By Dennis Ford, CEO, LSN

Before we jump directly into the potential benefits and issues surrounding crowdfunding, let’s clarify exactly what we are talking about. Crowdfunding within the life science arena can be divided into two categories: equity crowdfunding and philanthropic crowdfunding.

The latter is typically donations to companies developing therapeutics or medical devices. This philanthropic concept isn’t particularly new, and has been a key source of funding for moving science forward for decades, because there is no risk or upside reward on the part of the donor.

Equity crowdfunding, however, refers to an instance where the contributor is given an equity stake in the emerging life science company raising money. The passing of the JOBS act has allegedly allowed this activity as a fundraising tool for private companies.

Simple enough, right? Well, don’t be so sure, because the equity share is defined as a “security” by the SEC and FINRA, which makes the selling of equities fall under these regulated government agencies. This becomes an issue when taking into account that direct investment in private companies is a risky endeavor, and federal and state laws have heavily enforced regulation on exactly who can invest – typically, only those above a certain income and net worth can be deemed an “accredited” investor.

Crowdfunding, however, has created an opportunity for the smaller players to access high risk / high reward investments, which were previously only available to investment funds or high-net-worth individuals. The reason for all these rules and regulations in the first place was to protect vulnerable consumers from predatory financing opportunities that would be hard to understand, and net out the risks of an investment.

There is an obvious potential benefit to entrepreneurs looking to raise capital, as this opens up a significant pool of potential financing, but the water is murky – both on the regulatory side, and in terms of problems inherent in the crowdfunding model. The regulatory piece is most interesting, because there is an inherent contradiction in what is considered legal under SEC/FINRA vis-à-vis the JOBS act, which the regulatory authorities have been vague about so far.

Beyond the regulatory piece, however, there are a significant number of inherent problems with the crowdfunding model. The most significant is that a company that has used crowdfunding now has hundreds (potentially thousands) of investors to maintain a dialogue with. This is simply not feasible for most emerging biotechs, who have bigger problems to address than holding the hands of uninformed investors. Given the fact that the life sciences space is highly technical and complex, it isn’t possible educate a pool of people who don’t understand the science behind a particular technology. This also makes it almost impossible to effectively communicate the scientific risks involved in an investment.

Secondly, the amount of capital required to move products forward in life sciences is often massive, and it is highly unlikely that crowdfunding could meet this need. This means not only being exposed to potential regulatory issues, but also having to carry hundreds of investors along through subsequent capital raising rounds. There may be a place for crowdfunding in helping emerging biotechs and medtechs get off the ground, but as with everything else in the world, if it sounds too good to be true, then it probably is.

In short, the regulatory environment remains unclear, but this isn’t the core issue surrounding the feasibility of crowdfunding in life science sector. In my opinion, the main issue is that professional life science investors are a small minority because of the difficulty in parsing new technologies in a rapidly changing landscape. These life science investors have PhDs and a network of highly experienced researchers & market valuators that add to the cost of the risky business of life science investments. The resources required to educate and maintain a dialogue with a pool of hundreds or thousands of unsophisticated investors is a daunting task. Though equity crowdfunding may be effective for other industries, the complexities and problems inherent in the model make it extremely challenging for life science entrepreneurs. The jury is still out, the firmament is moving, and the fog has not lifted.

By Jack Fuller, Research Manager, LSN

As a whole, the life sciences really have one overarching goal, which is to develop and bring to market products that will in some way improve people’s lives. It doesn’t matter if you are an MD developing a life-saving medical device, or a CFO keeping an early stage biotech afloat. We all at some point recognize and pat ourselves on the back because the work we do has the potential to change even one life. This is not to say we (myself included) are enlightened saviors of the world; most of us are working to make a profit, for our companies, for our families, and for ourselves.

Then there are the people who have found – and drive forward – the missions of the hundreds of disease foundations around the world. We always knew they were doing good things: educating people on disease, increasing awareness, organizing pledge walks and even funding research grants for investigators at research institutions. Lately however, foundations around the country have been investing directly in projects and products at for-profit companies.

Foundations have the common goal of increasing the number of products being developed with the sole purpose of bringing treatments to patients. Conversely, the survival of any investment firm rests firmly on the bottom line, the return on investment. If the risk / reward profile is skewed too far, as in the capital requirements are too high for the risk involved, venture capitalists won’t touch the deal.  Foundations have seen the widening valley of death for early stage companies, due to the poor financial climate and reduced government spending.

As a result, a growing group of foundations are now taking it upon themselves to directly invest or set up separate bodies that invest directly in products and companies with the potential to bring products to the clinic. Autism Speaks is one such foundation. They recently founded an arm that has the mandate to invest directly in projects at for profit companies their scientific board believes will help treat the most severe cases of autism. Only months after their founding, they have injected $2 million into an early stage biotech company to fund a project that would have otherwise been too risky for such cash-strapped startups to finance.

Foundations and all forms of venture philanthropy are poised to fill the market need in the life science sector. With the goal of supporting early stage research efforts and passing it off to dedicated investors, we may see these patient centric treatments entering more company pipelines. The relationship between foundation and company provides value well beyond simply providing cash. Some of the foremost scientific minds sit on boards of these foundations, and provide a network and the scientific acumen to which a company might not otherwise have access.

Here at LSN we have identified over 400 foundations and endowments focused on curing specific diseases. As more join the growing trend of venture philanthropy, we will see even greater opportunities for early stage companies to pursue their most pioneering research. Overall, this trend can only mean good things for the future of emerging life science companies, and the patients we all serve.

By Max Klietmann, VP of Research, LSN

The cardiovascular device space is currently undergoing a major shift. Two major trends, the growth of renal denervation and the decline of cardiac rhythm management (CRM) devices will be central themes in the device space in 2013. In this article we will touch on both of these trends and what it means to emerging medtechs and investors in the space.

Renal denervation refers to a class of therapeutic devices targeting drug-resistant hypertension by ablating renal artery nerves. Essentially, the concept is to decrease blood pressure by widening the renal arteries. Every major medical device firm in the field is developing a product in this area, and many of them are buying up emerging medtechs to enter this space. Emerging medtechs that are able to show significant competitive advantage to large strategic investors are poised to become highly attractive targets.

However, all of the hype over renal denervation technology and its multi-billion-dollar market potential is quite obvious when we look at the CRM space. CRM – which basically refers to pacemakers and the like, used to be a primary source of reliable cashflow for major industry players. However, the space has become overcrowded, innovation isn’t there to create the incremental demand required to drive sales, and investors are pushing companies to move into the next big thing. So what does it mean for small medtechs in the space? The key is differentiation. A decline in investment means a decline in future competition, so finding a strategic partner with whom you can develop a differentiated product is a key to success.

Overall, investors and emerging medtechs should be wary of these two trends, and realize the potential to succeed that offer. Times of change are times of opportunity, so those who see where the space is moving will be the winners.

By Max Klietmann, VP of Research, LSN

Investor interest in companies developing gene therapy products has risen quite dramatically in recent months. In fact, according to the LSN Company database, 20 companies in this space raised new capital in the last twelve months (approximately 50%), indicating strong investor interest. But why are investors suddenly interested in this space again? It all comes down to a wealth of new data surrounding this space, suggesting that gene therapy may be more clinically viable than previously thought.

Gene therapy boils down to using DNA as a therapeutic agent for a specific indication. The basic concept is to take a patient with a genetic disease, and replace the mutated or defective gene of a patient with a healthy, functional gene. Theoretically, this should solve the issue. However, historically, the data was dubious at best, and many investors lost faith in the technology. But this has changed substantially in recent time. Due to a growing body of positive data surrounding a number of gene therapy products, and market approval of a handful in recent months (especially for orphan indications), many investors that previously steered clear from this risky space are now chomping at the bit to make placements. Most interestingly, it is largely private investors willing to take a risk in this emerging field rather than big pharmas. In fact, there are many gene therapy programs actively being pursued by the big pharma players. However, if this space is as promising as the data suggests, it could be the next hot acquisition target for pharmaceutical companies seeking to expand their pipelines.

Keeping a watchful eye on this subsector and capitalization/development trends will be a strong indicator of things to come for the industry. We could be looking at a total industry game-changer.

By Jack Fuller, Research Manager, LSN

For the last year or so, I have been following two interesting classes of molecules that have garnered a great deal of press in the therapeutics space. These are macrocycles and constrained peptides, and they have enormous potential to treat diseases in a number of unique ways. Due to their size (they fall somewhere between small molecules and biologics), and their ability to access previously “undruggable” targets, this class of compounds has caused a recent explosion of big pharma, emerging companies and investors pouring resources into validating these molecules. At least 12 companies are currently developing these therapeutics, and several dozen research collaborations have been formed with big pharma since 2009. This upsurge in activity would appear to indicate that we are entering the early stages of an R&D cycle that will lead to a host of clinical trials and at least a few blockbuster drugs. Getting in now could mean big rewards down the road, but as any savvy life science investor knows, the promise of the next big thing often leads to broken promises and a meager return.

History is a compelling teacher, so let’s look back and remember some hope and hype associated with the next big thing. In the 1990s and into the early 2000s, regenerative medicine and tissue engineering were supposed to allow us to repair or replace damaged tissue and organs. After failed clinical trials and disappointing financial returns, the sector matured, and has since progressed at a measured pace toward developing products and therapies. Similarly, every few years new targets appear in the literature and a rush of companies are formed or refocus their efforts to push the first products through clinical trials and onto the market. One of the reasons is because there are so few druggable candidates remaining for which companies can develop game changing therapies. I understand that executives and investors see the potential for the big ROI and are willing to take the risk. Unfortunately, having so much hype results in overvaluing companies where the fundamental science just isn’t that well understood.  Sometimes, a sector may be 3-7 years away from turning out therapeutics that can pass the clinical review process.

Don’t get me wrong, macrocycles and constrained peptides have a HUGE upside. The science has been relatively static, stuck since the discovery of the first macrocycle therapeutic, cyclosporine, forty years ago. In recent years, advances in synthesizing and screening macrocycles have allowed research to progress at a rapid pace. These compounds have the potential to be formulated as oral pills for untapped intracellular targets. I repeat, oral pills for untapped intracellular targets! If this proves to be the case, the potential markets are enormous.

From a pragmatic side, the reality is that every company developing macrocycle-based therapeutics is aiming for the low-hanging fruit of extracellular targets. This gives the companies less risk, but also lowers the disruptive potential of the products. Another significant problem is that it is relatively easy to develop in vitro assays to screen for potential hits. However, it is yet to be determined how to correlate the in vitro properties of the compound with its pharmacological properties. Basically, these compounds may look like great initial hits, but fail miserably in clinical trials due to poor drug distribution, clearance rates, and cell permeability.

What we have learned in the past may well be applied to current and future trends in drug development. Macrocycles have a real chance to treat diseases and make a lot of money, but we’ve heard that promise before. The message? As always, have top-notch due diligence, and never let the hype outstrip the science.

By Dr. Karin Bakker, Managing Director, PharmaPlus Consultancy, B.V.

LSN’s deals database is a powerful tool for investors and corporate strategic groups looking to follow key trends in the area of licensing and product/technology specific transactions. This week, LSN takes a deeper look at three major trends indicated by life sciences deal activity around discovery stage assets in the last two years: First, the number of discovery stage deals worldwide is on an upward trend, deals including major upfront payments (greater than $20 million) for assets increased significantly, and the percentage of deals focused on CNS products has effectively doubled. The following charts explain the trends:

Worldwide deals trending upward: For discovery stage deals done between 2011 and 2012, there was an 8% rise in deals that had worldwide licensing rights. This means that the licensee has exclusive rights to research, develop, manufacture & commercialize, regardless of territory.

Upfront payment sizes increasing: The number of deals surrounding discovery stage assets with an upfront payment of $20 million or less as part of the terms decreased from 50% to 42%. This translates to a significant increase in deals with large upfront payments, reflecting the trend that LSN identified a few months ago of Big Pharma looking closer to the source when it comes to in-licensing assets.

CNS is one of the hottest indication areas: Among a number of shifts in primary indication areas associated with deal activity was a huge increase in CNS deals. The percentage of CNS deals effectively doubled year-on-year, suggesting that this is trending towards becoming one of the hottest activity sectors (soon to overtake oncology, which has seen a downward trend in deal activity).

In summary, there is an increase in licensing activity surrounding discovery stage assets as a whole, an improvement in deal terms at this development phase as a whole, and a significant increase in activity surrounding CNS drugs. These trends will have a resounding impact on industry dynamics, and are critical for savvy players in the space to take into account.

Max Klietmann, VP of Research, LSN

Genomics is becoming a major buzzword in the diagnostics space. In short, the concept boils down to mapping an individual’s genome and predicting health risks, therapeutic efficacy, and/or other variables based on genetic predisposition. Despite some disappointments with genomics in certain other applications, it is rapidly making its headway in preventative and personalized treatment, especially in the oncology space.

Oncology research has helped to identify a host of genetic biomarkers, which creates a particularly compelling opportunity for a robust application of genome sequencing. Moreover, cancer and oncology represent a major indication area and a highly favorable market profile from an investor perspective. Moreover, when used as a diagnostics tool, there is minimal regulatory risk, enhancing attractiveness to investors even more due to the fast track to cash flows. Finally, thanks to the rapidly declining cost of this technology and the accuracy of projections it can deliver on a patient-by-patient level, it is well positioned to become a standardized component of a typical person’s regular health screening. In short – this is a dream opportunity for investors looking to gain from the rapid growth in the life sciences space without risking regulatory exposure.

According to LSN Company Database data, there are 54 emerging companies specialized in this space globally, and less than 50% have secured financing since January of 2012. This presents a particularly interesting opportunity to investors who are seeking the opportunity to find undiscovered value in a non-competitive space. Keep your eyes on this area as a hot sector in 2013.