(SOURCE: Ginger Fox Photography)
The State of Life Science Investing – Insights from the City of Brotherly Love
By Bryan Spiegelberg, PhD
June 12, 2023
You know it. We know it – life science investments have lulled over the past year, with much of that lull due to the state of the economy at large.
All job sectors are feeling the hurt, and the life sciences are no exception. While there’s always going to be a need for new medicines and medical devices, investors have become choosier in how they spend their money.
Two luminary figures in the life sciences industry, Joan Lau, PhD, MBA, and Marian Nakada, PhD, also provided insights on the current economic situation and words of wisdom on how to persevere.
Lau has more than 20 years of high-powered experience in the life sciences arena. She holds a PhD in Neuroscience, and she earned her MBA from the Wharton School of Business at UPenn. Her scientific and business expertise has translated into a wealth of successes in building and investing in life sciences companies. She is presently the CEO of gene therapy company Spirovant and Founding Partner of Militia Hill Ventures.
Nakada is presently headquartered near Boston as Vice President of Venture Investments for Johnson & Johnson Innovation – JJDC. She has Philly roots, however, as she earned a PhD in Pharmacology from Penn. She similarly has a long track record of success in building life sciences companies and many investment successes at JJDC and elsewhere.
The big question on everyone’s mind – how do we successfully swoon investors and raise capital, and how long will this funding desert last?
Both Lau and Nakada, of course, acknowledged that funding is slow. Public financing is challenging, and there are fewer active investors and thus fewer investment leads. From the perspective of venture capital, then, it’s a buyer’s market, and investors are pickier when it comes to entrepreneurs’ potential.
The overall message was certainly not one of despair, however. While investors are less active at this point in the economic cycle, opportunities still exist. VC firms are willing to invest in exciting projects – according to Nakada, “The science drives all of this. When you see exciting science and efficacy, investors and consumers realize that it’s worth investing in those innovations… If it works, we will find a way. That’s the exciting part of investing in science, because those kinds of catalysts help to drive people to want to invest in those game-breaking innovations.”
While Lau and Nakada were optimistic that better times were on the horizon, they also cautioned that economic improvements would be slow, or at least would seem slow in comparison to the rapid changes that have been occurring during recent economic cycles.
Recovery will likely involve some potentially painful corrections. In the past, company valuations have not necessarily been in step with reality, and the deployment of capital has not always been strategic enough. According to Nakada, “For certain companies out there, valuations have been completely artificial. At some point, it was going to come home to roost. As the correction happens and these companies can’t fundraise because of ridiculous valuations, they’ll go through a variety of processes, including mergers and wind-downs.”
The good news is that, according to Nakada, “The companies being formed now are doing so in a way that is much more strategic and orchestrated with respect to valuation. They start with modest pre-money valuations, and therefore the capital going in is creating true value. People are much more focused on the data that leads to the valuation. When we come out of this [downturn], the companies that are funded now are going to be in a much better place.”
Unsurprisingly, the effects of the recent banking crisis on VC were also a part of the conversation. While the panelists recognized that a disaster was averted, they also acknowledged the negative effects of the financial environment on entrepreneurs. Nakada noted that challenges to borrowing, combined with increasing interest rates, have made capital more difficult to procure and have added additional challenges to the process. Pharma and biotech companies are becoming more strategic with the deals that they seek out, and increased scrutiny accompanies lending relationships.
She also strongly encouraged pursuing non-dilutive grants as sources of support; “However you can get the money, get the money. But there are fewer and fewer avenues and the hurdles are higher to get that financing today.”
Hot areas of interest
Since investors have become pickier, what kinds of science and technology are they more likely to invest in nowadays?
It was no surprise that the first avenue mentioned was nucleic acid modification and editing, a field of particular interest in Cellicon Valley. Referring to the broad field of nucleic acid-targeted therapeutics, Lau said “I see a lot of stuff on RNA, maybe because it worked over the last few years.”
Another hot area of development is obesity. Nakada stated that “We were in obesity decades ago at J&J. The previous concern was that safety had to be pristine, and the trials had to be phenomenally huge and expensive. There had to be a sustained effect in order to get reimbursement, and therefore trials had to be really long.
“But now obesity is back. Once a couple of pharmaceutical companies have success, it creates that roadmap for those blockbusters.”
And what about oncology, which has seen a tremendous boost in recent years with the growth of immunotherapies, cell therapies, and vaccines but has, in turn, become an increasingly crowded space? Lau noted that “Oncology was really hot, but now it’s a little slower. Everything is cyclical; you just have to catch the wave at the right time.”
The state of the life sciences in Philly
While current economic issues have made people cautious, both Lau and Nakada were upbeat about the relative strength of the Philadelphia life sciences ecosystem.
Lau in particular is “incredibly bullish on Philadelphia… What I’ve seen historically is tremendous development and commercialization experience and skills here. What we’ve had perhaps a little less of is the founder component, but that has really begun to change — this room is an extraordinary example of early-stage biotech and life sciences companies.”
She praised the efforts of the Philadelphia city government, especially the Department of Commerce, and other entities for creating a collaborative ecosystem. Lau acknowledged that “we’ve historically had to live with less funding here. But that’s enabled a lot of people to build relationships and to help each other. It has allowed people to build relationships. The culture is one of ‘co-ompetition’… a lot of collaboration and shared learning… that’s quite unique here in Philadelphia.”
Lau also stated that “there’s a lot of effort now with the new Governor [PA Governor Josh Shapiro] to progress risky investment across the state.” Some of the resulting activity has supported start-ups in Pittsburgh and other parts of the state, but it has already begun to have tangible benefits for Philly.
Because of her ties to both Philly and Boston, Nakada was asked to compare the two areas. One difference she described was the geographic distribution of VC firms. In Boston, much of this money is highly concentrated, which means that investors can more easily socialize with investors. Philly entrepreneurs, on the other hand, need to put in more leg work – especially as a higher proportion of potential investors are outside of the area.
In addition, while Nakada noted that “the community – the medical schools, the innovation – is similar,” she cautioned that “at least some of the Boston/Cambridge-based tech transfer offices are a little bit more start-up-friendly than the ones in the Philly area.”
Other areas that need to be addressed include increasing the number of local investors and helping those investors become more comfortable with taking risk.
Nakada also pointed out growth opportunities in workforce development and for “getting young folks interested in the biotech industry.” And already we’ve seen momentum in this area, such as the West Philadelphia Skills Initiative’s customized talent solutions.
Words of wisdom for entrepreneurs
First and foremost – entrepreneurs need to socialize to develop productive relationships with VCs.
Lau noted that relationship building leads to an “ability to ask for advice. Learning and understanding what’s important to both you and the investor. That’s the most important thing – you can ask me for advice, not just right before a pitch, but so I can understand what I’m investing in and what makes it different, and you can see how I’m thinking about things.”
Nakada agreed, noting that strong relationships and continuous dialog with investors enables entrepreneurs to hear important critiques, which leads to “pivoting, iterating, and responding to feedback. By responding, they might end up evolving into what is our sweet spot.”
Next is persistence. In an era of belt-tightening, it may take an uncomfortable amount of time to find and procure funding.
Nakada reminded entrepreneurs that “Finding the lead is the hard part. Diligence is critical. On average from when you go out with your first non-contact to money in the bank: nine months. A lot of that has to do with finding that lead. There are fewer and fewer people willing to invest, and they expect perfection.”
Lau cited her own start-up, Spirovant, as an example of the need for strategic timing. “Because of the timeline of investment, we need to start early. Are we thinking about an inflection point in three years? We need to start now – especially socializing, as we are doing here [at Investor Day]”.
Finally – lay everything on the table. When pitching, you need to provide investors with everything they’re looking for, including:
- The specific ways your company is differentiated from your competitors
- Realistic timelines and the money needed at important steps
- Evidence in the form of scientific data to support your claims.
Even amid the backdrop of economic uncertainty, there’s still an air of optimism. Lau said it best, “If we meet again in 10 years, this room will not be able to hold all of us, because I think there’s going to be so much more activity.”