By Natasha Eldridge, Marketing Manager, Life Science Nation

The healthcare IT sector is booming, with $6.5 billion invested in healthcare IT companies in 2014. As the Texas Medical Center taking a lead on supporting healthcare IT companies in the Southwest, RESI @ TMCx will feature a panel session exploring investment in the sector.

LSN has gathered a group of experienced healthcare IT investors to share their expertise and advice with entrepreneurs. These investors focus on the information technology opportunities that underlie healthcare innovation, from the possibilities created by big data to the digitization of healthcare providers and research labs. Panelists will discuss issues related to funding in healthcare IT, such as: How do you make your company stand out in this crowded marketplace? What do investors see as the most high-potential fields of innovation in healthcare IT? How do you demonstrate to an investor that your product has the potential to succeed?

• Eugene Zhang, Founding Partner, TEEC Angel Fund
• Michael Peck, Venture Partner, Flyover Capital
• Momei Qu, Senior Associate, Baird Capital
• Tom Hawes, Managing Director, Sandbox Industries

By Shaoyu Chang, MD, MPH,  Senior Research Analyst, LSN

As the pharmaceutical industry is cutting back on R&D, more and more big corporations in the field are searching externally for innovative technologies to replenish their pipelines. For biotech start-ups, partnership with these big players not only offers a source of funding, but also helps them tap into a broader knowledge base of therapeutic sector expertise, drug development, regulatory submission, and commercialization.

Experienced, serial biotech entrepreneurs are well-versed in leveraging big pharma to create value for their ventures; however, many first-time entrepreneurs do not understand how to position themselves and communicate effectively with this segment, therefore they miss out on the opportunity to cultivate big pharma relationships.

• “My company has to be impeccable before I can show it to big pharma.”

Often fundraisers hesitate to reach out to big pharma because a technical detail is under development, a certain test is not completed, or the technology is simply “not ready.” As my colleague Michael Quigley has advised[1], outreach should begin as early as a consistent branding and messaging package can be prepared, despite the fact that some data may be pending. The aim with this outreach should be to introduce your company and establish a relationship, rather than to make a direct solicitation for funds.

“Initiating dialogue with big pharma early gives you many advantages,” said a former director of external research at a major pharmaceutical corporation in a recent interview. “You will have a better understanding of what pharma wants and where their interests are. You will also gain insight on where your company stands within the competitive landscape.” With this information, an entrepreneur has a better chance of conducting the right studies that will create value for the company.

• “If I am in conversation with one big pharma company, I should focus on that relationship. If they find out that I am speaking to other pharma groups, it may sour our relationship.”

Engaging in a dialogue with a big pharma company is a great milestone. However, upon reaching this point, many entrepreneurs wrap themselves in a false sense of security and stop contacting other potential partners. Compared with traditional VC funds, big pharmaceutical corporations generally take longer to review and reach a decision regarding investment, especially when it comes to preclinical assets. A company may risk running out of cash if their only dialogue does not reach fruition within a critical timeframe.

What is a comfortable number of big pharma groups to talk to simultaneously? “Somewhere between four to twelve,” said a veteran venture capitalist and MIT professor. Entrepreneurs should not worry about irritating potential pharma partners. Big pharma corporations know each other, and collaboration between them is common. Therefore, entrepreneurs should disclose to potential pharma partners that they are in conversation with other parties. Interest from other big pharma companies lends credit to an asset and offers the entrepreneur an opportunity to demonstrate their ability to maintain confidentiality in a professional manner. In some cases, a healthy sense of competition can lead to higher valuation and even a bigger deal size as big pharma corporations try to outbid each other on a hot technology.

• “If a pharma does not invest in me, they are not interested. I should look elsewhere.”

You are advised to always do your homework first: figure out what a big pharma partner is looking for, how your technology can complement their existing pipeline, and how to get introduced to the key person who might be interested in your technology.

However, entrepreneurs must remember that making a connection with big pharma does not result from a “hit-or-miss” shot, but from a dialogue, which is an ongoing dance. Many decision makers at pharmaceutical corporations are scientists themselves who are genuinely interested in new technologies. However, they are also worried about risks when making an investment decision. If they think you are too risky for investment now, they can lay out the steps you need to take to make yourself investable in the eyes of the firm.

More and more frequently, big pharma corporations are choosing to enter some form of collaboration with early stage companies on high risk, preclinical technologies. “Instead of licensing, big pharma enters service-based agreements with a small biotech to test their technology by using big pharma’s facility, such as disease models or animal labs, at no cost,” said the former pharmaceutical corporation director interviewed. “In exchange, the biotech shares data with its pharma partner.” Such collaboration serves as an opportunity for a small biotech to gain early validation data and open doors to further cooperation in the future.

In 2014, big pharma struck 559 licensing deals, with an average total deal size of $280 million.[2] The same year also saw $234 billion in merger and acquisition (M&A) activity in the pharmaceutical sector.[3] For many entrepreneurs, collaboration with the right big pharma partners can provide invaluable access to technical guidance, market intelligence, and funding. You must be mindful as you proceed in your outreach, but it is never too early to start!

[1] Michael Quigley. “Four Reasons Why It Is Never Too Early to Build Relationships with Investors.” Next Phase: Life Science Nation Blog. Accessed from https://blog.lifesciencenation.com/2015/03/26/four-reasons-why-it-is-never-too-early-to-build-relationships-with-investors/

[2] The Boston Consulting Group. “2014 Biopharmaceutical Partnering Survey.” Page 6. Accessed from http://www.slideshare.net/TheBostonConsultingGroup/2014-biopharmaceutical-partnering-survey

[3] Steve Sapletal. “After A Blockbuster 2014, What Will 2015 Hold For Pharmaceutical M&A?” Benzinga. Accessed from http://www.benzinga.com/general/education/15/02/5220037/after-a-blockbuster-2014-what-will-2015-hold-for-pharmaceutical-m-a#ixzz3Y1AG7dNI

By Michael Quigley, Director of Research, LSN

As family offices have been increasing their exposure to direct private investments, the ability to contact these groups is benefitting fundraising entrepreneurs in a number of industries, including the life sciences. LSN’s research team has been building and maintaining dialogues with these groups for nearly three years and in doing so we have identified five strong channels for finding family offices.

1. Web/LinkedIn Search

Having recently discussed how the LSN Research Team uses advanced search techniques to uncover investors, I won’t go into too much detail here. Suffice it to say, many family offices, particularly those that are highly active in the life science space, have a significant web presence and can be identified by using Boolean Operators to target both Google and LinkedIn searches. As these groups have established these communication channels with the intent to be found, they also tend to be more open to outreach and the discussion of new opportunities.

2. Legal Firms

Family offices usually have legal representation that is often outsourced to a legal firm. These groups can provide a solid, trusted reference for young companies. If you have a relationship with a lawyer or legal firm, it is definitely worthwhile to ask if they are currently working with any family offices or high-net-worth clients interested in direct transactions in your space. Being referred by these groups can help your company bypass the fear that a family office might have of being scammed or duped.

3. Foundations

Family offices often contribute a portion of their assets to philanthropic organizations, including disease foundations, which can often foster introductions. Many foundations list major contributors on their websites and in press releases so that is a great place to start your research. These family offices often have direct ties with the disease the foundation is working with making them more likely to have interest in your opportunity. Being introduced through the foundation may be especially helpful if the organization has significant scientific expertise in the disease area and is able to validate your opportunity to the family office.

4. Academic Institutions:

Family offices, also often with a philanthropic motive, make significant contributions to academic institutions and frequently serve on the schools board. These Institutions often list board member and significant donors on their website, so those can both be great places to look. Additionally contacting the school or their tech transfer office can also lead you up the stream to who is funding them (pending they are willing to tell you). Family offices funding Academic Institutions do so in many cases to leave a lasting legacy and have a positive impact in the world, this desire to make impact can make them good targets for funding life science companies looking to impact healthcare.

5. Conferences

There exist a number of family office conferences that take place all around the globe. However, if you plan on going to a general family office conference without a direct investment focus, there will only be a small fraction of those in attendance that will be interested in your opportunity. Not all family offices go direct and not all of those that do invest in the life sciences. Also, many planners of these events are loose in their application of the label “family office,” so, if possible, it is important to conduct some due diligence on the attendees before signing up. In our experience a company has a greater chance of finding a fit with a family office when they attend a conference focused on an area that is connected with their technology.

These five channels have been valuable resources for LSN Research in the past and have led to a number of the relationships we currently have with family offices. However, as with any potential investor pool, you should not spend your time trying to contact and follow up with every family office you can find. While these groups can be more flexible with their investments and their level of risk tolerance than more traditional capital sources, not all of them are making direct investments into life science companies. You should be sure to research previous deals a family office has been involved with, perhaps by speaking with a mutual third party; this will let you know whether reaching out would make sense. If you are able to target them properly, family offices represent a significant source of financing for life science companies.