Studie - The Funding Landscape for Small Biopharma Ventures, 2010-2015: Trends, strategies and priorities

The funding landscape for small and mid-cap biomedical companies has changed enormously over the past two years, driven by recessive public markets and withdrawal of private equity financing. The cost of raising capital has increased, and investors have become very selective about the type of transactions they participate in. Most small biopharma ventures are struggling to raise funds and maintain enough working capital for their clinical endeavours. As with any negative development, there are greater opportunities for both buyers and sellers.
This report investigates the implications of the credit crisis over the next five years and suggests strategies that can improve the chances of raising money without compromising on the inherent strengths of a company or clinical asset. The emerging trends, priorities and strategies of investors are described to help entrepreneurs target the right type of investor and communicate their value proposition in the best possible manner.


Key features of this report

• The long-term and short-term implications of the credit crisis on investors and entrepreneurs seeking to raise funds from public and private markets.
• Established and emerging preferences in the actual deal valuation and execution process- both at a conceptual level and in terms of specific inputs that industry professionals will need. Additional insights on the due-diligence process are also provided.
• Trends associated with 'conditional” investments that are better able to share the risks, uncertainties and upsides; especially relevant for alliances between large pharmaceutical companies and smaller biotechnology companies.
• Insights on the negotiations between deal-makers: their focus areas, issues of concern, preferences in risk-sharing and how these preferences are reflected in the actual deal terms and conditions.

Scope of this report

• Facilitate communication between entrepreneurs and investors by appraising them of each others priorities, areas of concern and operational constraints.
• Plan in advance by understanding how such priorities, concerns and constraints will evolve over the next five years.
• Understand the role of large pharmaceutical companies in funding the clinical initiatives of small biopharma players via options-based deal structures that best resolve the conflicting incentives of the two parties.
• Understand the exit strategies of healthcare investors and tailor asset valuations and negotiation points accordingly.
• Use the top-line industry ‘average’ data to shape economic assessments and communication.

Key Market Issues

• IPOs are not around anymore and private equity funds are struggling to raise capital and yesteryear’s artificially suppressed rates. This has severely restricted the funding options for the majority of small-mid cap biopharmaceutical companies.
• Large pharmacutical companies, with their AAA credit ratings and stable cash flows, have become the major source of funds for smaller biotechnology ventures via an array of collaborative arrangements like product licensing, co-development, etc.....
• This situation has greatly improved the bargaining position of the large pharma companies, enabling them to pick and choose from a wide range of relatively lower priced assets to replenish their ailing pipelines.

Key findings from this report

• Existing investors are reinvesting in assets they have already committed funds to because newer investors are demanding excessively dilutive investment structures that do not favor the existing owners.
• Small biotech companies are struggling to maintain working capital reserves as private equity investments have been scaled back and the IPO is no longer a feasible source of funds.
• Both supply and demand-side factors are reducing the earnings potential of biopharma assets. The higher cost of raising capital has fundamentally reduced the capacity to invest in risky drug development assets. Simultaneously, budgetary pressures on healthcare spending are reducing society’s willingness to pay premium prices for therapies that offer marginal improvement.
• Drug manufacturers are likely to become the primary source of funding for small-mid cap biopharma via a variety of established arrangements such a licensing/ marketing agreements, co-development, joint-ventures or M&A.
• The financial crisis has not changed the geographic distribution of venture financing in any discernable manner. The US and Canada will continue to remain the hubs of biopharma innovation in the next five years.

Key questions answered

• How has the financial crisis impacted the funding environment for small-mid sized biomedical companies? What will be the short-term and long-term effects of the crisis for biopharma companies?

• How do healthcare investors value opportunities in early stage biomedical assets? Are there any preferences by investor type in terms of methodologies, discount rates and cash flow projections?

• What are the priorities and preferences of different types of private equity funds? What issues should entrepreneurs prepare answers for to successfully negotiate the due-diligence process of private equity investors?

• How has venture financing changed in response to the credit crisis? Is there a renewed interest in some therapy areas, geographies or stages of the development lifecycle?

Table of Contents

The funding landscape for small biopharma ventures,

2010-2015

Executive Summary 10

Macroeconomic trends and implications 10

Accelerating biopharma collaboration 11

Valuing investment opportunities in small biopharma 12

Priorities and preferences of private investors 13

Top-line trends in venture financing 14

Investment choices of most active firms in 2009 14

Chapter 1 Macroeconomic trends and implications 18

Summary 18

Introduction 19

Recent events 19

Supply side factors- higher cost of capital 20

Demand side factors- Decreased earnings potential 21

Provider-level constraints 23

Patient-level implications 25

Short and long term implications 26

Non-dilutive funding in an era of excessive dilution 29

Research grants and government contracts 30

Incentives of non-profit foundations 31

Government incentives and associated initiatives 33

Issues surrounding NDF from non-profit agencies 34

Chapter 2 Accelerating biopharma collaboration 38

Summary 38

Accelerating biopharma collaboration 39

Rapidly evolving deal structures 43

De-risking R&D via options-based investing 44

Due diligence in biopharma alliances 47

Marketing agreement 49

Licensing arrangement/Product acquisition 50

Joint venture 50

Alliance/Corporate partnering 51

Outright acquisition of a company 52

Conclusions 52

Chapter 3 Valuing investment opportunities in small biopharma 54

Summary 54

Introduction 55

Valuation methods and usage 55

Discounted cash flow 56

Risk-adjusted net present value 57

Real options 57

Comparables 58

Assessing commercial potential 60

Sales potential 61

Pricing and positioning 62

Cost of commercialization 65

Chapter 4 Priorities and preferences ofprivate investors 68

Summary 68

Introduction 69

Stages of investment 69

Investors: definition, overview 72

Distinction between private equity and venture capital funds 72

Angel investors 73

Venture capital funds 74

Mezzanine investors 74

Venture investors versus buyout investors 75

Process of getting new investment 77

Term sheets 78

Type of security 79

Board representation 80

Valuation 82

Capital expenditure 83

Single versus multiple investors 84

Investor priorities in the new landscape 85

Market attractiveness and product-market-focus 86

The organization 87

Financials 87

Business plan 88

Assessment of risks 88

Intellectual property protection 89

Chapter 5 Top-line trends in venture financing 92

Summary 92

How to use this chapter 93

Definition of key terms 94

Venture financing 94

Seed 94

Start-up 94

Early stage 95

Growth/expansion capital 95

Later stage 95

Mezzanine 96

Bridge loan 96

Private placement 96

Other 96

Countries attracting the most venture financing 97

Recent trends 98

Conclusions 99

Distribution of venture financing rounds by investment stage 100

Recent trends 101

Further analysis of financing rounds by stage 103

Conclusions 105

Chapter 6 Investment choices of most active firms in 2009 108

Summary 108

Most active venture capital investors in 2009 109

Analysis of investment preferences 110

Therapeutic areas of focus 110

Investment destinations by geography 113

Stage of investments 114

Two types of venture investors 115

Corporate Venture Capital (CVC) funds 116

Emerging role of CVC in Life Sciences 116

Strategic motivations 117

Novartis Venture Fund 119

Novo A/S, Denmark 121

Independent venture capital funds 125

SV Life Sciences 125

Investment focus in 2009 125

Texas Coalition for Capital 127

Chapter 7 Appendix 129

Research methodology 129

Index 132

List of Figures

Figure 1.1: Components of government healthcare expenditure in US, 2008 22

Figure 1.2: Market share of generic medicines in Europe, 2007 (by volume) 24

Figure 1.3: IPOs have recently reappeared at a low level 28

Figure 1.4: Grant-making focus of Bill & Melinda Gates Foundation 32

Figure 2.5: How biotech entrepreneurs hope to deal with the financial crisis 39

Figure 2.6: Reliance of big pharma on R&D externalization 41

Figure 2.7: Trends in biotech-pharma deals by development stage 42

Figure 2.8: Overview of partnering issues 44

Figure 2.9: Option agreements by top 20 pharma companies (?Phase I) 46

Figure 2.10: Reliance on the option model varies by company 47

Figure 2.11: Deal structures and responsibilities 48

Figure 3.12: Primary valuation methodology by investor type, 2009 59

Figure 3.13: Assessing the net earnings potential of a medical intervention 60

Figure 3.14: Assessing revenue potential 61

Figure 3.15: Pricing and positioning 63

Figure 3.16: Impact of incoming therapies on payor budgets 64

Figure 3.17: Development and commercialization costs 65

Figure 4.18: Company growth stages and funding sources 71

Figure 4.19: The deal 'funnel” at a typical VC firm 77

Figure 4.20: Sequence of documents 78

Figure 4.21: Board size: advantages and limitations 81

Figure 5.22: Geographic distribution of venture financing rounds 97

Figure 5.23: Trends in geographic distribution of venture financing rounds 98

Figure 5.24: US investments by region, 2008-2009 99

Figure 5.25: Total number of financing rounds by stage, 2004-2010 100

Figure 5.26: Distribution of financing rounds by stage, 2004-2010 101

Figure 5.27: Trends in financing rounds by stage, 2004-2019 102

Figure 5.28: Early-stage funding by type, 2004-2010 103

Figure 5.29: Mid-stage funding by type, 2004-2010 104

Figure 5.30: Late-stage funding by type, 2004-2010 105

Figure 6.31: Preferences of top 15 venture finance investors, 2009 111

Figure 6.32: Preferences of top 15 venture finance investors, 2009 113

Figure 6.33: Number of deals by investment stage, 2009 114

Figure 6.34: R&D performance scorecard 118

Figure 6.35: Novartis Venture Fund investments in 2009 120

Figure 6.36: Novo A/S ownership structure 122

Figure 6.37: Novo A/S investments, 2000-2008 123

Figure 6.38: Novo A/S investments in 2009 124

Figure 6.39: SV Life Sciences investments in 2009 126

Figure 6.40: Texas Coalition for Capital investments in 2009 128

List of Tables

Table 1.1: Non-dilutive sources of funding 30

Table 2.2: Established and evolving deal structures 43

Table 2.3: Incentives in a strategic licensing arrangement 50

Table 3.4: Overview of valuation methods 56

Table 4.5: Stages of equity investing 70

Table 6.6: Most active venture investors in 2009 109

Table 6.7: R&D focus of top 15 venture investors, 2009 110

• Biomaterials Market – Global Forecasts to 2017
• Protein Engineering Market - Global Forecast to 2017
• Biotechnology in Asia-Pacific
• Biotechnology in Belgium
• Biotechnology in Canada
• Biotechnology in China
• Biotechnology in Europe
• Biotechnology in France
• Biotechnology in Germany
• Biotechnology in Italy
• Biotechnology in Japan
• Biotechnology in Spain
• Biotechnology in the Netherlands
• Biotechnology in the United Kingdom
• Biotechnology in the United States
• Biotechnology: Global Industry Guide
• Global Biotechnology
• Downstream Processing in Biopharmaceuticals - Increased Demand for Biologics Drives Improvement in Cost -effective Purification Technologies
• Home Improvement and Gardening Supplies Retailers in Malaysia
• Biotechnology Pharmaceutical Market in US 2009-2013