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WHAT CAN MASS DO?

Posted by Richard Gabriel on Thursday, July 29, 2010 @ 12:00PM 

By Richard Gabriel

I live in Massachusetts and let’s face it; we live in what is perceived to be a high tax state. Whether this belief is true or not we share that belief of high taxes with California, New York, New Jersey and Michigan. On the other hand Florida, Texas and North Carolina, among others share a different belief and it is reflected in each states approach to funding of Life Science companies. And each of those states would kill for the concentration of Life Science, technology and educational institution that we enjoy with California and the other so called high tax states.

Sure, taxes in Massachusetts and the overall business environment for start up companies are less than ideal. There is frankly, no comparison between the incentives being offered in Florida and Texas for start up companies to move to those states and start their businesses. Some entrepreneurs have moved to these states and have taken advantage of the help, financing and favorable state environments. Each time a technology leaves Massachusetts heading for more fertile pastures, we lose jobs, tax revenues and population, which in turn decreases our real estate values, creates more stress on our commonwealth to raise taxes even more, it’s a vicious cycle and yet we sit on one of the greatest natural intellectual resources in the world and have yet to figure out how to fully mine its fountain of bubbling opportunities.

However, in my last blog, we talked about a new funding model for biotech and the life sciences industry and we received hefty responses from VC’s that were interested in exploring a new way of funding. Some ideas that we kicked around included a new ‘fund’ that would have a longer time horizon, attract a more patient and less capricious group of investment partners that weren’t demanding a 5 year exit with double digit returns per annum, but rather a combination of long term debt, mixed with long term equity investment.

How would such a fund work? Well a possible appropriate debt to equity ratio should be 1 to 4. Every dollar in long term debt at a reasonable interest rate is backed by 4 dollars in equity. This ratio, provides the limited debt partner with the interest only coverage for the life of the debt, which in Life Sciences, should be no less than 10 years. Additionally, expecting a short term double digit return on a Life Science equity investment is, frankly, ridiculous. Not only does it place an unfair burden on the entity that is being formed and its management, it is an unfair hurdle and it’s artificial to the practical operations of starting and running this type of business.

Well then, what about the risk? How is a venture fund ever to make any money? All these choices have their pluses and minuses and are self evident. For the entrepreneur, think, Steven Jobs, Michael Dell, Bill Gates and not a veteran of multiple start up companies, all of whom have, by now, failed, been swallowed or otherwise disappeared and, if alive, are headquartered in another part of the country. Perhaps the alternative though of invest big, hold, pay dividends and interest or buy back the shares at an appreciated rate that reflects the true value of the business that was built has some merit today? Take a look at the valuation gaps between a pre-clinical candidate and the sums of money paid by Pharma for Phase 2 & 3 compounds, the gap is astronomical and it is that gap that tells us or should tell us that the current model is wrong

We should be looking more carefully at the broken institution of funding our start ups in our state and instead of letting Texas, Florida, North Carolina and California pirate our technologies and people away, find a way to fund them and keep them here. Build businesses and jobs and people will start coming back to Massachusetts or perhaps they won’t even leave after they graduate! Got any ideas? Write us. We’d love to hear from you.

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Richard Gabriel is head of the Life Science practice at Sema4 Inc., dba Semaphore (www.sema4usa.com), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore’s corporate offices are in Boston with principal offices in New York and London.

Topics: Venture Capital, Semaphore, technology, Life Sciences, entrepreneurs, Biotech, equity, investment, venture funds

A New Biotech Funding Model is Critical to Survival of the Industry?

Posted by Richard Gabriel on Thursday, March 25, 2010 @ 2:00PM

By Richard Gabriel

So what's wrong with Biotech financing today? What will it take to bring the Biotech market out of the doldrums and back into action? If you are having trouble finding financing for your next greatest idea then the only comforting news is that you are not alone.

Venture capital technology assessments, which are advisory diagnostics we perform frequently, have revealed some interesting information. Unfortunately, when the biotech bubble first burst, right around the 9-11 time period, there were already a bunch of troubled venture capital funds. Most of these funds became challenged because the time horizon for their investment to mature is too short for the drug development cycle. Too many of these firms believed that the capital market was an exit strategy.  True, for some it was the best thing to do, and to a point it made sense for both company and investor - but not today. Following the market collapse and then the near fatal blow that the biotech market received along with the rest of the market, venture capital in the bio tech sector was and continues to be in a state of disarray. There are, however, a few funds that actually know how to make money in the biotech world.  The problem is they too are having trouble raising capital for their next funds. Overall the VC market is a nightmare for biotech with lots of rationalization expressed - too early, too late, not enough differentiation, to expensive, too long to market.  When all boiled down it shapes up as too many people that don't know how to develop a drug controlling the capital to one of America's brightest economic and social stars - medicine.

The trend for finding later stage products is so rapacious right now that VC funds are having deal flow problems. Everyone wants to jump on the band wagon, leaving the start up holding the ‘your too early for us' bag of hot air. Ask Pfizer what they think of late stage drug investment? They just dropped $215MM on a drug from Russia that showed great clinical efficacy in Alzheimer's patients in Russia and the surrounding areas and has been in use for over 10 years, and guess what? Bring it to the U.S. for clinical trials and it shows absolutely NO clinical efficacy against the placebo! Who said late stage drug development was lower risk? Somebody tell the Pfizer board.

For $215MM and some savvy investment types, Pfizer management could have invested in 10 start-up's at $5.0MM a pop and reserved $15MM each as the investments hit their milestones. Now granted the chances of a drug start up reaching the market is pretty low, but come on folks, $215MM will buy you a lot of entrepreneurial grease, commitment and energy as well as some damn good technology. In my book, I like the odds of the new technology over slumping something just because it is in Phase 2 clinical trials or worse as Pfizer found out. So much for due diligence. But why take the chance and invest in the ‘too early' crowd of drugs and technologies?

The new drugs being developed today are smarter because they will be tied to diagnostics to help physicians decide who should get the drug and who shouldn't. This new combination technology approach to drug approval could be a decidedly better approach to drug development then what most investors are doing today with their ‘closer to market' picks. Why is that the case? The FDA likes this approach, tie a diagnostic to a drug, prove the efficacy, and your going to get approved!

The long and the short of it is that in the biotech world the ‘valley of death' extends from Boston to San Diego and swings up to San Francisco and bounces its way across the globe to the Far East, Europe and the UK. The only people who seem to be getting all the money are the people in India, China and other places that are trying to eat the pharmaceutical and biotech industries' lunch in Europe and the U.S. with generics, biogenerics and more cut rate manufacturing suites than you can shake a stick at. Nothing wrong with that but hardly any one is paying attention to new technology.

Isn't it time we looked for a better financing model for Biotech products? We think so. Got any ideas? Let us know what you think might be a better way to fund Biotech!

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Richard Gabriel is head of the Life Science practice at Sema4 Inc., dba Semaphore (http://www.sema4usa.com/), a leading global professional services provider of Private Equity funds-under-management and technology diligence services. Semaphore currently holds fiduciary obligations as General Partner for six Private Equity and Venture Capital funds and advises General and Limited Partners as well as Corporations around the world. Semaphore's corporate offices are in Boston with principal offices in New York and London.

Topics: Biotech, Venture Capital, Technology Assessment, due diligence, valley of death

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