June 22, 2009

Sharpen your axe...and daydream!

In these challenging times how can we get more out of less? Here are some interesting tips on improving productivity, and the value of daydreaming:

In his book, "The Seven Habbits of Highly Effective People", Steven Covery relays an old fable about a woodcutter:

Once upon a time a very strong woodcutter asked for a job with a lumber company, and he got it. The pay was really good and so were the work conditions. For that reason, the woodcutter was determined to do his best. His boss gave him an ax and showed him the area where he was supposed to work. The first day, the woodcutter brought 18 trees. "Congratulations," the boss said. "Continue what you were doing!" Very motivated by the boss’ words, the woodcutter tried harder the next day, but he only could bring 15 trees. The third day he tried even harder, but he only could bring 10 trees. Day after day he was bringing less and less trees. "I must be losing my strength", the woodcutter thought. He went to the boss and apologized, saying that he could not understand what was going on. "When was the last time you sharpened your ax?" the boss asked. "Sharpen? I had no time to sharpen my ax. I have been too busy trying to cut trees..."


In a recent article in the Wall Street Journal, Robert Lee Hotz reveals some fascinating work into brain mapping, indicating what we should do more of to reach "Eureka" moments:


A Wandering Mind Heads Straight Toward Insight
Researchers Map the Anatomy of the Brain's Breakthrough Moments and Reveal the Payoff of Daydreaming

It happened to Archimedes in the bath. To Descartes it took place in bed while watching flies on his ceiling. And to Newton it occurred in an orchard, when he saw an apple fall. Each had a moment of insight. To Archimedes came a way to calculate density and volume; to Descartes, the idea of coordinate geometry; and to Newton, the law of universal gravity.

Eureka Moments

Five light-bulb moments of understanding that revolutionized science.

In our fables of science and discovery, the crucial role of insight is a cherished theme. To these epiphanies, we owe the concept of alternating electrical current, the discovery of penicillin, and on a less lofty note, the invention of Post-its, ice-cream cones, and Velcro. The burst of mental clarity can be so powerful that, as legend would have it, Archimedes jumped out of his tub and ran naked through the streets, shouting to his startled neighbors: "Eureka! I've got it."

In today's innovation economy, engineers, economists and policy makers are eager to foster creative thinking among knowledge workers. Until recently, these sorts of revelations were too elusive for serious scientific study. Scholars suspect the story of Archimedes isn't even entirely true. Lately, though, researchers have been able to document the brain's behavior during Eureka moments by recording brain-wave patterns and imaging the neural circuits that become active as volunteers struggle to solve anagrams, riddles and other brain teasers.

Following the brain as it rises to a mental challenge, scientists are seeking their own insights into these light-bulb flashes of understanding, but they are as hard to define clinically as they are to study in a lab.

To be sure, we've all had our "Aha" moments. They materialize without warning, often through an unconscious shift in mental perspective that can abruptly alter how we perceive a problem. "An 'aha' moment is any sudden comprehension that allows you to see something in a different light," says psychologist John Kounios at Drexel University in Philadelphia. "It could be the solution to a problem; it could be getting a joke; or suddenly recognizing a face. It could be realizing that a friend of yours is not really a friend."

These sudden insights, they found, are the culmination of an intense and complex series of brain states that require more neural resources than methodical reasoning. People who solve problems through insight generate different patterns of brain waves than those who solve problems analytically. "Your brain is really working quite hard before this moment of insight," says psychologist Mark Wheeler at the University of Pittsburgh. "There is a lot going on behind the scenes."

In fact, our brain may be most actively engaged when our mind is wandering and we've actually lost track of our thoughts, a new brain-scanning study suggests. "Solving a problem with insight is fundamentally different from solving a problem analytically," Dr. Kounios says. "There really are different brain mechanisms involved."

By most measures, we spend about a third of our time daydreaming, yet our brain is unusually active during these seemingly idle moments. Left to its own devices, our brain activates several areas associated with complex problem solving, which researchers had previously assumed were dormant during daydreams. Moreover, it appears to be the only time these areas work in unison.

"People assumed that when your mind wandered it was empty," says cognitive neuroscientist Kalina Christoff at the University of British Columbia in Vancouver, who reported the findings last month in the Proceedings of the National Academy of Sciences. As measured by brain activity, however, "mind wandering is a much more active state than we ever imagined, much more active than during reasoning with a complex problem."

She suspects that the flypaper of an unfocused mind may trap new ideas and unexpected associations more effectively than methodical reasoning. That may create the mental framework for new ideas. "You can see regions of these networks becoming active just prior to people arriving at an insight," she says.

In a series of experiments over the past five years, Dr. Kounios and his collaborator Mark Jung-Beeman at Northwestern University used brain scanners and EEG sensors to study insights taking form below the surface of self-awareness. They recorded the neural activity of volunteers wrestling with word puzzles and scanned their brains as they sought solutions.

Some volunteers found answers by methodically working through the possibilities. Some were stumped. For others, even though the solution seemed to come out of nowhere, they had no doubt it was correct.

In those cases, the EEG recordings revealed a distinctive flash of gamma waves emanating from the brain's right hemisphere, which is involved in handling associations and assembling elements of a problem. The brain broadcast that signal one-third of a second before a volunteer experienced their conscious moment of insight -- an eternity at the speed of thought.

The scientists may have recorded the first snapshots of a Eureka moment. "It almost certainly reflects the popping into awareness of a solution," says Dr. Kounios.

In addition, they found that tell-tale burst of gamma waves was almost always preceded by a change in alpha brain-wave intensity in the visual cortex, which controls what we see. They took it as evidence that the brain was dampening the neurons there similar to the way we consciously close our eyes to concentrate.

"You want to quiet the noise in your head to solidify that fragile germ of an idea," says Dr. Jung-Beeman at Northwestern.

At the University of London's Goldsmith College, psychologist Joydeep Bhattacharya also has been probing for insight moments by peppering people with verbal puzzles.

By monitoring their brain waves, he saw a pattern of high frequency neural activity in the right frontal cortex that identified in advance who would solve a puzzle through insight and who would not. It appeared up to eight seconds before the answer to a problem dawned on the test subject, Dr. Bhattacharya reported in the current edition of the Journal of Cognitive Neuroscience.

"It's unsettling," says Dr. Bhattacharya. "The brain knows but we don't."

So far, no one knows why problems sometimes trigger an insight or what makes us more inclined to the Eureka experience at some moments but not at others. Insight does favor a prepared mind, researchers determined.

Even before we are presented with a problem, our state of mind can affect whether or not we will likely resort to insightful thinking. People in a positive mood were more likely to experience an insight, researchers at Drexel and Northwestern found. "How you are thinking beforehand is going to affect what you do with the problems you get," Dr. Jung-Beeman says.

By probing the anatomy of 'aha,' researchers hope for clues to how brain tissue can manufacture a new idea. "Insight is crucial to intellect," Dr. Bhattacharya says.

Taken together, these findings highlight a paradox of mental life. They remind us that much of our creative thought is the product of neurons and nerve chemistry outside our awareness and beyond our direct control.

"We often assume that if we don't notice our thoughts they don't exist," says Dr. Christoff in Vancouver, "When we don't notice them is when we may be thinking most creatively."

June 08, 2009

Is Silicon Valley the Best Global Entrepreneurial Region: Fact or Myth?

The US is inspiring and pioneered Venture Capital. Often, non-Americans (and even some Americans) believe that Silicon Valley is the role model to follow for new venture creation and a location that provides the best entrepreneurial experience. However, nowadays everyone can easily glean lessons from all around the world about entrepreneurship and business financing, etc. This has accelerated in the last ten years due to the growth of the Internet, social networks, blogs and the proliferation of business schools worldwide. Also, Governments have invested heavily into regional development of innovation clusters all across the world and provision of basic business skills and information to early-stage businesses.

My philosophy is that, no matter what you do, companies end up performing in a regional environment with set culture and behaviours - so the Silicon Valley model does not fully translate to e.g. Paris, Tokyo or Cambridge (UK or US)! Entrepreneurs will do what they do by mainly using their "national" knowledge to build a company and get things done in their local business and legal environment. International development will come later but the management team will probably still maintain a national or regional-centric view of the world. 

To underline the point, the financial returns of the investment funds of Venture Capitalists in the rest of America and Europe have been stated by some to be identical to those in Silicon Valley! A logical conclusion which may back up this view is that American VCs do invest in Europe and vice versa – an activity they would only do if their firms got the same or improved financial returns – not worse? The national or regional Venture Capitalists invest in the best entrepreneurs within their locality who have knowledge of national business infrastructure and an international understanding of their industry to enable them to generate rapid sales from large industry players. With the law of averages, entrepreneurial talent should emerge fairly evenly across the world so investors will always be able to find excellent opportunities and management.

There are many paths to success: Silicon Valley's is no longer the sole route. Let's all of us have more faith in our native entrepreneurial population and their ability to do things in whatever style is prevalent in whatever region or country they live. Diversity is natural and not conformity in most of the world. Entrepreneurs by their nature tend to be innovators who break the mould with new products, services and business models – so “copycats” will likely not be the most successful, in any case.

In today’s world, business productivity is perhaps not by emulation - but by adaptation of global information to your national location to enhance your innovation? From that synergy, comes success. Go glocal (global and local)!

 

This article was written by Dr Frank F Craig MBA. Frank is a successful entrepreneur who has (co-)Founded several biotechnology companies which grew to have a market capitalisation of almost £2 billion. He has worked internationally and performed business development in Europe, Asia and North America. He is a Principal at ATPBio and also manages his own consultancy business, Life Sciences Consultancy Limited.

June 03, 2009

Kinetic Concepts revisited: value or growth?

For all investors, the key to success, is to buy an asset which is priced at less than its intrinsic worth. This applies whichever style of investing one considers - either value or growth. In "The Warren Buffett Way" by Robert G. Hagstrom, Buffett even goes as far as stating that the difference is irrelevant:

"Growth and value  investing are joined at the hip, says Buffett. Value is the discounted present value of an investment's future cashflow; growth is simply a calculation used to determine value".

Turning to a company highlighted in the ATPblog in May 2008, Kinetic Concepts (NYSE: KCI), I wrote about the Perils of M&A: Overpaying. In it was described why the acquisition of LifeCell Corp didn't make great sense for existing investors in KCI. Before the announcement was made, KCI's share price was around $50 in April 2008, had fallen to around $38 at the time of writing, hit a low of just over $18 in Dec 2008, and is currently at $27. This was accompanied by a fall in market cap from around $3.4 billion in April 2008 to $1.9 billion today - quite a drop, especially when you consider that LifeCell's market cap was $1.7 billion at the purchase price.

Z
So, effectively this means the combined companies market caps were $5.1 billion pre-merger announcement, and down over 60% now to $1.9 billion as a combined entity. Sure, this also includes a large amount of debt taken on by KCI to fund the acquisition, so it's less severe when considered from an enterprise value perspective (try telling that to KCI investors) but still a big drop. And not all due to the recent credit crunch.



But where does this leave us now? Well, all of a sudden, KCI has both value and growth elements as a stock. On the value side, the shares are cheap with a forward P/E ratio at a very lowly 6.5x for full year 2010 (other value metrics are also cheap for the sector: price to book of 1.99x, price to sale of 1.00x). And yet, the story is one of growth opportunity with the newly acquired LifeCell providing future fillip from the regenerative medicine division. The return on equity (ROE) is also very respectable, projected at over 20% for both 2009 and 2010 - often the hallmark of a growth share. Infact, combining such metrics to find "good companies at bargain companies" can be a very powerful approach (as documented in Joel Greenblatt's "The Little Book That Beats The Market"). Potential pitfalls to still consider are that debt levels remain high, due to the debt used to fund the acquisition, though these trending in the right direction and are being paid off year by year.

So, in summary, there's still a long way to go for KCI investors who were in before April 2008, but perhaps the combination of the acquisition and the recession has created a fresh opportunity for new investors?  As Buffett says, one where growth and value are "joined at the hip". And while we are in no way in the business of predicting the kind of stock collapses that have contributed, picking off individual situations can make for interesting opportunities. All good things come to those who wait...

(NB. Do your own research, and nothing in this blog is an investment recommendation).


This article was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.

May 08, 2009

Using Grants to Reduce Cash Burn and Equity Dilution

Entrepreneurs can be defined as “businessmen who utilise resources beyond their direct control”.  In the early phases of research or product development, some technology entrepreneurs tend to take advantage of grants from various sources to progress their scientific ambitions. I have learnt that many CFOs disapprove of this source of finance as they prefer the company’s science teams or entrepreneurs to focus on generating “commercial” sources of cash via sales and/or the raising of Private Equity.

Grants are very useful as they minimise spend on core R&D (enabling saved funds to be invested in other functions such as sales). Also, contrary to loans, grants have no penalising interest and capital repayments required and, unlike Private Equity, there is no share ownership dilution! So, in this “cold financial winter”, the CFOs may at last start warming to this source of money?

I have observed in the biotech media and blogosphere that, since Private Equity is now becoming rare, start-ups in the US and Europe are now hunting down relevant Research Foundation or Government Grants to fund their science programs. There are also specialist conferences emerging across Europe dedicated to explaining to SMEs and academics the availability of various grants. So, in the words of Bob Dylan, “The times they are a changin…”.

Over the last several years, as part of my business development activities, I have gathered together a novel database collection which contains information on almost 200,000 funding sources for new enterprises, and around 2000 sources specific to life sciences. The sources of funds includes: Charities, Foundations, Loans, Lease Finance Firms, Government Grants, Regional Development Agencies, Government R&D Tax Credits, Corporate Donors and Sponsors, Philanthropists, High Net Worth Individuals, Angel Syndicates and Venture Capital (VC). The vast majority of the database entries are grants from various institutions. Currently, our financing database is mainly UK-based with a proportion from the US and large European Union funding sources (e.g. Framework 7) now being integrated. This set of information is unique and can be exploited by SMEs ranging from pre-start-up firms with intellectual property (IP), which need a balanced, corporate financing strategy, through to an established firm wishing to identify all sources of funding for its planned growth (or even survival in this harsh, economic climate?).

Let’s examine a common biotechnology start-up paradigm: identify some IP, get some seed investment from an angel or VC firm, create or update the business plan and then use the seed money to leverage a commercial partnership and subsequent round of Private Equity. This could take 12-18 months, is focussed, formulaic but not truly entrepreneurial.

Let’s revisit this model in light of our improved understanding of available “resources”. This time we will be truly entrepreneurial: go get some IP, bootstrap the company for a little while and meanwhile create a plan which reviews all of the known financial resources available to generate a robust financing strategy. This will involve the accessing of funds in a systematic manner such that the overall cash coming into the business is increased - improving the company’s cash-flow and valuation and minimising the owners’ equity dilution. A much better scenario in anyone’s view.

However, even with grants there are some hurdles to overcome: forms to complete, presentations to give and a decision-making process that can take 3-12 months. Also, one must carefully read the details of the conditions of the associated contract as certain awarding bodies may claim some or all of the emerging IP. Saying that, a shrewd SME can still use these funds to progress its plans and is usually in a prime position to be the first firm considered as a licensor of any shared IP. Noticeably with grants, funding success is not always guaranteed: most individuals or companies will win 1 in 4 applications (recent figures from Nature).  In my view, this can be significantly improved with a better understanding of the grants available, specific grant selection and targeting, professional drafting of the application and involvement of the correct individuals and/or team to win favour from the review panel.

To compare this approach, only up to 5% of those companies wishing to obtain Private Equity investment are successful. Plus a VC investment process involves lengthy due diligence. This takes significantly longer and is more expensive than a grant submission - as the former involves preparation and review of multiple technical, business, financial and legal documents. Currently, global VC investment in new firms has significantly decreased as the VCs preserve their funds to provide lifelines for their current portfolio of companies.

While the recession has undoubtedly reduced the net worth of most philanthropists and business angels, there are complex patterns according to geographies and philosophies. Some investors in the UK have cash to invest but the bank interest rates are so low that angel investment rates in some regions (e.g. Scotland) have gone up. The angels have seen that the valuations of start-up firms have gone down, are competitively priced and thus the financial returns should, in theory, be significantly better over the mid to long-term than other types of investment. Whereas in the US, angel investment has crashed – perhaps due to a larger exposure to the Stock Market or difference in market outlook?

Charities, Foundations and Government grant funding sources are usually more impervious to economic pressures as they have a longer-term view of the world and are more consistent in delivering on their objectives to invest a certain amount of money per year – no matter the state of the economy. Thus, they are a relatively predictable and stable source of finance.

Another market observation has been the recent (re-)emergence of the Venture Philanthropist (remember Andrew Carnegie?). Recent examples include Tom Hunter, Warren Buffet and Bill Gates. These individuals are now giving away hundreds of millions of dollars to scientific and humanitarian causes. These funds will likely grow in the future and may well increase the amount of funding available to biomedical science based start-ups?

In conclusion, talented entrepreneurs should consider all sources of finance to generate fuel for their business. To date, a major barrier to doing this successfully has been the lack of a codified set of information. To this end, ATPBio has developed such an approach, and is able to work with external individuals or companies to enable their subsequent growth. Other challenges have included available management ability, energy and experience to juggle these funding options, prepare applications and process them successfully.  We also have expertise to help here with the provision of professional, business support services. In our view, the future of financing businesses is via improvements in strategy, exploitation of a portfolio of funding sources and adoption of more entrepreneurial processes. The future starts here……..


This article was written by Dr Frank F Craig MBA. Frank is an entrepreneur who has (co-)Founded several biotechnology companies, one of which grew to have a market capitalisation of almost £2 billion. He has raised Venture Capital and utilised many sources of finance to fund his companies. He is a Principal at ATPBIO and also manages his own consultancy business, Life Sciences Consultancy Limited. Working with colleagues, Frank has also been key in winning a recent research grant of £1.6 million for a new biomedical software venture.

April 21, 2009

Getting the most “bang for your buck”

Last month saw an interesting project for ATPBio, and one to mark the sign of the times. We were retained by a European VC to provide an outside commercial evaluation and strategic review for a portfolio company. In particular, the VC was keen to assess the company’s strategic plan in light of the current economic and funding climate.

The overall objective was to advise what course of action should be set if the company were to continue to build upon existing progress and be able to position itself for exit in around two years. Given that the company is working in a popular therapeutic area (inflammation) and has its most advanced project already in phase II with scientific proof of principle, this was not an unreasonable goal.

The project brief included an examination of the company’s current position. This was in terms of a pipeline project review, potential value inflection points, projected budget and additional investment required to reach these, and scenario based stress-testing to allow for contingency planning. An assessment of each of these areas was necessary to arrive at an overall strategic recommendation, and what course of action would lead to the optimal return for the VC: getting the most "bang for your buck". Each of these areas, and impact on overall recommendations, is considered below:

PIPELINE PROJECT REVIEW

This forms the core of a commercial and strategic review, since pipeline projects command the lion’s share of a company’s valuation. A review should lead to a ranking to determine which programs are the key value drivers – it is rarely as simple as just ranking the most advanced programs the highest.

We considered a qualitative and quantitative assessment. The qualitative view was a top-down benchmarking analysis looking at similar deals in the therapeutic spaces and stages of development. Given the significant change in market conditions and sentiment of late, deals were generally examined only in the last 18 months. While a benchmarking analysis is helpful, limitations include that each deal is very different, and with only a few closely relevant deals available to examine, there is no statistical significance to creating average deal sizes. Though, such benchmarking does afford a useful “look and feel” of what is possible, and gives an indication of what has occurred recently.

The quantitative assessment involved a bottom-up analysis by building NPV models for each program. These models considered market size, market growth and penetration, launch date, revenue growth and profit, patent expiration, milestones and royalty payments, and appropriate discount rates. Clearly, numbers plugged into an NPV model for a therapeutic program can have a wide variation, depending on whether assumptions used are based on conservative or aggressive scenarios, with resulting wide variation in valuations. However, providing a consistent approach is used across the board for all programs (at least within the realms of possibility) then a relative picture begins to emerge, from which one can begin to develop a ranking. We tend to favour and encourage conservative assumptions: take care of the downside then the upside will take care of itself. 

We also considered the spectrum of relative complexity for further development for clinical stage programs. For example, projects focusing on skin diseases with topical treatments are relatively straightforward to recruit for and to monitor progress based on clinical outcomes. By contrast, certain orphan indications, by their nature, address rare and difficult to treat disease conditions, with associated complexity in trial recruitment and logistics, trial design and end-points. And somewhere in the middle, are conditions requiring systemic treatment for serious and life threatening diseases affecting large patient populations.    

VALUE INFLECTION POINTS

Ahh, that wonderful cliché strived for by investors and company managements across the globe. For at the end of the rainbow is a value inflection point. As we all know, this pot of gold is where a buyer or trade partner is suddenly willing to pay a significant premium to development costs to date, given the degree of de-risking that has already occurred.

In truth, this is part art and part science, depending on how efficiently a company has developed assets to a certain stage, and to a large degree on benchmarking of similar deals in the space. If a company has managed to develop assets very efficiently, a highly respectable return on investment may be possible at, say, end of phase I. However, the same asset developed in a heavily cash hungry, infrastructure rich environment may not work even at phase II.

So, to truly give indication of a value inflection point, it’s not sufficient to just give a benchmarked industry standard approach for any given therapeutic area (so typically at phase II); one must also consider the finances and the efficiency of investment and budgeting within the individual company.

INVESTMENT REQUIRED

In more abundant economic climes, companies can shoot for the moon, and plan ambitious projects with additional work-up and gold standard style clinical trials. More funds are generally available for investment, enabling a greater wish-list of work to be performed. Assuming such work is done properly, and read-outs are positive, this should put a company’s projects in stronger position for future partnering or trade sale negotiations.

However, in today’s market cost control is king, so the key is to find a common denominator: what is the minimum investment required per program to get to a validated clinical read-out which will be acceptable to potential big pharma partners or trade buyers? i.e. what is critical rather than “nice to have”? This is the optimal scenario.

This information is likely to come from a couple of sources: early discussions with future partners defining their internal needs, and the clinical trial development team (e.g. Chief Medical Officer and associated team members). Management must then balance these criteria against the VC and shareholder imperative – what’s the minimum spend possible to achieve such an output?

STRESS TESTING

In the words of Harvey MacKay, “Failures don’t plan to fail; they fail to plan”. Stress testing is contingency planning for drug development. What happens if a given program fails, is delayed, or if only a smaller amount of investment is available than indicated in the optimal scenario above?

By considering such alternative scenarios, a management team can still plot a course of action to help build value while avoiding the risk that comes with an all-or-nothing plan where value is entirely dependent on a single program succeeding in a single development plan. In some ways it is like navigating a journey through the ocean – sometimes plain sailing but knowing what to do when the storms hit.    

We developed such stress tests for the VC client’s portfolio company, enabling a positive NPV even for several sub-optimal scenarios. Of course, in drug development, there is real possibility that all programs fail completely, with total destruction of value. Though, incorporating this into the stress testing exercise allows investors to see “value at risk” and mitigate even this crisis outcome through broader portfolio planning.

OTHER CRITICAL POINTS

Ideally, to develop a strategic plan which has a defined objective over 1 to 2 years, a company and its investors must be in a strong enough financial position to consider alternatives. Financial factors which would impact the development and execution of a sound strategic plan include cash runway remaining within the company, the impact of dilution on existing investors, valuation, and VC specific concerns (e.g. life of fund, ability to follow on).

Essentially, companies should actively engage in such a review process while they still have financial staying power – cash starved companies in fire-sale or shut-down mode have left it too late and will be in no position to negotiate terms for partnering, new investment or even programs of work.

We were also asked to provide feedback on some of the softer issues, such as the management team and advisory board. Throughout the project, the VC and company management demonstrated an unusual and refreshing degree of openness, humility and genuine interest to find the most suitable alternatives for the portfolio company. Invariably, a good strategic review will also include recommendations for where to cut spend or planned investment. An open and receptive investor/ management team is essential to take advantage of such negative recommendations as well as the positive.

So, in summary, despite the challenges of the current economic crisis, one very positive outcome arises for investors and company management that want to stay in the game. Everyone has to examine current practice, review plans, and figure out new and creative ways to get the best return on their investment dollar; thereby sowing the seeds for a sustainable industry.

 

This article was written by Raman Minhas. He is CEO of ATPBio, a consultancy firm providing strategic insight and transaction support to the life sciences industry.

April 06, 2009

“Mum, what should I do when I grow up if I want to be rich?”

Suspending disbelief for a moment, and assuming that little Johnny has set his heart on being an investor in the life sciences, there are still plenty of options for where he might invest his money to make a fortune. Many seasoned investors restrict themselves to one (or a small number of areas), such as diagnostics, medtech, therapeutics or healthcare services. But there are investors specializing in all these areas, so how would you chose one over another?

A common presumption, which may have more than just a substratum of truth, is that investors specialize in the particular area they understand the best. Experience is, after all, the best training you can have as an investor. Whether in life sciences or any other area, successful investing comes down to a mix of knowing a little bit more than the next man and a fair portion of luck.

The kind of knowledge that might yield a competitive advantage may be technical (assessing with some accuracy the likelihood that a concept can be converted into a product) or perhaps more likely commercial: an understanding of the valuation that can reasonably be ascribed to a particular asset based on some product of its market-readiness and the eventual market size.

But imagine you had no such asymmetry of information. Are biotech assets in some areas intrinsically better bets as investments than others? To an extent, it depends on factors such as your appetite for risk and the amount of capital you have to put to work. Yet there must be some useful general yardsticks, even though data is often hard to get hold of.

Recently, Total Medical Ventures (a boutique life-science seed investment house headquartered in Cambridge UK) published an assessment of its assets, which was very revealing. Admittedly, the dataset is a relatively small sample: around a dozen companies created over the last five years, all of them based in the UK. But despite this, a clear pattern emerged.

The companies fell into a wide range of subsectors across life sciences: several in diagnostics, a couple of toolkit companies and healthcare services companies, one in consumer healthcare, and the rest in therapeutics (one late stage and several preclinical stage). For each, Total Medical Ventures calculated the net present value of the asset at the time the company was created, benchmarking the sale of each company at the optimum point in its development. Importantly, as a seed investor, they calculated how much additional capital was likely to be required, and at what cost to the company.

Of course, with any such forecasts the errors are likely to be substantial, but the findings were so clear that the conclusions nevertheless seem robust: preclinical therapeutic assets had an NPV that was about a tenth as large as the average for the companies in all the other disciplines. And, since all the NPVs were calculated from the viewpoint of the initial investor, this was not simply the result of the longer time to exit for such assets. Interestingly, the NPVs for all the other disciplines were remarkably similar suggesting that the market adjusts asset valuations relatively efficiently.

For sure, all of the forecasts assumed that the underlying technology would eventually be proven, since in every case if the technology could not be successfully developed the company would be worthless. One possible explanation for the lower NPV for preclinical therapeutics is the failure rate – the asset value is heavily discounted because so many fail to reach a successful exit (let alone eventually reaching the market). But is that the only contributory factor? All the other companies were based on unproven technologies in their disciplines too. Are preclinical therapeutics really 10 times more likely to fail than novel diagnostic content?

Probably not. The lower values for preclinical assets may also reflect the highly capital intensive nature of drug discovery. One or two rounds of capital raising is enough to achieve proof-of-concept for technologies elsewhere in the life sciences (including later stage therapeutic plays, although, of course, the size of the rounds would be larger). For preclinical therapeutics, however, its not just the amount of capital required, but the number of rounds over which it must be raised (to reflect the many stop:go decision points that need to be passed to achieve regulatory approval of a new product).

Even the largest venture capital backers of drug discovery often cannot bear the full burden of taking a preclinical asset to clinical proof-of-concept (at least not if they want to maintain a sufficient diversity of product candidates to achieve an acceptable risk profile). So new investors are sought at each round to share the risk.

Financial regulations also play a part: to achieve a validated valuation at each round (particularly important for the protection of minority shareholders), external investors need to join the syndicate.

The overall impact is that with each new round of capital raising that is required, the incoming investors have the upper hand, and the capital already invested (and spent) is substantially undervalued. The more such rounds that have to be completed, the more the early investors are over-diluted. This phenomenon, more than anything else, accounts for the severely depressed asset values for preclinical therapeutics compared to unproven technologies in other areas of life sciences.

The consequences of these observations are severe: the number of investors who will consider backing an early preclinical therapeutic asset, however promising it looks, is shrinking year on year. New models for financing early stage drug development are badly needed before the supply of assets achieving clinical proof-of-concept dries up altogether. 

What is clear, is that small investors (and ‘small’ in this context might include some very substantial investors indeed) should avoid putting their money into early stage therapeutics plays – no matter how outstanding the scientific rationale seems to be. Diagnostics, healthcare services and medtech – for so long the poor cousins of biotechnology – offer substantially better returns to their inventors and seed investors, with a lower technology risk to boot.

So assuming little Johnny’s mum didn’t do the sensible thing and recommend a career as a premiership footballer or patent attorney, the next best option would be to restrict his life sciences investing to the quick-to-market opportunities, and to shun therapeutics altogether. The vast market sizes of blockbuster drugs are nothing more than a mirage on the (very) distant horizon.

This article was written by David Grainger. David is a scientist directing an internationally recognized research laboratory in the Department of Medicine at Cambridge University, focused on inflammation. David is a biotech entrepreneur and investor, having founded several biotech companies, and he runs a successful consultancy business, TCP Innovations. He is also a Senior Partner at Total Medical Ventures, a life sciences boutique investment group, and a Principal at ATPBio.

March 16, 2009

ATPBio office move to Market Harborough, UK

This month sees the move of ATPBio to a new office address in the historic town of Market Harborough. Although not (yet) known for its links to life sciences, it is located in the Welland Valley, amongst some of the country's most beautiful countryside. Situated in South Leicestershire, it sits in the middle of the UK's most active life sciences clusters: one hour north of London, one hour from Cambridge, and just over one hour from Oxford. Some readers might find interesting a little of the history and some fun facts about Market Harborough.

The town originally dates from around 1200 AD, and these excerpts from an article in Wikipedia describe some of the history:
 1026_04_58---Market-Harborough--Leicestershire_web

"The centre of the town is dominated by the steeple of St Dionysius Parish Church which rises direct  from the street, as there is no church yard. It was constructed in grey stone in 1300 with the church itself a later building of about 1470. Next to the Church stands the Old Grammar School, a s mall timber building dating from 1614. The ground floor is open, creating a covered market area and there is a single room on the first floor. It has become a symbol of the town. The nearby Square, is now largely pedestrianised and surrounded by a mixture of buildings of varying styles. The upper end of the High Street is wide and contains mostly unspoiled Georgian buildings ..."


"...Harborough figured nationally in the English Civil War in June 1645, when it became the headquarters of the Kings Army. In Harborough, the King decided to confront Parliamentary forces who were camped near Naseby but the Battle of Naseby proved a decisive victory for Parliament led by Oliver Cromwell...
"

"...During the eighteenth century the original timber mud and thatch buildings of the town were largely replaced with brick building. After roads were turnpiked and regularly repaired making wheeled traffic easier all year round, Harborough became a staging point for coach travel on the road to main road to London from the North West and the Midlands..."


Famous residents of Market Harborough include:

  • Martin Johnson, CBE, who captained England's Rugby team to victory in the World Cup in 2003, and is currently England team manager.
  • William Henry Bragg, who uniquely won the Noble Prize in Physics with his son, William Lawrence Bragg, in 1915.
  • Robert Smyth, who became the Comptroller of the Lord Mayor's Court of the City of London (around 1600).
  • Thomas Cook, the eponymous founder of the travel firm, Thomas Cook Group.


Other interesting facts - Prince Charles, voted the world's best dressed man by Esquire magazine in March 2009, uses three tailors, one of which is based in Market Harborough. And finally...the town also has the shortest street in Europe, appropriately called "Little Street".

So, if you ever fancy a trip to visit us at ATPBio, I'd be delighted to have a chat with you over coffee at Giorno's (run by an affable Italian who loves his coffee), while looking out over 600 year old buildings.

   

March 09, 2009

PML deaths: growing pains for antibody therapeutics or first signs of a bigger problem?

No-one can deny the impact of antibody therapeutics on the drug development landscape.  By 2008, around a quarter of products in clinical development were biologics, and the majority of those were humanized antibodies.  Over the four years to 2012, Rockpool (a biotechnology consultancy) estimates that more than half of the estimated $54bn growth in pharmaceutical sales will come from biologics.  The future for therapeutic antibodies seems set fair, underpinning the high valuations for biotechnology companies with dominant intellectual property in the area.

The attractions of humanized monoclonal antibodies are obvious enough: the large molecular framework ensures exquisite specificity for binding to the chosen target, offering (at least in theory) the prospect of much reduced side-effects compared with conventional small molecule therapeutics.  The inferior pharmaceutical properties (such as the need for parenteral administration) and the substantially higher cost of goods for antibody therapeutics, it seems, are counterbalanced by speed of development and improved safety.  In this brave new world of biological medicine, antibody therapeutics are just the vanguard of a medicines cabinet stocked with siRNAs, stem cells and diverse, highly specific, therapeutic proteins.

Last month, however, the EMEA recommended suspending Raptiva™, Genentech’s anti-CD11a for the treatment of psoriasis following the third confirmed case of progressive multifocal leukoencephaolopathy (PML), a rare but usually fatal inflammatory brain disease.  This followed the addition of a Black Box warning to the product’s label in the US in the wake of the first PML case associated with Raptiva™ in 2008.

Raptiva™ is not the first therapeutic antibody to suffer this problem: Tysabri™, an anti-alphs4 integrin originally approved for the treatment of multiple sclerosis and Crohn’s Disease in 2004, was withdrawn from the market in 2006 following a number of cases of PML, although it has since been returned to the market under a special prescription programme.  Rituxan™, an anti-CD20 therapeutic antibody launched in 1997, has also been associated with PML cases particularly among patients with systemic lupus erythromatosis (SLE).

PML is a demyelinating disease (like a highly aggressive form of multiple sclerosis) caused by the reactivation of a polyoma virus called JCV.  JC virus is almost endemic among adult populations, with almost 90% of people positive for antibodies against the virus.  However, it remains latent unless reactivated usually as result of severe impairment of the immune system.  PML is most commonly seen in AIDS patients, and those treated with immunosuppressive drugs including tacrolimus, mycophenolic acid and in rare cases high doses of corticosteroids.  It is tempting to assume, therefore, that PML is a side-effect of the highly effective anti-inflammatory activity of Raptiva™, Rituxan™ and Tysabri™.

But these products all have something else in common: they bind with high affinity to cell surface receptors on leukocytes (and in the case of anti-integrins, on other cell types as well).  In contrast to therapeutic antibodies targeting soluble mediators (such as the highly successful anti-TNF and anti-VEGF products), antibodies which target cell surface receptors decorate the surface of the target cells with immunoactive protein sequences.  The constant regions of these antibodies can bind to, and activate, Fc receptors on other leukocytes, they can modulate complement (a major effector pathway of the innate immune system) and a wide array of target-independent effects can ensue.  Any or all of these pathways could contribute to the risk of PML, alongside the intended anti-inflammatory effects of binding to the intended target.

What are the lessons that can be learned?  While tragic for the small number of PML sufferers, it is always going to be impossible to detect such rare, but serious, side-effects of any new therapeutic during clinical development.  Moreover, at least for Tysabri™ and Rituxan™, these products provide such a degree of efficacy for treatment of diseases that were otherwise very severe and poorly managed that they remain a valuable therapeutic option despite the PML risk.

Of greater concern, however, is the possibility that PML represents a class effect of antibodies binding to cell surface targets on leukocytes.  If that were the case, then the consequences would be significant: antibody therapies targeting cell surface proteins are being developed currently for milder diseases, where risk of PML cannot be sustained in return for therapeutic efficacy (as in the case of Raptiva™, at least in the eyes of the European regulators).  It may be time to take off the rose-tinted spectacles and see antibodies as no less susceptible to target-independent effects than small molecules.

Even if it eventually emerges that PML has nothing to do with persistent antibody binding to cell surface targets, and is purely a side-effect of aggressive anti-inflammatory intervention, this episode nevertheless fires a warning shot across the bows of drug developers.  Globally, we have embraced a shift towards therapeutic antibodies with the fervour of an alcoholic downing a breakfast gin, but we still have too little clinical experience with them as a class to fully understand the long term consequences of treatment, particularly with agents that bind to cellular, rather than soluble targets, and so accumulate at particular sites.

Small molecule therapeutics may have already have had their golden age in the last quarter of the twentieth century – they were, after all, the only show in town.  But the recent experience with PML reminds us that all classes of therapeutic interventions carry the risk of unintended consequences, and that a balanced global portfolio of drug development capability is the best prospect for improving healthcare, and with it, returns for healthcare investors.



This article was written by David Grainger. David is a scientist directing an internationally recognized research laboratory in the Department of Medicine at Cambridge University, focused on inflammation. David is a biotech entrepreneur and investor, having founded several biotech companies, and he runs a successful consultancy business, TCP Innovations. He is also a Senior Partner at Total Medical Ventures, a life sciences boutique investment group, and a Principal at ATPBio.

February 20, 2009

Pragmatism and Creative Necessity

The credit crunch is now some 16 months old and major market indices are down around 50% since their peak in October 2007. So, where are we now within the life sciences sector? Despite all the doom and gloom, principally related to funding (or lack of!) and its knock-on effects, the early part of 2009 does seem to have seen a change in outlook.

LOWER EXPECTATIONS, GREATER RETURN?

In speaking to various industry leaders over the last 2 months, and taking a broader market read, there seems to have been a broad change in acknowledging the environment in which we now live. Initially the response was shock and disbelief. Everyone was caught unaware and it took several months to really understand the severity of this downturn (often quoted as the worst we've seen in our lifetime and since the Great Depression of 1929).

Now, we seem to have made a fundamental downward change in expectations. Expectations are more closely linked to "when" there will be more bad news around the corner, rather  than "if". Though, ironically, it is usually at times of greatest pessimism when the cycle changes again - I'm not making any predictions here, though Warren Buffett had a very interesting take on it a few months ago in his recent Op-Ed piece in the New York Times. In it, referring to American companies, he says: 

"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors. To be sure, investors are right to be wary of highly leveraged entities or businesses in weak competitive positions. But fears regarding the long-term prosperity of the nation’s many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now."

Specific changes within the life-sciences sector have included: reduced availability of funding, through public and private markets; downward valuations of most assets; hesitation or even withdrawal by companies to commit to anything other than core research budgets; and hesitation by some managers to engage in meaningful corporate discussions. But there is a silver lining...  

WHAT'S CHANGED IN 2009?

So, what's changed in 2009? Well, managers and investors now seem to have recovered from the initial shock. They have accepted that this IS a brave new world, where cash is king (as mentioned in a recent blog-post "Fundraising in the Credit Crunch"). However, the key thing that has not changed is that big pharma still have to fill and grow pipelines - and product development timelines and investment required remain as lengthy and as costly as ever. A similar story exists for medtech. So, smaller companies at R&D stages still have a clear path to exit.   A recent FT article, "Biotech tie-ups face squeeze" even goes one step further to support this notion. It suggests (from a report from Oliver Wyman) that where biotechs may be cash constrained and hence threaten existing partnership arrangements, then:

"...it may be better for pharmaceuticals companies to refinance biotech companies directly, even on less-favourable terms than their original partnerships, rather than risk having their work threatened or delayed in litigation."

And by and large, managers and investors recognizing that great opportunities still exist, are once again rolling up their sleeves and getting on with it. This also echoes the resilience, character and long-term vision needed to build biotech and medtech companies.

EMERGING BUSINESS MODELS

Another emerging trend we're seeing is adapting business models to survive in the new climate. One of particular interest is utilizing a product financing approach. This is where a company (be it an investor, pharma or biotech) is identifying many projects for POC review, often by investing small amounts of cash to validate key science, in exchange for equity stakes in new IP. The attraction to this model is since many projects are reviewed, it is much easier to reach "kill" decisions if early critical end points are not met. And at this early stage, management overhead can be spread across several projects, rather than accounting for a top-heavy cost base for early stage IP that is spun into a new company (cited at 30% or greater by one serial entrepreneur/ investor we spoke with).

By definition every cycle has its ups and downs. Of course, upturns are nice, carrying with them an air of optimism and possibility. But downturns are just as essential - to cut the excesses, and through pragmatism and creative necessity, sowing the seeds for future growth.


And finally, to put this all in perspective, today's situation was perhaps best described by Charles Dickens, in a Tale of Two Cities:

"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way."


January 22, 2009

Why Obama is Good for Biotech

This week saw the inauguration of Barack Obama as the 44th President of the United States. He enters his term at a time of great challenges on multiple fronts - including economic, geopolitical, environmental and healthcare. Specifically, relating to healthcare, in his inauguration speech he states:

"We will restore science to its rightful place, and wield technology's wonders to raise health care's quality and lower its cost."

Encouraging sentiment, but of course, you can never take any politician's words from a speech on face value. And we're all aware of the many challenges facing healthcare and biotech, from very difficult financing through private and public markets, through to likely new and stiffer regulation on drug pricing and downward pricing pressure from overburdened governments. True to form, the industry is already adapting to this new environment, utilizing its entrepreneurial and survival instinct to full effect - through greater consolidation between biotech-biotech and pharma-biotech, and restructuring (highlighted in G. Steven Burrill's industry predictions for 2009, and a recent FT article: Pharma buying spree could swallow biotechs).

But where Obama provides a break from the past is the one magic ingredient he's brought all the way from Martin Luther King Jnr's speech in August 1963, "I Have a Dream." That ingredient is change. With change comes enthusiasm, hope, energy, creativity and effort; these are exactly the character traits necessary for building biotech. And as that change is being led from the front, it creates a domino effect. It helps to inspire industry leaders to develop more effective and sustainable business models, and scientists to find new and better therapeutics and healthcare solutions.

So, while no one is denying the difficulties ahead, a change in sentiment can go a long way.

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