Overcoming Myths that Slow Investment in Biotech and Pandemic Companies

Pitching to potential investors is an art, particularly when they don’t fully understand the life sciences industry or have misconceptions about pandemic-focused companies. Peter Adams, executive director, and Dave Harris, director of operations at Rockies Venture Club (the oldest angel investment group in the U.S.) explored those myths and offered strategies to counter them during a recent webinar hosted by Johnson & Johnson Innovation and the Biomedical Advanced Research and Development Authority (BARDA).

Potential investors have five major myths about life sciences companies, Adams said. “Investors think:

• It takes 10 to 20 years to exit.
• Life science companies need $1 billion.
• Early-state investors get ‘crammed down.’
• Regulatory risk is too great.
• Life science companies don’t have revenue and are never profitable.”

Long times to exit and the need for substantial capital “are true in some cases, but most of the time, the exit occurs after filing an Investigational New Drug (IND) application with the FDA, or after Phase I or Phase II trials. In medical devices, there are shorter timelines, and the need for capital is less,” Adams said. The risk of early-stage investors being crammed down – forced to accept undesirable terms – also is valid, but not inevitable.

To counter these concerns, it is very important for biotech executives to think about their capital requirements and timelines in great detail. At Rockies Venture Club, “we look through a ‘venturenomics’ lens,” Adams said. “We focus on how companies can generate a return through a great exit.”

Companies developing vaccines, therapies or diagnostics for the COVID-19 pandemic have an additional set of myths to counter, he said. Potential investors believe: The

• The pandemic will end before the product gets to market.
• There may never be another pandemic – at least not for a long time – so investment is too risky.
• Government – not venture capital – should be investing in pandemic detection, mitigation and response.
• We have enough problems now and shouldn’t spend time and money focusing on something that may never happen.

The reality is that the time between pandemics is becoming shorter. The 20^th century faced the Spanish flu from 1918 to 1920, with no subsequent pandemic until the 1957-1958 flu pandemic that originated in East Asia. Since then, the world has endured the 1968 flu pandemic that originated in Hong Kong, Human Immuno-Deficiency Syndrome (HIV) beginning in 1981, Severe Acute Respiratory Syndrome (SARS-CoV) in 2002 and 2003, Swine Flu (H1N1) in 2009, Middle East Respiratory Syndrome (MERS) in 2012, Ebola Virus Disease in 2014 and now COVID-19, which is ongoing.

The United Nations suggested last year that there are 1.7 undiscovered viruses in mammals and birds, and that about half of them have the potential to infect humans. With human mobility increasing globally, the potential for any infection to quickly spread around the world is exacerbated.

Many of the technologies developed to detect and combat the SARS-CoV-2 virus are applicable to other ills, however. And, as Adams said, “frankly, pandemic deals are profitable enough even without government support. We are bullish on pandemic deals.” Here’s why:

• Most have a clear path to exit.
• Exits tend to be attractive.
• They have a social benefit.
• The deal flow is strong (because many seed funds and angels avoid the life sciences).
• There is a high level of innovation.
• Life science corporate venture capital funds are active, but often don’t lead the deals.
• There is greater opportunity for non-dilutive grants.

In pitching investors, “people assume there is a low-return environment, so place the financial impact first,” Adams advised. Then show how your COVID-19 product applies to future pandemics and – importantly – to non-pandemic situations. “Also, research competitors meticulously. “Many companies focus on the big players, but a lot of early-stage companies are researching similar solutions.”

The pitch to investors should include exit opportunities and possible partnerships, as well as patents and intellectual property that are granted as well as those in the pipeline. “There are many possible off-ramps to provide liquidity for investors,” Harris said, including seed funding, Series A-D venture funding, expansion or mezzanine funding, mergers and acquisitions and initial public offerings. “Investors need to know what these (possible exit points) are to frame their investments.”

The regulatory strategy and environment also are important. Discuss both the costs and the timeline, and “detail the regulatory steps,” Harris emphasized.

Non-dilutive funding is an important way to de-risk projects. During their pitches, company executives should detail opportunities for grants as well as past and current grants. Small Business Innovation Research (SBIR) grants and those from other agencies not only provide funding but also provide some degree of concept validation that helps assure potential investors.

BARDA Ventures, which the U.S. Department of Health and Human Services (HHS) announced last summer, is another funding opportunity for projects that may not otherwise receive BARDA interest. It is designed as a self-sustaining investment fund that uses both venture capital and equity financing to accelerate healthcare technology developed specifically for health emergencies and threats.

In any pitch to investors, once all the elements have been addressed, bring those fundamentals together in an analysis of technical, regulatory, financial, market and competitive risks, Harris advised. This will help potential investors understand where your company and technology fit in the overall ecosystem. Consequently, they can better assess its potential.

That said, “the pitch is only the first step,” Harris pointed out. As an angel investor, his goal is to find a lead investor quickly to avoid pitching over and over. “That’s taxing on time and business, so seek an effective lead investor to act as an advocate and to share their due diligence,” with other potential investors and thus speed the investment process.

Ultimately, “Investors don’t invest in pandemic science or technology. They invest in companies,” Harris said. “Therefore, the science should typically be less than 25% of your pitch. Keep that in mind.”