Despite trade wars and economic shifts in China and the European Union, early-stage investing in life sciences, particularly in the biotechnology and medical device sectors, remains strong and presents myriad opportunities for the prepared.

Significant funding continues to roll into the life sciences sector, driven by legacy venture capital (VC) funds bringing in new money, new players that are outraising their fund targets, and active corporate venture capital players.

The confluence of funding and an innovation-friendly regulatory environment provide early-stage life sciences companies with ample opportunity to bring their solutions to market. There are a number of factors driving opportunity in this space, and genuine opportunities for companies to position themselves as attractive partners.

GETTING INNOVATION TO MARKET AND SUBSECTORS TO WATCH

Recent actions by the US Congress and the Food and Drug Administration (FDA) have demonstrated regulatory support for innovative life sciences solutions. Numerous programmes, including the FDA’s Breakthrough Designation Program for medical devices, and the Digital Health Precertification Program, have allowed companies to communicate with regulators early in the approval process and bring products to market more rapidly, while maintaining patient safety.

These programmes, which require fewer data submissions at the outset in exchange for increased post-market study and surveillance obligations, can allow companies with smaller budgets to get to market earlier.

Coinciding with the shift in focus from treatment to cure, and from status quo to innovation, the first generation of gene cell therapies has arrived, along with a new wave of digital health applications using artificial intelligence (AI) and machine learning (ML).

New tools, diagnostics, and devices are reshaping the way patients receive treatment across the spectrum of care. These breakthroughs are accelerating discovery and creating a better understanding of the mechanism of action which, in turn gives better insight into clinical outcomes and investors a more predictable return. 

Particularly ripe subsectors for investment as indicated by performance and regulatory attention include AI, ML, and medical devices.

From diagnosing tumours to matching patients to clinical trials, the staggering amount of data collected in the life sciences space presents numerous use cases for AI and ML. While implementation challenges remain, a recent FDA white paper to develop a framework for regulating AI products, along with two AI-based devices approved by the FDA in 2018, are promising for investors and developers alike. Investors and analysts have taken note, with AI in the space valued at US$902.1 million for the period 2019 to 2024.

Funding for medical devices continues to increase. The FDA’s Breakthrough Device Program is one example of the supportive regulatory environment and a contributing factor to the funding increases seen in this subsector.

TRANSFORMATION-DRIVEN PARTNERSHIPS: EVALUATING AND ATTRACTING TARGETS

Within this dynamic landscape, early-stage life sciences companies and investors are forming mutually profitable and often novel partnerships to bring transformative products to market faster and more efficiently. When evaluating targets, investors often look for the following elements:

• Innovation and unmet need. Novel products, therapies, or approaches addressing an unmet need in the market are prime candidates for investment.

• The right team. It is often easier to find good technology than good managers, say some investors. A life sciences company with a well-run team and strong leadership in place makes for a more attractive investment partner. Effective leaders who can clearly articulate the path to commercialisation and the cost of doing so will attract investment.

• Cross-border application. More than ever, US investors are looking for products that can enter multiple markets, including Europe and Asia, because an expanded geographic approach can increase returns. Devices and other products that have application in China’s burgeoning market are a particularly hot focus for investors.

• Value-added opportunities. Investors seek targets that present compelling and quantifiable propositions to drive significant costs out of the healthcare system while improving health outcomes. Investors are not seeking opportunities for marginal savings, but rather transformative, “move the needle”, innovation.

US investors are looking for products that can enter multiple markets.

To set the stage for an effective investment partnership, life sciences companies should reach out early and often to potential investors. Attending industry and well-orchestrated partnering events like Life Science Nation’s Redefining Early Stage Investments series are great opportunities to connect and develop relationships with a host of potential investors. Investors don’t just invest in a product, they invest in a team, so face-to-face interaction can lay valuable groundwork for a potential partnership. Curating those contacts through lawyers, accountants, and bankers can reap dividends over time.

In addition to evaluating whether or not a partnership is a good fit from a leadership and culture perspective, investors will often consider the following questions when evaluating a potential target. Being prepared to respond to these points and to set out the commercial goals for the partnership sets the stage for a much more fruitful conversation with a potential investor.

What is the regulatory risk?

Investors are increasingly conditioning funding on regulatory milestones. What will it take to get the company through the next regulatory milestones in all relevant jurisdictions? Will the device or product to be approved globally at the same time, or will there be regulatory lag? What level of investment will it take to get the product into a clinic and generate the necessary clinical data?

Life sciences companies should reach out early and often to potential investors. 

What is the reimbursement pathway?

With approvals completed, revenue can only be achieved by executing a reimbursement strategy that addresses coverage, coding, and payment. After satisfying investors on the ability to secure coverage determination and coding, investors will focus on the pricing of a product to assess the sales potential.

Does the company have a clear point it is trying to reach?

If the company can’t articulate a specific, discrete strategy for how it will use the funding to develop or commercialise the product, investors may pass on the opportunity.

What is the competitive landscape?

How big is the market opportunity? This evaluation should take into account not just the general consumer or patient pool, but also specific practicalities, including the number of patients willing to pay a given price for the product, or the treatment paradigms that come into play. Who are the other players in the space and where are they on the road to commercialisation? What are the salient differences between one product and the competition?

What is the exit opportunity?

It makes sense for early-stage clients to “begin with the end in mind.” Investors want to hear a clearly articulated vision of the exit. Is the company seeking to access the capital markets in an initial public offering, looking for an exit through an acquisition, or seeking to out-license the technology? In the case of an M&A exit or an out-license, companies should identify potential suitors and the reasons why those potential buyers will find the company to be a strategic fit.

Changing economic and political environments aside, the life sciences market presents exciting opportunities for early-stage life sciences companies and the investors who believe and invest in them. Companies with defined strategic goals, an innovative product addressing unmet need with a compelling value proposition, effective leadership and, above all, an exit strategy that enables investors to achieve returns they demand, can position themselves to attract the right investors to bring their solutions to market.