Biotech funding 2012: Innovation is not enough
Venture capital is the most expensive form of capital, so companies are advised to be creative in sourcing other types of funding. With the current capital headwinds, creative alternatives may be the only options companies have, according to panelists at Biotech Showcase™ 2012’s luncheon plenary Wednesday.
Biotech Showcase™ 2012 Wednesday Plenary Session
These days innovation alone is not enough to attract investors. According to Arthur Pappas, Managing Partner at Pappas Ventures, companies today need to demonstrate that they are both efficient in medical discovery and have sustainable business enterprises, noting “if it’s not sustainable, it may still be a science project.”
Even with these thresholds met, panelists agreed that biotech companies need to look at creative alternatives to the usual funding mechanisms.
Foundations like the Michael J. Fox Foundation are working to de-risk innovative projects to successfully make them attractive to other investors, said Todd Sherer, CEO. “We have a number of initiatives to help biotech build a solid data pack,” he noted.
Additionally, universities are launching venture funds. “The University of California system and Cornell University each have venture funds which provide the benefit of having a low cost of capital,” added Roger Longman, CEO at Real Endpoints.
Longman also suggested “in-kind” investors who can contribute necessary services in lieu of cash. Ideally, these would be organizations that can provide such things as clinical trials in a real world setting. For example, large teaching hospitals like the Mayo Clinic or Memorial Sloan Kettering may be likely sources to provide clinical trial expertise, recruitment and management. “Those are equity deals, and they can be done,” he insisted, “but very few companies are trying to take advantage of them.”
Angel groups are playing an increasingly important role. Barbara Fox, CEO of Avaxia Biologics, is closing a USD 4 million Series A financing round entirely with angel investors. “We have about 100 investors,” she said, while a CEO in the audience countered by saying that they have 1,700 angel investors. Such high numbers are manageable because “most are in organized groups,” Fox noted.
Biotech Showcase 2012 Wednesday Plenary Session
Angel groups do have different dynamics than institutional investors. They often are unfamiliar with the science and want to be educated, and need clear and frequent communications. They want to see a modest return, an early exit path and a lean operation. In addition to angel groups, high net worth individuals with a personal connection to a particular disease may be tapped for investment, panelists suggested.
The financing challenges are driving an interest in orphan indications. “The regulatory risks and costs are lower, so time to market may also be less,” observed Evonne Sepsis, Managing Director at ESC Advisors. This also may be time to monetize projects that won’t be pursued in-house.
“Our number one responsibility,” Pappas stressed, “is to make a profit. Therefore, companies must be more cash efficient.” And that means securing low-cost financing.
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