Life Science Funding Today: A View from the Trenches
Highlights BioUtah’s Masters Series Funding Panel
By BioUtah Staff
On July 31, about 50 Utah life science leaders gathered at the Alta Club in Salt Lake City to hear and interact with a panel of top life science investment pros from the Beehive State and Silicon Valley.
Anand Mehra, managing director of Sofinnova Ventures, one of the nation’s most successful life science venture firms, provided a brief keynote and was one of seven top investment pros on the BioUtah Masters Series Funding Panel
The panel, moderated by BioUtah CEO Kimball Thomson, included:
· Brad Bertoch
, president & CEO of the Wayne Brown Institute
· Brian Demmert
, managing partner, Armentum Partners
· Peter Fitzgerald
, professor of medicine at Stanford University and co-founder of Laterall Venure Partners
· Andrew Laver
, managing director of APL Capital Advisors and Salt Lake Life Science Angels
· Anand Mehra
, managing director of Sofinnova Ventures in Menlo Park and San Francisco
· Dinesh Patel
, managing director of Signal Peak Ventures and Chair of the Utah Science Technology & Research Initiative (USTAR)
· Matt Peterson
, VP, Utah Fund of Funds
· Kimball Thomson
(moderator), president & CEO of BioUtah
Following are some of the highlights of the panel.
Kimball Thomson, BioUtah:
It isn’t as easy now to raise money in Utah as it is in the Bay Area, San Diego or Massachusetts, is it?
No, it is not.
I agree in general, but I think Utah has some of its own advantages.
How do you see the current environment, and do you see any hidden or overt advantages for Utah entrepreneurs?
In Silicon Valley, where Peter and I live, we have silos that are venture focused that have traditionally been strong but are now eroding. Some of this is because it’s too expensive. A lot of it is also because things are taking a lot longer to get to revenue and profitability, even though we are seeing decreases in the FDA approval process for the first time in many years. We have seen some great returns in biotech and pharma for the better part of the last decade, contrary to popular belief. Because of all the pressures just mentioned, I’m not sure we will be able to use the past decade as a model for the coming one, though.
I think medical technology is a little bit more of an opportunity, especially here in Utah, given the talent base, the price and the fact that there are other mechanisms now to test devices earlier.
Intermountain Healthcare is establishing an intriguing program for getting things from the bench to the bedside, with strong business development and looking at capital to monetize internal and external opportunities. I think a lot of the people here are great. There are world-class engineers. There is a lot to build on here.
I think right now you lack a little bit of the CEO rolodex and middle management depth. I think you can change the management sometimes, but you can’t change the market. I believe mechanisms like Intermountain will be vital to shuttling these technologies to market, especially medical devices in the program’s first years. It may take some time for biotech and specialty pharma to take off here, because of the time and cost horizons involved.
I agree that people don’t want to put in a half million in biotech and pharma. People want to put 5 to 15 million and more and to have a stake. That is not established here yet in a consistent way, investors on that level. That is an issue that I don’t have any answers for, that’s why I’m sticking with my mundane medical devices. And I think by the way a lot of the big players are going to act as banks in the device world—Abbott and Johnson & Johnson in particular. You are going to see that for the next five or six years at least. Abbott is going to buy more things than we have ever seen and so is J&J, because they have the pipeline. R&D stands for regulatory depression today. The big players can afford to push things through to approval. I figure in the next years medical device growth will be exponential, and Utah can be a major beneficiary of that.
: Let’s look at what it means to build critical mass for Utah. How important are programs like the Fund of Funds and USTAR in bringing in talent and increasing access and introductions to capital?
From my standpoint, it’s critical. The money Utah capital funds have raised is significantly down, and that trickles down to the entrepreneurs and companies. The less money that the capital funds raise, the less money there will be available to fund new technologies. The Utah Fund of Funds is working to secure some initiatives that help turn this trend around, by investing in new VC and private equity funds that emphasize life sciences. Peter mentioned Intermountain Healthcare. Their involvement is very promising; we are encouraging them to invest in the landscape here in Utah. We are trying to support the creation of new funds here in the state. Our message to entrepreneurs is we want to be your eyes and ears with the national funds, so when we call them up we will be able to get you a meeting and make credible introductions. Otherwise you’re just reaching out cold.
: What is the role and progress of USTAR in bringing in stars and getting them engaged in commercialization and economic development, for the cloud seeding at the universities that is so crucial?
The issue is not just how many startup companies we can launch, but how do we do in taking those startups to success. I believe it starts with talent. As far as science talent goes, Utah can compete with anyone. This is no problem on the genetics or diagnostics side because of population database and the other things that we do as well or better than anywhere else. But we need to go further, to actually empower people to figure out what to do with the database and the resources we have, how to leverage them. We are fully engaged in that process.
And we do have the diagnostic capability that actually tests the things that can be detected, not only at the cellular level but at the genetic level. Utah can definitely be a major player in the emerging personalized healthcare marketplace.
Patrick Shea (comment from the audience):
Dinesh, I appreciate what you are saying about USTAR, how helpful it is to the University in terms of continuing basic research. But it seems to me that the venture capitalists are focused, as they always are properly, on the marketplace. But the seed crop of basic research is getting decreased more and more. As the National Cancer Institute and the National Institutes of Health are decreasing funding because of sequestration and gridlock, how do you see us supporting basic research? It seems to me that if the seed crop dries up they’ll have five or six years of what’s in the pipeline but then we will be in a real desert, with dire consequences for the future.
To Pat’s insight about the need to replenish basic research dollars, I would add the corollary question of how we improve value creation at our universities and within our growth companies? We have some of the world-class ideas coming out of all three universities in Utah. How do we get them to where they will be interesting to investors outside Utah—and ultimately, to market?
I think that there are really three elements to this. One is the innovation and basic research, and I think we can all agree that federal funding is drying up. I think the second is capital. I think we can all agree we need more Utah-based capital and also much more from outside. The third is people. Are seasoned entrepreneurs going to locate in Utah? Because in the end if one of these wants to start a company, he or she can find great technology at UCSF or MD Anderson, as well as in Utah. The crucial decision is why not Utah? That’s why for me it comes down to the people and human capital. Technologies come from all over the place, not just the universities. The venture capital comes from all over the place and unless somebody lives there and believes they can hire and build an organization and make that company a reality, they will go somewhere else.
This to me is fundamentally the problem that Utah needs to figure out and solve. We need to nurture the basic research and motivate capital to come here. But the most important thing is to attract people. Some of the best ways to get great people are through direct recruitment to attract large divisions of established corporations, and through their acquisition of entrepreneurial companies, such as what happened with Edwards, BD, Cephalon (now Teva), Watson (now Actavis), GE Healthcare and Bard. They buy companies here and keep running them as divisions. There is a lot of opportunity for that now, as the tax structures and other expenses are so high in places like California and Massachusetts, and Utah has great quality of life and people.
Strategic investment has been going strong for the last two to three years, and will pick up even more. They have invested more in the early stage than they have in the last 20 years. The “technical philanthropists” in the Bay Area are actually coming on as a growing source of investment capital.
The one thing venture folk don’t do well is kill things, so too much money gets put into things that don’t work well. There needs to be a mechanism where they can put a small amount of money in and find out if they going to kill it as opposed to dribbling in money. We have an opportunity here without the silos that are there right now in the Bay Area.
Another thing to consider is the nexus of electronics and healthcare. This could be an epicenter for that promising development of getting people out of hospitals and doing preventative care at home. Preventative health at home is going to be a megatrend, and strategics will put a lot into that, including electronics players like Samsung and Sony.
With venture capital coming in later than it has, is angel investment going to play a significantly increasing role?
We’ve seen already a gap in Series A funding, and angel capital has been moving in to fill that gap, especially through syndication. Outside Utah, we have seen some deals of $8-12 million funded almost exclusively through angel funds. Inside the state, we have seen a few angel deals between $2 million and $5 million.
One of the most important functions of angel funding is to get companies further downstream, so they have been de-risked and created enough value that a firm like Sofinnova, for example, would be interested in participating in a $20-30 million round.
Another major trend we’re seeing, back to the strategics, is that they are getting involved much earlier than they used to. This can be a double-edged sword, which makes it essential for companies to structure deals to protect their valuation. But if they do this right, it can be a real win. Having some angel money can extend the runway further to create more value before taking strategic money. Some of the strategics might also do better deals than some of the angel offers, so it pays to compare and be as patient as you can afford to be.
I think from a regional advantage perspective, a lot of Utah companies excel at being disciplined and frugal, making their cash go further than companies in a lot of other places, so they can ride out cash-flow storms exceptionally well.
Brian, can you weigh in on the role of venture lending, and trends you are seeing in the current environment, and what it adds to the life science funding ecosystem?
For companies that are already in revenue stage or have received capital from a highly respected venture capitalist or private equity player, venture debt can be much less expensive capital than most. If a company is promising, even if it isn’t yet in our sweet spot, we are often willing to make introductions to investors to help that company get into the range of revenue performance where we can help them find more plentiful capital.
On a personal note, the quality of life in Utah drew me and my partners here; we could operate from anywhere in the country. Since we got here, though, we have been impressed with the dealflow we are seeing. We were able to do a major deal for BioFire Diagnostics, and are exploring potential opportunities with a number of smaller Utah companies now.
What do we need to do in Utah to bring more indigenous and outside capital to play for our entrepreneurs here—especially given that most of our companies are small companies that need that rare commodity, early stage capital?
How does the state support very early stage funding? I would say that there is hardly any now to speak of. Our entrepreneurs are competing with people from all over the country, and we need to do a better job of getting capital for them. We need to create better opportunities or many will fail or be forced to go other places. Obviously we need to get more local firms engaged, such as the seed stage Andrew Laver is raising. That will help validate other companies. Then we need to sell Utah nationally and globally as a place to invest capital.
Really, though, the bottom line is that we need to create some more successes. Capital and talent are attracted to success.
There is much debate about whether Utah should focus essentially exclusively on medical devices and ignore biotech and pharma.
In terms of biotech and pharma, the bad thing for Utah is that you need a lot of money to build your company. The good thing for Utah is that we have some very promising companies and promising people far beyond devices here.
It is easy to forget that there was a time before the golden era of medical devices in Utah, when we were not even on the radar. Then we had Willem Kolff, Homer Warner, Jim Sorenson and Dale Ballard, followed a generation later by others like Gary Crocker and Fred Lampropoulos.
Then in biotech and pharma we had folks named Dinesh Patel, Pete Meldrum and Hunter Jackson, who built the basis of something special here. I think it would be a really sad waste if we were to cede this field and say we should just focus on medical devices. In biotech and pharma, I think we have some truly promising things here. It is not just Myriad and ARUP now. Hunter Jackson and Brandi Simpson are poised to lead Navigen to good places, David Bearss and Dallin Anderson are on the path to a breakthrough with Tolero, and we have exciting up and comers like MesaGen. Michael Paul is breaking through with Lineagen. We need to support and systematically leverage what these people and companies are doing, as we have done with devices over the years. We need to attract some biotech and pharma anchors here, such as we did in the past with GE Healthcare, Bard and Edwards on the device side. BioUtah is looking forward to working with EDCUtah and GOED in that regard.
We should not forget that singles and doubles in biotech and pharma are often bigger than grand slams in devices. We have much to build on now.
Lee Hood has said to me that we have the seeds of greatness here. I agree with him. I am convinced that we have an extremely promising ecosystem here. We can take advantage of our opportunities to move upstream in medical devices, and to revitalize and build biotech and specialty pharma. That is our story, and we’re sticking with it!