By Dennis Ford, CEO, LSN
Investors have a new sense of urgency when it comes to engaging with early-stage academic scientists and biotech executives. Early stage investors have always sourced deals from these groups, but now even mid-stage and later stage investors are devoting significant time talking to these constituents of the life science arena.
I have initiated a dialogue to find out exactly how investors see these two groups relative to one another, and what value each has to offer. I decided to conduct an informal survey among some of LSN’s contacts within the industry to better understand the dynamic.
Though the question may be simple, the answer is complex and multi-faceted. Here is some feedback I received from my question: “Why do investors have a new sense of urgency to engage with academic scientists and emerging biotech executives?”
Interview #1
Consultant / Pharmaceutical Executive
The Lesson:
Buy low, sell high!
This executive was previously involved with several big Pharma players – The new direction is a variation on the theme inherent in most drug discovery scenarios within Pharma. Find and select interesting and compelling candidates and then help guide and shepherd them through the clinical development process.
The new twist is creating a life science entity funded by an investor group consisting of a combination of pharma, family office, corporate venture (not VC), and other new life science investors. The theme is creating a portfolio of assets made up of next generation small molecules around a particular indication. The overall business model here is to select and buy a large group at a low price, and then, sell the few that make it through the development process for a very high multiple. The distribution channels can be a traditional distribution or a “rent-a-sales force-model” to move product through. This new entity can be a very lean and hugely profitable virtually outsourcing almost every facet from discovery to distribution. As an experienced entrepreneur, this executive has seen firsthand how the industry is changing, and he can explain that very well to investors.
Interview #2
Private equity firm with an academic focus
Around $100 million in AUM (Assets Under Management).
The Lesson:
The value of the first pass.
This conversation was with a mid-tier PE that’s interested in life science investments post-phase II, and supply capital for phase III. They concentrate on assets with a research university pedigree. They don’t put capital in early stage investments, but they do invest time in building relationships for the future, because it is a big win when something is available to be commercialized, in which case they turn first to the ones they know. The strategy? Spend time with early stage academic scientists as they grow in the industry, and if by chance they do want to commercialize some technology, they will surface to do a “first pass” with people they already have a relationship with.
Interview #3
Scientist / Entrepreneur
Life Science Industry Association
The Lesson:
The Past: Publish or Perish;
The Future: Publish to Commercialize
Academic innovation and commercialization are closer than ever, and this trend is only accelerating. Academics used to be irrelevant to investors in the 80’s and 90’s because their work was often decades away from market potential, and most scientists didn’t care about or even consider commercializing their work. Instead, they wanted to be respected by other academics, and lived by the mantra “publish or perish.”
All of this began to change in the late 90’s, when a massive surge in academic publication occurred that led to a huge rise in patent registration around various technologies. This made investors suddenly aware that academic scientists were not just professors in labs trying to impress other professors in labs – they were sources of deal flow, investment opportunities & market intelligence, and could point out disruptive technologies before they reached the “commercial realm.”
The big pharmaceutical companies, investors (both early and late-stage), and even secondary constituents like insurance firms all maintain dialogue with academia precisely for these reasons. Academia is the industry’s “crystal ball,” so to speak, and has the most future-oriented perspective on emerging trends in the space.
Interview #4
CEO
Emerging Biotech
The Lesson:
Find a brilliant Scientist and build a management team around the commercialization of his technology.
The overriding issue in academic scientists versus private emerging biotechs is that the academic side usually has no business sense. Academics know science, but the management team is the critical foundation. The best formula is a strong business player, a brilliant scientist, a practical scientist (one who performs trials and benchmarks), and finance & legal support. Without a team assembled to back you up, you have big problems. Investors do not have to be life science gurus to help organize and assemble a management team; providing management guidance and mentoring does not require a PhD in some esoteric science.
Interview #5
CEO / Scientist
Emerging Orphan Drug Biotech
The Lesson:
“R&D vs. r&d” – Understanding the dynamics
In the area of therapeutics, it is important to understand how to break down research and categorize the various segments and opportunities. For instance “little r,” which are targets, as opposed to “Big R,” which are actual drug candidates. Also, “little d” early phase management VS “Big D” phase II and phase III management. Each category area is different and investors exist for each phase but for different reasons and bring different values. Each segment has a different but distinct exit orientation, and as such it is important for investors to understand this interplay from all of the various constituents’ perspectives.
Interview #6
Entrepreneur & Life Science Investor
The Lesson:
Creating an academic network for validating investments, in order to determine if the science makes sense.
This particular investor’s main reason for speaking to scientists is as a self-education exercise – investors want to educate themselves on science and theories that are outside of their particular area of expertise. By reaching out to scientists to get knowledge of a particular topic for due diligence purposes, a lot of basic science due diligence goes on, even for later stage investing in the life sciences space. In doing so, this investor is able to later draw on his relationships in the academic science space to validate his investments.
As is plain to see, there are varying opinions, innumerable reasons for the dialogue between investors and early stage/academic scientists, but fundamentally it is a desire to be at the cutting edge before anyone else. The primary purpose of this article is to bring some conversations that LSN is having and creating in the market to the surface. Feel free to email me with any comments or input at dford@lifesciencenation.com
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