By Gur Roshwalb, M.D., CEO, Celsus Therapeutics
What can executives of biotech companies working on novel treatments do to attract investors? With a professional background that has spanned the worlds of finance and biotech, I believe I have a valuable perspective on this question.
In my view, the lessons can be boiled down to a few key insights that could be useful for biotech company executives who wish to attract investor interest and potential new sources of funding.
Before I share these insights, let me briefly detail my own experience. Prior to assuming my current position as CEO at Celsus Therapeutics, a NASDAQ-listed biotech company developing a new class of anti-inflammatory drugs, I served as a VP at Venrock, a leading venture capital firm. At Venrock, I was an investment professional on the healthcare team, investing in both private and public healthcare companies and becoming intimately involved in the valuation and diligence of numerous pharma and biotech firms. Prior to Venrock, I was a VP and senior research analyst at Piper Jaffray & Co., where I focused on specialty pharmaceuticals and small cap biotech companies. In this role, I was responsible for analyzing, valuing, and publishing research on both private and public biotech/ pharma companies.
SO WHAT INSIGHTS HAVE I GAINED WORKING IN THESE AREAS?
As an investor, there were several specific qualities I looked for in a biotech company. The first of these was a management team with relevant experience. A company is much more likely to inspire confidence if its CEO, chief medical officer, and/or other top-level executives have a background that involves working in the particular therapeutic area being presently addressed, or a closely related area, and a history of successful execution. This lets an investor know that management is likely to be intimately familiar with the specific challenges involved in treatment, as well as the competitive landscape. Overall, it increases the chances the company is well-run and will remain on track.
Second, a careful investor will seek to ensure that a company’s treatment is based on sound biology. Does the company’s description of the drug and its proposed method of action make sense? Good investors will be able to sniff out dubious claims or those that are radically inconsistent with the current state of medicine in the field. Just as important, an investor will ask if the data obtained to date is consistent with the claims being made.
Also, investors will be sure to assess if the return potential offered by a company fits in with their current portfolio needs. Given that every investor has a specific investment profile they are seeking to maintain, a company whose promise does not seem like a good match is much less likely to be pursued as a viable investment.
As an investor myself, companies I passed up were often those where I did not believe the data demonstrated sufficient proof of concept or where I and company management disagreed about the real market potential — and hence return profile — of the company. A prototypical example would be an oncology company; often, it will present with open-label, early data with “interesting” responses versus historical response rates. It is very difficult to invest in such a company with confidence as the comparability to historical response rates is rife with too many questionable assumptions.
I worked at a long-only, micro/small-cap fund, where returns are generally driven either by being contrarian or "early to story" (e.g., recognizing the value of a company early in its development). Among the companies I liked to invest in were those that had data from an unsuccessful laterstage trial, where the company resolved to redo the trial "correctly." This type of company allows an investor to assess all three of the considerations I outlined above. Did management recognize the issues that led to the first failure, and can they successfully carry out the new trial? Does the data from the failed trial demonstrate a failure in the biology of the drug or more in trial design and execution? These companies are often written off, but can come back with a roar if successful.
Based on the above, what advice can I offer to companies going forward? First, it is wise for management teams to be intimately familiar with their data and their competitive landscape. If management can convey to potential investors that they really understand what they have and who they are up against, the more secure investors will be in taking a position. Second, remember that a good management team is one that is open to outside viewpoints. If an investor comes away from a conversation with management with the impression that they have blinders on, this lack of flexibility will serve to deter them. It's important to conduct the right trials — i.e., trials that really get to the heart of the science behind your drug and answer real questions about what treatments might do. Finally, be familiar with the investment style and return objectives of the funds you are speaking to — often, you can shape your story to speak more directly to satisfy these points.
In my view, executives at biotech companies wishing to attract investor interest should be aware of the insights I've outlined above, as these are likely to motivate investors focusing on this space.