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  • Is Orphan saving Biotech?

    Orphan drugs have been en vogue for a while. However, in the last quarter there has been a record financing that has put drugs for small patient populations on the map even more. In Q1 2014, over 60% of the financing in European Biotech has gone to companies that have a lead orphan drug product. Over USD 170 m of the recorded USD 269 m in European Biotech financing has been done by orphan focused companies. Dutch UNIQURE raised USD 91 m and French Txcell raised USD 22 m in an IPO, but also Swedish Wilson Therapeutics raised USD 40 m last quarter from VCs.
     
    So is orphan saving the Biotech industry? It does certainly look like an interesting investment possibility for Venture Capital investors. Even though the (initial) target patient population is very small, orphan is very attractive due to the following reasons:

    • High price of up to EUR 400’000
    • Less competition, fast-tracked, lower-cost late-stage development and marketing
    • Market size: USD 127bn by 2018 (16% of total prescription)
    • Gross profit margins of over 80% (industry average 16%)

     
    Of the current 43 brand blockbusters, 18 were approved solely for orphan so this shows the big potential. As an example Novartis Gleevec originally targeted 9,000 patients for chronic myelogenous leukemia which was later approved for non-orphan gastrointestinal stromal tumors with over 120,000 patients. This seems to be the strategy of many companies – developing the drug for an orphan indication and later expanding it into non-orphan. Also, orphan markets are more suited for biotech companies, as they are based on small communities around patient organizations. Big Pharma has to be very careful in working with such organizations and showing the required commitment and interest. For a Biotech company with its full focus just on one orphan indication, this is much easier.
     
    Never the less, orphan drugs provide great opportunities for Biotechs in terms of raising capital / IPOs, by out-licensing to Big Pharma but also for M&A exits. If you are interested in learning about deal terms in orphan drugs, please have a look at Biotechgate Deal Report on this topic here.

  • Who is investing and who is not?

    Are you wondering what investors still have money and are investing? At Biotechgate we are tracking all financing of investors and we also run a global database of what investors are looking for. As an example, the following investors have made investments into European Health Care companies in Q1 2014:

    • AT NewTec, Germany
    • Boehringer Ingelheim Venture Fund (BIVF), Germany
    • Eckert Life Science Accelerator, Germany
    • HBM Healthcare Investments Ltd, Switzerland
    • Investinor AS, Norway
    • Jossa Arznei GmbH, Germany
    • Novo Seeds, Denmark
    • Peppermint VenturePartners, Germany
    • Rosetta Capital Limited, United Kingdom
    • Sarsia Seed AS, Norway
    • Sunstone Capital, Denmark
    • Versant Ventures, U.S.A.

     
    For further information regarding Biotechgate see here.
     

  • What is the impact of Novartis transformation on biotech industry?

    With the announcement of the portfolio transformation of Novartis this month, we believe this will have a positive impact on the biotech industry. The company will focus on Pharmaceuticals, Eye Care and Generics. The diversification strategy of former CEO and Chairman Daniel Vasella has been axed by the new leadership of Novartis. Key components of the transformation are:

    • Novartis acquires GSK oncology products
    • The Novartis OTC business will be combined with GSK’s consumer business in a joint venture
    • Divestment Vaccines business (excluding flu) to GSK
    • Divestment of Novartis Animal Health to Lilly

     
    Impact:

    For the biotech industry this transformation is good news as we see it. There will be another clear partner for oncology projects with know-how, dedication and resources. That it is another Swiss player might be by chance, but both Roche and Novartis have been very successful compared with their peers and this might be the opportunity for Novartis to capitalize on past success and reshape for the future. On the other side, there is the danger that the number of possible partners for biotech companies becomes smaller and smaller. The question is if mid-size pharma can close this gap?

    As a new joint venture company (OTC) will be created, this increases diversification and helps at least to some degree to off-set the trend of M&A activities (Pfizer / AZ).

    Overall, transformation shows that the pharma companies are under pressure and that there is a constant ongoing need for new pipeline products.

    Value terms:

    In value terms, the transformation is very impressive and the investment banks involved will have generated nice fees. The key terms of the reshaping are:

    • Novartis pays USD 14.5bn for GSK oncology products plus another USD 1.5bn based on milestones
    • GSK pays USD 7.1bn (USD 5.25bn upfront and USD 1.8bn in milestone payments) plus royalties for Novartis vaccine business. Novartis will try to divest the flu business separately.
    • The OTC business of Novartis and the GSK consumer Healthcare are brought into a new joint venture. Novartis will own 36.5%.
    • Lilly will pay approx. USD 5.4bn for Novartis animal Health Division.

     

    Read more here: Press release Novartis.

     

  • Early stage VC funding in the US more difficult than ever

    Even with the public biotech was just at an all time high, VCs in the US also have difficulties convincing LPs (Limited Partners) to make investment in their funds. At a recent panel discussion led by Venture Valuation at the RESI (redefining early stage investment) conference in Boston, VCs offered an insight into their perspective of the industry.

     

    Alternative investors such as family offices and corporate investors have become more and more important to fill the financing gap. It was a general understanding among the panelists that investment has to come from alternative sources including family offices and corporate VCs. Early stage investors in particular seem to have difficulties to syndicate deals, but need co-investors that can mitigate the risk and have the capabilities to co-finance across several rounds of financing.

    Health IT and platform companies were the hot topics discussed by the VCs on the panel. West Coast VCs seem to be very eager when it comes to Health IT companies, combining the strength of Silicon Valley with the life sciences industry.

    Investors tend to look for lower risk but also lower return opportunities. It was mentioned that the VCs have reduced their expected returns somewhat. They also expect the risk to be reduced when looking at broader platform technology companies, companies with service components or medical devices.

    The balance between Biotech – Pharma – VCs seems to shift and include family offices and corporate VCs, driving biotech companies to look for alternative sources of funding. If you are interested in Biotechgate’s new Investor database, please contact us here.

  • Global, Early-Stage Investors in Emerging Life Science Companies

    Does it make sense for a life science fundraising executive in Europe to look internationally for early-stage funding? Should U.S. based firms look at investors in Europe and Asia? As the famous folk singer Bob Dylan sang “the times they are a changing” and the answer is yes!

     

    To someone looking to fund a life science startup ten years ago, the funding possibilities would have been primarily local. Government programs and angel networks are almost invariably regionally-focused, as are many VCs (particularly within the long tail of smaller VC funds that used to provide capital to life science start-ups, many of which have now closed their doors). However, the new investors on the stage today are typically much broader in scope. Large pharma companies and global PE companies that used to focus on mid to late-stage opportunities are now looking to capture the value of emerging technologies; from the opposite direction, medical foundations that used to support only basic biology research are now focusing on getting new breakthroughs out of the lab and into the marketplace, and while some foundations are regionally based, many are looking for advancements in their field globally. Family offices, too, are most often interested in opportunities worldwide.

    To an entrepreneur unaware of how the world has changed around him, regional investment can become a self-fulfilling prophecy; the entrepreneur will focus their fundraising campaign on the traditional, mostly regional sources, and never reach out to the new global investors that might be very interested in the opportunity.

    LSN Research in collaboration with Venture Valuation, Biotechgate Database has examined the geographical scope of the investors who take part in early-stage life science deals. We looked at the trove of financial data available via the BTG Company Platform, and took a sample of small financing rounds ($10m or less) raised by companies developing a preclinical or Phase I therapeutic product. From this sample, we aggregated a list of all the lead and co-investors who had participated in these deals, and then we took a more detailed look at each of these investors and assessed the range of their activities. To keep things simple, we categorized the scope of each investor’s allocations as

    1. Global, anywhere on the planet where companies are a fit for investor.
    2. Continental, North America, Europe or Asia.
    3. Regionally, focused on small discrete geographies like Massachusetts, California, or specific countries in Europe.

     

    Sample 1: From Biotechgate Company Database

    Lead and Co-investors that have Allocated <$10 Million to Pre-clinical or Phase I
    Sample 1: From Biotechgate Company Database

    As you can see, about 25% of the investors that are active in these early stage deals reported in BTG financing rounds database are global investors. To further support this, we also pulled data from investors in the LSN Investor Database who are willing to allocate under to $10 million in a single round into Pre-clinical and Phase I stage therapeutics companies.

    Sample 2: From LSN Investor Database

    Investor that are willing to Allocate under $10 Million and are looking at Pre-Clinical and Phase I
    Sample 2: From LSN Investor Database

    Early Stage life science investment is in transition. This means that there is a clashing of the old ways and methodologies and the generally accepted status quo. The investor available categories have morphed as new players fill the void left by the early stage VC investors. The challenge today is to get everybody singing from the same hymnal and up to speed on who’s who in the market place and educate the players on how to find the best fit for and match for capital needs. Below are 3 points to keep in mind when developing a fundraising strategy.

    1. Life Science fundraisers are in two camps. One camp still hangs on to out-of-date strategy that the investor market process and protocol is as follows friends and family, angels, government grants, followed by VC’s. This might have been true 5 years ago but is no longer relevant as new players have entered the arena and VCs have waned due to lack of funds and unproven track records. The new process looks more like this, friends family, angels, funding portals, government grants, followed by parsing the new investor landscape and determining who is a best fit for a fundraiser to target the old stand by and these new investors including single and multi-family offices, venture philanthropy, patient groups, corporate development, private equity, hedge funds, pensions and foundations.
    2. There is a self-fulfilling prophesy that says that emerging life science companies cannot canvass and get allocations from global investors and that their market place is limited to only going after regional investors. This is simply not true as it turns out that each investor type has its own modus operandi in that an angel or a regional VC strategy may be local where a venture pharma, foundation or a patient group may have no such requirement and are therefore global. Net/net is that the profile and strategy of the life science investor determines their investment sphere.
    3. Investors are moving upstream and this creates a trend that in turn moves investors to join in. Previously certain investor types were early stage but now when mid to late players get involved early this then creates a pull on the rest of the investor base. Basically making early stage a topic of consideration for all the mid to late stage investor categories. Investors are demonstrating that in order to remain competitive you need to form early alliances and partnerships or you will miss out. Emerging life science companies are simply forming their partnerships earlier.

     

  • Licensing demand for biotech products will increase

    The recent acquisition of Forest Laboratories Inc. by Actavis for USD 25bn shows the trend of generic producers to move into the innovative drug space. With fewer blockbusters on the market, companies focused on generics will need to move into innovative therapeutics.

    The acquisition of Forest Laboratories Inc. by Actavis is a clear sign where the future growth of generic companies will be – it’s the patent protected innovation. Such projects can either be generated in-house or through licensing / M&A of innovative young biotech companies. Through the extension of the business model of generic companies, they will be able to control the whole life cycle of drugs from the patent protection into the generic phase. Novartis has actually implemented this approach many years ago with the purchase of Hexal and Eon Labs, for USD 7.3bn in 2005, which later became Sandoz. Now generic companies are going the opposite direction from generic to innovation.

    The same trend we also notice in Asia where many generic companies are based. There is an increased appetite for innovative projects from Europe and North America. Based on our own analysis of data in Biotechgate where we track which companies are looking for what kind of in-licensing opportunities, the demand in Asia is led by China, followed by South Korea. About a third of the companies that are seeking in-licensing projects in Asia focus on oncology followed by metabolic diseases. In terms of stage, over half are looking for pre-clinical products and about a forth for clinical stage products. Find more information on Biotechgate and what companies are looking to in-license here.

  • How do you determine the discount rate you need to calculate the current value of a company that hasn’t generated revenues yet?

    The meaning of a “discount rate” is best understood by making a parallel with the interest rate you get from the bank on your savings account. While the interest rate is a % you use to calculate what 100 USD or EUR on your account will become after a number of years, the discount rate is a % to convert future cash into today’s money.

    A start-up company with a product in development, for instance, will (hopefully) generate revenues in the future. The revenues in years x, x+1, x+2 etc. need to converted into today’s value with a discount rate. By first deducting future expenses from all future annual revenues, you get the Free Cash Flow in each year and when discounted those future free cash flows back to today, you will get what is called the company’s Discounted Cash Flow.

    The discount rate will thus have a huge impact on the calculation of the value of a company. It is a % that will need to be determined in the valuation process, and it is not just the interest rate you get on a bank, but needs to also incorporate several risk factors. There are two kinds of risk factors that will need to be taken into consideration in the case of a biotech company with no products on the market:

    • The general risk associated with the characteristics of the company, of which its management definitely the most important one.
    • The product specific risk: obviously, a development project in phase 1 is much riskier than a phase 3 project. (this risk can be applied separately for a risk adjusted net present value calculation rNPV)

    In other words, these are risk factors that determine whether the investor will ever see his/her money back, and collectively they will drive up the discount rate to a much higher % than the interest rate you get from the bank.

    If you are interested to learn more about how to value companies and biotechnology products, our one day valuation workshop is a must. See more here ››

  • Site Selection for Life Sciences Companies 2013

    For Life Sciences companies it has never been easy selecting a location for HQs, shared services centers, manufacturing or R+D operations in Europe. A huge variety of factors must be taken into consideration. Venture Valuation, together with KPMG has analyzed the key decision factors relevant to site selection in Europe. Click here to read or download the full report ››

  • Singapore The Business Times, Growing business opportunities

    Singapore The Business Times, Growing business opportunities (page 6)

    English (PDF) – 15 Pages 8799kb