Next Phase Newsletter

By Dennis Ford, CEO, LSN

The single most important issue in the life sciences space today is that traditional sources of capital have slowed, creating a void, and fundraisers are left navigating using outdated maps & trying to play catch up. Anyone who has recently attempted to raise capital knows that this causes a lot of frustration and churn. Times have changed, and adjustments must be made. There is a distinct sentiment that the old funding models were broken to begin with (which I won’t belabor here), and the past investor segments aren’t going to return. The new landscape is substantially different, and new investor breeds are emerging across the space. Enter the Venture Philanthropist.

Venture philanthropists, or VPs, are extremely active investors and want to see results. However, this is not your typical exit-hunting venture firm; VPs mission is to speed up medical progress by eliminating the myriad of obstacles that researchers face, thereby hastening the delivery of breakthrough solutions to patients. Essentially, we’re talking about a mandate for medical progress and improved outcomes (hence philanthropy). VPs are impatient, and their goal is to accelerate the development of treatments and cures for the world’s most challenging diseases. There is a high degree of direct involvement as these investors are hands-on – they are more open, and therefore, flexible deal terms with multi-year allocation timelines can be negotiated. VPs know how to get things done, so expect milestones and carefully scrutinized metrics, along with action plans & organizational input.

VP firms provide funding for scientists and young life sciences companies in order to move along the development of therapies for certain diseases. Unlike traditional philanthropic organizations, venture philanthropists expect the companies and individuals they invest in to achieve certain milestones and focus on accountability. This isn’t just funding basic research; it’s driving products to patients as quickly and efficiently as possible.

These investors are becoming increasingly important, especially due to many scientists’ inability to translate discoveries into compelling market opportunities, and because of impending cuts in the NIH budget, which could cripple future therapy development. Venture philanthropy currently only represents less than 3% of the spending on medical R&D in the US, but this figure is expected to grow as the need for funding from scientists and early stage biotech firms continues.

There doesn’t seem to be a global source on exactly how many of these Venture Philanthropist entities exist, although preliminary research indicates around 150 and growing. Both North America and Europe have burgeoning grassroots groups that are starting to organize and recruit fellow family offices, using the ideology of expediting science for the good of the world.

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By Danielle Silva, Director of Research, LSN

There are a number of investor groups that are playing an increasingly significant role in the life sciences space as of late. One of the most compelling and motivated investors to enter the space are patient groups. These are indication-specific sources of capital that want to bring science forward in a distinct disease area. This includes a strong emphasis on carrying drugs across the “Valley of Death” to accelerate progress towards a cure. Patient groups essentially allow those afflicted by a disease to vote with their wallets to bring treatments to market, rather than seeking exit opportunities or financial returns.

At a basic level, patient groups are a collection of individuals who are afflicted by a disease that come together and mobilize to find cures for a certain affliction. In the past, patient groups often times partnered with foundations or venture philanthropists in order to make an investment or donation. One example of this is the Cystic Fibrosis foundation partnering with a number of patient groups and Aurora Biosciences [1]. However, we are now seeing more and more of these groups mobilizing others to make a strategic investment to more directly improve patient outcomes.

Patient groups are taking an innovative approach to investing in the life science space, and are becoming empowered, investing in promising companies & researchers. Patient groups will often times take a strategic approach to attempt to bring many parties together to push research along in a certain area. Generally, patient groups will try to bring together scientists that are researching different areas of the disease – usually, they will also try to find some of the best and most well known scientists in the space in order to gain further legitimacy. This is also helpful because it creates a collaborative environment amongst scientists who are researching the same disease area. Patient groups then establish their clinical network – which is a network of patients that can be utilized for clinical trials for companies that they invest in (essentially utilizing the members of the patient group that are afflicted by the disease). The final step for these patient groups is to bring biotechs / big pharma into the picture, who in turn help the scientists to commercialize their research.

Patient groups are also dynamic because they almost create an ecosystem within their particular disease focus. Generally, patient groups are huge advocates of sharing as much information as possible – and help researchers even outside of their network gain access to research and data more quickly and easily. Patient groups also help patients to educate themselves, and allow them to see the various options that are available to them that may not yet be FDA approved. Thus it is expected patient groups will start to become an increasingly major player in the life sciences space because of their collaborative nature, and gain the ability to bring together different groups to work towards a common goal.

[1] http://www.xconomy.com/national/2012/04/09/investing-in-biotech-isnt-just-for-the-investors-anymore/

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By Michael Quigley, Research Analyst, LSN

LSN draws from the vast and talented pool of university & collegiate undergrads in Boston to recruit research analysts for its team. Michael Quigley is a Senior at Bentley University studying Economics and Finance.

It is no secret that the number of investments being made in the life sciences private sector is increasing at an extreme rate. At Life Science Nation, we’ve tracked over 4000 individual financing rounds in the space over the past few years. As is visible in the chart below, things are moving at quite a clip:

This may seem like great news for entrepreneurs looking to start up a life science company. With the number of investments increasing so rapidly, access to startup capital appears easy to come by. However, as anyone who has tried can tell you, this is absolutely not the case: Despite this increase in investment rounds, one trend that our data makes strikingly obvious is that the growth rate of seed and startup financing rounds is growing at a much slower pace.

This lack of growth is something that is, in part, a result of young life science companies inability to find the right fit in terms of funding partners. This problem is becoming more evident as competition for capital is increasing as traditional capital sources evaporate. Another factor contributing to this trend is that some investment firms, in particular venture capital, are looking more towards investments in the space with a shorter period to exit. They don’t want to hold a company for longer than they need to make a return on investment since the venture model no longer works well for early stage life sciences investment. The result is this “Valley of Death” we so often refer to, when discussing early stage fundraising.

When taking both of these factors into account, there is a portion of this industry that is being both undersold (due to lack of fundraising capabilities) and under-examined (due to the desire for faster ROI). As time progresses if this gap goes unfilled, there will be a pool of strategic players (Big Pharma) with painfully dry pipelines, and a shortage of prospects developed enough to in-license or buy up. Consider this a call to action: Life science entrepreneurs – throw out your old maps and start looking at new strategies and opportunities for finding sources of capital. Investors – evaluate emerging opportunities and take advantage of the upcoming demand explosion for developed assets. Change is upon us, and those players who will come out on top are those that adapt first.

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