Next Phase Newsletter

By Max Klietmann, VP of Research, LSN

The life sciences arena has been aware of the substantial market opportunity that the developing world represents when it comes to delivering diagnosis and therapy. This segment of the population suffers largely from preventable and/or easily treated diseases that could represent massive opportunity for pharmaceutical and device companies to improve outcomes and increase revenue streams. However, the challenge has been – and continues to be – getting treatment to patients in remote, impoverished, and underdeveloped areas. However, recent developments in the diagnostic device space are beginning to address these logistical issues, and delivering product to patients in these markets is becoming a reality. This is being driven by rapidly decreasing costs of disgnostic technologies, investor demand for larger addressable patient populations, and lower regulatory thresholds for diagnostics.

One of the biggest problems facing emerging markets is an inability to effectively diagnose patients. Considering that most disease-related deaths in the third world stem from preventable and easily-treated conditions, diagnostics are one of the easiest ways to address public health issues. Governments in China and Russia, for example, have been actively supporting initiatives to bring affordable diagnostics and treatments to remote and/or underserved regions for exactly this reason.

Hand-held and portable low-cost diagnostic devices, genomic sequencing and proteomic profiling are all being developed by a number of companies for developing nations. These are designed to be simple, robust, and user-friendly. Historically, this technology was enormously expensive, and cost prohibitive, even in developed markets. However, as the cost of genomic sequencing and proteomics has declined, new opportunities have made themselves apparent. However, delivering this technology to, for example, remote villages in Africa, presents its own challenges (e.g. harsh climate, high temperatures, contamination risk). Thus, much of the technology being proliferated for this purpose is technology initially designed for battlefield use that can now be scaled for larger markets with similar requirements to field-deployed medical units. Combine this opportunity with the fact that regulatory requirements to enter many developing countries have a much lower threshold than developed markets, and you have a very attractive investment prospect.

Investors are increasingly becoming aware of this as well. As pressure from investors has pushed many companies to seek larger addressable populations, emerging markets present a compelling opportunity to find these patients. Medical technology companies developing in vitro diagnostic devices are in a unique position to easily target this opportunity (relative to therapeutic companies, who in most cases have higher regulatory thresholds and a significantly more costly R&D process).

In-vitro diagnostic device companies should consider the option of using this type of market approach when courting investors. The opportunity to rapidly proliferate product to a market with a serious need and low regulatory barriers is a compelling target for a strategic buyer down the road. “Grooming for exit” in a market that offers a buyer a turnkey market entry option is one way to stay ahead of the curve and take advantage of macro trends in the life sciences arena.

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 Dennis Ford, CEO, LSN

I wanted to discuss the general vetting process for scientists, whether it be vetting scientists to present at a conference or selecting scientists that are developing early stage products to invest in. LSN’s staff attend a lot of life science conferences, and we are always interested in the types of companies asked to showcase their technologies at these events. This is always interesting to see, because sometimes spectacular technologies are presented by poor presenters, and in other cases, less interesting technology can be made to appear groundbreaking by the right speaker. Considering that LSN is organizing an Early Stage Life Science Investor Conference September 16th, I wanted to explore the concept of “vetting” presenting companies more deeply, as we select companies to present at our event.

The process of vetting potential investment opportunities is an interesting topic, especially in the case of early stage biotech firms because there is really no formulaic way to vet scientists other than the obvious data gained through trials – but the issue is for early stage biotech firms robust data simply isn’t there yet. I would like to point out that the VC community has had some very smart minds “formally vetting” science for a long time, but as we all know, the results have not been the greatest. The question is simply, why? If VCs can’t pick them, then who can?

Investing in life sciences almost reflects the nature of the field itself – trial by experimentation. An investor cannot simply evaluate a potential investment based on a firm reaching a few key performance milestones. There are also many science research publications that track the leading edge science and cover the latest and greatest strides forward in the space, but being highlighted in such publications rarely has a direct correlation to success in the market.

A lot of times, it really isn’t the fundamental science or underlying technology, but rather the person(s) driving the endeavor that determine success or failure. My take is that it all comes down to the inventor/entrepreneur and their own personal quest to move the science and technology forward. This is why so many investors end up investing in a management team rather than in the specific technology that the scientist is developing. This however leads to another challenge – if early stage life science venture success is a function of science (which can be objectively validated) and people (an aspect that is impossible to quantify on a start-up scale), then who can evaluate the true quality of an investment?

I will posit that if you had 100 leading scientist entrepreneurs, all with great science and inner drive, that only 20 of these scientists (applying the 80/20 rule) are capable of learning what they need to learn to do the rest of the work that would get their science to the market. The extra work I am referring to here is taking that giant step of learning rudimentary sales and marketing skills that enable an entrepreneur to go outbound and seek out the capital needed to move down the pipe, and realizing that you need to spend money to make money. I talk to gifted scientists on a weekly basis, and there is no doubt that their hearts and minds are in the right place. However, it is only a minority of these scientists that are so possessed that they will virtually learn anything and do whatever it takes to get their science to market.

Scientists that know what they need to do to succeed realize they need to get their messaging down so that it can be understood, and understand that they need to learn rudimentary marketing skills. In my mind, if they budget the funds, make the commitment to do the marketing, attempt to create the web presence and buy a database to enable them to go after investors and partners, then they are committed and aware, and thus vetted enough to deserve a chance to pitch to investors.

LSN is putting on an early stage investor conference in Boston September 16th, and LSN is soliciting presenters from a dozen or so of the top private and academic incubators in the U.S., as well as European and Asian scientists looking for early stage funding. We vet by word of mouth from our early stage science and business development partners, from our own in house science team reviewing responses from our newsletter’s request for innovation, our early stage investor network, and from our own LSN client base.

However, at the end of the day, it is the investor who needs to do the vetting, and ensure that the person on the other side of the term sheet has what it takes to succeed. We will have some great and interesting technology at the conference, and will also have some early stage investors that most entrepreneurs are not aware of. I understand that there is a vast difference between academic and private, and where the two intersect is where we are focusing the event.

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 past issues of the LSN newsletter, we’ve spoken at length about how venture funding the life sciences space has become increasingly scarce, especially for early stage companies in the sector – basically, the number of venture capital funds has significantly decreased, and those that are left are investing in later stage companies and are much more risk-averse. Those that remain are mostly the large, well-known and well-capitalized firms. However, a new group of venture capital investors are emerging on the scene, and these investors – known as social venture funds – have a much different philosophy than their traditional venture counterparts.

Social venture capital firms are similar to traditional venture capital firms in the sense that they are investing in early-stage, often pre-revenue firms. The major difference between the two, however, is that generating ROI is secondary to creating social impact for the social VC. In the past, it was very difficult for firms focused on making a social impact to receive funding, because investors perceived that there was some kind innate tradeoff between making a socially responsible investment and generating a financial return. Despite this fact, the number of social venture capital funds has started to increase as of late.

Social venture capital firms are similar to venture philanthropy firms, another group of investors who we discussed in depth in a previous edition of the LSN newsletter. Venture philanthropy firms, however, are often formed as the venture arm of a foundation or family office, with the goal moving the science along for a certain indication. Social venture funds, on the other hand, have a broader investment mandate, and are structured from the start as a venture fund.

In the past, social venture capital funds mainly focused on supporting green technologies. However, the scope of their investment focus has widened significantly in the past few years to many different kinds of investments that are making some kind of social impact, which has lead these firms to consider themselves as “impact investors”. Unlike traditional venture capital firms, social venture capital funds aren’t investing in a large number of small opportunities, hoping for one blockbuster investment. Instead, they are investing based on what they believe will have the largest social impact. Furthermore, they tend to have longer holding periods than traditional venture capital firms – usually around seven to ten years.[1]

In the life sciences investments specifically, these firms are allocating in many different areas. During a recent conversation with an LSN analyst, one east-coast based social VC noted that they were extremely opportunistic in terms of their allocations within the life sciences space. The firm invests in companies developing therapeutics, diagnostics, medical devices, and even has an interest in the biotech R&D services space, such as contract manufacturing organizations (CMOs). What this suggests is that these funds have a much broader scope than venture philanthropies, which typically invest in therapeutics, diagnostics, and sometimes medical devices targeting a specific disease area.

Ironically, many social venture capital firms have actually outperformed their traditional venture capital counterparts in terms of ROI. As traditional venture capital firms begin to dwindle, and the need for capital in the life sciences space becomes greater, it seems as if more and more of these social venture capital firms will begin to emerge as players in the life sciences arena, especially if investors begin to realize that social impact does not hamper financial returns.

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 Max Klietmann, VP of Research, LSN

As we have previously discussed in this publication, the entry of family offices into direct investments in biotech and medtech is one of the most promising trends in the life science financing environment today. I have been in dialogue with a few investment banks that deal specifically with this type of transaction to get their perspective on the trend.

The general consensus is that it is a combination of objective and subjective factors. On the objective side, family offices are aware that from an economic standpoint the sector is too big to ignore: It is a significant piece of GDP, and there is powerful growth in demand as populations age.

On the subjective side, the family may have had a direct experience with disease or medical treatment, which strongly motivates them to make a difference. Their activism may commence with charitable giving or the funding of early stage research, and as their network and knowledge grows, they begin to see more pure investment opportunities and elect to pursue them.

We’ve discussed this trend extensively, but I was curious to learn more about the ways in which family offices should approach this move on a tactical level. How should family offices orient themselves to be successful in this pursuit? Here are the three keys to success:

Institutionalize

Often, direct family office investment in private companies has been an ad hoc pursuit rather than a sustained strategy. However, investors who build a more visible institutional profile are at an advantage for two reasons: First, by making direct investments into life science companies an integral investment strategy, the family office benefits from diversified investments. Second, by establishing a track record of effectively moving science forward, the family office stands to benefit from better deal flow and more attractive terms going forward. This institutionalization can be done in house, or via a strategic advisor such as an investment bank.

Lead the Deal

Once investors identify a company in which they want to invest, they may find that the management would prefer them to be a “lead” investor, one who negotiates the term sheet and sets the price for all investors in the financing.

Historically, the lead role was played by a fund, but a new strategic or institutional investor from a family office is increasingly welcome. However, being a lead investor does require a capacity for diligence, syndicate building and post-deal monitoring via board seats, which cannot be created over night. A strong outside advisor can shorten the path and avoid costly mistakes.

Co-Invest with Strategics

Family investors share a long-term orientation with strategic investors such as big pharma corporate venture. In the current environment, we will likely see more financings in which corporate venture funds invest alongside active, institutional family offices, who are systematically investing in life sciences. The family office benefits from these structures by leveraging the diligence of the strategic investor. However, these relationships can become complex, so success depends on getting the other two pieces in place.

The general perspective among those close to this investor category is that the family office will become an increasingly sophisticated player in the life sciences arena. Those family offices seeking to enter the space have a great deal of opportunity, and can learn from the mistakes and successes of others by following the guiding principles laid out above – Institutionalize, lead the deal, and team up with the big strategic players. This ensures a compelling portfolio, top-notch deal terms, and the ability to move science forward efficiently over time.

Click here to read more about the family office direct investment trend from an investment bank’s perspective.

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