Next Phase Newsletter

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

By Dennis Ford, CEO, LSN

Before we jump directly into the potential benefits and issues surrounding crowdfunding, let’s clarify exactly what we are talking about. Crowdfunding within the life science arena can be divided into two categories: equity crowdfunding and philanthropic crowdfunding.

The latter is typically donations to companies developing therapeutics or medical devices. This philanthropic concept isn’t particularly new, and has been a key source of funding for moving science forward for decades, because there is no risk or upside reward on the part of the donor.

Equity crowdfunding, however, refers to an instance where the contributor is given an equity stake in the emerging life science company raising money. The passing of the JOBS act has allegedly allowed this activity as a fundraising tool for private companies.

Simple enough, right? Well, don’t be so sure, because the equity share is defined as a “security” by the SEC and FINRA, which makes the selling of equities fall under these regulated government agencies. This becomes an issue when taking into account that direct investment in private companies is a risky endeavor, and federal and state laws have heavily enforced regulation on exactly who can invest – typically, only those above a certain income and net worth can be deemed an “accredited” investor.

Crowdfunding, however, has created an opportunity for the smaller players to access high risk / high reward investments, which were previously only available to investment funds or high-net-worth individuals. The reason for all these rules and regulations in the first place was to protect vulnerable consumers from predatory financing opportunities that would be hard to understand, and net out the risks of an investment.

There is an obvious potential benefit to entrepreneurs looking to raise capital, as this opens up a significant pool of potential financing, but the water is murky – both on the regulatory side, and in terms of problems inherent in the crowdfunding model. The regulatory piece is most interesting, because there is an inherent contradiction in what is considered legal under SEC/FINRA vis-à-vis the JOBS act, which the regulatory authorities have been vague about so far.

Beyond the regulatory piece, however, there are a significant number of inherent problems with the crowdfunding model. The most significant is that a company that has used crowdfunding now has hundreds (potentially thousands) of investors to maintain a dialogue with. This is simply not feasible for most emerging biotechs, who have bigger problems to address than holding the hands of uninformed investors. Given the fact that the life sciences space is highly technical and complex, it isn’t possible educate a pool of people who don’t understand the science behind a particular technology. This also makes it almost impossible to effectively communicate the scientific risks involved in an investment.

Secondly, the amount of capital required to move products forward in life sciences is often massive, and it is highly unlikely that crowdfunding could meet this need. This means not only being exposed to potential regulatory issues, but also having to carry hundreds of investors along through subsequent capital raising rounds. There may be a place for crowdfunding in helping emerging biotechs and medtechs get off the ground, but as with everything else in the world, if it sounds too good to be true, then it probably is.

In short, the regulatory environment remains unclear, but this isn’t the core issue surrounding the feasibility of crowdfunding in life science sector. In my opinion, the main issue is that professional life science investors are a small minority because of the difficulty in parsing new technologies in a rapidly changing landscape. These life science investors have PhDs and a network of highly experienced researchers & market valuators that add to the cost of the risky business of life science investments. The resources required to educate and maintain a dialogue with a pool of hundreds or thousands of unsophisticated investors is a daunting task. Though equity crowdfunding may be effective for other industries, the complexities and problems inherent in the model make it extremely challenging for life science entrepreneurs. The jury is still out, the firmament is moving, and the fog has not lifted.

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

As a whole, the life sciences really have one overarching goal, which is to develop and bring to market products that will in some way improve people’s lives. It doesn’t matter if you are an MD developing a life-saving medical device, or a CFO keeping an early stage biotech afloat. We all at some point recognize and pat ourselves on the back because the work we do has the potential to change even one life. This is not to say we (myself included) are enlightened saviors of the world; most of us are working to make a profit, for our companies, for our families, and for ourselves.

Then there are the people who have found – and drive forward – the missions of the hundreds of disease foundations around the world. We always knew they were doing good things: educating people on disease, increasing awareness, organizing pledge walks and even funding research grants for investigators at research institutions. Lately however, foundations around the country have been investing directly in projects and products at for-profit companies.

Foundations have the common goal of increasing the number of products being developed with the sole purpose of bringing treatments to patients. Conversely, the survival of any investment firm rests firmly on the bottom line, the return on investment. If the risk / reward profile is skewed too far, as in the capital requirements are too high for the risk involved, venture capitalists won’t touch the deal.  Foundations have seen the widening valley of death for early stage companies, due to the poor financial climate and reduced government spending.

As a result, a growing group of foundations are now taking it upon themselves to directly invest or set up separate bodies that invest directly in products and companies with the potential to bring products to the clinic. Autism Speaks is one such foundation. They recently founded an arm that has the mandate to invest directly in projects at for profit companies their scientific board believes will help treat the most severe cases of autism. Only months after their founding, they have injected $2 million into an early stage biotech company to fund a project that would have otherwise been too risky for such cash-strapped startups to finance.

Foundations and all forms of venture philanthropy are poised to fill the market need in the life science sector. With the goal of supporting early stage research efforts and passing it off to dedicated investors, we may see these patient centric treatments entering more company pipelines. The relationship between foundation and company provides value well beyond simply providing cash. Some of the foremost scientific minds sit on boards of these foundations, and provide a network and the scientific acumen to which a company might not otherwise have access.

Here at LSN we have identified over 400 foundations and endowments focused on curing specific diseases. As more join the growing trend of venture philanthropy, we will see even greater opportunities for early stage companies to pursue their most pioneering research. Overall, this trend can only mean good things for the future of emerging life science companies, and the patients we all serve.

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

The cardiovascular device space is currently undergoing a major shift. Two major trends, the growth of renal denervation and the decline of cardiac rhythm management (CRM) devices will be central themes in the device space in 2013. In this article we will touch on both of these trends and what it means to emerging medtechs and investors in the space.

Renal denervation refers to a class of therapeutic devices targeting drug-resistant hypertension by ablating renal artery nerves. Essentially, the concept is to decrease blood pressure by widening the renal arteries. Every major medical device firm in the field is developing a product in this area, and many of them are buying up emerging medtechs to enter this space. Emerging medtechs that are able to show significant competitive advantage to large strategic investors are poised to become highly attractive targets.

However, all of the hype over renal denervation technology and its multi-billion-dollar market potential is quite obvious when we look at the CRM space. CRM – which basically refers to pacemakers and the like, used to be a primary source of reliable cashflow for major industry players. However, the space has become overcrowded, innovation isn’t there to create the incremental demand required to drive sales, and investors are pushing companies to move into the next big thing. So what does it mean for small medtechs in the space? The key is differentiation. A decline in investment means a decline in future competition, so finding a strategic partner with whom you can develop a differentiated product is a key to success.

Overall, investors and emerging medtechs should be wary of these two trends, and realize the potential to succeed that offer. Times of change are times of opportunity, so those who see where the space is moving will be the winners.

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