Non-accredited investors are beginning to have the opportunity to invest in biotech, thanks to some innovative new financing mechanisms and the growing democratization of healthcare, according to panelists at the Biotech Showcase™ 2015 financing session.
Crowdfunding is an example. “Although Congress voted a few years ago to allow crowdfunding for healthcare, the SEC is dragging its feet,” said Steve Dickman, CEO of CBT Advisors. Nonetheless, options are available. Notably, Poliwogg Holdings, Inc., is sidestepping SEC regulations by using an older law that allows non-accredited individuals to invest in business development companies. The development companies are formed along diseases or technologies. “Shares in these companies are listed (and currently priced at USD 20 per share) and can be traded on the open market,” said Gregory C. Simon, Polliwogg’s CEO.
Democratization of life science investing panel at Biotech Showcase 2015
The first exchange-traded fund (ETF), the ALPS Medical Breakthroughs ETF, launched earlier this month to track the performance of the Poliwogg Medical Breakthroughs Index (PMBI). Funds in the PMBI are categorized by subsections, including cancer, diabetes, neurodegenerative diseases, stem cells, and others. Companies listed on the ALPS ETF must be small or mid-cap firms that are listed on a US stock exchange with at least one drug in Phase II or III FDA clinical trials. “This gives people a chance to invest in small companies,” Simon said. It seems to be working. After about two weeks, he reported 150,000 shares per day are trading on the ETF.
The view of IPOs has changed, too, according to R. Doug Armstrong, Chief Business Officer at Dawson James Securities. Rather than merely an exit strategy, IPOs increasingly are perceived as the best way to raise money. “Companies can raise small amounts—USD 15 million to USD 40 million—on a national exchange. That won’t carry a company to profitability, but it can take it to the point of a material uptick in value. If you can do that, you can raise money again and again.” He stressed the importance of using a national exchange, however. “The over-the-counter market is a graveyard—not the place you want to be.”
“I’m struck by the change in behavior at disease foundations,” Dickman said. “For example, the Juvenile Diabetes Research Foundation a few years ago took a very pragmatic approach to investing and began funding companies that could take products to commercialization. To protect itself, it used term sheets with substantial penalties for non-compliance, and also co-invested with venture capital funds.”
Government grants have long been hailed as a funding source, but they involve a tradeoff, cautioned Ethan Perlstein, Founder and CEO of the startup Perlstein Lab PBC. “It takes time to become good at getting grants. Often you’re resubmitting. It’s often faster to raise angel funds. For example, in six months we raised USD 2.2 million from angel investors. We couldn’t have gotten that through SBIR grants.” Even if it succeeded, the initial grant amounts typically are less than one-tenth of what Perlstein raised.
Although companies may subsist on government grants for a decade, “they almost never make it to institutional funding, unless they’re a top academic lab,” Dickman added. Instead, he advises companies to concentrate on other funding sources and use grants occasionally, to meet specific needs.
The democratization of funding sources extends to the companies themselves, as incubators and innovation centers increase the number of innovative companies that can form and grow. For example, Perlstein said he rents bench space at QB3 incubator for USD 800 per month per bench, plus other usage-based expenses. Such relatively low costs of entry expand the field of growing companies, potentially bringing more innovative science to investors. Specifically, this enables companies outside what Dickman called “the academic mafia” of major universities with big-name principal investigators to have a shot.
JLABS is trying to change that “academic mafia” reality, according to Asish K. Xavier, VP of Venture Investments at J&J Development Corporation. “Innovation can come from anywhere, and J&J has been aggressive about going to where the innovation is, rather than expecting innovation to come to us.” With several innovation centers and their satellites located around the world—including one opening soon in Houston—emerging companies can access the resources they need. “We try to provide the infrastructure to get companies to their next stages,” Xavier said, without having to leave their geographic base.
Social media also is changing the investment landscape by bringing companies to the attention of potential investors. Perlstein Lab, for example, wasn’t noticed by venture capitalists or other traditional gatekeepers. It found funding through Twitter. “I was talking about orphan diseases on Twitter, which led to emails, a lunch pitch and a term sheet,” Perlstein recalled.
“A lot of value and communication with investors is through social media,” Armstrong said. As analyst coverage for small and microcap companies declines, social media fills in the gaps and actually provides more information. Effectively, social media is replacing the declining coverage of banks and sell-side analysts with something more democratic.
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