Can Pharma Conquer the Consumer the Way Apple Did? This App Might Help

By Steve Dickman

CEO, CBT Advisors

Apps are moving much closer to delivering real therapeutic benefit, as I wrote last month on Forbes. But life science venture capital  investors of any stripe – financial or corporate — are reluctant to invest in app developers. For most venture capitalists (VCs), anything you can buy in an app store is, with rare exceptions, not yet a “doable deal.”

Simon Meier of Roche Venture Fund

Simon Meier of Roche Venture Fund

Then, earlier this month, I noticed that a life sciences venture capitalist I know, Simon Meier, a corporate VC from Roche Venture Fund, had just invested in a $4.8 million round raised by mySugr, an Austrian app developer that has produced some popular apps to help both Type 1 and Type 2 diabetics manage their disease. According to TechCrunch, mySugr has attracted over 230,000 registered users to its diabetes management apps and web-based educational tools. Roche Venture Fund had previously invested in Foundation Medicine, an investment which is turning out phenomenally well due to the billion-dollar majority acquisition of the company in January by none other than Roche itself.

In my latest post on Forbes, I show what mySugr is doing; describe what the success case looks like (lucrative but not in a drug-like way); and give a few reasons why it was attractive to the fund, which seems to be one of the only life science venture groups investing in apps (two more are here and here) and which was in fact the only life science investor in a round otherwise composed of IT investors. Then I share my take on what this type of deal, especially if it is repeated, might mean for the pharmaceutical industry.

Read the rest of my post here:  http://www.forbes.com/sites/stevedickman/2015/03/25/can-pharma-conquer-the-consumer-the-way-apple-did-this-app-might-help/

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Coming to an App Store Near You: Drug-Like Interventions

By Steve Dickman, CEO, CBT Advisors

A note to my readers: As of this week, I have been made a contributor to Forbes and many of my pieces will appear there. Thanks for your continued readership and please keep the comments and questions coming on Forbes, Twitter and LinkedIn.

Although replacing pharmaceuticals with apps still sounds like science fiction, it will be just a few years before getting medical treatment by downloading an app from the Apple App Store or from Google Play will begin to seem routine. All the pieces are coming together: startups are working on real medical challenges, apps are showing clinical utility and a path is emerging to approval by the Food and Drug Administration (FDA). The only things missing at this point are definitive proof and, oh yes, venture money. At a panel that I put together at Biotech Showcase in San Francisco last month (panel video here), three startups showed how they are tackling both the lack of funds as well as some real health issues: smoking cessation, attention deficit disorders and migraine. It is instructive that each of these companies sees peer-reviewed, controlled clinical trials as a must. A consensus seems to be emerging that in order to occupy the more clinically useful – and more highly remunerated – realm of “apps-as-drugs,” the winners will have to do much more than just monitoring.

To read the rest of my post and see which companies are emerging as leaders in the apps-as-drugs field, click the link or copy-paste it:
http://www.forbes.com/sites/stevedickman/2015/02/11/coming-to-an-app-store-near-you-drug-like-interventions/

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BIO CEO 2015 Conference Preview

By Steve Dickman, CEO, CBT Advisors

Feb. 3, 2015

One conference that is a highlight for me every year is BIO CEO in New York. This year’s edition arrives next Monday Feb. 9, concluding on Tuesday Feb. 10. One of many reasons I like it so much is that so many fund managers attend. That makes for some excellent Q&A and chatter in the hallways of the Waldorf.

BIO CEO2013_205x100_Thumbnail

If you can get there, I highly encourage it. If not, read the tweets (hashtag is #BIOCEO15) and other media coverage.

The sessions I am most looking forward to include these:

  • “Emerging Trends in Deal Structures,” Mon. Feb. 9 at 9:30am. Panelists will discuss recent trends in both performance milestones and earnouts as well as swaps between pharmaceutical companies of therapeutic assets. Excellent panelists include:
    • Bruce Booth, Partner, Atlas Venture
    • David H. Donabedian, PhD, Vice President, Head of Ventures & Early Stage Collaborations, AbbVie
    • Randall Mills, PhD, President and CEO, California Institute of Regenerative Medicine (CIRM)
    • Adelene Perkins, CEO, Infinity Pharmaceuticals
    • Mark Schoenebaum, MD, Managing Director, Evercore ISI

It will be especially interesting to hear from Randall Mills, who is ushering CIRM into a hectic phase of clinical trial funding after that state agency’s first few years funding mostly early-stage research. And it is always fun to hear from Mark Schoenebaum. I half-expect him to steal the show…

  • “Getting Ahead of Ebola and Other Infectious Threats—Overturning Assumptions,” Mon. Feb. 9 at 11am. The panel will discuss how companies are trying to bring new vaccines and therapies to market faster, with implications likely for a wide array of diseases. Ebola was on the front page of the New York Times on Sunday with good news, finally: the recent outbreak seems to be ebbing. However, as much as the topic will predictably fade, there will certainly be new outbreaks of Ebola and other emerging diseases and actual strategies from government and industry have been in short supply. I am glad that there is a representative of the Gates Foundation on this panel alongside some biotech luminaries to bring the much-needed non-profit perspective. Panelists:
    • Ripley Ballou, MD, Head of Ebola Vaccine Research, GSK
    • Chris Garabedian, President & CEO, Sarepta Therapeutics
    • Peter Khoury, PhD, Senior Program Officer, Bill & Melinda Gates Foundation
    • Guillaume Leroy, PhD, Head of Dengue Vaccines, Sanofi Pasteur
    • Clifford J. Stocks, CEO, Theraclone Sciences
  • “Digital Health—Early Successes for Investors and Biotech R&D Productivity,” Mon. Feb. 9 at 3pm. This session will feature perspectives from both financial and corporate as well as from experts who have broad exposure to digital health investments. One focus will be how digital health companies are improving R&D productivity for biotechs. I had panelist Julie Papanek on my “apps as drugs” panel at Biotech Showcase (the link will take you to a video of the full panel), which took place in January. There, Julie helped me learn about what VCs are doing (and not doing) in the space. Panelists:
    • Angela Bakker Lee, PhD, Partner, VP Healthcare, Global Business Services, IBM
    • Donald Jones, Chairman, Wireless-Life Sciences Alliance
    • Julie Papanek, Principal, Canaan Partners
    • Ryan Pierce, Entrepreneur in Residence, Rock Health
  • VC Funding Report for biotech. Dave Thomas from BIO Industry Analysis will be unveiling his new biotech VC Funding Report. This first-of-its-kind study looks at where venture financing has been put to work in terms of disease area and novelty of research over the last decade (five years pre and post economic crisis). Results are broken down across fourteen disease areas, including oncology, cardiovascular, neurology, psychiatry and more.

There are also some high-profile hour-long “fireside chats.” For example, on Tuesday morning, Gilead’s John Milligan will be followed by Alnylam’s John Maraganore. I wonder if anyone else remembers that Gilead started out as an antisense therapeutics company! Then on Tuesday afternoon, a chat with Peter Greenleaf from Sucampo will be followed by Ron Cohen of Acorda and then by Ian Read of Pfizer. I will try to attend many of these. Reading the CEOs’ body language and hearing their jokes will help me interpret both company commentary as well as investor sentiment in the months to come.

In between these plenary sessions, there are over a hundred company presentations. I hope to see you there.

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It Had to be You: Why Roche Was the Lone Suitor for Foundation Medicine

By Steve Dickman, CEO, CBT Advisors

January 16, 2015

Originally published on Xconomy

The buzz from day one of the JP Morgan conference in San Francisco earlier this week was the announcement on Sunday night by Roche that it was acquiring a majority interest in Foundation Medicine (NASDAQ: FMI) for a bit more than $1 billion in cash for a little more than half the company, which translates into $50 a share. Those were just the latest eye-popping numbers from Foundation, which went public in September, 2013, amid warnings of a biotech bubble. From its initial offering price of $18, Foundation proceeded to enjoy a first-day jump all the way up to $35 a share, straining credulity for those investors focused on the fact that the company had not received meaningful reimbursement for its flagship cancer diagnostic product FoundationOne.

It’s sixteen months later and Foundation still has not received the positive coverage decisions from Medicare or major private insurers that it would need in order to even dream of making money on its sequence-based diagnostic test. The stock had ridden down to $23 a share before the acquisition and there was plenty of short interest even at that level (pity those investors who did not cover those shorts on Friday!).

Roche was the only pharmaceutical company in the world that had a rationale for acquiring control of Foundation. It is best positioned to make the acquisition a success.

But Roche still went ahead and bought an unprofitable company for $1 billion in a transaction reminiscent of its purchase of a controlling stake in Genentech in 1990. Aside from the deal structures, which in both cases leave the US management team intact if now reporting to Roche HQ in Basel, there would seem to be virtually no similarity. Roche has moved far beyond its early-1990s status as a small-molecule-heavy European pharma eager to transition into biologics. At the time of the initial Roche transaction Genentech was already a powerful product engine, having developed early protein replacement therapeutics human insulin and human growth hormone with lots more in the pipeline and vibrant science to match. By contrast, Foundation has done little more than make losses on its diagnostics business.

But there is one big parallel between that deal and this one: In both cases, Roche believes that it has seen the future of the pharmaceutical industry. And it can only grasp that future by placing a large and risky bet on a US innovator company. Roche’s thorough transformation into a company invested in targeted therapies driven by disease biology supports my thesis that it was the only pharmaceutical company in the world that had a rationale for acquiring control of Foundation and that it is the one best positioned to make the acquisition a success.

In my view, the key reasons boil down to these:

  • Roche was early and fervent in its embrace of diagnostics as drivers of drug development and sales. I know only one top executive in the pharmaceutical industry who cut his teeth in molecular diagnostics and he did so at Roche– Dan O’Day, who was CEO of Roche Molecular Diagnostics from 2006 to 2010 and is currently COO of Roche Pharma. Once the Foundation transaction is completed, O’Day and two others chosen by Roche will join Foundation’s board of directors. Aside from the personal, Foundation also fell on fertile ground at Roche on the institutional level. Roche had already changed its drug-discovery focus to be more diagnostics-driven than most other pharmaceutical companies on virtually every level. As Roche CEO Severin Schwan declared in 2012: “More than 60% of our pharmaceutical pipeline projects are coupled with the development of companion diagnostics in order to make treatments more effective.” That number has almost certainly gone up.
  • Roche was the pharma that had most thoroughly integrated clinical genome sequencing into its trial protocols, long before it had figured out how best to use the data. In my work with biotech companies, I had been hearing for years how Roche had embraced sequence data as a key success factor for the pharma industry of the future. As soon as the cost of sequencing became halfway affordable (maybe $5,000 to $10,000 per full sequence), Roche began to require genome sequence data as a key data point from every patient in every clinical trial. If there was any doubt about how highly Roche regarded sequencing, its $51-a-share Illumina bid in 2012 dispelled it. (Illumina, whose CEO Jay Flatley said at the time that the bid seriously undervalued his company, now trades at $181). An executive speaking under condition of anonymity who knows Roche Ventures well confirmed that Roche places high importance on sequence data, both data which it has itself collected as well as data being collected by Foundation. As an aside, Roche Ventures had invested in Foundation two rounds before the IPO in 2012 and had no strings attached in the form of a promised acquisition or partnering deal. That investment is another indicator of the value Roche management placed on keeping up with the world of clinical sequencing. That executive told me on Monday that Roche was counting on Foundation’s data scientists to be able to make the most effective use of their own data banks of both sequence data and outcomes data and that the prospect of joining forces was irresistible.
  • Roche realized that it would face competition if another pharma company scooped up Foundation. Roche believes that in genomic profiling, it has identified a common theme for creating value in oncology therapeutics of whatever stripe – targeted therapies like kinase inhibitors; biologics like monoclonal antibodies; and even immuno-oncology approaches like checkpoint inhibitors. Having made this observation, it did not want anyone else to catch up. Combining Roche’s clinical sequence data and its drug pipeline with Foundation’s gene-level and patient-level insights clearly would realize the most powerful synergy. But in the hands of another pharma, the Foundation team and data sets could have posed competition. Ergo, Roche decided to buy it now.
  • Roche is counting on a shift from biochemical targets to genomic profile targets, especially in drugs for solid tumors. Foundation’s “poster child” cancer cases are those in which genetic profiling suggested – against all experience of oncologists and with no evidence from n-of-1,000 clinical trials – that cancer drug X, developed for, say, ovarian cancer, would work best in cancer indication Y (e.g. prostate cancer). Because the patient is desperate, the physician prescribes the drug and voila – there is a response or even a remission. This pattern echoes what has happened in blood cancers such as chronic lymphocytic leukemia (CLL), in which old-fashioned chemotherapeutic agents have been replaced by biologics like rituximab (Rituxan) and are being augmented or, eventually, replaced again by kinase inhibitors like ibrutinib (Imbruvica). This will likely happen in solid tumors as well: chemo as we know it will be scaled back (though, like that other blunt instrument, surgery, it will likely never completely disappear) and physicians will chase cancer cells through various waves of genetic mutations, each of which demands a different targeted therapeutic or biologic to hold it at bay. In that world, the company that is most on top of the mutation patterns and treatment patterns and can incorporate those into both its drug development efforts and its sales pitch, wins, or at least has an edge. Diagnostics will likely be an important part of immunotherapy as well, an area where Roche is currently weak. Right now companies like Juno (NASDAQ: JUNO), Kite (NASDAQ: KITE), Bellicum (NASDAQ: BLCM) and Novartis are taking baby steps with CAR-T. Most companies are focusing on surface antigens like CD19 that are widely expressed and therefore do not require molecular diagnostics.  To realize the full potential of these therapies, companies will need to match patient-specific tumor profiles with panels of off-the-shelf biologic reagents and cell engineering products. That’s where Foundation’s tests might come in.
  • Foundation is setting new standards in cancer genome analysis. Foundation has raised the bar in the accuracy of genome-based tumor profiling (sensitivity, specificity) by something like a factor of three, and built robust and scalable informatics and analytics. Roche was already using the Foundation platform on a limited basis and realized that it was simpler to expand that use rather than to try to copy it.

Since the last few pharma mega-mergers, the industry’s biggest players have gone in wildly different directions. Novartis embraced gene therapy and gene editing. AstraZeneca doubled down on the biologics franchise it obtained with the acquisition of MedImmune. Bristol Myers and Merck have raced ahead in checkpoint inhibitors. Merck, Sanofi and to some extent Pfizer have rapidly expanded investment in “beyond the pill” and “digital interventions” (apps as drugs). And Roche took up diagnostics and genetics. For Roche, drug development, especially in oncology, is all about “genetics-driven medicine,” which in their view requires “genetics-driven drug development” and “genetics-driven marketing.” No one else has placed such a big bet on genetics though all pharma companies are certainly exploring it. For example, AstraZeneca, Johnson & Johnson and Sanofi recently announced a collaboration with Illumina (NASDAQ:ILMN) to develop a “next-generation-sequencing based test system for oncology.” In some sense, if Roche wins this one, others – e.g. those betting on checkpoint inhibitors and CAR-T cells – might lose out.

In CBT Advisors’ world of venture-backed biotech companies, this landscape poses significant challenges. Gone are the days when a biotech’s innovation would be appreciated by as many as five or ten pharma companies at the same time (there are barely fifteen left that regularly carry out M&A) and there could be a big bidding war. The biotechs’ leverage is not what it used to be. Counterbalancing that is the obvious productivity flop in pharma R&D. Biotech is the only place pharma can turn for real innovation. And turn they do, early and often.

This creates a bonanza for firms like mine that assist early, science-driven companies in managing their public positioning and their BD pitch from day one to create the largest possible exits. Now more than ever, the right story sells, just maybe to only one or two bidders. In Foundation’s case, the billion-dollar number was probably what it took to get the company’s pre-IPO investors (who included Google Ventures and Bill Gates not to mention smart funds like Casdin Capital) to give up on at least some of their dreams of long-term returns in exchange for a sweet 10-12x (I’m guessing) on their last pre-IPO investment from early 2013.

From Foundation’s point of view, the deal does three things, all of them good:

  • Cashes out the early investors at a price they can accept.
  • Delays, perhaps indefinitely, the need to break even on selling tests and shifts the focus to drug development and companion diagnostics
  • Relieves the constant pressure to market the company’s analytic services to multiple pharma companies in deals that have been the main source of revenue for Foundation to this point. That pressure was undoubtedly going to become heavier as Foundation’s pharma partners realized that, quarter after quarter, there was no reimbursement coming from Medicare and little from other payers, leaving pharma to provide the vast majority of the company’s source of revenue. (A first small insurer in Grand Rapids, MI, announced coverage of FoundationOne and another Foundation test in October, 2014.)

Back to why the acquirer had to be Roche: remember that over the last 25 years, Roche has had the undoubtedly humbling but ultimately very profitable experience of owning Genentech. Revenues and product pipeline from that acquisition long ago overtook those products from Roche’s own drug development in volume and importance. In some sense, Genentech has come to own Roche. Since Roche is nowhere near as advanced in gene therapy as Novartis nor as advanced in checkpoint inhibitors as Merck and Bristol-Myers, the move to own Foundation is an attempt to be the best it can be as a genetics-driven drug developer and marketer. No other pharma would have seen this deal that way. When and if Foundation’s investment bank called around looking for better offers, I bet no one called them back.

For Roche, the deal will either turn out to be a leap frog or, maybe, a dead end. But if cancer therapies, especially for solid tumors, really do wind up getting developed and marketed in a genome-driven way – and many trends point in that direction – then this move will have turned out to be prescient indeed.

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Why have only a few European biotechs made it through the IPO window?

By Steve Dickman, CEO, CBT Advisors

Posted to Boston Biotech Watch and to the Partnering360 blog

If the recent falloff in biotech IPOs continues, then many European biotechs would seem to have missed the longest, widest IPO window in the history of the industry. Why did a few European biotechs manage to go public (on NASDAQ, Euronext and the London Stock Exchange) in this window when most others did not succeed or even try?

In recent advisory work for about a dozen companies at various stages of the IPO process, five of which went public, and at a panel discussion organized by your correspondent and the EBD Group on the topic of European biotechs having US IPOs at last month’s BioPharm America conference, I identified three major trends contributing to the paucity of European IPOs:

  • Lack of access to EU capital for EU companies;
  • Absence of interest from (US) crossover investors in EU companies (maybe because they were not asked to invest); and
  • The conservative attitude of European IPO investors.

Sorting out the reasons for this phenomenon is important because of the long-term implications for the biotech industry in Europe. I’ll circle back to that larger question after looking at the data on some representative European IPOs and examining the reasons more European biotechs have not made it to an IPO during this window.

In Table 1 below I put together a sampling of eight European biotech and life sciences companies that pulled off IPOs in 2013 and 2014, their locations, their IPO dates and the amount of capital they raised.

Performance of some IPOs by European biotechs.

Table 1: Performance of some IPOs by European biotechs. Bold: CBT Advisors clients

Some observations:

  • Companies came from several European countries.
  • They went public on several stock exchanges.
  • Some of them raised a considerable amount of money (though typically less if they went public in Europe).
  • Most of these are therapeutics companies (similar to the US IPO crop).
  • With one dramatic exception, the stocks have traded down.

By comparison, according to data from an industry insider we know, this group of European companies have raised about the same on average as US biotechs that have gone public on NASDAQ in 2013/14 – $68.5 million for these six vs. $64 million to $70 million in the comparable crop of US-based biotechs. The trading down tells me that, while investor interest was just as strong initially for the European biotechs as for their US counterparts, the European companies either did not have the news flow or (my hypothesis) they lacked the “true believers” in their stories that would have been required to keep prices up in the months after their IPO.

Venture investors like panelist Rafaèle Tordjman, a general partner with Paris-based VC fund Sofinnova Partners, recalled that there have always been such challenges for European companies. “Our portfolio company Movetis went public on Euronext at the same time [in 2009] and at the same stage as Ironwood Pharmaceuticals but the valuation was three times less!” To be fair, she continued in an email, Movetis, later acquired by Shire, owned only European rights to its gastroenterology product whereas Ironwood owned worldwide rights. But the valuation gap still seemed disproportionate.

What is striking is the number of US companies that have gone public on NASDAQ: About 70, by my count, versus just six European companies. According to OECD, in 2013 there were 2,954 “dedicated” biotechnology companies in the United States and 2,654 in Europe. “Dedicated” firms are those that devote at least 75% of their production of goods and services, or R&D, to biotechnology. Even if these numbers were off by a large amount based on different definitions or stages of biotechs, and even taking into account the superb performance of the US stock market across the board as compared with the market in recession-prone Europe, it would still seem that a number of envious European biotechs are looking across the pond and wondering why their star has not yet risen. Here are my three answers:

Lack of capital from local investors

Despite the huge increase in investment interest in biotech in the United States from both specialist biotech investors as well as generalists, the sector has not gained wide enough appeal yet among either category of European investors to provide sustained support for a European biotech industry on either US or European exchanges. On top of that, what has happened lately is a wave of specialist support for US biotechs, which have been able to go public without much generalist backing at all.

In part, the lack of support in Europe for European biotechs is in part a function of scarcity, said Philip Astley-Sparke, a Venture Partner at the top-tier Dutch VC fund Forbion. He also happens to be President, US, of UniQure, one of the successful US IPO candidates. “Historically, LSE biotech listings did not get done unless generalists were involved to a large degree. In the States, no generalists are required.  These UK generalists are unlikely to be diversifying into US biotech. Hence, a few UK biotech IPOs may get done and then a single disappointment sends the generalists running for cover. This makes the market less stable. By contrast, a few blow ups on NASDAQ is just noise.”

In any event, the total amounts raised by biotechs in both IPOs and follow-ons combined have turned up in Europe but they still lag US deals by a wide margin (Figure 1).

Biotech deal volumes (cumulative) 2004-2014: Europe lags

Figure 1: Europe lags in volume. Data courtesy Dealogic. Figure courtesy FT.

Some reasons vary country by country. Germany, in particular, has lain fallow for many years in the aftermath of the dot-com boom. German tech stocks have come roaring back but there has not been a single biotech IPO on the Frankfurt exchange. Only one Germany biotech company, Affimed Therapeutics, an antibody therapeutics company in Heidelberg, had a NASDAQ IPO in 2013-14. It raised $56 million.

In other European countries such as the Netherlands and Great Britain, there are quite a few high-quality biotech companies so windows might someday reopen. There are signs of a thaw in Switzerland, where both institutional and retail investors were burned by disappointing clinical results from companies like Addex and Cytos. On September 23, the day after the panel discussion took place, Zurich-area biotech Molecular Partners announced that it was filing for a blockbuster $134 million IPO by the end of the year on the Swiss exchange SIX.

But none of the European biotechs I know would be likely to choose an EU over a US IPO if current conditions prevail. If the wave of IPOs that hit NASDAQ were to later reach Europe’s shores after it hit NASDAQ, this would be about the time for it to happen, but, with the exception of that one big-ticket Swiss IPO attempt, there is little sign of a biotech boom on Euronext or other exchanges.

In fact, on October 21, just before this post went to press, Molecular Partners pulled its IPO due to “market conditions.” “Whenever Wall Street starts coughing, Europe gets pneumonia,” was how one European biotech industry insider characterized that reversal.

Missing crossover investors

For those who have not encountered them, crossover investors, mostly US-based, have been driving the surge in biotech investment for some time now. This is a big change from the 1990s and early 2000s, when many pre-IPO investors, including venture capitalists, were eager to “flip” their shares immediately post-IPO. That period ended abruptly in around 2003-2004. What has happened lately is really the opposite. Savvy crossover funds jam-packed with PhDs and MDs are getting in just before the IPO with the goal of getting a bite of the company at a better valuation than they would get at the IPO. The same investors then typically buy in the IPO, then hold for clinical data. That is, the US crossover investors are not investing in the biotech as a non-public entity in order to turn it into a public entity that is now liquid and “flippable” but rather to turn it into a public entity in which they can share in and reap the rewards for good data (once their lockups have come off and they are allowed to sell shares).

It’s not that Europe has none of these deep-pocketed, risk-loving investors. Some have played quite strongly in the recent boom – some funds in Switzerland, Polar Capital in London and Omega Funds in London come to mind. But the diversity of the crossover investing sector, including mutual funds and some VC-like funds as well as traditional long-only hedge funds, and the sheer number of funds in the United States dominate the industry. Indeed, Omega has begun to invest more frequently out of its Boston office and considers itself more of a global investor. At least twenty US funds, some of them able to deploy many hundreds of millions of dollars in capital, have been extraordinarily active over the past two to three years.

There is no law preventing European management teams from pitching the same crossover investors that their US counterparts are pitching. But the logistical challenges are apparent. Ultimately, said Astley-Sparke, “a European company coming to the US has to be here a year in advance, doing non-deal road show work, getting in front of the crossover investors and preferably doing a crossover round. That [crossover round], in my experience, is almost a pre-requisite for being taken public by one of the larger banks.” Tordjman concurred that for Sofinnova’s portfolio company ProQR, a Netherlands-based therapeutics company focused on cystic fibrosis, the crossover round was very helpful.

Panelist Dan Grau, the President of UK-based Heptares Therapeutics, a highly regarded, still-private drug discovery and development company with management located in both London and Boston, concurred. “The pathway of doing a crossover financing to lead you to an IPO is clearly the preferred pathway,” he said. The caveat for companies, said Tordjman, is that in order to access all that capital in the United States, sometime companies have to make sacrifices in their valuation. “It’s an equilibrium,” she said. Lining up the preferences of existing investor against the valuation wishes of new investors requires careful thought and planning.

It will be a while before such a fund group can emerge in Europe. Some of the US-based crossover investors are part of decades-old fund families (e.g. Fidelity). Others among the seven thousand hedge funds in the United States are the specialists focusing specifically on pre-IPO biotech. It will almost certainly require a pretty large crop of European biotech IPOs that turn into long-term success stories for an investor pool like this to be replicated in Europe, if it ever is.

“What are you selling, the promise or the actuality?”

The final factor that is holding Europe back is more of a cultural one. US and European investors think they are buying different things and value companies accordingly. European investors want to see more data; US investors are more interested in the “sex and violence,” as Astley-Sparke put it in an email, that accompany earlier-stage companies. Grau summed it up nicely on the panel: “For US investors, there is a greater appetite for something that has potential and promise but may not have shown its data, may not have become actual yet. One doesn’t see exactly the same kind of fever on the European side, which sometimes be a bit more conservative in looking for the evidence in hand, especially for therapeutics, that you have crossed a risk threshold. So that is a potential dividing line. The reception we have as a Phase 1 stage clinical company with a substantial preclinical pipeline on Wall Street, whether we are talking to the buy side or the bankers, is very intense. They see the prospect of a very interesting data flow coming soon.”

US investors do occasionally invest in EU companies such as Innate Pharma and GenFit, both in France, says Otello Stampacchia, a Partner with Omega Funds. “Typically,” he says, “these investors need to see a clear value proposition (e.g. when there is more attractive pricing of assets in European companies) as well as a presence in a very topical space – immuno-oncology for Innate, NASH for GenFit.”

What hangs in the balance for the European biotech industry is more than just the return rates for some biotech VCs or the valuations of a few biotech companies, as important as those aspects absolutely are for the readers of this blog. IPOs these days are financing events rather than exit opportunities. This is consistent with the “buy-and-hold” approach that most crossover investors are taking now with most therapeutics company shares they own. But then what is the endgame? For many companies developing exciting new therapeutics, that will be acquisition by existing biotech players. Biogen Idec found its high-flying dimethyl fumarate product Tecfidera in a European biotech. Amgen snapped up Micromet and BioVex, both of which moved part of their operations to the United States prior to acquisition. Amgen kept a research facility open in Munich but the companies otherwise were lost as sources for new ideas, entrepreneurs and capital in Europe. Other such examples are bound to follow.

As I see it, what is at stake is Europe’s ability to build IPOable companies and fund them beyond the first good dataset. What makes a place a good biotech hub is well-known to us in the biotech nexus of Boston: Durable, lasting sustainable companies generating products, revenues, returns, innovation, ecosystems and spinouts. If the companies are all getting acquired – nipped in the bud, so to speak – such an ecosystem does not arise. If Europe wants to have a sustainable biotech industry, it doesn’t want all the companies acquired, at least not before there is enough value in the company and its team that it can create spinoffs and get them funded. On the other hand, if I’m a VC shareholder, I want and need them to get acquired.

Panelist Sinclair Dunlop, the Founder and Managing Partner of Epidarex Capital, an Edinburgh-based VC fund, agreed that this is a challenge, but that the interests are actually aligned right now in favor of acquisition. “[As an investor], you have to make money. You’ve GOT to be able to deliver competitive financial returns to financial institutions that back the cluster in those locations. Only then have you got a shot at recycling capital and ultimately growing it. One thing we lack in certain parts of Europe is the generation of entrepreneurs who have made their mint and who are now back to recycle their cash. You don’t have that yet in enough parts of Europe.”

Meantime, Tordjman reported that DBV Technologies, a Paris-area Sofinnova portfolio company making protective immunotherapies against peanut allergies – largely a US market – had announced an hour before the panel began that it was taking the next logical step after it pulled off a successful 2012 Euronext IPO and, in September, 2014, obtained excellent Phase 2b data: it filed an F-1 with the SEC to go public (again) and have a dual listing on NASDAQ.

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Sure, Biotech is Hot. But Are Biotech IPOs a Good Investment?

A Guest Post to Boston Biotech Watch by Christoph Bieri, Managing Partner, Kurmann Partners*

This year will see an unprecedented number of biotech IPOs at a record high investment volume. But  is it wise to invest in them?

We tracked the performance of about 350 biotech and life sciences companies which listed on NASDAQ, NYSE, LSE/AIM and the Swiss Exchange SIX beginning in 2000.  As shown in Figure 1 below, we would divide those fourteen years into four distinct phases:

  • The years 2000 and 2001, which we call the “millennium vintage”
  • The years 2003 to 2007, the “post-millennium”
  • The years 2010 to 2012, the “post-Lehman”
  • The current period, the “13/14 boom”

Figure 1: Funds invested in biotech IPOs, cumulative, Jan. 1, 2000 - Oct. 9, 2014

 

We then tried to estimate the performance of each newly issued stock. Our model assumed that somebody invested at the IPO and held the shares until today, until the company was bought or until it went out of business. We calculated the gains or losses made under these assumptions, correcting for stock splits where applicable. Grouping the individual performance by the date of IPO in the above phases results in Figure 2:

Figure 2: Performance by vintage of biotech IPOs

 

You can read the bar graph top to bottom. The top blue bar represents the total of all amounts invested at the IPO. This is followed in light green with the total appreciation (or depreciation) of the share price until today (October, 2014) if the respective company is still listed. In case the company was sold, the next bar (in red or green) shows the profit or loss the initial investors made.  The next red bar reflects the total funds invested in those companies that later went bankrupt. The net of all of these changes is shown above as gain or loss in percentage of the total investments made.

As you can see, the millennium vintage did not perform well at all. In our (simplified) assessment, investors on average took a loss. According to our analysis, the best vintage was those companies that went public in the extremely risk-averse climate post the 2008 Lehman Brothers bankruptcy. As of today, those investments have almost doubled.

We admit that there are many caveats to our analysis. The biggest factor skewing this analysis is what we see as the current valuation inflation, which has had a disproportionate effect on those companies that listed in the post-Lehman phase (hence the big contribution of “share appreciations” to the net gain). Also, those companies which went public post-Lehman had less time to go out of business, so to speak. We may have missed stock splits (reverse or “real”) or some of the other tools which companies resort to when in dire straits. We did not account for cash pay-outs, and secondary offerings, non-dilutive funding or licensing transactions are also not included. But we think we still got a pretty clear picture.

Figure 3 puts the current climate into context. This chart shows IPOs on a time axis. The bubbles indicate the size of the initial offering in millions of US dollars. The y-axis gives the stock appreciation as of today (or until acquisition) on a logarithmic scale. Not surprisingly, the “cloud” of new IPOs of the 13/14 boom are still clustered around the 1x mark on the y-axis since they have not gained or lost much value in this short time. We can also see the diverse fate of the millennium vintage, when a similar IPO boom took place.

The IPO weather forecast: Clouds on the horizon?

 

Is the current frenzy just the “return to a healthy normal”, as some industry leaders say? Or is it “the folly of year 2000 all over again”, as some others state?  We don’t know.

Biotech always makes for exciting investments, in all shades of the word “exciting”. The combination of money, science and the potential to be part of something really new and important may be satisfying all by itself for some private investors. So there is the fun factor (if you can bear the potential losses). Those who intend to profit will spread their risk broadly and time their investments carefully.

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*Kurmann Partners is an M&A and strategy advisory firm based in Basel, Switzerland, advising globally on mid-market transactions in the Pharma, Biotech and MedTech industries.

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Health IT: Will Europe catch the wave?

By Steve Dickman, CEO, CBT Advisors

The US health IT space is white hot. Europe lags far behind both in the number of companies and in the amount of money being invested. There have been very few (no?) exits. I was wondering if Europe will ever catch up and which companies and geographies are emerging winners. So I decided to survey a half-dozen Europe-based VC partners active in healthcare investing some of whom have taken their first tentative steps into health IT investing. Here’s what I found out.

But first the impressive US benchmarks: HealthITNews reported in mid-July that VC investment into health IT surpassed $1.8 billion just in the second quarter of 2014, double the amount that had been raised in the previous quarter. Investors have cashed in on exits from companies such as Castlight Health (NASDAQ IPO in 2014); Humedica (acquired by United Health for a reported several hundred million dollars in 2013); and Healthy Circles (acquired by Qualcomm Life in 2013 for an undisclosed amount).

This makes sense given the obvious drivers for health IT activity in the United States: the mandated shift to electronic medical records (EMRs); consumer interest in web and especially mobile health apps; the boom in analytics in all areas including health; and especially the multi-payer system, one that heavily involves employers. Castlight would not even exist without the employer aspect. Rock Health reported in its excellent midyear funding report published in late June that startups developing payer administration tools took in more VC money (over $200 million in the first half of 2014) than any other subsector within health IT.

A Europe of borders

Meanwhile, as much as Europe has dismantled many of the internal impediments to the single market (local currencies, border crossings), there are many barriers to developing solutions to Europe-wide healthcare challenges. These include:

  • Language barriers. Start a web site for a consumer-facing business and you will see your user base fracture unless you can communicate in at least three (or four!) languages.
  • Scaling challenges. Try to remedy the challenges inherent in the healthcare system and you will soon realize that there has been virtually no harmonization yet. Single payer systems are fine as long as you stay within them. If you try to work cross-border, then look out! As Antoine Papiernik, a managing partner at Sofinnova Partners in Paris put it, “Our European system is also messed up, but in a different way than in the US. It is the fact that [EU healthcare systems] are completely state controlled and operated that makes it difficult for a Health-IT play to get to scale as well as it could in the US.”
  • Missing incentives. When it comes to reducing inefficiencies and shifting responsibility and benefit to the consumer, the US healthcare system is a target rich environment. Similar incentives are hard to find in Europe, especially across borders. Consumers are less incentivized when they get cradle to grave healthcare financed by payments much lower than those in typical US health plans. Therefore, said Anne Portwich, a partner at LSP in the Netherlands, it is hard to imagine a consumer-focused company gaining VC financing in Europe, at least before it has huge traction (some promising examples will come up later). This is because “Something the consumer has to pay for him or herself, even 1 Euro per month, that is a completely different [and more challenging] dynamic and a different business model than what we are familiar with.”
  • Big data not yet “in.” Finally, a less obvious example. The larger business environment in the States has been largely penetrated by the type of thinking that favors “big data” and “analytics” as solutions to real problems. This way of thinking is years away in Europe, said Simon Meier, investment director at Roche Venture in Basel, Switzerland. Meier went part-time for a year in 2013 to work with a startup in big data and advertising so he observed this firsthand. Even sectors ripe for analytics such as retail and advertising have not yet been overhauled in Europe, he says. Therefore, Meier said, “our data scientists are still occupied in resolving issues or setting up infrastructure in areas from which US scientists have already moved on. There are plenty of markets in the European Union that have not even started thinking about data science. Compared to the US, applying data science to healthcare in Europe is going from a simple sailor knot to a Gordian knot.”

For all of these reasons, successful early-stage European health IT companies (see inset below) seem to be primarily single-country focused for now. Sometimes that leads to companies in different countries occupying similar niches, such as helping consumers improve sleep. Consumer-focused sleep-aiders we found include sleepio in the UK and iSommeil in France. Either app could be used in any country. Sleepio, which offers online sleep therapy, even prices its services in US dollars, so perhaps these apps’ reach is very broad. However, iSommeil’s sample language is all in French so I suspect that a majority of their readers are in French-speaking countries. Its app is available in the US iPhone app store but there are no reviews.

The bulk of Euro health IT activity that we turned up is in the UK, where a couple of active VCs (SEP, Albion) and some pioneering companies are mining turf (e.g. practice management software, EMRs) that has either already proven fertile in the States (despite the vastly different healthcare system) or that, though initially local or Europe-focused, may later turn out to be interesting for expansion. Those rounds have been on the small side, in keeping with the early stage of the companies and the low initial capital needs of software businesses. We’ll see if even more international VC funds begin to follow the pioneers in later rounds. Those international VCs, some of whom we reached, are certainly paying keen attention.

Withings' connected (and stylish) blood pressure monitor

Take your BP at home – in style

Breaking the mold

One company that breaks the mold is Withings, an Apple-like consumer products company based in France that started out selling an internet-connected scale added a blood-pressure cuff and is now branching out into a stylish wristwatch that doubles as a self-tracking device. 

MyTomorrows, based in the Netherlands, also offers something novel and very intriguing: an online platform that allows patients who have exhausted standard therapies to be treated with medicines not yet approved by regulatory authorities. Self- and angel-funded with $6 million, MyTomorrows already offers patients with an impressive list of diseases the opportunity to ask biotech companies directly for medications on a compassionate basis. If it gets over what are likely to be some very challenging regulatory hurdles, this one has real promise. 

But there are not many outliers like these and even fewer that have been financed by top VC firms. Furthermore, outside of the UK, VC activity in European health IT in general has been very limited. 

Will Mint be the solution? 

Thus it was with great interest that I noted the recent $6M Series A investment by two top-tier European VC firms, LSP and Seventure, in Mint Solutions, an early-stage company that originated in Iceland and has relocated to the Netherlands. 

As much a device as an IT play, Mint Solutions illustrates what is working about European health IT and at the same time why scaling will be hard. The challenge Mint addresses is errors that hospital personnel sometimes make in administering medication. Mint features a small bedside scanner (PICTURE?) that images the pills and confirms their identity before they are dosed. “The real challenge is the oral meds,” said Portwich, “not infusions. Mint has a scanner, a box with a drawer that comes out. First it does a 3D scan – shape, size, accompanying instructions. An algorithm verifies the identity of each pill. Then it gives a readout in a couple of seconds. It’s connected to the e-prescribing system. And it puts into the chart: ‘Mr. Miller got 2 ibuprofen and Lasix at 10am.’” 

Demand among Dutch hospitals – the company’s test market – is strong, said Portwich, spurring optimism that Mint’s solution, dubbed “MedEye,” can be marketed in other countries as well. A good review of MedEye and Mint Solutions appears here.

MedEye scanner

What’s next, a robot nurse? Don’t answer that…

In the “avoiding medical errors” market, though, the technology that has already taken hold in the United States is barcoding. This does not trouble Portwich. “We know that barcode scanning is widely used [in the States]. There is not yet 100% penetration but big hospitals have implemented it. But when you look at the long-term care facilities, that is a different story. Barcoding is not so well established there. So that could be our entry market.” 

Though LSP was early to discover Mint, to encourage co-founder Gauti Reynisson and his team to set up shop in the Netherlands rather than his native Iceland and to make a commitment to invest, Portwich recalled that, until Seventure came along, the search for a syndication partner was not so simple. “It felt like we are the only one” investing in health IT, she said. We spoke to IT investors and they said, ‘We only do software and this has a hardware component. They also said, ‘Oh, you are selling to hospitals – the sales cycle is too long.’ And our healthcare colleagues said, ‘Wait, but this is IT. We don’t do IT. We prefer medical devices.’” 

It helped that in 2012 LSP had set up a “health economics fund (HEF)” backed by two Dutch insurers, among other investors, in order to invest specifically in private healthcare companies with products close to market. In most cases, Portwich said, the HEF’s investments will go into traditional medical technology. 

Mint Solutions represents a type of company that Meier of Roche Venture says he is seeing increasingly often in the diagnostics space. To capture an opportunity, Meier says, “You have to number-crunch AND design a small device that does its job well. Both for the company and the investor, the small device is more the focus than the big data.” 

“Big time” IT and data plays in the healthcare space such as Foundation Medicine, in which Roche Venture invested, are still rare in Europe. “Look at Flatiron Health,” Meier said, an oncology-focused cloud-based data and analytics platform in which Google invested $100 million: “I have not seen anything similar in Europe.” 

Language barriers, fragmented markets, a pot of gold across the ocean: no wonder many European health IT entrepreneurs I know either have already moved or are thinking of moving to the States

I suppose the best that Europe can hope for besides outliers is that some of its best companies hit it big in the States and then return and offer their services in their home markets. But it will take a while before that starts to happen. 

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This post originally appeared on The Healthcare Blog.

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