By Dennis Ford, CEO, LSN

Everyone is familiar with the tale of the emperor who cares only to show off his gorgeous fine attire. As the Hans Christian Anderson tale goes, he hires two tailors/swindlers who claim to make the finest clothes that are rendered invisible to anyone unfit for his/her position, or not smart enough to see the garments. Of course, being swindlers, they put on a grand spectacle, collect their fees, and leave the emperor with his invisible clothes. The emperor’s ministers know there are no clothes, but pretend to see them for fear of being deemed incompetent and the townspeople play along for fear of losing their positions. Finally, a child too young to understand the dynamic blurts out the truth. Soon enough, it is then picked up by the crowd that the “emperor has no clothes” and when the emperor hears the chorus realizes his folly but proceeds on anyways.

This little parable echoes in the back of my mind when I survey the fundraising landscape and talk with the myriad of “fundraising tailors.” Please keep in mind that in every category you have great super professional firms that can and will do what they say but on the other side of the coin you have the good the bad and the ugly. All pontificate about how money is raised, and what scientists need to do. In fact, many of them make quite a compelling pitch and value proposition, which can make it difficult for even seasoned life sciences entrepreneurs to accurately gauge how much (or how little) value these constituents really offer. Call me naïve, but what is being preached often simply doesn’t reflect reality. The emperor has no clothes!

I recently spoke with a few go-getter Scientist/CEO/Entrepreneurs that have enough experience in the space that I trust their opinions, and I asked them to identify all the players that they are utilizing (or have utilized) fund-raising efforts. Fasten your seatbelts for the cast of characters I am about to introduce you to:

The Finder & The Sourcer

This category claims the ability to source capital via special high-end personal networks. They come in two flavors – Either they have some technical expertise that allows them to vet deals, so that when they present an opportunity to someone with capital, they can claim to have gone through a first due diligence pass of sorts (The Sourcer). The other type claims connections in the “right places” through word-of-mouth, and their specialized connections can get you into introductory meetings with people who have money (The Finder). The right sources could be an investment bank, VC, family office, etc. However, they often claim that they are the only access point, and only they possess the inside knowledge required to reach these investors. Finders and Sourcers will find you at seminars/symposiums/conferences that revolve around informing or guiding entrepreneurs about how to raise funds. Either of these constituents can charge you for general services, charge for meetings, or get a piece of a deal – or a combo of all three.

The Third Party Marketer

The 3PMs, as they are referred to, come in two flavors as well – One that is a legitimate broker-dealer, meaning that they are blessed by the SEC and FINRA to represent a firm and be part of a transaction that involves the selling of securities. The other type of 3PM isn’t officially licensed but does it anyway. I do not know what the ratio is for licensed versus non-licensed 3PMs, but I would imagine it have to be around 50 to 1. The 3PM makes their money through a monthly stipend plus a success fee in the form of a cut of the money they raise.

Investor Conference Providers

These folks will typically charge you a fee to go to a preset/prequalified meeting with an alleged C-type executive or someone with a title who can do a deal. In these types of scenarios, if it sounds too good to be true, then it probably isn’t true. The word on the street is that a person from a well-known firm or institutional investor will be there, but typically not the person you would want to meet. Caveat emptor!

Investment Banks

The I-banks are typically certified broker-dealers, and do have access to life science entrepreneurs and a myriad of investors – some specializing in high net worth individuals, family offices, and institutional connections as well. The trick here is vetting and establishing a compelling relationship with the right I-bank. We’ve spoken about how to successfully do this previously, but at the most basic level, find an I-bank that is specialized and has access to the right kind of clients.

So Who is on the other side of the transaction? Here’s an overview:

The VC

We’ve discussed the unfortunate trend surrounding VC’s extensively, but in short – barring a few major players – the money is dried up and the terms can be predatory. The myth, of course is that this is the go-to source of capital after friends, family and angels.

The Institutionals

These are the foundations and endowments with a mandate to invest in life sciences. They are often indication-motivated and have the intention of moving science forward. These can make an excellent partner if you can identify the right ones due to their motivation to quickly push product to market.

Family Offices

These are wealthy families that have “gone institutional” and are making direct investments into life science companies. Typically, they are indication-motivated as well, and tend to invest with a long-term perspective. This category also includes patient groups backed by wealthy individuals and families looking to resolve specific diseases within their families. They are top notch partners, but can be tough to identify – LSN provides a database of family offices active in the space.

Mid-Stage PE & Virtual Pharma

These constituents have gotten smart, watched industry trends, and have begun to aggregate pools of assets around specific disease areas or molecule types. They are getting in early and shepherding them through clinical trials as efficiently as possible. The endgame is either spinning a portfolio into a large pharma with a dry pipeline, or using a rent-a-salesforce distribution model to bring product to market. These can be a very efficient capitalization option, but be careful – they are not idle, so don’t stand by!

The Strategics

Big pharma & corporate venture capital are the primary players here. The name of the game is scouting for assets that fit the strategic orientation of the company. This can take the form of a large pharmaceutical company looking to fill a pipeline gap, or a more non-traditional scenario such as a high tech company looking for an opportunity to enter the medical device space. They can be a great resource due to large budgets and infrastructure that can be put at your disposal.

The critical piece in the whole process is finding out how to effectively navigate the space without getting stuck in the mud or shelling out unnecessary fees for minimal value. This is where a roadmap becomes a key asset. Please remember the aforementioned parable, and be aware of what it teaches… People should have their own opinion and not depend solely on other people; the two tailors earned a lot of money without doing anything. The emperor pretends to be important but only worries about his clothes. For me, the big take away is preserve a bit of your child honesty and remember that if it sounds too good to be true, it probably isn’t.

Lastly, as I have stated before, having a current accurate roadmap is paramount. The database you choose to work with can be either the most efficient way to secure the right investor, or the ultimate waste of money. This is your roadmap to the landscape, but not all maps are created equal – far too many people are relying on outdated information that will get you nowhere. There are three critical pieces to focus on: Freshness, accuracy, and a forward-looking perspective. Freshness is critical, because the investor landscape is changing so rapidly, that data is very quickly outdated. VCs are dead or dying, government funding is shriveling up, and hardly anyone can identify the emerging opportunities for capital. Accuracy is critical, because almost no investor databases get their data from the horse’s mouth, which makes many investors identified as “fits” irrelevant. Finally, there is the issue of forward-looking perspective – this means a mandate of what investors are looking for, not a record of what they have invested in in the past. But be wary if considering a database, as they are certainly not all created equal.

By using the right database and working with the right partners, raising capital can be efficient, strategically aligned with your firm, and will make you more successful in your endeavor. However, it is critical to use the right map, and call things as they are. Too often, great ideas don’t make it to market, because no one is willing to say “the emperor has no clothes!”

By Danielle Silva, Director of Research, LSN

In the life sciences space, the idea of outsourcing R&D is certainly not novel. However, a new trend has emerged amongst companies in the biotech space over the last several years that is gaining more and more steam – companies are now not only outsourcing their R&D activities to other companies on a regional basis, but are also outsourcing these activities to on a global basis. What may come as a surprise to many, however, is that these companies are offshoring their R&D activities to CROs in these countries for reasons besides just their lower costs.

Two of the most popular locations for offshoring have been India and China – but now many companies are outsourcing to CROs based in other countries within Asia, and even to firms in Latin America and Eastern Europe. In the past, companies were mainly outsourcing activities such as data management, clinical development, and preclinical toxicology activities to CROs based in emerging markets. Now however, life sciences firms based in more developed companies are outsourcing more complicated projects to emerging markets-based CROs, such as target identification and assay development. This paradigm shift is largely due to the emergence of an educated workforce in these regions, allowing companies there to offer more value-added services.

Another major factor is that many emerging market countries offer large patient populations for indications less common in developed countries (particularly in the infectious disease space). Issues surrounding the recruitment (and retention) of clinical trial are the biggest causes of delays in clinical trials for companies based in developed countries. This makes clinical trial CRO’s based in emerging market countries compelling partners for trial management.

On the other side of the equation, many emerging markets CROs are getting wise about this trend as well, and have begun hiring western staff, and aligning themselves to western business culture. This makes it even easier for emerging biotech companies in developed countries to easily offshore projects without fear of cultural barrier.

Due to these trends, life science companies will have even more reasons to outsource and offshore their R&D activities. Emerging countries offer Western companies a larger patient population to conduct clinical trials – which will, in turn, reduce the time to bring the product to market.

By Jack Fuller, Investor Analyst, LSN

A recent report that took a look at the current trends and future forecasts for drug development found that compared to conventional drug development, the research and development of drugs for orphan indications showed a greater overall return on investment. [1] Orphan drugs are classified as pharmaceutical products aimed at rare diseases or disorders, which in the US means a potential market of less than 200,000 patients. In 1983, the US government passed the financially incentivizing initiative, the ‘Orphan Drug Act of 1983’. Additional markets have emerged since 2000 with the adoption of similar acts in EU and Japan. Drug developers targeting orphan indications have the additional benefits of 7 years of market exclusivity from ‘same drug’ recombinant products (baring clinical superiority), a 50 % tax credit on R&D cost, special grants for phase I – III clinical trial, and user fees waived on revenues <$50 million. These incentives have allowed the development of therapeutics with a limited market financially feasible and as we will see, actually provide a stronger return on investment (ROI) than non-orphan drugs.

According to the new report, worldwide markets for orphan drugs are set to grow from $83 billion in 2012 to $127 billion in 2018 at a compound annual growth return (CAGR) of 7.4 % as compared to 3.7 % for the overall prescription drug market.  The financial incentives and expanding market make a strong case for investment in orphan indications; however, the true value to big pharma is derived from the smaller required patient size for approval. Phase III drug development costs can be cut in half or more with an average of 43 % reduced patient size. These results translate into big pharma achieving a 1.7 times greater ROI compared to non-orphan drugs.

So what is the end result for early stage life science investors? Companies such as Eli Lilly, Roche, and Biogen Idec are acquiring more orphan drug development companies. Of the top 10 orphan R&D products (by NPV) acquired externally, 50% have been the result of company acquisitions, 30% have been in-licensed, and 20% product acquisitions. This is good news for institutional investors looking to exit their investments and foundations looking to advance promising new therapeutics into later stage clinical trials.

Beyond the financial incentives for investors and life science companies, this push toward fostering development of previously underdeveloped diseases is benefiting patient groups who previously had scarce treatment options. Take the Cambridge, MA based Aegerion Pharmaceuticals, which is developing the orphan drug lomitapide for patients suffering from a rare form of familial hypercholesterolemia that causes cholesterol levels to soar, followed by almost certain death from heart disease by age 30. The success of the ‘Orphan Drug Act’ leads us to wonder if the poor market performance of other necessary indications will result in similar legislation and resulting financial opportunities.  Will we be seeing an ‘Antibacterial Development Initiative Act’ in the future? We’ll keep you posted.

[1] “EvaluatePharma Orphan Drug Report 2013.” EvaluatePharma, n.d. Web. 24 Apr. 2013.

By Max Klietmann, VP of Research, LSN

It is no secret that venture capital firms are distancing themselves from early stage med-tech investments and are focusing more on later-stage opportunities. Interestingly, there is an emerging trend among the large, established players in the device space, whereby they are making strategic allocations to emerging device companies. What is especially interesting is that in certain indication areas, device companies are starting to see themselves as competitors to pharmaceutical products, meaning that we may be seeing the beginning of a new competitive landscape.

Medical devices were traditionally viewed as a distinct entity in the medical field, and not in direct competition with drug companies. However, as various major sectors in the space are converging, and the concepts of personalized medicine, companion diagnostics, and therapeutically-oriented devices are becoming mainstream, all this is changing. Take for example a major indication like cardiovascular disease – this is an area that has shown limited promise in terms of drug development over the past decade. However, devices might offer a solution for many patients that can be tailored on an individual basis. Consider the faster time to market and significantly lower risk surrounding devices, and you have a major new source of competition in the space.

Of course, the device firms recognize it, and have begun to outwit big pharma using their own strategy. Rather than develop devices in house or focus on later-stage products, many large device firms are investing in seed-stage companies or forging licensing deals early on in the R&D process to build a robust product portfolio. The implications are huge: Device companies may rapidly become the leading solution to many major indication areas, and pharma might be in even bigger trouble than anticipated. However, for the emerging biotechs and medtechs, this is excellent news – the emergence of a new industry-wide arms race means demand for product and a desire to invest capital, helping to accelerate the industry forward and bring cures to patients faster. Brace for impact!

By Tom Crosby, Marketing Manager, LSN

A recent study found that among most small-medium sized businesses, approximately 15% of marketing budgets are allocated towards email marketing (by far the largest single line item). By comparison, SEO and social media budgets came in at 8% a piece, and the confidence levels in the effectiveness of each were dramatically lower than they were for email marketing. This may sound surprising, considering the hype that surrounds social media outlets, but the data clearly shows that new and flashy doesn’t necessarily mean effective. CROs marketing their services should be mindful of how to effectively approach this tool.

In the current state of CRO service marketing inbound leads are few and far between, and small & emerging biotech opportunities are hard to map out. In this environment there is no easier and more efficient outbound attempt that a marketing team can make than email. This is reflected in the findings of the study. Personally, I see the positive effects of our newsletter campaign every day at LSN – most notably is that the few inbound connections that we are able to establish often come directly from the newsletter.

Email marketing is definitely a sales tool. However, there is a right way and a wrong way to go about email marketing. Many marketing professionals make the mistake of believing that the wider your audience is, the better your chances are of making that connection. We’ve all seen the cold emails coming into our Outlook inboxes every morning from marketers at nameless list providers. However, the reality is that a clean and narrow list of good targets is infinitely better than a large, clunky list of cold contacts.

The key to an effective campaign is targeted, interesting content that is being sent to interested readership on a regular basis. You want to create a dialogue with customers so they feel engaged, rather than throwing things against a wall and seeing what sticks. Direct, sales-driven “pseudo-articles” will only cheapen your brand, and will likely put your domain name on the spam list. However, if your prospects feel engaged, you can bring the business to you by solidifying your firm’s position in the marketplace as a leader with niche expertise. In other words, show how your CRO is differentiated from the competition by highlighting the unique advantages you offer. Having created a dialogue with prospects, it will then also be easier for you to adapt as conditions shift.

The aforementioned study showed that one of the main concerns with email marketing was losing subscribers when sending out weekly mailings. In my mind, this is a good sign, because it means that our list is getting stronger, and that we’re not reaching out to people who aren’t a fit for our product. This comes with the added benefit of staying in good favor with the community at large. If somebody doesn’t want to receive emails from us anymore, it’s made quick and easy to just say ‘no thanks.’ This is a simple courtesy that has far-reaching implications in terms of your company’s image – nobody wants to be seen as an annoyance. More importantly, this helps to keep your list fluid and up-to-date, allowing for more targeted campaigns and more effective dialogue.

The key take-away is that email marketing requires planning, strategy, and consistent execution and follow-up. Marketers need to maintain a conversation with their prospect audiences, and make their mailings interesting and easy to read. The goal is to connect your brand with insight and expertise that no one else can offer. When successfully executed, this can be an incredibly powerful tool that enhances the efficacy of the business development team.

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 popular parts of the space with compelling activity in 2011 and 2012: These are oncology-focused therapeutics, antibodies, and early-stage products. The tables below explain the latest shifts in the space.

Worldwide deals increase dramatically: For oncology deals done between 2011 and 2012, there was a nearly 20% rise in deals that had worldwide licensing rights.

This means that the licensee has exclusive rights to research, develop, manufacture & commercialize, regardless of territory. Of these deals, at least 41% in 2011, and at least 26% in 2012, were reported to pay double-digit royalties to the licensor (10% or more.) It is important to note that this number tends to fluctuate positively, because royalty figures are not necessarily publicly disclosed in licensing deals.

In at least 7% of the deals of 2011, and at least 15% of the deals in 2012, equity payments became publicly available in the database. In 50% of the deals with equity in 2011, the investor was a large pharmaceutical company. In 2012, this figure fell to 25%. This statistic highlights another trend – companies are licensing more to smaller private companies than to big pharma.

In terms of deals involving antibody-based therapeutics, there was a 2% rise (from 28% to 30%) between 2011 and 2012. It is important to note here that a majority of these are early stage deals – for example, deals with research alliances and companies in the preclinical stages.

In summary, there is an increase in licensing activity surrounding oncology, antibody-based therapeutics, and among earlier stage products. This shift represents a positive trend for those emerging biotechs targeting this major indication area, who are considering early stage licensing as an alternative route to capital or exit.

By Dennis Ford, CEO, LSN

LSN has written extensively on several facets of the capital-raising process, from the various new types of investors active in the space, to the technologies most actively being targeted by investors. However, we have not yet delved into the actual timeline required to raise money. This is the big question, as most emerging life sciences companies exist in a life-or-death situation. A misconceived notion of the required timeline to capital is the kiss of death for many; this article seeks to correctly define this critical period in the life of a company.

First things first: all of your collateral must be in order – this includes getting the business plan written along with the necessary investor presentation documents (powerpoint, executive summary, and website – yes, your website is an investor presentation tool!). This is a multifaceted process, which goes far beyond just explaining the science. Adroit entrepreneurs will know that as they write their plan, they are also creating a brand and a message that they are delivering to a marketplace of investors, and hopefully beyond. When writing the plan, keep in mind that the document you are creating is for distribution, and that it will be compared and contrasted with other companies that are going after the same capital as you are. If you take the time to present the data and create compelling facts & forecasts around your plan, then you have a leg up. Technology, market sizing and financial forecasting are all important elements, but don’t forget the most important one: your plan is your identity as a company! It can take anywhere from 6-8 weeks to develop and write a business plan, and then a considerable amount of ongoing time to hone and edit it as you move through the fundraising process.

The next step is compiling a global target list of investors that are likely candidates. You need to do your research and outline all of the likely candidate investors. This includes researching past investments in products like yours, groups targeting your specific disease area, and other relevant criteria that are major components of your company. This is why it is so important to have a cohesive understanding of who you are before seeking out investors. You will also want to research & target investors that have declared that they have a current or future mandate for investment in products that are like yours. This can be easy if you decide to buy an up-to-date database of investors, such as LSN’s. Alternatively, it can be incredibly time consuming if you decide to do this by vetting a list of likely investor fits through Internet research. Essentially, this is a process that can take a few clicks of your mouse with a good database, or over a month (or more) if researched manually. Here you must remember that accurate, current information on investors and investor contacts is paramount. Nothing creates thrashing like out-of-date data.

Then it is off to the outbound marketing campaign, and actually contacting investors – creating dialogue that turns into a relationship and, eventually, nets you an allocation. Contacting investors is a tedious, time consuming, and difficult process. It takes incredible tenacity to work your investor list and stay on the mission. Most of the time you spend will be doing referred outreach, cold calls, follow up, and more follow up. Most meetings involve multiple incantations and various follow-ups. This is because, realistically, it takes 2-6 weeks to regroup between follow-ups. What’s more, repeated meetings with various stakeholders can take months. All in all, the process of creating dialogue and developing a relationship takes a serious commitment of time and effort.

This is why it is important to know and understand the cycles of a fundraising campaign. Fundraising used to be more product-centric, but now a big part of the investment is vetting and building a relationship with the executive teams. Fundraising is a numbers game, and if you do get an investor on your radar screen, and the interest is really there, it is a still at most a one-in-four chance of getting through the due diligence, and an even smaller chance of being selected and funded after that. The fact is you really have to find, develop, and maintain an investor target list that includes hundreds of investors that are a fit to go after. If you understand this process, you will understand why it takes a dedicated commitment to raise capital, and therefore, why it takes so much time.

The last step, which is similarly time consuming and expensive, is to get you and your lawyer negotiating and closing the capital allocation down, and getting the cash into your account. Although there are no hard rules on this process, here are some of the things I’ve observed:

• If you are fortunate enough to be in the right place at the right time with a compelling product or technology, you can raise your required capital in 3-6 months, but this represents a very small fraction of the players. Adding to this, angels, venture philanthropy, and patient investor groups can act swiftly, but they are a minority of investors. This is largely an issue of “passion versus risk” – meaning the venture philanthropy and patient groups move faster because of a sense of urgency in finding a cure.

• From my firsthand accounts with fundraising clients, somewhere between 6 and 12 months is a reasonable timeline to raise capital, assuming investor climate is suitable and proper campaign execution is present.

• The rest of the major categories of investors have firm “institutional” best practice investment processes. This means a stringent, time-consuming methodology and adhering to established protocols for the particular investment mandate. In other words, it takes time.

• 2008 and 2011 drastically elongated fundraising timelines (for obvious reasons) to 9-18 months. This is beginning to soften now, but things can still be tough.

• Investors are not going it alone anymore, so “herding” spells more time, as more players opt in.

• Entrepreneurs can plan on spending around 1,000 hours (or about 9 months), which is at the top of the bell curve in my estimate. The 6-9 month point is when you will have a good idea of your funding potential in terms of investor’s feedback and interest. If it’s not working out, something needs to change.

• A campaign is a living vehicle that needs to be honed and morphed as the investor reaction is calculated, which either enhances or delays your timeline.

• Finding the right investor fit is critical. If you don’t achieve this, you’re looking at churn, churn and more churn – which can be expected today.