By Danielle Silva, Director of Research, LSN

As time-to-exit has become protracted for life science investments in recent times, capital efficiency has become somewhat of a buzzword in the industry; but it seems that many firms still struggle with understanding not only what capital efficiency is in the context of the life science space, but also how to demonstrate it to potential investors. In the past, many young life science companies believed that more is always better – the more capital raised the better, and in turn, the bigger their valuation the better. Just because a firm is able to raise more capital does not mean the firm has in turn increased value for the firm’s stakeholders.[1]

It is still important for life science firms to constantly be in fundraising mode in order to keep an ongoing dialogue with potential investors, and companies still need to be cognizant of the fact that they need to raise money in order to get to the next round of funding. However, life science companies need to keep in mind the mantra of capital efficiency – doing more with less – creating more value with less capital, which is what life science firms need to focus on in order to both gain investor interest and create value for their investors.

Often, when investors refer to firms that do not have a “capital efficient” model, they point out firms that have been able to raise a good amount of capital in a small amount of time. Raising a huge lump sum is not always a bad thing – but if firms aren’t able to provide any returns to shareholders on the huge sum invested, then receiving this large allocation does prove to be problematic. Firms that aren’t able to illustrate that the investment has created any value will have trouble raising money in subsequent rounds, even if they are somehow able to show that there is a dire need for the capital.

Capital efficiency also plays a huge part in driving down the cost of capital over time – which is something life sciences firms also need to keep in mind when raising capital, considering the relatively large number of financing rounds required before product reaches marketability. Your firm needs to create more value with your cash on hand than your burn rate. If you don’t follow this rule, then subsequent financings will continue to dilute your company’s value.

The major question for life science companies, then, is how to achieve capital efficiency and how to demonstrate it to potential investors. One way to improve capital efficiency is to simply gain an understanding of the cost it will take to get to market – this includes what regulatory risks/costs may be associated with developing the technology and the firm’s target market for the product. Understanding the risks and the market will help the firm to more accurately identify if their firm is being overvalued or undervalued – again, if the firm is overvalued it will exacerbate problems with obtaining follow-on funding and raise the cost of capital in the long run.

Another useful concept that life science companies need to keep in mind is that time is money – if failure is inherent, then the firm needs to be able to quickly change their strategy and be able to identify an alternative market, indication, or application for the technology being developed. One of the most important aspects of capital efficiency is to be efficient on an operational level; firms need to leverage their existing capital base and if possible monetize their non-core assets at an early stage.

In order to prove that your firm is capital efficient, you will need to provide potential investors with financial statements, as well as outline your team. Illustrating that you have hit key milestones with a lean staff is an integral part of demonstrating capital efficiency to investors. Additionally, if your projected infrastructure expenditures or current spending to operational spending exceeds a ratio of 1:1 then this will be a huge red flag to investors.[2] Furthermore, to illustrate capital efficiency, it is important to make multiple projections for regulatory costs to show investors that you have already thought about the best and worst case scenario for getting the product to market.

If all these factors are taken into consideration by life sciences firms, it can help a company to become much more capital efficient. In the end, for life sciences firms and investors, capital efficiency is a win-win – the cost of capital is reduced for life science companies, and the return on investment is greater for investors. Thus, moving forward in order to attract investor capital life sciences firms will need to adopt the mantra of capital efficiency. If there is one thing you keep in mind – you will always need twice as much money and time as you think, and there will always be bumps in the road. Plan for it, and you are immeasurably closer to success.

By Alejandro Zamorano, VP of Business Development, LSN 

As of late, LSN has seen a dramatic uptick in the number of investors focusing on allocations to service providers. It is evident that the appeal stems from two fundamental factors: first, service providers provide less investment risk to investors relative to companies developing therapeutics, diagnostics and medical devices, as they can generate cash flow quickly by avoiding exposure to regulatory approval. Second, service providers’ growth is boosted by taking advantage of big pharma’s appetite to outsource non-core competencies, such as assay development, toxicology, clinical development, and manufacturing service providers. As a result, service providers are in a golden age of opportunity.

As evidence, for the past two years, some of the industry’s largest service players have been on a hiring spree in order to support their increasing workflow. Forbes reported recently that, in a poll of 388 drug makers and biotechs, CRO clients saw a 9% increase in outsourced R&D budget, with total market penetration by CROs increasing from 35% to 38%. Among large drug makers, 27% expect to outsource, while 47% of emerging biotechs are expecting to outsource. This growth trend bodes well for an industry that is largely insulated from the risk that plagues the rest of the industry, and allows investors to take some advantage of macro trends without the downside of exposure on a therapeutic asset level.

All service providers, however, are not created equal. Service providers focused on preclinical development are projected to have the lowest growth prospects in the short term as they suffer from the declining R&D budgets. Clinical service providers like Parexel and Icon are projected to have the strongest growth with revenues projected to grow by over 12% for next three years. Despite the apparent abundance of service providers, the industry is currently just barely keeping up with demand.

Private equity has the most appetite for service providers in the life science, as their large capital investment can significantly expand the marketing and sales efforts of small operations leading to substantial returns. By using the added capital, service providers can also expand their service portfolio, adding to new revenue opportunities.

By Max Klietmann, VP of Marketing, LSN

As we come to the close of Q1 of 2013, LSN has compiled some insight into three of the hottest subsectors being targeted by investors in the medical technology space. New technologies are surfacing that are changing treatment philosophies, and more importantly, medtech is attracting a whole new class of investors such as corporate venture from the consumer electronics, digital media, and telecom space. Here are the three trend areas that are changing the world from the medtech investor perspective:

Personalized medicine

As med tech becomes more complex, it is becoming easier to create patient-customized technologies. This allows treatments to be developed that target specific subgroups of patients within a disease area. The idea is to create better outcomes by tailoring therapy. We’ve spoken about this at length with regard to biopharmaceuticals, but this is taking place in the med tech space as well. It is occurring both in the form of devices that can be customized, as well as in the diagnostic/health IT space. For example, big data and cloud computing are being used in combination with genomics. For under $100, a patient can be screened for over 275 biomarkers, which when run through complex algorithms and predictive models, are helping to create custom treatments. This allows for scalable tailoring of therapy on a patient-by-patient level, resulting in better outcomes with fewer side effects. Investors find this attractive, due to the innate advantages offered, and the scalability of many of these technologies.

Biochips

Biochips are becoming an extremely hot area, especially in the screening space. They are being developed for diagnostic and monitoring purposes, and are being heavily focused on with regard to accurate biomarker measurement. Biomarkers are substances that indicate a particular indication or biological state in a patient, and increased accuracy in their measurement means earlier diagnosis, more targeted therapy, and better outcomes for patients. Again, the ability to significantly improve outcomes in a scalable way has investors excited about this technology.

Mobile-Enabled Active Implantable Devices

Active electronic implants are old news, but what’s new is that these devices are beginning to get smart – the integration of mobile technologies into devices is creating a whole new marketplace within the device space. For example, pacemakers and insulin pumps are already being fitted with mobile technology to allow physicians to monitor patients remotely, compile data on large populations, and diagnose problems / recommend treatment before the patient is even aware. This area is attracting a lot of attention from non-traditional investors, including mobile and telecom corporate venture.

Things are changing fast in medtech and savvy investors are moving fast to dig up the hottest opportunities across the board. Keep your focus on these areas, as they are likely to heat up heavily over the next few quarters.

By Max Klietmann, VP of Research, LSN

What do an emerging diagnostic company from Norway, a small Israeli single family office, a therapeutic company from Boston, and a small CRO from Switzerland have in common? They are all organizations that one would expect to be locally-oriented, and yet they have a world-wide focus in terms of sourcing capital, uncovering deal opportunities, and sourcing new business. LSN encountered these constituents at every conference our staff has attended in the past year in the US and Europe – Boston, Philadelphia, Hamburg, San Francisco, New York, Barcelona… These are not multi-national pharmaceutical companies or multi-billion dollar PE funds, but they are thinking as though they were, and they’re not the only ones.

The life sciences industry is no longer constrained geographically, and a local orientation can be massively disadvantageous – it can mean missed opportunities, a myopic perspective that results in missing disruptive innovation, and can make a star performing company a laggard in short order. Collaborative IT, cheap global communication and logistics solutions, and big data have opened the floodgates for local players to tackle the global marketplace with a tactical precision that was previously reserved only for massive companies.

So what does it all mean? Most importantly – increased competition for business, capital, and deal opportunities. In short, if you aren’t thinking globally already, you’re dead in the water. If you are seeking a service provider, look for higher quality/less expensive options outside of your local sphere. If you are selling services, hit those areas that are locally underserved, even if you are on the other side of the planet. If you are looking to invest in companies, make sure that at a minimum, your competitive analysis and due diligence is in a global context. If you are raising capital any further down the line than a pre-seed angel round, you need a global target list of potential investors, not a handful of business cards from a local networking event. Fundraising is a numbers game.  The more investors you have on your list to engage with the more chances you have to make a connection and receive an allocation.  By all means exhaust your regional ties first, as the cost savings and ease of marketing make sense. But don’t stop there – The age of regional focus is disintegrating, and those who can adapt the fastest will be the early success stories of the era – go global young entrepreneur!

By Dennis Ford, CEO, LSN

Investors have a new sense of urgency when it comes to engaging with early-stage academic scientists and biotech executives. Early stage investors have always sourced deals from these groups, but now even mid-stage and later stage investors are devoting significant time talking to these constituents of the life science arena.
 
I have initiated a dialogue to find out exactly how investors see these two groups relative to one another, and what value each has to offer. I decided to conduct an informal survey among some of LSN’s contacts within the industry to better understand the dynamic.
 
Though the question may be simple, the answer is complex and multi-faceted. Here is some feedback I received from my question: “Why do investors have a new sense of urgency to engage with academic scientists and emerging biotech executives?”

Interview #1

Consultant / Pharmaceutical Executive

The Lesson:

Buy low, sell high!

This executive was previously involved with several big Pharma players – The new direction is a variation on the theme inherent in most drug discovery scenarios within Pharma.  Find and select interesting and compelling candidates and then help guide and shepherd them through the clinical development process.

The new twist is creating a life science entity funded by an investor group consisting of a combination of pharma, family office, corporate venture (not VC), and other new life science investors. The theme is creating a portfolio of assets made up of next generation small molecules around a particular indication. The overall business model here is to select and buy a large group at a low price, and then, sell the few that make it through the development process for a very high multiple. The distribution channels can be a traditional distribution or a “rent-a-sales force-model” to move product through. This new entity can be a very lean and hugely profitable virtually outsourcing almost every facet from discovery to distribution. As an experienced entrepreneur, this executive has seen firsthand how the industry is changing, and he can explain that very well to investors.

Interview #2

Private equity firm with an academic focus

Around $100 million in AUM (Assets Under Management).

The Lesson:

The value of the first pass. 

This conversation was with a mid-tier PE that’s interested in life science investments post-phase II, and supply capital for phase III. They concentrate on assets with a research university pedigree. They don’t put capital in early stage investments, but they do invest time in building relationships for the future, because it is a big win when something is available to be commercialized, in which case they turn first to the ones they know. The strategy? Spend time with early stage academic scientists as they grow in the industry, and if by chance they do want to commercialize some technology, they will surface to do a “first pass” with people they already have a relationship with.

Interview #3

Scientist / Entrepreneur

Life Science Industry Association

The Lesson:

The Past: Publish or Perish;

The Future: Publish to Commercialize

Academic innovation and commercialization are closer than ever, and this trend is only accelerating. Academics used to be irrelevant to investors in the 80’s and 90’s because their work was often decades away from market potential, and most scientists didn’t care about or even consider commercializing their work. Instead, they wanted to be respected by other academics, and lived by the mantra “publish or perish.”

All of this began to change in the late 90’s, when a massive surge in academic publication occurred that led to a huge rise in patent registration around various technologies. This made investors suddenly aware that academic scientists were not just professors in labs trying to impress other professors in labs – they were sources of deal flow, investment opportunities & market intelligence, and could point out disruptive technologies before they reached the “commercial realm.”

The big pharmaceutical companies, investors (both early and late-stage), and even secondary constituents like insurance firms all maintain dialogue with academia precisely for these reasons. Academia is the industry’s “crystal ball,” so to speak, and has the most future-oriented perspective on emerging trends in the space.

Interview #4

CEO

Emerging Biotech

The Lesson:

Find a brilliant Scientist and build a management team around the commercialization of his technology.

The overriding issue in academic scientists versus private emerging biotechs is that the academic side usually has no business sense. Academics know science, but the management team is the critical foundation. The best formula is a strong business player, a brilliant scientist, a practical scientist (one who performs trials and benchmarks), and finance & legal support. Without a team assembled to back you up, you have big problems. Investors do not have to be life science gurus to help organize and assemble a management team; providing management guidance and mentoring does not require a PhD in some esoteric science.

Interview #5

CEO / Scientist

Emerging Orphan Drug Biotech

The Lesson:

“R&D vs. r&d” – Understanding the dynamics

In the area of therapeutics, it is important to understand how to break down research and categorize the various segments and opportunities. For instance “little r,” which are targets, as opposed to “Big R,” which are actual drug candidates. Also, “little d” early phase management VS “Big D” phase II and phase III management.  Each category area is different and investors exist for each phase but for different reasons and bring different values.  Each segment has a different but distinct exit orientation, and as such it is important for investors to understand this interplay from all of the various constituents’ perspectives.

Interview #6

Entrepreneur & Life Science Investor

The Lesson:

Creating an academic network for validating investments, in order to determine if the science makes sense.

This particular investor’s main reason for speaking to scientists is as a self-education exercise – investors want to educate themselves on science and theories that are outside of their particular area of expertise. By reaching out to scientists to get knowledge of a particular topic for due diligence purposes, a lot of basic science due diligence goes on, even for later stage investing in the life sciences space. In doing so, this investor is able to later draw on his relationships in the academic science space to validate his investments.

As is plain to see, there are varying opinions, innumerable reasons for the dialogue between investors and early stage/academic scientists, but fundamentally it is a desire to be at the cutting edge before anyone else. The primary purpose of this article is to bring some conversations that LSN is having and creating in the market to the surface. Feel free to email me with any comments or input at dford@lifesciencenation.com

By Tom Crosby, Marketing Manager, LSN

To have a successful fundraising campaign, it is important to create effective marketing mate­rials from the very beginning. Not only does this process require a lot of time, but you must also make a financial commitment up front if you want to see the best results.

What conclusion can investors make when they see unprofessional marketing materials coming their way from a life science firm looking to secure capital? First and foremost is that the firm in question doesn’t take their outward image seriously. This can be a telling sign of internal operations, and is often all that is needed to turn a serious investor away.

It can seem like a good idea to put you marketing materials together in-house. After all, who knows more about your company than your staff? However, there is much to consider before trying to brand your firm by yourself. Most importantly is that unless you have gone out and specifically hired a marketing professional with design experience, your team will be taking valuable time away from performing the job functions that they are trained in, and therefore, are the best at. Design is a practiced skill with developed theory and technique behind it. Many people take its nuances for granted, and this is the genesis for poor design of marketing materials.

If, on the other hand, you make an initial investment in your marketing materials by hiring a professional firm with design expertise, the message you are sending to prospec­tive investors is that their time is important to you, and that you value their ability to discern professionalism from amateurism. This lets them know that you are making your best attempt to cover all your bases in terms of making your firm’s message clear and concise.

While it is an option to place your investment in hiring an in-house marketing professional, the more realistic move is to outsource the work to a professional marketing firm. Although the overhead will be higher initially, the results will be worth it. It is easy to tell when professional firms have created marketing materials. Not only do they stand out as more visually appealing, but they read differently, and evoke a different feeling in the audience. Furthermore, they make an investor’s job easier, because they are created with their interest in mind.

So what does it cost to have a marketing company create high-quality materials with content that matters – content that reflects your firm in the most positive way possible, and gives you the best chance at securing valuable capital?

Prices will vary based on the type of your company, its complexity, your strategies and audience, and other factors. Your branding requirements will also affect the cost. However, a quality firm can pro­vide a quote for each individual item. Typically, firms quot­ing at the low end use templates, and create very little original content, leaving that part up to you. Estimates on the higher end usually include custom content, and thereby, custom graphic design.

Through his years of this type of market research, Life Science Nation CEO Dennis Ford has estimated that the cost of branding, messaging, & website creation for a regional outbound marketing campaign should cost somewhere between $40 – $60,000. For a global campaign, this range increases to $80-$100,000. Unfortunately, this type of financial commitment makes everything more difficult for those entrepreneurs who are just scraping by, but the fact remains that their competitors are figuring out that to make money, you have to spend money.

A life science firm should expect to have this type of capital ready to deploy in order to run a successful campaign. Of course, these figures are ball park estimates and you can do it for less by trying to finesse the collateral. But at the end of the day, it has to get done, and is simply the cost of doing business.

If you get your branding, messaging and marketing presence sorted out, and make it a priority, you will have quick turnaround with a high-quality product. Prioritize what is important – which is getting in front of investors and pitching your ideas, technology, and products.

By Danielle Silva, Director of Research, LSN

There has been a great deal of buzz surrounding the topic of personalized medicine in the life science sector recently. Personalized medicine attempts to forecast a patient’s likelihood of being afflicted with certain diseases through genetic testing, and offers cures that are tailored to their specific needs. Thus, diagnostics and therapeutics are moving towards personalization based on an individual’s phenotypic and genetic makeup.

As a result of the Human Genome Project (HGP), which was completed in 2003, DNA sequencing has become much more accurate, and the cost of sequencing a single genome is dramatically lower than it was in the past due to advances made in the area of sequencing instrumentation (it’s estimated that the price is getting down to around $1,000 per genome)[1]. One of the uses for this lower-cost DNA sequencing technology is the development of individualized biomarkers. The development of these biomarkers, however, is just the beginning of the story; to truly develop a well-rounded therapy involves the use of a diagnostic as well, which is why investors have been drawn to investing in firms developing diagnostics as of late.

Overexpressed proteins (or genetic markers) are unique traits that are often associated with a specific disease. These are known as biomarkers. Creating a therapeutic that targets an individual biomarker can create a favorable result in terms of patient outcome. The biomarker, however, needs to first be located in order for the therapeutic to truly fall under the umbrella of a personalized medicine. The agent that locates the specific biomarker is therefore known as a companion diagnostic. The advantage of using such an agent is that it is easy to identify whether or not a given patient can benefit from the use of a certain therapeutic.

Because of the importance of companion diagnostics in the personalized medicine space, interest from investors in firms developing diagnostics has surged accordingly. From 2011 to 2012, the number of reported financing rounds in the Life Science Nation Financing Rounds database increased from 11 to 31. This represents an increase of nearly 182%. In January of this year, Cambridge, Massachusetts-based Foundation Medicine received $13.5 million in Series B expansion equity, adding to the $42.5 million they had received just four months prior in their initial Series B round. The firm focuses specifically on conducting cancer genomic analysis to match patients with a targeted therapy and clinical trial. In the area of cancer, the development of companion diagnostics is arguably the most advanced. This is a large reason why cancer diagnostics have been a particularly attractive area for life science investors.

In a recent conversation with a large corporate venture capital fund that typically invests in 5-10 firms per year, the firm expressed a particular interest in therapeutics with companion diagnostics. Advances in genome sequencing are predicted to continue, and if the cost of sequencing a single genome falls below $1,000 it is possible that insurance companies may even begin to start to cover some of the costs of this service. Consequently, LSN predicts that investor interest in the area of personalized medicine and diagnostics will continue to gain steam.

[1] http://articles.philly.com/2013-03-06/news/37503360_1_genetic-tests-caplan-expectant-parents