Editor’s Note: Garheng Kong is a member of the Intersouth Partners investment team. Kong will also serve as a panelist on “Cracking the Code: Understanding the New Landscape of Biotech Venture Capital Investing” at CED’s Biotech 2006 conference on May 22-23 in Winston-Salem (www.cednc.org/biotech ). This Entrepreneurial Spirit column is the latest in a series done in partnership between the CED and WRAL Local Tech Wire.
RESEARCH TRIANGLE PARK, N.C. – No one knows better how biotech venture capital investing has evolved than a biotech venture capitalist. And since joining Intersouth Partners in 2000, Garheng Kong has focused primarily on Intersouth’s life science portfolio. His role at Intersouth involves all aspects of venture investing.
Kong has full-cycle investing experience, successfully sourcing, syndicating, managing and exiting investments. CED recently sat down with Kong to help entrepreneurs gain an inside look in to the ever changing field of biotech venture capital investing.
As a specialist in life sciences investing, what criteria do you look for in the companies that you choose to invest in?
While there are specific aspects of life science investing that are critical to success, the general investment themes of strong management, capital efficiency and large markets remain the most important. Within life sciences, there are several factors that are particularly important. These include intellectual property, scientific insight, an efficient development plan and clear milestones.
Intellectual property is the lifeblood of almost all life science companies. In many cases, it is the only true value a young company owns and the only thing that can protect against larger competitors. Understanding the breadth and strength of the patent estate is an important criterion for investment. Since there are so many people and companies pursuing the major therapeutic areas (oncology, cardiovascular, infectious diseases, etc.), a company must demonstrate deep scientific insight such as understanding a new mechanism or pathway that gives them an advantage in developing a new product in addition to having patents.
Due to that fact that timelines associated with product development in the life sciences is unusually long (up to 10 years), it is important to have a well-formed development plan that takes advantages of unique indications that are easier for approval or surrogate markers that can shorten the time to reach the required endpoints. Lastly, most product-focused life science companies don’t generate revenue for quite some time and are even more beholden to the financial markets than companies that can decide when to raise capital for growth opportunities because they have a revenue base. Given this circumstance, it is very important for life science companies to have very clearly defined milestones that are well recognized as valuable. This is the only way to continue to raise the required follow-on capital and a requirement for the initial investment.
As the biotech capital markets continue their recovery, how do you feel the structure and dynamics of venture capital investing have evolved?
While the public markets for biotechnology companies have historically been an opportunity for very significant returns, the recent past markets have not been as attractive. With significant downward pressure on public valuations for many biotechnology companies, venture capital investors have had to evolve some of their thinking. Some of these areas have occurred in the areas of total capital requirement, syndication and exit strategies.
With the markets valuing many new public companies in the range around $150 million (as opposed to $300 million), investors can no longer invest in companies that require $80-100 million to mature to the point where they can go public. This has forced companies and investors to be much more capital efficient and to pursue creative paths to product development and ultimately commercialization. This might manifest in the pursuit of more developed assets or the adoption of clinical development plans that can be abbreviated.
Despite the pressure towards smaller capital requirements, the fact that investors can be at the mercy of the financial markets downstream have led to broader and deeper investor syndicates being formed. This allows companies and investors more flexibility in respect to when they need to pursue new investors in the private or public market as well as allowing for the ability to overcome the standard delays with more ease.
In the current environment, the acquisition by a large biopharmaceutical company is often much more attractive then going public. This has caused companies to rethink their strategy when it comes to corporate partnering and has also led investors to occasionally pursue companies that are designed for sale from the very beginning.
How can early-stage companies strategically position themselves to attract potential investors?
Early-stage companies are often in a difficult situation of trying to make progress with limited resources. While there is no magic answer to this dilemma, a few things are reasonable to consider: surrounding the company with advisors, non-dilutive capital and technical validation. One of the hurdles that a young company may face is attracting experienced management without funding. To that end, many early-stage companies have benefited from reaching out to very experienced (perhaps recently retired) executives who have an interest in the company’s activities and can give strong advice for modest equity. Additionally, the presence of these established individuals lends increased credibility to young companies in the eyes of investors.
In most cases, biopharmaceutical companies are developing products to treat significant unmet clinical needs. Similarly, most of these diseases have major foundations or agencies that are interested in funding efforts to further medical treatments in the area. Obtaining grants or other methods of non-dilutive funding is an effective way to advance programs and further validate the science. Another way to strategically position a company is to do some deals (even small ones) with third party groups that would validate the underlying science…these parties are typically large biotech or pharmaceutical companies.
How does the investment process differ for late-stage companies?
The overarching principles should be similar to early stage investing, but the emphasis may be weighted slightly differently in specific areas. Later stage companies tend to have much more infrastructure and specific data to consider. These companies often have full management teams that investors can reference (as opposed to only one or two executives or perhaps none at all). The ability of the assembled team, instead of the level of difficulty to recruit a team, is evaluated in later stage companies. Since they are more mature, there is usually human clinical data to consider. This type of information is much more complex than the preclinical animal data that most early stage companies generate. Given this fact, much of the investor due diligence is focused around the clinical data looking for efficacy and toxicity signals. Another important factor to consider in this context is the clinical trials design regarding endpoints, inclusion/exclusion criteria and strategies for enrolling patients.
Since drug development occurs over such a long time frame, diligence at the early stage may not have as much visibility on the marketplace when these investments are made. Almost by definition, late-stage companies are nearer to market. This allows investors to better evaluate the other competitors on the market or in late-stage development. There is also a focus around pricing, reimbursement and strategies to reach the patients. Lastly, later stage companies tend to raise larger rounds of capital. This frequently involves a larger number of investors and perhaps investment bankers.
What do you see as the “hot sectors” for investment today?
The number of scientific breakthroughs continues to occur at an amazing pace. In many areas, there are meaningful technologies that are being developed where successful investments can be made. That said, a few sectors seem to be attracting an increasing number of investors compared to their historical levels. These include personalized medicine, vaccines and regenerative medicine.
Personalized medicine is a broad area where the individual patient’s characteristics are taken into account when making the diagnosis or determining therapy. This trend moves away from the “one pill fits all” or blockbuster drug approach. Vaccines have gained recent popularity primarily due to bioterrorism and the potential of pandemic diseases. Lastly, the field of accelerating or inducing your body to heal itself, “regenerative medicine”, has been fairly hot with the advances in stem cell therapy and the understanding of the aging process.