How Are Life Science Companies Funded

Presentation for Building Biotechnology CourseSpring 2014

Agenda – Financing your discovery

Environment for funding life science entities State of Colorado initiatives Friends Angels Venture Capital

What do investors really want One group’s viewpoint

Attributes of Success

Why is this guy here?

Kevin M. Smith, President and CEOColorado Institute for Drug, Device and Diagnostic

Development

Former President of Gambro Inc., the US Holding company of Gambro AB – a publicly-traded, Swedish multinational, medical device and healthcare services company

Strategy, acquisition analysis, integration, investor relations

Partner in Ernst & Young; initiated the Colorado Life Science Practice and started the Colorado Entrepreneur of the Year program

VC and IPO financings, new business formation, managing entrepreneurs,

Serves on NFP and commercial Boards; seen success and failure; believe that helping patients is laudable and can be profitable

What is a CID4?

CID4 is a 501(c)(3) not-for-profit organization whose mission is to:

Accelerate Colorado bioscience company and job growth via select capital infusions and active management designed to

bridge the gap between life science discovery and product commercialization

CID4 Mission

CID4

$

Economic Development through Innovation Advancement

CID4

SponsorsFunders

Project-directed philanthropy

IP

Economic Development through Innovation Advancement

The Need

• Research dollars are becoming scarce• Cost to bring life science products to market is getting

higher• Regulatory• Intellectual property protection

• Angel investors are oriented to later stage developments – expansion capital

• Colorado venture capital is very limited

The Need

The Solution

State is trying to fill part of the VC gap• “Valley of Death” between discovery & commercialization is

widening!• State of Colorado created BDEG (Bioscience Discovery

Evaluation Grant) Program • ~ $5 million per year, 2006 – 2018, must be matched• Non-fixed asset infrastructure

GRANT GRANTEE # FUNDED PER YEAR

MAX GRANT BUDGET

Proof of Concept

Research institutions

20-25 $200k

Early Stage Company

Early stage companies

8-10 $500k

Colorado is encouraging entrepreneurism

• Bioscience Discovery Evaluation Grant Program (Approx. $5.5 million per year from 2006 – 2024; must be matched): • $1.65 million in POC grants to research institutions;

funds 15-20 projects per year; maximum $200k• $1.65 million in Early Stage Company grants; funds

6-8 start-up companies per year; maximum $500K• $2.2 million in Bioscience Infrastructure grants to

address pre- and post-POC research, development, entrepreneurship and management gaps

CID4: Helping to Grow the BioScience Sector

• Accelerate discovery-to-commercialization process

• Work with research institutions & private businesses

• Bridge the Valley-of-Death financially

• Connect companies with potential partners/investors (BIO, C21, GUST, ‘open our rolodex’)

• Access to FreeMind (non-dilutive funding), oHours, etc

• Fine-tune business plans, financial models, regulatory strategy, budgets, etc

• Actively manage or bring in management - People, people and people

• Catalyze high-quality job growth

• Save money - No allocation of resources to physical infrastructure

CID4 Team

• Kevin M. Smith, President and CEO• Partner, Ernst and Young• President, Gambro (medical device)• Focus: Medical devices and operations

• Richard C. Duke, Ph.D., Founder and CSO• Tenured in Medical Oncology at UC-SOM (Immunology & Apoptosis)• Serial Entrepreneur: Seven companies in Colorado (GlobeImmune;

Newellink; Sierra; ApopLogic; PeptiVir; MenoGeniX; Aurora Oncology)• Focus: Cancer therapeutics, infectious disease vaccines and diagnostics

• Lauren Costantini, Ph.D., VP-Therapeutics & Device Development• Former Harvard faculty (Neurosciences)• Executive with several biotech companies (Titan; Accera; Sierra)• Focus: Product development, clinical trials, regulatory across platforms

CID4 History

Founded in late 2009 Initial funding

State

Local

Federal

Governance

Board of Directors

Technical and Business Advisory Committee• Individuals with relative industry experience:

Venture capitalists; serial entrepreneurs; pharmaceutical company scouts, medical device company executives, regulatory consultants; reimbursement consultants

• Advisory role on investment selection• Specific domain-expertise on an as needed basis

Our Reach• Portfolio Companies • Client Companies

• Introductions to investors/partners; pitch at BIO; fine tuning programs, bus plan, financial models, regulatory strategy, executives in residence

• Collaborations• Rockies Venture Club –angel network• oHours –provides unique one-on-one setting

to ‘dig into the details’ (20-min slots over 2 hours

• Formal – RMI, TTOs (CU; CSU; Mines)• “Informal collaborations” with CBSA, Innovation

Center of the Rockies, other angel groups

CID4 Organizational Progression

Dates Events

Spring 2009 Formation/Submission of BDEGP grant

February 2010 First Technology Solicitation

July 2010 First and second project fundings

Summer 2011 Second solicitation/third and fourth project fundings

May 2012 Third solicitation/fifth project funding

Summer 2012 Sophono raises $7M; CID4 repaid $350k

Summer 2012 Fourth Technology Solicitation

Fall/Winter 2012 Sixth company funding

Summer 2013 Seventh company funding as part of a $2 million total

Fall 2013 CID4 receives follow on grant from State

Spring 2014 Actively soliciting newest technology

The Results

Since commencing operations in November 2009

Over 85 direct jobs created as a result of CID4’s investment of time and money

Follow on funding

>$25,000,000

CID4 Project funding

commitment -

$2,500,000

Screened ~120

technologies, selected

eight

The Results

THE RESULTS

8 Portfolio companies created/funded

$6.4M Annual revenues of current Portfolio companies

85 New or retained jobs

4 Number of companies that have raised significant follow on capital

$25M Total capital raised by portfolio companies

$12.6M Portfolio companies spend in calendar 2013

Investment Activities – 2010

• PeptiVir: Company created by CID4 and UC-Denver-AMC inventors. Novel vaccine platform for unmet viral indications: universal influenza; RSV; SARS-CoV; parainfluenza; HIV; Ebola.

In lock-up: $15M A round

• Sophono: Private company. Non-percutaneous bone conduction hearing device. FDA clearance and CE mark. Product on the market in U.S., Europe, Latin America and Africa.

Graduation Date: Aug. 2012, $7M

Investment Activities – 2011

• VetDC: Company created by CSU Ventures. Repositioning in-licensed human drugs for companion animals. Seeking FDA MUMS approval for canine oncology product

Graduation Date: November 2012, $3M

• Flashback Technologies: Company created by faculty from CU-Boulder and Children’s Hospital. Software algorithms and machine-learning techniques to analyze large sets of complex physiological data; first product is platform technology for the real-time analysis of human vital signs

Graduation Date: January 2013, $1M

Investment Activities – 2012

• KromaTiD: Company created by CSU ventures, advancing knowledge of genetic abnormalities and diseases by developing the next generation of molecular cytogenetics assays, reagents and kits for use in research and clinical laboratories. First product launched in 2013.

• Aurora Oncology: Company created by CID4 and UC-Denver-AMC faculty inventors. Novel therapeutics for bladder cancer entering clinical development in 2014.

Investment Activities – 2013

• AktiVax: All-in-one vaccine and drug delivery device that is highly useful for biologic products. Working with several corporate entities.

Syndicated Investment with High Country Venture - $800K

• Fitbionic: Prosthetic foot company and life style management targeting diabetic amputees

Syndicated Deal with multiple investors - $2M

The Process

• Rolling solicitation• Rigorous review process & advisory panel (TBAC)• Deep due diligence and development plan• Final decision to BOD• Select promising post-proof-of-concept CO

technologies from research institutions and startups• Technologies MUST have clear pathway to commercialization – we

do not fund research

GOAL:Augment the value of these innovations,

and position our companies to attract Series A

financing and/or partners

State of Venture Capital

• 2012 performance was better than 2011• Up rounds – 52% (47%); • Down rounds – 17% (25%)• Round to round increases up 23% vs 14%• Medical devices outperformed bio pharma

• However, the trend for life sciences continues downward• VC fundraising allocated to life sciences

was down to 12.5% from 19% in 2009• Actual dollar decrease is substantial

• 2008 funds - $7.8 billion• 2012 funds - $2.5 billion

Source – Fenwick & West LLP report

Implications of Funding Crisis

• VCs making fewer investments with less technology/development risk and which requre less capital to commercialize - i.e. later stage, device, digital health

• Large established life science companies are looking for new technology – increases in JVs; licenses

• IPOs are making a comeback – but generally below their initial pricing range

• All players are looking for earlier exit strategies than in the past

Capital Sources in Colorado

• BioScience Discovery Evaluation Grant Program• Proof of Concept• Emerging Company• Infrastructure

• OEDIT Advanced Industries Initiative– expanded program; significant changes to BDGEP

• Angels – Rockies Venture Club; independent investment groups

• Venture capital funds – High Country Ventures; Boulder Ventures; ???

• CID4

Advanced Industries Initiative Bill passed in 2013 session

Repealed BDEG, but bioscience industry will have a $5.5 MM per annum funding carve out.

The significant changes are reflected below

The amounts are not subject to the indicated caps if the award is to a project that bridges multiple industries/organizations

Why are you watching this video?

• Believe that the entrepreneurial path may be yours?

• Desire to make a difference in the health of patients?

• Expect that increased knowledge improves the odds of success?

• Want to get rich?

Are you Ready?

• Stage of Technology• Stage of Business Plan• Status of Management Team

Are you Realistic?

• Who will invest in your project?• Philanthropy – science grants• Philanthropy – economic

development grants• Friends and family• Angels• Venture Capital• Strategic Partner

• How much to you really need?• What do you think your business is

worth?• Is crowdfunding the answer?

Crowdfunding – The Good News

• Globally raised $2.7 billion in 2012; up from $1.5 billion in 2011 and headed towards $5.1 billion in 2013 *

• There are a growing number of websites to assist entrepreneurs in raising funds

• Investors can make very small investments – increase in the number of potential investors

• Early trends – charities; creative projects; consumer products

• Kaufmann Foundation cites a study estimating the market for equity crowdfunding at $4 billion

* Source – Massolution 4/8/13 per Life Science Nation

Crowdfunding – The Bad News

• Life science technologies are complex and will be difficult to tell to an inexperienced investor group

• The amounts available are limited – $1 million is not enough to get to the finish line

• The complex capital structures that result will be detriments to ongoing angel or venture rounds.

• The SEC still has not formulated the regulations needed for equity fundraising – maybe 2014?

• Summary – Crowdfunding will not solve the ongoing capital challenges of life science companies anytime in the near future

Angel Investors – A Starting Point

• Entrepreneur• Intellectual Property• Needs cash• Has equity to sell

• Angel Investor• Has money to burn• Likes the idea• Wants ROI

Starting Point – Alignment

• Entrepreneur• Extremely Valuable Intellectual

Property • Desperately Needs cash • Has equity to sell but it’s “my baby”• LIKES TO BE IN CHARGE

• Angel Investor• Has money to burn but it’s my money• Likes the idea but not all angels are

“angels”• Wants ROI• LIKES TO BE IN CHARGE

The deal should be pretty straightforward

• How much money does the entrepreneur want to raise?

• How much equity is the entrepreneur willing to give up?

• Who is going to control the company after the investment is made?

The Basic Deal

• Amount of financing being sought

• Valuation

• Control

The Basic Deal

• Amount of financing being sought• Entrepreneur vs. investor• How much money do you need to

get to the next milestone if things don’t go smoothly?

• How much do you need in the next round?

• Can your investors fund the next round

• It’s all about mitigating risk?

The Basic Deal

• Valuation• Who are the investors?

• Family vs. friends vs. angels vs. professionals

• Individuals vs. syndicates or clubs

• Type of security• Common• Preferred stock• Convertible debt

Preparing for Armageddon

•Common stock (low transaction costs)• We’re all in the boat and there are no life preservers

•Convertible Debt (low transaction costs)• Let the next investors be the bad guys

•Preferred Shares (high transaction costs)• We need a pre-nuptial agreement

• Dividends• Liquidation Preference• Reverse Vesting• Voting Rights• Anti-dilution• Drag along rights

Preparing for the Negotiation

• Dilution of company ownership• Loss of managerial control• Adequacy of financing• Future capital requirements• Alliance with investors that have

helpful industry connections• Get help to close the deal• Don’t be afraid to ask dumb

questions. They’re easier to handle than dumb mistakes.

Due Diligence – You want what by when?• Business• Market• Financial forecasts• Capitalization Table

• Scientific• Research• Clinical• Regulatory

• Legal• Intellectual property protection• Corporate• Contracts

KMG – Seven Step Process

STEPS DECISION

1. Initial review of the business opportunity and business plan GO – NO GO

2. In-depth presentation by the management team in person GO – NO GO

3. Preliminary validation of the management team and assessment of key assumptions, market opportunity, technology/service concept, and the business model

GO – NO GO

4. Preliminary investment case (terms, valuation, and IRR) GO – NO GO

5. Presentation of investment proposal to the company/owners

GO – NO GO

6. Final due diligence, including final validation of management, legal, intellectual property rights, and validation of the investment case

GO – NO GO

7. Negotiate the final deal and invest GO – NO GO

KMG- Investment Assessment

INDUSTRY

• Market size• Market growth (historic & next

five years)• Market participants and relative

share• Historical behaviors by

market participants– Acquisitions– Innovation– Price competition– Promotion activities

• Expected behaviors towards new entrants

• Vendor concentration• Customer concentration• Barriers to entry• Potential substitutes

STRATEGIC BUSINESS OBJECTIVES

• Management team’s 4-6 key strategic objectives

TARGET MARKET

• Market segments• Segment size• Segment growth• Market shares• Geographic

scope• Product

categories• Barriers for rapid

adoption rate

VALUEPROPOSITION

• Differentiated products & services

• Disruptive technology• Intellectual property

rights• Relative cost position• Superior clinical value

VALUE CHAIN

• Vertical integration• Strategic partners

KMG – Investment Assessment

KEY PEOPLE

• Who are they and why

MANAGEMENTSYSTEMS

• Organization• Incentive structure• KPIs• Cash management

controls• Financial reporting• Sales reporting• Manufacturing

reporting• Quality systems &

reporting• Customer satisfaction

tracking• Project management

process• Sales training• IT systems

MANAGEMENT TEAM

• Background and experience

• Capabilities• Team dynamics• Compensation

structure

CRITICAL CAPABILITIES TO

WIN IN THIS BUSINESS

• Management team’s identification of key capabilities for competitive advantage

• Capability GAP analysis

ACCESS TO

CAPITAL

• Capital needs to reach the next value inflection point

• Ability to attract new investors with sufficient capital at the right time

KMG – Value Drivers

COMPANY

• Market size and growth

• Market penetration

• Sales volume

• ASP

• COGS/unit

• Revenues/Reimbursement

• Revenue Growth

• Gross profit margin %

• R&D expenses

• Sales & marketing expenses

• Operating income margin %

• Working capital % of revenues

• Capital expenditures % of revenues

INDUSTRY

• Gross profit margin %

• Operating income margin %

• Working capital % of revenues

• Capital expenditures % of revenues

• Trading P/E ratios

• Acquisition P/E ratios

• Trading EV/EBITDA ratios

• Acquisition EV/EBITDA ratios

Attributes of Success

Passion

Perspective

PridePersistence

Patience

Objective

Passion For the product

Convince others of its value Persevere in the face of technical and financial

challenges For the journey

The growth comes from the process; not the destination

For the people It is the team that drives success Help others to succeed Pay it forward

For the patients The reason you are doing this The ones whose lives you are improving The creators of your market and therefore all the

value you will get from your product

Perspective

What do others see that I can’t or won’t?

Why don’t you agree with me?

How hard could it be?

Filters

Pride

Wait – isn’t this one of the seven deadly sins?

Quality, quality, quality

Self satisfaction

Competition

Persistence

Learn from your failures- There are more of them than successes

Our industry demands data and performance

- Accept the challenge and get the answers

Use Perspective to understand when Persistence becomes PITA

Patience

Pathway to success is longer than in other industries

Be honest with yourself- Patience versus facing reality

A sense of urgency is dependent on one’s Perspective

- Patience versus indifference