Cell Therapy Interview Series Part 1: Funding and Financing Considerations
One of the most significant challenges that cell and advanced therapy (CAT) companies can face at every stage of their growth is decisions related to financing to keep their operations well-funded at the most advantageous terms. From the very earliest funding stages often involving personal investments by company principals or “angel” investors to decisions related to venture capital investment, public offerings or licensing or acquisition strategies, multiple factors must often be considered.
How do companies identify and attract the right investors for their technology platform and target indications? How far advanced and “de-risked” must their technology be to attract investors at different stages? How much equity and control will investors have? How might changing economic conditions affect future financing options?
Decisions related to financing can have a profound impact on a CAT company’s chances for success. To highlight some of the most important financing challenges and opportunities for CAT companies, Invetech reached out to several experienced leaders in investment and corporate finance in the sector for perspectives and insights, including:
Jean-Jacques Mondoloni, Wombat Capital
Jean-Jacques is Managing Partner at Wombat Capital, a New York City-based investment banking firm with a focus on the Life Sciences Industry. Previously he was Managing Director at Morgen, Evan & Company and the Chairman of the Healthcare Group of M&A International (now Oaklins).
Miguel Forte, M.D., Ph.D., TxCell
Miguel is the Chief Operating Officer, TxCell. Previously he was VP Global Medical Affairs Inflammation Worldwide at UCB, VP Clinical, Medical and Regulatory Affairs at Nabi Pharmaceuticals and VP of International Medical Organization at Bristol-Myers Squibb.
Richard Katz, M.D., M.B.A., Argos Therapeutics
Richard is Chief Financial Officer at Argos Therapeutics. Prior to joining Argos, he was CFO at Icagen and at Viamet Pharmaceuticals and has worked in investment banking at Goldman Sachs. He has guided companies through multiple financing rounds including VC investments and public offerings.
Shawn Leland, PharmD, R.Ph., Argos Therapeutics
Shawn is the Senior Director of Corporate Development and Strategy, Argos Therapeutics. Previously he was Oncology Medical Science Liaison at ARIAD Pharmaceuticals, Inc. and an Oncology Global External R&D (Search and Evaluation) Advisor at Eli Lilly and Company.
Q: In general, what are your assessments of the different options in identifying and accessing capital for CAT companies at the earliest stages of development?
Richard Katz (Argos): While angel investors are often essential in early stage financing in life sciences, the amount of money CAT companies require can make this challenging. CAT companies generally need to raise more money earlier compared to developers of small molecules. As a result, CAT companies typically require traditional venture financing to get started.
Miguel Forte (TxCell): Angel investors also usually want careful assessments of risk, which can be challenging in early stage CAT companies. In many cases these companies must look for seed funding before a full business plan is in place.
Jean-Jacques Mondoloni (Wombat Capital): For CAT Companies, angel investment and even series A could be challenging since the amount to be raised is often high. Many CAT companies looking for investment at the earliest stages have an idea and a general plan, but have not adequately demonstrated proof-of-concept.
“While there are certainly challenges in early stage financing for CAT companies, there has also been a strong period of growth in interest in the sector in recent years.”
Shawn Leland (Argos): While there are certainly challenges in early stage financing for CAT companies, there has also been a strong period of growth in interest in the sector in recent years. This has been driven by examples of positive early stage research results. So there is increasing confidence, but many investors are waiting for one or several big positive news events in research that are timed for the next few years. They are looking for examples of registrational data, regulatory filings/approvals and commercial product launches. These events could really drive interest in the sector to new levels.
Q: What are the most important considerations when it comes to venture capital investment?
Mondoloni (Wombat Capital): We are seeing a fairly significant growth in investor’s interest in cell and gene therapy. Venture capital (VC) investment in regenerative medicine was probably around $1 billion in 2010 and topped $2 billion by 2014, and we expect that growth to continue. We are going to see more validated mature projects to invest in and more investors coming to the table.
Forte (TxCell): A key point for CAT companies is that VCs usually only invest when they see a clear path to an exit. They will be looking for specific milestones and timelines. You need to have that clearly outlined in your business plan.
Katz (Argos): While there is nothing fundamentally different about VC investing in CAT companies, typically more capital is required to start a CAT company, so a series A round in a CAT company is generally larger than a series A investment in a company focused on small molecule therapeutics.
Leland (Argos): VC investors are also looking at many different factors right from the start. They tend to prefer platform technologies with potential for multiple indications and broad applicability. And they want some depth among executive management in terms of an experienced and dedicated leadership team.
“Especially in the earlier funding cycles, investment is often relationship-driven and based on the track record of the management team and on the strength of the board of directors.”
Mondoloni (Wombat Capital): They tend to invest in sectors with which they are familiar and comfortable. And especially in the earlier funding cycles, investment is often relationship-driven and based on the track record of the management team and on the strength of the board of directors.
Q: What considerations should CAT companies keep in mind when targeting VC investment?
Katz (Argos): When it comes to targeting VCs, CAT companies should go broad. Look at the top 30 to 40 VC investors with a focus on any that invest regularly in related areas. Of course, having existing VCs on the board facilitates the process for subsequent financing rounds.
“In the presentation you must demonstrate strategy, science and enthusiasm. VCs are looking for strong science together with passion and commitment.”
Leland (Argos): The caveat is that some VC investors won’t want to invest in multiple companies in the same sector – they prefer to spread out their risk. And in the presentation, you must demonstrate strategy, science and enthusiasm. VCs are looking for strong science together with passion and commitment.
Katz (Argos): They also want you to be up front about obstacles and your plans to address them.
Forte (TxCell): In road shows you have to be prepared to explain your vision for the company to the end run. And you must be very specific about the near-term milestones. The exit for the VCs must be clear.
Mondoloni (Wombat Capital): If the VC has not invested in your sector previously, it will be an uphill battle. To generate attention, especially in early financing, making a connection through a personal or business relationship is usually essential. They will also be interested in knowing more about your current investors and their pedigree. Knowing that reputable investors have already invested in your company is somehow de-risking their investment.
Q: What about strategies for presentations to investors?
Leland (Argos): You need to have good slides and clear messaging that explains your technology and data. The discussion is likely led by the CEO, but key members of the management team must be there. You need someone to present strategy and also have someone that can speak in depth around the science.
“Investors want a clear business plan, and while it is usual to see optimistic financial projections from business plans, the company should be able to clearly demonstrate the thought process behind any forecast.”
Mondoloni (Wombat Capital): The presentation must clearly outline the market opportunity, and the company should present the multiple indications that the platform may address. Investors want a clear business plan, and while it is usual to see optimistic financial projections from business plans, the company should be able to clearly demonstrate the thought process behind any forecast. One potential misstep I have frequently seen is companies asking VCs to sign long-term confidentiality agreements and being uncompromising about it. Very few would agree to this, if they even accept to sign a CDA at the time of preliminary discussions. If necessary, CAT companies should prepare two or more sets of presentations based on the type of investor and the degree of confidential information disclosed.
Katz (Argos): Show your enthusiasm!
Q: How much information will investors want regarding manufacturing and scalability?
Mondoloni (Wombat Capital): With CAT companies, much of the IP is based on manufacturing and scalability, so investors are very concerned about this. They want to clearly understand purity, potency, safety and efficacy.
“At series A, you probably don’t have to have your commercial scale manufacturing process locked in, but you have to have a plan. And you have to show how this process will evolve.”
Forte (TxCell): At series A, you probably don’t have to have your commercial scale manufacturing process locked in, but you have to have a plan. And you have to show how this process will evolve.
Leland (Argos): CAT companies do get some benefit of the doubt early on related to scalability. They assume you will figure it out and so are more focused on the data. This changes as you get to later stages of development. Many VCs still see Dendreon as a cautionary tale about plans for commercial scale manufacturing. At Argos, we have focused on our commercial stage manufacturing capability from the start, which has been of significant interest in our investor meetings.
“As the program advances to Phase II, and especially by Phase III, the focus tends to shift towards other issues, such as manufacturing, marketing, competitive dynamics and other commercial considerations.”
Katz (Argos): For investors, the risk profile changes as the development program advances. Early on the focus is primarily scientific and clinical. In immuno-oncology, there is often the ability to obtain early data reads that can provide good support for mechanism of action even in Phase I. As the program advances to Phase II, and especially by Phase III, the focus tends to shift towards other issues, such as manufacturing, marketing, competitive dynamics and other commercial considerations.
Leland (Argos): You should have high quality GMP standards in place early, and you also need to be prepared to explain your supply chain model and logistics for all phases of production and delivery. And they also want to understand your IP position and the risk of competition from generics and others.
Q: What considerations are important as CAT companies consider a public offering?
Mondoloni (Wombat Capital): The IPO market for regenerative medicine companies has tripled in recent years; however, CAT companies should keep in mind that going public presents considerable regulatory challenges and much higher visibility and scrutiny.
Forte (TxCell): Decisions related to a stock offering must consider both internal and external factors. Recently, national and international issues (i.e., U.S. presidential election, the Syrian civil war and Brexit) have created a sense of instability that can affect when and how successfully CAT companies go public.
Katz (Argos): IPO is an important option for CAT companies where capital needs can be high. As a result, many consider a public offering early in their business strategy. In some cases, companies do a “crossover round” of financing. This is a private round of financing prior to an IPO that involves many investors who typically invest in public companies. This can help to support investment in an IPO.
“The key element in considering a public offering is maturity of the company – you must be in position to deliver on key milestones.”
Q: What about other strategies to raise capital?
Leland (Argos): Two areas that have been especially important to Argos have been partnering opportunities and grant funding. We have focused on partnering opportunities outside the U.S. and have established relationships with strategic partners. We also look for non-dilutive grant funding from multiple sources. For example, our HIV program is funded in part through a National Institute of Health (NIH) grant. The California Institute for Regenerative Medicine also provides funding in different risk-sharing models.
Katz (Argos): In thinking about licensing deals, most companies first consider ex-U.S. opportunities and seek to retain U.S. commercial rights, or minimally U.S. co-promotion rights.
Q: Any additional insights on financing you feel are important for CAT companies?
Forte (TxCell): As CAT companies consider different options in financing, it is essential to keep in mind the need to carefully manage and communicate with investors, and to make strategic decisions related to dilution.
Mondoloni (Wombat Capital): These are exciting times for CAT companies. We are just at the beginning of the period where big pharma is embracing CAT. It is bringing more money and credibility to the sector, which will present new opportunities for financing in the years ahead. In addition, as more products reach commercial stage, these successes will also support the entire industry.