Early Stage Spin Outs and the Road to Success




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Video title: Early Stage Spin Outs and the Road to Success
Released on: October 30, 2008. © PharmaVentures Ltd
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In this panel discussion, Fintan Walton talks with the three panel members about early stage funding and the ability to spin out companies. They discuss the difficulties faced by spin out companies, what approach they should be taking, and the difficulties that they will likely face in the future.

Dr. David Glover, who has had vast experience within the biotech industry and been involved in the creation of previous spin outs, starts the discussion by highlighting problems new spin out companies are facing in the current climate and what they can expect to face in future. He indicates ways in which to move the company forward by seeking alternative funding and ensuring they have a mature business model.

Dr. Tibor Papp, Head of Advisory at PharmaVentures agrees with David and advises start-up companies to keep their options open. He recommends looking into many different types of deals and funding options in order to spread their risk and progress the company despite the decrease in availability of early stage funding.

Dr. Davidson Ateh of Queen Mary’s University of London, a budding entrepreneur, adds to the discussion by outlining the difficulties he is facing in finding funding and his approach to survival within the current market. He talks about the efforts start-ups are required to make in order to secure funding and their need to be flexible in many ways to ensure the longevity of the company, suggesting possible ways in which to sustain revenue and ensure funding continues to come in.
Early stage funding, ability to spin out companies and future of entrepreneurs of startup biotech companies
Fintan Walton:
Hello and welcome to PharmaVenturesBusiness Review here in London. On this face-to-face I have a panel made up of David Glover who is a former Chief Medical Officer of CAT, who is currently an Independent Consultant but also a Director of relatively small biotech company called MedCell Biosciences Ltd, welcome. Tibor Papp who heads up our Advisory and Transactions business at PharmaVentures, welcome Tibor Papp and Davidson Day Ateh who is from Queen Mary University of London, welcome.
Davidson Day Ateh:
Thank you.
Fintan Walton:
Gentlemen we are here to talk about early stage funding and particularly ability these days to spin out companies, David Gloveryou are a person who's had lot of experience with the biotech industry, you seen it from the perspective of CAT but also from your other activities subsequent from CAT and even during CAT you would have seen companies been spun out and created, today in October 2008 things have obviously changed to what they were even 10-years ago. From your perspective is there any future for an entrepreneur trying to set up a start-up biotech company?
David Glover:
Yes I think there is bright future but it's going to be on a completely different basis to have people who've considered funding companies in the past and it's going to be different sources of funding and different ways of moving companies forward.
Fintan Walton:
Right. I mean does that mean in a sense that obviously the sources of capital, so capital like seed capital in some early stage funding has more or less dried up, but what are the alternatives?
David Glover:
Well it's not just this source of the capital though it's also what the end game is, if we go back in my past CAT was basically always going to float, there was no way that we could see the way to raise the sort of funding we required without going public, where as now a day's little companies aren't really looking at flotation they are looking at a trade sale in some description in whole orient part. And so you build the company up in rather different way, so you are not aiming for flotation.
Fintan Walton:
So therefore do we need to or the entrepreneurs need to think about the type of business model they want to adopt?
David Glover:
Yes I think there needs to be rethink about how you put the company together and how you take it forward and how you make it attractive to the buyer if the ultimate end game is trade sale rather than public offering.
Funding opportunities of biotech companies.
Fintan Walton:
Right. Tibor Papp going to looking at the experience that we've had at PharmaVentures looking at these start-up companies and the once that have already existed and tried to set-up are they have they got a future in the current climate?
Tibor Papp:
Well I think good companies do have future there are a lots of early stage companies out there with immature business models and management and they certainly will face great difficulties going forward, we know that we have seen that since 2001 the burst of the bubble and then since 2003 after the mapping of the human genome and then the hire as subsided there has been less and less early stage money available for these companies in fact investors in early stage funds have expressed the similar interest and the other investors they want the an exit in four or five-years time they want high returns, they are simply not willing to wait that long and at this moment it's about seven, eight-years before you can get to an exit the trade sale. So I think companies do have to think differently in fact they do want to go forward for any early stage companies to have multiple options open and to be open to many different kinds of deals, many different kinds of funding opportunities. But in general my opinion is that good companies will receive funding whether it's early stage or late.
Fintan Walton:
But where is the money, is the funding going to come from big pharma companies, is it coming from other biotech companies because if the seed guys, seed capital guys and the VC's aren't putting money, where is the money going to come from funding?
Tibor Papp:
Now certainly there is increase in the loud arguments out there for proposing the biotech company should emerge to increase their proposition to those investors, investors want to see broad and deep pipelines and that these sort of mergers can produce that. From another angle large pharma companies have a lot of cash and they have been waking up to this challenge in the past few years, they have been developing their venture funds, their option funds and they are going earlier and earlier buying of companies with good technologies. So certainly these options deals, these strategic partnerships to finance these early stage companies are certainly possible.
Fintan Walton:
Davidson Day Ateh, you are attempting set up a company you are a budding an entrepreneur and you are attempting to raise some funding right now, how is it going?
Davidson Day Ateh:
Well that's right Fintan Walton it's quite difficult. We are sort of based at Queen Mary University of London within the neuroscience centre and we've come up with a technology which is a therapeutics delivery platform for neurological diseases and we sort of survived over the last couple of years with these proof of concept grants that we getting from funds that of sort of sprouted up from we've got Heptagon fund for example which is an organization consisting of 8 investors in London, we have a The BBSRC Follow on Fund which enables researchers to do a bit of proof of concept from technology that might of derive from piece of normal research grant and that's sort of how we are surviving at the moment, I've also personally received The Royal Society of Edinburgh BBSRC Enterprise fellowships for this next year to concentrate on commercially developing company.
Alternative funding and mature business models.
Fintan Walton:
So coming back to you David Glover I mean clearly remember the heavy days of CAT where you were they were able to raise something like 250 million pounds these days the concept of a biotech company raising that amount of money is very distant, but you also sit on the board of at least one biotech company I think couple of other smaller biotech companies then the past, do you see Davidson Day Ateh's approach the right approach or are there any other alternatives?
David Glover:
Yeah, it sounds like he is doing all the right things and that's the sort of thing that little companies that I've worked were doing, you've got to look at not just the multiple sources of funding but the way to add value or demonstrate the potential of what it is the wanted investment in. And the challenge is not just getting the first seed funding gain, but actually getting the next round of funding if all you succeed in doing just getting the first round and then within a few months management has got to be on the road trying to raise more money, they won't be making progress with demonstrating the value of the technology whatever it is. So one of the consequences of present funding environment and actually it's being on " some time now is you tend to be drip fed rather than raising reasonable slugs of money that give you a runway in which to demonstrate the potential of what you've got. So and that's way it's different from the past because when CAT floated we raised 40 million pounds and that made us financially secure for the next three-years and before that 40 million run out then we've raised another 90 million et cetera. But unfortunately guys can't seem to do that at the moment.
Fintan Walton:
No it's tough. But clearly investors like to see proof of concept they like to see clear pathways to the next event that's what makes it attractive within so for the smaller companies a greater reliance on non-venture capital money means that they have to plan differently, so does that mean that we need not only do biotech companies need to change, entrepreneurs need to change but there is a call now for government to provide greater funding similar to where the type of funding that's available in the US for an example for biotech companies?
David Glover:
Well I think we are going to end up in the situation where companies get a longer time in which to demonstrate the potential of what it is they've been set up for, I said if you are drip fed basically you can't make as much progress if you got a big slug of money and you can get on a demonstrated for a couple of years for example.
Fintan Walton:
Right.
David Glover:
But getting two-years funding forget at the moment you just won't do it, you will get six months, nine months, one-year at most but of course if you only get nine months money within a few months of receiving that money you've got to be out there raising more.
Different types of deals and funding options.
Fintan Walton:
Exactly. Tibor Papp when it comes to the pharmaceutical industry and it's behavior towards an early stage funding obviously our early stage research and early stage companies obviously from their perspective they could just jump in and grab the technology from the universities before it's spun out, but or entrepreneurs in a way making themselves or even the universities just trying to spin these companies out, are they actually making the technology more vulnerable to failure by creating the spin out shouldn't they just leave the technology inside the university and then ask the pharmaceutical companies to come in and take it from them where they can get the best value for money?
Tibor Papp:
Yeah I think it's a very good point especially in this current environment, whether you wanna rush ahead and create the spin out and dispose yourself to all the issues of raising funds or keep yourselves in especially in the larger universities where you have lots of opportunities to get some extra grants and funding and so on. I think it is wise to consider this before you spin out now. I think it is also certain that large pharma companies they go out and they look at university innovation in a lot more sophisticated way then before, but they are certainly they are not rushing to have in licensing those in, they are aware of it or aware of the landscape but they are not licensing, so and my advice to biotech companies or biotech entrepreneurs and academics that they should be very careful now before they expose themselves, if they have options that available to them from large universities and grants exploit that before you going into this environment as a business.
Alternative business models.
Fintan Walton:
Okay. And Davidson Day Ateh going to your situation which is interesting you've talked about the alternative sources of capital or not necessarily capital more of grants which is all non-dilutive which is all good stuff for an earlier entrepreneur to learn
Davidson Day Ateh:
That's right.
Fintan Walton:
Early stage entrepreneur to learn if you can get non-dilutive cash that's good but also you've also mentioned how you've tried to change the model that you originally concieved could you tell us about that.
Davidson Day Ateh:
Yeah. That's right I mean I agree with David Glover for example I mean we had the same problem with grants as well because at the moment a lot of the proof of concept funds are only one year long and before you've had a chance to do what you need to demonstrate and now you are back in the desk writing more grants to try and get the next round of funding in, so there is that pull and push there, when you talk about for somewhat Tibor said try and keep it in the university, I mean I think there is an argument against licensing out because often you don't get as much value as you do if you create a company, create a management team, create a technology that continues to grow, I think you often get better returns that way.
Fintan Walton:
But the question is your business model, clearly you can't adopt same business model if you had say six months so what's the business model that you've got there?
Davidson Day Ateh:
That's right everybody we've talked to no investor is really interested at this stage in investment at something where you might get a product five-years underline and get a return I don't know 10-years and so underline, so they've they put a lot of pressure and new entrepreneurs to think of ways of making money quicker, so what we've looked at is, okay our technology is not in a stage where we can put in a human but we have we think it's works very well in vitro and what we've developed is an assay we can offer to the pharmaceutical industry right now for a return. So we are trying to start small if you like with a sort of self funded model.
Possible ways to sustain revenue and ensure funding
Fintan Walton:
Okay. These days people like to blame somebody for the demise of various things this is sort of a culture that's created in the financial crisis that we are currently experiencing, is there anybody to blame in this David Glover?
David Glover:
I do, we wont point the thing at only one particular group but the sector I work in which is biotech and biological drugs particularly the issue there relates to the time frame that is takes to develop a new product from discovery to getting it on the market it's many, many years " now just a huge amount of money but many, many years and that time frame that time scale is beyond the patience or the interest of many of these early stage funders. So if I was going to try and change one thing this afternoon I would like to try and change the thinking on the regulation of new drugs and see whether we could get to a situation where products could get on to the market quicker.
Fintan Walton:
Right. Does also I suppose for entrepreneurs here we talked about business models we haven't talked very much about medical devices or diagnostics which in theory should be having shorter time lines to get to market, so should entrepreneurs be thinking more on those sort of models?
David Glover:
Well, yes if that's what their technology is produced, their technology is leading to a new medicine of some kind then trying to dress it up as a device or whatever going to actually for the regulator's they do spot the difference.
Fintan Walton:
Yeah, yeah.
David Glover:
But going back to the have people need to think differently, if you when you start of as a company if you have basically only one idea then that sort of company is attractive to those people who basically want to place a buying invest, other companies that have got platform or they got a portfolio projects look more attractive because of risk is spread across programs. And some companies diversify, we've just heard Davidson saying about going into service as a way of bring some revenue in to build the company up, we did that at CAT, we basically did a if you like it contract service contract business to help bringing, betting you before we floated and continued afterwards, but the problem with that is it actually doesn't grow the company and the technology as rapidly as a significant injection of cash. So slow organic growth based on service revenue whatever is not as attractive to the investor.
Fintan Walton:
Right, but it is a way of keeping cash?
David Glover:
Yes.
Fintan Walton:
In the company?
David Glover:
And the other thing that's already come up in this discussion is the concept that some companies are actually too early stage, that's actually a criticism that often gets leveled at you as a company when you go and sit in front of VC's they reel out one of their standard excuses why they're not going to invest. And it could be you are too early stage, could be they don't like hybrid models, they don't like service and et cetera. It you are too early stage where can you go and one of the options that isn't available at the moment is to revert back to universities where you started it's almost as if once you've been set up and so on the umbilical cord is cut and you're out on your own and there is no safe hop you can't get it back under the university umbrella. And I recently had to advice a company that actually their best bet would actually be to stop operating the company but to put the technology back into the university for the time being and try and
Fintan Walton:
Nurture it back.
David Glover:
Bring it out from the rappers a bit further down the road and perhaps little bit more data is being added.
Funding and flexibility in deal models for early stage biotech companies.
Fintan Walton:
Sure, sure. And Tibor Papp you know we are looking at the early stage biotech companies and so forth can we be pessimistic and optimistic for these sort of companies in the future is it is this, this environment such a shift that it will always now be difficult for an entrepreneur to set up a biotech?
Tibor Papp:
Well I think that for the very near future we can be quite pessimistic about the chances of biotech companies needing lot of cash, we have seen some failures, quite a lot of failures in fact you know we now the AtheroGenics is going into administration, Adeona is going into administration so these companies you know will face significant difficulties on the other hand I don't think the question is whether you are early stage or not, the question is how strong robust your offer is, how much risk you face and what is the size of the opportunity that's what matters, so when a VC tells you are too early stage it means that you are not good enough it's that's what matters.I think going forward biotech companies that are in need of significant amount of cash and they have possibly multiple options and technologies, they should consider selling of some of their technologies as IP packages to others, it may sell at a lower price but that certainly brings cash in, they sit on differences of their strategy, they can certainly use their cash to buy some of these as this IPN and they should consider doing innovative deals with particular funds that do these sort of deals, Symphony Capital for example in London or with pharmaceutical companies that would want to look now certain patterns for their the sake of their landscape. So if you are open and flexible in your deal making you can get that cash in and may be not in large amounts, but to survive this current drought.
Fintan Walton:
So you have to be not just an innovator in technology you have to be an innovator in how you get funding?
Tibor Papp:
What I think the CEO's now have to remix one is to develop products, second is to raise funds so they have to be a business developer to be a good CEO.
Fintan Walton:
Yeah. Davidson Day Ateh, as a budding entrepreneur are you put off?
Davidson Day Ateh:
I try not to be. I think the key thing is flexibility. I mean one of the great things with participate in the enterprise fellowship is we sort of having entrepreneurs club so there it's been running in Scotland for the last I think well it's actually stopped after 10-years a year ago and we had a great kind of restarted it now. And there is a whole wealth of people that have been through the middle and it's very interested to go and see them and discover how they have had to may be change what the ir original plans where, they've had to very flexible in order to produce a business at the end, but I must say the success rate is huge and I think over 80% of them have companies that have had still in operation or being sold off for profit. It is quite impressive, I think the key think is to maintain flexibility may be if you've got very early technology see if there is another company around that might benefit from collaboration with you go down the joint venture route et cetera.
Fintan Walton:
Okay. so adapt and be flexible?
Davidson Day Ateh:
I think that's the key, yes. And keep up the spirit.
Fintan Walton:
Okay. Well thank you very much indeed all of you for coming on to the show. Thank you very much indeed. Thank you.
Tibor Papp
Head of Advisory
Davidson Day Ateh has an interdisciplinary scientific background in both the physical and life sciences. He received a BEng (Hons) in Biomedical Materials Science and Engineering form Queen Mary University of London. He then developed polypyrrole-based conducting polymers and studied their interactions with biological cells for a PhD in Bioengineering. Dr Davidson Day Ateh now works at the Neuroscience Centre of the Institute of Cell and Molecular Science in Barts and The London's School of Medicine and Dentistry where he has held research positions and currently leads the scientific and commercial development of a therapeutic delivery platform for neurological diseases based on drug-loaded biodegradable particles. David Gloverworks as an independent consultant in pharmaceuticals and biotechnology and is currently a director of MedCell Biosciences Ltd, a stem cell company focusing on orthopedic and sports injuries. Tibor Papp is a senior strategy advisor to leading companies, he has 16 years of experience in the healthcare/life sciences industry in corporate strategy, investment appraisal, portfolio development, business transformation, licensing/M&A deal making, marketing strategy, and risk management. He has advised health care and private equity companies about acquisition and transaction strategies in pharmaceuticals, biotechnology, medical devices, drug delivery systems and medical supplies globally. Currently, he is Head of Consultancy at PharmaVentures and focuses on commercialization strategies, product/technology licensing, mergers & acquisition, divestments and alliances. Dr Tibor Papp is also an experienced surgeon and has a PhD from the University of Aberdeen and an MBA from the University of Oxford.
Queen Mary University of London
Queen Mary University of Londonis one of London and the UK's leading research-focused higher education institutions. Amongst the largest of the colleges of the University of London, Queen Mary University of London 3,000 staff deliver world class degree programmes and research across a wide range of subjects in Humanities, Social Sciences and Laws, in Medicine and Dentistry and in Science and Engineering. Queen Mary University of London was ranked 13th in the UK in the 2008 Research Assessment Exercise (RAE) according to the Times Higher Education. MedCell Bioscience LtdMedCell Biosciences Ltd is a UK based biotech company focused on harnessing the power of stem cells to provide musculoskeletal regenerativetherapeutics. MedCell Biosciences Ltd's novel lead technologies cover cell therapy, cell expansion, and tissue scaffolds. These are three of the cornerstones of regenerative medicine address unmet needs and provide significant advantages over current practice:MS-ten - Stem cell treatments for tendon & ligament injuries . PharmaVentures Today's health care industry is being transformed by deal transactions. We are PharmaVentures a specialist advisory firm, a world leader in deals and alliances, one of the few with the depth of expertise to actively shape this crucial transformation. We offer a comprehensive range of health care deal advisory services. Our unrivalled bank of specialist knowledge, experience and network of contacts within this industry makes us uniquely placed to support your business in all aspects of transactions.