential, technology, products and services are among the top value drivers for a life sciences company. In this article, we will take a closer look at key issues within these topics that, in our experience, are often overlooked and, when thoughtfully addressed, can help to distinguish a company from its competition in the eyes of an investor or potential development partner.

Top Value Drivers

Management

Many investors have learned from experience that a company with good technology and bad management is likely to fail, while a company with good management still has a chance to succeed despite technology challenges. When we value a company, we see the management team as the “insurance policy”, the executive arm that will ensure that a given development strategy is effectively implemented in a real life business environment, that challenges will be met and that hurdles will be overcome. As such, in our view, identifying and addressing the following key issues can favorably distinguish a company.

Key Issue: Management is wearing too many “hats”:

In a small to midsize company, it is often the case that a small management team covers a large area of responsibilities. We see, for example, companies where the CEO also covers the role of Chief Scientific Officer, Chief Financial Officer or Business Development officer, and, as a result, one or several of these functions that are critical to a company’s governance and growth, gets less than adequate attention. While such resource issues often cannot be immediately remedied, a clearly outlined hiring strategy as well as the temporary enlistment of qualified members of the board and/or third party advisors to cover management gaps, can help to avoid raising “orange flags” in the eyes of an investor. In addition, although this is not always possible due to logistic and tax reasons, instating a management and employee stock option plan can give an added sense of stability and help demonstrate that a company is serious about attracting and retaining key talent in the future.

Key Issue: There are “gaps” in expertise:

Gaps in expertise in critical fields including regulatory affairs, manufacturing and intellectual property, while often unavoidable in startup and even in midsize companies, can, if left unaddressed, lead to missed product development milestones, increased development costs and ultimately to a decrease in product and company value. While it often does not make sense to fill such expertise gaps with full time, in house personnel at an early development stage, it is never too early to identify and retain qualified external advisors to help put together the initial elements of registration, manufacturing and intellectual property strategies. Often such proactive behavior can save a company thousands of dollars and go a long way to lending credibility and substance to a given corporate or product development plan and associated future projected earnings.

Technology, Products and Services:

A technology platform, products and/or services often represent a high-growth company’s main assets and as such form the foundation of future projected earnings. Most technology companies excel at understanding their technology and its potential, they often have already  demonstrated proof of concept for their lead product(s) and now are looking for financing to help with further development steps. The challenge often lies in moving from initial proof of concept stage to focusing on and executing solid development strategies for lead products. Here are some of the critical issues that we tend to see inadequately addressed.

Key Issue: Intellectual Property (IP) Protection:

While the majority of technology companies have filed initial patent applications to protect their platform and lead products, questions of prior art and freedom to operate are often unanswered. Regional IP and marketing strategies are not always aligned, and the importance of having a reliable process in place to capture and protect existing “know-how” and identify future patentable inventions, is sometimes underestimated. The old adage of “you can’t sell what you don’t own” comes to mind, and demonstrating that a company has a solid intellectual property strategy that goes further than an initial patent filing can be a key competitive advantage in the search for funding.

Key Issue: Regulatory Affairs:

While the importance of regulatory requirements as they relate to clinical product development is generally recognized, some companies with products in pre-clinical development underestimate just how much time and money a well thought out registration strategy, even at this early stage, can save. In addition, it is nearly impossible to accurately estimate the development costs and timeline for a product without having put together a registration strategy and, as a result, projected earnings and cash flows may be inaccurate. Looking at the registration path for already marketed products in similar indications can give invaluable insight as to what type of data regulators will expect for a drug that is still in development. Regulatory affairs is all about understanding the rules and how to adapt them to a specific product by applying a well thought out scientific rationale. An experienced, external regulatory affairs advisor with expertise in registering products in target markets can be worth his/her weight in gold, and initiating regular discussions with such an advisor early on provides added insurance that a company is on the correct path, especially at a time where there are seemingly many possible avenues open.

Key Issue: Manufacturing:

It is said that “the devil is in the details” and we find that this is certainly true when it comes to manufacturing. This is especially a topic for biotechnology companies who are in advanced preclinical development; a point in time where initiating discussions with a contract manufacturer who is qualified to produce a technical batch and who will work out initial scale up issues, can save a lot of time, headaches and money. A company that can demonstrate that it has a plan to address questions of stability and quality control (including efficacy testing for clinical trials material prior to batch release) will have a much easier time with regulatory authorities, investors or development partners.

Market Potential:

Most development companies have a good understanding of the general target markets for their products. In some cases, however, management can be too optimistic when it comes to estimating market penetration and the number of patients that may benefit from a given product.

Key Issue: Overestimating the Market Potential:

An honest look at the efficacy and safety proof of concept available for a given product, paired with a realistic assessment of the competition, goes a long way in correctly estimating the product’s ultimate position and success within a given market sub-segment. When it comes to assessing the competition, it is important to consider not only products that are currently on the market, but also those products that will be approved by the time your product is ready for market entry. In addition, issues such as cost of production and product pricing as well as reimbursement by insurers and hospital formularies are potentially critical to a product’s market success and need to be addressed. Needless to say, they present yet another excellent opportunity to set a company apart from the competition with a relatively small amount of effort.

Conclusion

We hope we have provided you with a few helpful hints on how you can distinguish your company in the eyes of investors and development partners. If you would like to hear more about the “Venture Valuation” approach to high growth company valuation, you can find additional information on our company website at http://www.venturevaluation.com. In addition, the customized, onsite workshop, that we conduct as part of each company valuation we offer, can be an invaluable tool to help identifying hidden assets and value drivers specific to your company. During the valuation process where you work directly with our experts, you can develop value-based management strategies aimed at highlighting strengths and addressing weaknesses prior to approaching the investor or partnering circuit.

Dr. Acklin is Senior Advisor & VP Life Sciences at Venture Valuation and has over 15 years of experience in the global pharmaceutical and biotechnology industry. She holds a Ph.D. in Neurophysiology/Neuropharmacology from the Biocenter of the University of Basel, Switzerland and completed post doctoral studies in medical sciences at the University of Toronto, Canada. Her professional background includes executive roles at Axentis Pharma (Chief Operating Officer); Viron Therapeutics (Senior VP Product Development), the University of Western Ontario (Associate Director, Business Development and Technology Transfer); and Eli Lilly and Company (Manager Regulatory Affairs and Clinical Research).

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CRO’s Targeting Emerging Biotechs

17 Dec

By Brian Gajewski, VP of Sales, Life Science Nation

Recently, I had a call with the head of business development from a top-20 CRO in the Boston area. He commented that he was looking for small and mid-size privately owned biotechnology companies developing therapeutics. Our discussion made clear the challenges currently facing CROs that are looking to sell in the space, and how important it is to find such targets.

What makes this category of companies so important to him is the enormous amount of future value that can come from a relationship established early in the product development pipeline. However, it is difficult for many CRO’s to justify the amount of time and resources that are needed in order to identify those emerging opportunities. This gives CRO’s s few options: continue fighting incumbent service providers in the large pharma and academic markets (highly unproductive), dedicate staff purely to prospecting emerging companies (very expensive).

A major problem, he said, is that all of the data suppliers he was aware of in the space are unable to accurately map out the emerging segment of the market place. They do a great job at researching mid to large size biotechnology companies, but many of these opportunities have already been exhausted. This is no surprise – traditionally, markets are mapped using a labor-intensive, top-down approach. The incremental costs and resources required to cover the considerably larger population of emerging companies regularly is simply not economical using this method of data collection. Therefore, there are certain metrics that companies must meet to even be included, be it a certain revenue level, number of employees, or other “minimum threshold.” Needless to say, this leaves many prospective CRO sales opportunities in a “gray space.”

Secondly, he made it clear that he wanted to “see the money” – highlighting the importance of understanding a company’s financial security before spending too much time pursing it as an opportunity.  All too often he watched his sales executives research a new prospect that looked promising, only to find out after a few calls and meetings that the prospect did not have the capital to buy their products. Many CRO business development executives can likely relate to this frustration.

Immediately, I could tell that I was speaking with the right person. Small and emerging biotech companies and their relevant financial data are Life Science Nation’s primary focus and differentiator in the market.

When LSN started collecting data over 10 years ago, we decided to take a totally unorthodox approach to mapping the industry in a way that included aggregating these small and emerging companies, without requiring the massive overhead of other data providers. We achieved this through two primary tactics; first, we created exclusive relationships with over 40 regional biotechnology clusters around the world by literally taking over the management of their membership directories (netted LSN around 20,000 profiles) for a very compelling price point, freeing up staff and bringing their constituents global visibility on the LSN sourcing portal. Our second tactic was partnering with conference providers who cater to small and emerging biotechs -LSN arranged an alliance whereby we were handed all of the profiles of the conference attendees. These two tactics enabled LSN to offer unprecedented insight into emerging life science companies. This insight includes information on historical financing rounds, products in the pipeline, and management contacts.

The value proposition to CROs is undeniable, as it is this piece of the market that offers CRO’s the highest future growth potential and the opportunity for the most repeat business looking forward. LSN is truly a must-have database for any CRO looking to sell in the space.

Brian Gajewski is the VP of Sales at Life Science Nation. He is in charge of developing and managing the global sales strategy in North and South America, Europe and Asia. In addition to direct sales, Brian manages all of the channel functions for both the life science companies and the life science investor product suites. Brian is an experienced sales executive who brings valuable knowledge to the LSN team.

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