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 BioMarketing Insight
Newsletter
Pharma, Biotech & Medical Device |
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| Greetings! | |
Welcome to BioMarketing Insight's monthly newsletter. This newsletter summarizes the trends and activities with angels, VCs and venture arm in pharmaceutical companies and what companies need to do or consider in getting funding or other types of deals.
Each month will summarize one relevant trend in-depth. Please see News Link on the right for more industry information.
Feel free to email me if you have any questions, comments, or suggestions.
Sincerely,
Regina Au
Principal, Strategic Marketing Consultant
BioMarketing Insight
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| Funding Overview | Since the mid 2008, money has become tight because Angels and VCs are more risk adverse in investing. The IPO market is basically closed due to unfavorable market conditions and the only other favorable exit option is acquisition.
After declining throughout 2008 and 2009, the angel investor market increased in 2010 both in terms of investment dollars and in the number of investments. "Total investments in 2010 were $20.1 billion, a 14% increase over 2009, according to the Center for Venture Research at the University of New Hampshire. Healthcare/Medical Device accounted for 30% and biotech for 15% of total investment.
However, in 2010, only 31% of angel investments were in seed and start-up stage. For the last 2 years angels have shown an increased interest in post-seed/start-up investing with 67% of investments in the early and expansion stage, an increase from 2009.
According to Foley Hoag's Venture Perspective for 2010, the number of Series A deals for life sciences in New England (16) was greater than in 2009 (10 deals) but still less than 2008 (21 deals) and 2007 (30 deals). The number of Series B and later round transaction (51) deals for life sciences decreased over 2009 (62 deals) but the same as 2008 (50 deals) and 2007 (53 deals). The number of Series B and later transactions was the highest in 2009 because VCs were only investing additional dollars in their existing portfolio.
The decline in US VC funding in the number of deals and dollars is also confirmed by Pricewaterhouse Cooper "Taking a Tumble," February 2011.
What are the other options for fund raising? Please read further.
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Other Options for Fund Raising
| For seed funding, other alternatives have been NIH grants, SBIR/STTR grants, foundations and advocacy groups (if technology is in their area of interest), and business competitions (i.e. MassChallenge, MIT $100K entrepreneurship, Babson College, Rhode Island Business) that vary from state to state. For example, Bioaccelerate NYC competition supports research in the "proof of concept" stage and awards winners up to $250,000 if the company is located in NYC.
Recently, another option has emerged-MicroAngels (aka SuperAngels or Angel Microfunding) have formed to help start-ups and early stage companies in the wake of declining VC funding. In addition to early stage seed funding, these groups can provide larger rounds that bridge the gap to VCs. MicroAngels are formed when angel groups partner with other angel groups or with VCs. Some are connected by a web base system that tries to bring together, the inventor, the manager and the investor world wide. VCs have taken notice because entrepreneurs are going to SuperAngels rather than VCs.
To help promote entrepreneurship a number of incubators have been developed in Massachusetts and surroundings areas:
1. MassChallenge in Fan Pier, Boston,
2. North Shore InnoVentures in Lynn for clean tech and in Beverly for Biotech,
3. Massachusetts Biomedical Initiatives in Worcester,
4. Cambridge Innovation Center,
5. MTTC Virtual Incubator in Shrewsbury,
6. Pioneer Valley Life Science Institute in Springfield,
7. Smith College, WITI Technology/Incubator Center for Women in Northampton, MA,
8. BU Entrepreneurial Research Lab (ERL) in Boston
9. Vermont Center for Emerging Technologies in Burlington, VT,
10. Univ. of Connecticut Incubator Program in Farmington, CT,
11. M2D2 in Lowell for medical devices (open-house May 18th in Lowell),
12. Harvard Innovation Lab (plans to open this fall - 2011)
For a list of additional incubators in Massachusetts, click here. The number of incubators has also grown nationwide.
What has been the VCs response to SuperAngels and incubators?
In response to these groups, VCs at the Xconomy 65th VC anniversary stated that they are looking at different business models. More progressive VC groups have tried to work with incubators that foster entrepreneurship and obtain the first look at new technologies. Earlier this year, five VC firms in Massachusetts sponsored a new co-working facility called "CriticalMass" with incubator Cambridge Innovation Center. In addition to underwriting the cost to lease the space for 48 start-ups, the VC firms are holding regular meeting with entrepreneurs in providing programs and mentoring.
Mark Boslet, Senior Editor of Venture Capital Journal, April 2011 reported that the traditional VC process is undergoing change, and the fundamental nature of the business.
Paul Graham, founder of Y Combinator, the model for all other incubators commented, "Definitely a lot of things have changed. Whether VCs like it or not, the world of funding startups has changed from (old style) elephants (with few offspring) to mosquitoes" churning out many entrepreneurs. "It's on a different scale," he said.
"Last month, VCJ asked readers at peHUB whether incubators are a threat to traditional seed and early stage venture investing. Nearly 71 percent, or more than two-thirds, voted "No."
"When asked whether they had any additional comments, most respondents pointed out those incubators are simply taking advantage of cheaper startup costs. Today, startups require less capital to gain momentum, and seed incubators are increasingly providing it."
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Mergers and Acquisitions and Other Deals
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While there has been an M&A frenzy for the past few years with Big Pharma, Big Biotech and Big Medical device, the pace of M&A can not continue and is declining according to HBM Partner report. Post M&A, it has been found that while the M&A looks good on the balance sheet short-term with acquisition of favorable assets, there are unfavorable side effects such as integrating two corporate cultures, duplication of human resources and manufacturing sites, and non-core assets, which leads to closing of facilities, numerous layoffs and selling of non-core divisions.
Recently the M&As have been made more by small to medium size pharma or by non-US companies and less by Big Pharma who are becoming more selective and strategic. Therefore, overall acquisition deals will be smaller. The deals will probably be structured with smaller upfront payments and additional payments will be contingency value rights (CVRs) that are based on meeting milestones. An example of this is the recent acquisition of Genzyme Corp. by Sanofi-Aventis. Genzyme and Sanofi were too far apart for a mutual agreement on the cash value of the company. Both parties came to terms when CVRs were introduced. If Genzyme meets their milestones, then Genzyme shareholders are entitled to the original value of the company proposed by the company. If Genzyme doesn't meet their milestones, then Sanofi does not have to pay more than their offer.
For now, M&As appear to be holding steady for large and medium sized device companies. However, this trend appears to be moving towards emerging markets following the same path of Big Pharma.
In general, pharma, biotech, and medical device are now favoring collaborations, partnerships and licensing deals over acquiring 100% equity and risk. For licensing deals, upfront payment will be smaller, additional payments based on milestones, and more options to continue or opt-out.
An example is the AstraZeneca (AZ) collaboration and licensing deal with Targacept (TC). In December of 2005, AZ and TC signed a research collaboration and exclusive global licensing agreement for TC's New Neuronal Nicotinic Receptor compound. Upon agreement, TC received an upfront payment; and additional payments would be based on regulatory approval (up to $300M) and first commercial sales. As of May 2, 2011 AZ citing a change in focus, opted not to license TC's compound leaving TC to move forward in commercializing their compound on their own.
Despite great efforts to encourage innovation and support entrepreneurship with incubators and business competition, access to funding has not really improved. Hemmie Chang, Chair, Licensing & Strategic Alliance Practice Group at Foley Hoag LLP summed it up nicely. "Angel investing is on the rise, sophisticated and available at later stages. But traditional VC investment is still lagging and exits are either uncertain or at depressed values. So you should expect to see the increased need for strategic licensing and collaboration with strategic partners to bridge the gap."
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What Start-Ups Need To Do
| Start-ups will have to abandon expectations of an early exit by acquisition and begin structuring the company for commercialization. Start-ups will have to conduct more due diligence not only on the scientific end but on the business end just as Big Pharma would normally conduct in de-risking the product development and commercial process. There are seven major business questions for commercialization that pharma, biotech and medical device companies need to be answered "yes" before they are interested in the technology. VCs and angels are also interested in these questions because this is what their customers (companies) want.
1. Innovation not Invention?
2. Does it meet a critical unmet need to majority of your potential customers?
3. Is this innovation first and best in class?
4. What is the market potential for the product vs. overall market?
5. Is it end user compliant?
6. Will it be reimbursed?
7. Is this a global product?
1. Innovation not Invention?
An innovative technology is a product that significantly reduces morbidity, mortality or increases the quality of life for a patient. Not all inventions have an application to improve the care of patients. For example, when nanotechnology was first discovered, it was a great scientific invention but there was no useful application. Then as scientist explored the field further, the innovation resulted in drug delivery systems or drug discovery tools to expedite research. "Me too" products and products that have a minimal advantage over products currently on the market are considered inventions.
An innovative technology can be a new class of drugs where there is no treatment for a patient. An example of this would be Cerezyme by Genzyme for Gaucher Disease. Prior to Cerezyme, there was no treatment and mortality was 100%.
An innovative device has to demonstrate a significant improvement for diagnoses or treatment. In the world of diagnostics, going from 2D imaging to 3D imaging improved the quality of imaging for early detection. Drug eluting stents is a good example of a treatment for preventing restenosis.
To be successful, the technology must be innovative and not an invention with no or minimal application and advantage.
2. Does it meet a critical unmet need for the majority of your potential customers?
There are two essential parts to the above question: 1) does this innovation offer advantages that your potential customers' reaction would be, "I need and must have this product for my patient" or is the reaction, "that's nice." If the answer is the former, than it meets a critical unmet need, if it's the latter, then it doesn't. There is a huge difference between a customer saying they like or would use the product and actually using and buying the product. One wants to make sure that the customer will actually use and buy the product, and 2) does it meet a critical unmet need for majority of your customers? Everyone has different needs, but if you can find the commonality with majority of your customers, then you are on the right track in having a large market potential for your product.
3. Is this innovation first and best in class?
It is important to know whether or not your product will be the first to market. It used to be that if you were first or second, you did well if both products were expanding a new market. Today, companies must be prepared to demonstrate comparative effectiveness for new products in head- to- head studied in order to satisfy the payors. If your product is second to market, then it will have to show significant advantages over the first to be successful.
4. What is the market potential for the product vs. overall market?
In determining the market potential for the product, you start with the overall market. For a simplistic example, there are 10,000 patients a year that develop hypertension. Not all 10,000 patients will be using your product. One has to consider, how hypertension is treated. The first line of therapy is diet and exercise. A certain percentage of people will respond to diet and exercise and non-responders will go on to be considered for the next step. Now one has to consider the age of the patient and whether the patient has other co-diseases. All these factors, plus the indication of your drug, will determine which medication is used. So you may start with 10,000 patients and possible end up with 1,000 potential patients that could possibly use your drug. After assessing the market potential for the product, you will be able to determine whether the anticipated return-on-investment justifies the dollars you expect to spend in R&D.
Devices typically capture smaller percentages of their overall markets because most therapeutic devices are used after drug therapy fails.
5. Is the product end-user compliant?
One of the hardest things in managing chronic diseases is getting the patient to take their medication for life. The are many reasons why a drug may not work, a few examples: 1) The compliance rate for a once-a-day oral drug is about 50%; 2) The compliance rate for an injectable drug is lower than an oral drug; 3) The bioavailability of an inhaled drug is lower than an oral drug and must be given multiple times and 4) The compliance is lower with a drug that has a high side effects profile. All of these factors have to be taken into consideration when developing a drug to be successful in the market.
For devices, user technique is the biggest issue. There is a very wide range of user technique and therefore the device has to be easy to use by majority of users. In addition, the outcome of an easy to use device must demonstrate a positive benefit in healthcare or cost savings.
One must know the standard of care in that therapeutic area and be better; otherwise there is no advantage of your product over what is already on the market.
6. Will it be reimbursed?
Answering the above questions is only part of determining the potential for reimbursement in the US. You then have to consider what pre-clinical and clinical trials data will be needed to demonstrate comparative effectiveness and cost effectiveness. If you product is not reimbursed, you will have a very hard time getting the product used or adapted.
For devices, being new can be a disadvantage from a regulatory and reimbursement viewpoint, because more data demonstrating safety, efficacy and cost effectiveness is needed to obtain approval and a new reimbursement code. One must consider these factors in determining whether one wants to continue down this development path or if one does decide to move forward, a strategy needs to be developed to overcome this issue.
7. Is this a global product?
We are truly a global economy, so one has to think not only of the US market but consider all markets (which are all different) from the beginning with the questions listed above. See my January newsletter for more information regarding emerging markets.
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| Closing Thoughts | We are a global economy and if companies want to have successful global products, then companies seeking funding should also think about looking at global investors in addition to US investors. It is more work with the due diligence on global Angels, VCs and companies, but it also widens the opportunities and it makes us think global from the start.
Conducting the business due diligence for your product whether you are dealing with Angels, VCs, SuperAngels, Venture arms of companies or directly with companies is extremely important. Answering the questions listed above de-risks the product development and commercial stages which make investors more comfortable and willing to invest in your company.
What I've been hearing from investors is that it is never too early to start a conversation with them before you start fund raising. Fund raising is like dating, courting each other to see if the needs are matched on both sides for a business marriage. Before the economic downturn, the business marriage with the Angels and VCs were relatively short with an IPO exit and then acquisition by a bigger company.
However, if the trend towards collaboration and licensing deals hold out, the marriage will be longer than shorter and investors will be more selective with who they enter into a business marriage.
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About BioMarketing Insight
We help companies de-risk their product development process by conducting the business due diligence to ensure that it is the right product for the right market and the market potential for the product meets the business goals of the company. We can then develop marketing strategies to drive adoption for the product.
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