Next Phase Newsletter

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

By Jack Fuller, Research Manager, LSN

We often hear the mantra from life science companies that they have a “patient-centric approach” to developing their latest and greatest technology or therapeutic. However, in the past, we have more often than not seen early stage investors focusing on product innovation and market potential; if a company is developing a technology or therapeutic which is both innovative and has significant market potential, it is likely they will see the term sheet.

That has been changing – and will continue to change – given that regulatory bodies are putting more emphasis on patient outcome as the determining factor for approval and reimbursement. Two areas that are getting attention are the overtreatment of disease, and overpaying for marginal improvements to patient outcome. In this article, we’ll look a few examples and outline the potential impacts on early stage investing in the life sciences.

Overtreatment is the treatment of a “pseudo-disease,” where a person unnecessarily becomes a patient even though they have an extremely low likelihood of developing symptoms. This is most often a result of the trend to over-test and over-diagnose, which also takes a financial toll on the healthcare system.

The most recently publicized example of overtreatment is the high number of low-risk prostate cancer patients who undergo excessive treatment. Individuals with low-risk prostate cancer have between 0-3 % chance of dying from the disease, and most guidelines recommend active surveillance as the preferred action. A recent study led by Dr. Ayal Aizer, MD, resident physician at the Harvard radiation oncology program in Boston, has shown that 67% of men with low-risk prostate cancer received treatment as either radiotherapy or prostatectomy.  This resulted in a dramatic decrease in the quality of life, with side-effects including long-term urinary problems, erectile dysfunction, and bowel problems. In addition, the total financial cost to the healthcare system for this form of overtreatment is $32 million per year.

The importance of clinical outcomes and cost of treatment can be seen if we look at two types of cancer treatment called Neutron and Proton Therapy. These cutting edge therapies were proposed in the 1950s, with clinical trials being carried out in the 1990s that indicated some clinical advantages, including the treatment of radioresistant tumors and targeting tumors with higher precision.
The problem with this treatment is that the cost is disproportionate to the patient quality of life.  To build a modern proton or neutron therapy center costs upwards of $150 million in the first year of operation. In order to make any kind of financial return, the therapy needs to have upwards of a 75 % pricing premium per patient over standard radiation therapy. The clinical evidence just isn’t there to justify that much of an increase in treatment cost.

The financial and regulatory impacts of over treating and disproportionate pricing on treatments is being felt throughout the industry from the largest pharmaceutical companies down to pre-seed ventures looking for their first funding. Pre-revenue investors are not willing to touch innovation if there is no clear path to reimbursement or the cost is inconsistent with the proposed impact. They recognize the impact these factors have on a company’s future value. When this happens, the burden of proving clinical efficacy shifts to even earlier stage programs. This is bad for inventors and entrepreneurs who are focused more on the science of developing their latest and greatest product.

We all know that a brilliant scientist does not a good CEO make, and I think a similar mantra must be taken when dealing these evolving patient and regulatory affairs. Let the lab scientists develop the product, and bring in a dedicated team member (in-house or third party) with patient and regulatory knowledge at an earlier stage. With all the regulatory changes to our healthcare system starting to roll out in the next few years, early stage companies are going to need to be smarter and more prepared than ever if they want to survive.

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