Next Phase Newsletter

By Michael Quigley, Research Analyst, LSN

The Supreme Courts ruled last week that naturally occurring genes are no longer patentable. The case was brought to the Supreme Court by the American Civil Liberties Union against Myriad Genetics Inc. for their patents on the BRCA1 and BRCA2 genes (two genes strongly correlated with breast and ovarian cancer) on behalf of researchers, doctors and cancer patients. For many, this ruling was seen as long overdue, as the idea of owning something that nature produces on its own is counter-intuitive. However, prior to this ruling, various companies had patented approximately 20% of the human genome, some of which they held for as long as 30 years. (1)

The largest benefactors of this ruling include diagnostic services companies, who can now test patients for previously patented genes that have a known association with a disease or disorder. Patents will also benefit now that companies are no longer able to have monopolies on the tests for these genes; the prices of these tests for patients – which, for certain indications, can cost more than $3,000 and aren’t always covered by insurance – are already dropping dramatically. (2)

With a likely surge of patients getting tested for the presence of these genes, bioinformatics companies will see a boost in amounts usable patient data for their software programs. Combining that with the fact that screening and sequencing costs are dropping at a rate faster than Moore’s Law for molecules, as well as an increasing number of hospitals going digital with their data, many early-stage investors are looking at health informatics as a potential “megatrend” in the drug discovery and diagnostics space. (3) The idea that software and informatics could be a serious player in the development of novel advancement in this industry is not new. However, with this ruling in place, it seems to be a much more a viable theory.

The opposition to this ruling this stems in part from the fact that without the ability to patent genes, funding for companies that are actively searching for genes correlated to diseases will pull back farther than it already has. With companies unable to patent the genes they discover, these discoveries become much less profitable, and therefore, less attractive to investors. However, the ruling also states that synthetic genes (cDNA) that are derived from natural genes but made synthetically still can be patented. These synthetic genes are often honed versions of their natural counterparts, and are used frequently in therapeutics. The ruling that these synthetics can be patented will actually be an attribute for companies working with them in terms of gathering funding, as investors finally have closure in an issue previously clouded in uncertainty.

It seems obvious that something produced naturally should not be patentable. But if having patents exist encourages investors to fund and push the science forward, the decision becomes more ambiguous. In the end this decision will aid millions by providing them will more affordable medical tests, and further down the road, more personalized treatments as a result of the increased inflow of patient data.

1. Cutler, Kim-Mai. “Supreme Court Ruling On Gene Patenting May Be A Boon For Biotech Startups.” TechCrunch RSS. TechCrunch, 17 June 2013. Web. 19 June 2013.

2. Than, Ker. “7 Takeaways From Supreme Court’s Gene Patent Decision.” National Geographic. National Geographic Society, 14 June 2013. Web. 19 June 2013.

3. Cutler, Kim-Mai. “SV Angel Says Health Informatics Is One Of Its New “Megatrends”.” TechCrunch RSS. TechCrunch, 25 Apr. 2013. Web. 19 June 2013.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Danielle Silva, Director of Research, LSN

In the US, there are two states that are known for being hubs for life science firms: Massachusetts and California. For this reason, the two states have logically become capitals for investors in the sector; some of the most well known private equity, venture capital, and angel firms that invest solely in the biotech space are based in either Massachusetts or California. But what happens if your firm is based outside of these two states? Will it be more difficult for your company to raise capital? The answer depends largely on what investor groups your firm is targeting.

Angel groups, for instance, are associations made up of high net-worth individuals that pool their money together in order to make investments in early-stage companies. These groups tend to focus on regional investments. Typically, an angel group’s investment goal will be to help stimulate economic development in a particular region. While some groups may focus on other types of investment themes (for example, investing only in female-owned businesses), most of these firms are regionally focused.

Another reason angels are usually regionally focused is because they tend to have no budget outside of the capital they put aside for investments. These groups also have limited full time staff for the same reason. Because of this, it is very difficult for angel groups to visit companies that are outside of their state. Even if the group does visit a company that is located outside of their state, it would be hard for them to have a company in their portfolio that is located far from their headquarters. Furthermore, angel firms have limited deal flow, and often times will not actually source a good number of deals outside of their state.

Private equity firms and venture capital firms lean towards a more opportunistic approach compared to angels in terms of where firms are located. Both groups certainly have larger budgets, and thus partners are able to travel more to visit attractive investment targets. Many of these groups, however, are operationally focused. Accordingly, many of these firms will favor deals that are close to their company’s headquarters so they can check in on the company and make sure everything is running smoothly. Many venture capital firms now will even act as quasi-incubators, maintaining additional office space for their portfolio companies at their headquarters. This is not only to help their portfolio firms that cannot afford to pay high rent, but also allows investors the ability to offer office space that is close to their own company so they check in on the company more often than they normally would be able to.

So does this mean you have to relocate your firm to Massachusetts or California to be successful? Of course not. Although there are undoubtedly more life science investors in both Massachusetts and California, there are certainly a number of investors located outside of those areas. What firms should do is make a target list of all investors that are located within their general region that invest in life sciences firms. These will be the low-hanging fruit, which a firm raising capital should be reaching out to first to begin with. Also, if the company raising capital is located in an unfavorable area in terms of investor concentration, there is still no need to worry. If the product or service is compelling enough, most investors will be willing to literally step outside of their typical geographical investment mandate and start a dialogue with the company.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Jack Fuller, Business Development, LSN

LSN is a big proponent of the importance of finding the right fit in potential partners. This is true for companies looking to develop assets together, finding the right CROs to outsource drug development, and especially in finding investment partners to help raise capital. Last week, I attended the Massachusetts Life Science Innovation (MALSI) Day, and I was incredibly pleased to hear that sentiment echoed by speakers and entrepreneurs throughout the day.

What we mean by fit is the list of criteria defined by a company/firm’s mandate. For example, with investors, a specific firm’s investment mandate may be to only invest in two or three companies in the next 12 months, targeting companies in the medical diagnostics field who also have a usable prototype. Any company that reaches out that does not fit these criteria has no chance of being funded, regardless of their value proposition. With this in mind, understanding an investor’s mandate is the most important factor when deciding whom to go after.

At the conference, I attended a panel where an Angel and a VC each lauded the importance of having a fit before the even reaching out to an investor. The question was then posed, “in the last 12 months, how many meetings have you had with people who reached out to you cold?” Both answered the same: “zero!” However, they were quick to point out that of all the people who reach out to them cold, the chances of them being a fit for their specific investment mandate hovers somewhere around 1%.

Needless to say, the audience (which was largely made up of emerging life science companies seeking capital) was outraged by this. Here is a room full of life science entrepreneurs, attending a panel about financing in the life sciences, and the panel tells them they have no chance of reaching out successfully. Just before a riot started, they explained the concept of fit. Investors in the life sciences are continually inundated with unsolicited business proposals that have less than a 1% chance of satisfying their specific investment mandate. They don’t have time to look at this unfiltered list, so they summarily dismiss everyone that hasn’t been filtered. The problem with the life science community is that the only real filter they currently have is through personal introductions or partner relationships.

Recently, LSN ran a boot camp at a local Boston incubator to explain to early stage scientists that part of doing a dedicated successful outbound marketing campaign is to take the time to research your look-alike companies and determine who has invested in them in the past. This uber investor list is paramount because they know your type of company, your marketplace and technology. Most importantly though, they have already pulled the trigger with similar companies. Next you want a list of investors who have self-declared “present or future mandate” to invest in a company in your arena or orbit.  This is more difficult but something in which we here at LSN specialize. This is particularly important when reaching out cold to investors.  For example, when emailing an investor you know has a mandate for small molecule cardiovascular therapeutics, it is incredibly impactful to have a subject header “CEO of cardiovascular small molecule company – in town next week – meeting request: First Attempt”  LSN has found that outbound campaigns to investors with whom there is a recognized fit results in a 15-20% open rate!

These two panelists were adamant that they are not opposed to people reaching out to them. However, the current method of blindly reaching out to every VC or Angel on the planet is not helping anyone find prospective deals. The old model of raising funds is being replaced with greater focus on connecting people who need to be in the same room together. LSN was founded on this principle, and is why LSN research spends so much time in dialogue with the investor marketplace. As a more efficient dialogue is created between companies seeking capital and investors looking for opportunities, the speed of product development increases, which in turn leads to a more robust industry with better patient outcomes.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital

By Danielle Silva, Director of Research, LSN

As any emerging life science entrepreneur knows, just getting on an investor’s radar is an extremely arduous task. What many biotech firms do not realize, however, is that initiating a dialogue is only the beginning of a relationship that must be managed and maintained over time, and there are still many things that can cause a prospective deal to go south. To help prevent future headache, or even losing a deal during negotiations with potential investors, entrepreneurs should make a concerted effort to avoid some critical errors from the very start.

One thing that often raises a red flag for investors is an issuing company’s capital structure. Are the existing investors difficult to deal with? Is there risk associated with unfavorable terms from previous financings? How much risk of dilution is there due to existing convertible loans, etc.? Some key ways that entrepreneurs can avoid sabotaging future deals is by thinking strategically about how and from whom you raise your first seed capital. Make sure your investors are partners that will be easy to work with past the check-writing stage, and that the terms won’t deter future investors.

One effective method of ensuring a more favorable set of deal terms from the onset is via a non-participating liquidation preference. Here’s a hypothetical situation: If an angel investor invests $1 million in a company and negotiates a simple 1X non-participating liquidation preference, and then the firm is sold for $4 million, the angel investor will get $1 million and the remaining $3 million will be divided amongst the firm’s common shareholders. Obviously, some investors may have a higher multiple preferences, but negotiating non-participating liquidation preference with early investors can mitigate the risk that more institutional investors will not invest due to concerns over a firm’s equity dilution.

Another important component of a company’s capital structure is the capitalization table. A capitalization table is a cash-on-cash analysis of the percentage of ownership for investors and founders, the value of equity for each round of investment, and equity dilution. Some firms may have a large number of small investors that could cause issues for the companies owners or investors down the line. This is one of the issues that crowdfunding can cause, as it can attract large numbers of “unsophisticated” investors. If the entrepreneur should ever go down the road of “herding cats,” it is important to show prospective investors a clear strategy to repurchase as much equity from these “micro-investors” as possible, and convert any of the remaining preferred equity holders to common stock. Often just having a clear answer to an investor concern is helpful in itself.

Showing potential investors that you are business savvy and strategically-minded can be just as important as illustrating how compelling your product is. Avoiding these missteps proves to investors that you not only benefit yourself and the other stakeholders of your firm, but also that you have the ability to run a business.

These mistakes should be avoided at all costs when going through the due diligence process with investors. If you are an entrepreneur who is in the due diligence process with an investor, and do happen to have such setbacks, don’t be alarmed. Acknowledging that you have made these mistakes and speaking with your potential investor about how to resolve these issues will help show them that they are not just making an investment, they are forming a partnership, and that you are doing everything possible to generate a return on investment for themselves and future investors.

Tags: biotech, biotechnology, CMO, consulting, CRO, family offices, Fundraising, investor, Investors, issue, letter, life, Life Science, life science nation, medicine, nation, news, newsletter, pharma, Pharmaceutical, private equity, research & development, science, startup, venture capital