Bio-pharma Investment Trends

At today’s MassBio (Biotechnology Council) meeting in Cambridge on new VC models for early stage financing, panelists painted a picture of changes in investor appetites and a more varied landscape for capital sources and exit opportunities.

Three fund managers (two independents and Reid Leonard who is Managing Director of Merck Research Venture Fund) noted a trend to smaller raises focusing on reaching more rapid inflection points for marketability and profit.  The days of nine-figure raises are over, as investors have learned that sometimes it is not good business to fund a decade-long quest to build a company and attempt to bring it public in the face of development risks and a recalcitrant IPO market.  Rather, investments with shorter-term goals and smaller cash needs, leading to licensing deals or acquisition by a large drug company, are becoming the norm.

One interesting logical anomaly seemed to capture the attendees: how do you measure success in a biopharma investment?  For a strategic or captive fund such as Merck, you might consider if it feeds the long term pipeline.  For a fund with a finite time line, say ten years, the metric is different, but even there different investors will have different targets.

Do you aim for a multiple of investment, which is how many GPs get compensated?  Do you aim for high IRR, which puts a premium on rapid exit and which assists in raising your next fund?  The fund managers also noted the interaction between funds at different points in their lives: a fund six years into its life and making its last investments has a different appetite and time-line from a fund making its first placements.  These tensions in goals lead some investors to attempt to invest alone and not in a syndicate, and that decision in turn puts further downward pressure on the size of any investment.  Some even expressed doubts that getting technology out of the Universities and into the marketplace is best accomplished by a for-profit model, as opposed to relying on foundations and pre-competitive consortia.

But clearly there are all types of investors out there; while some investors want to “build to sell” others retain the traditional approach of company-founding.  The art is to find the investor which matches the entrepreneurial vision.

And finally, like all else in the world, the biopharma world is getting flat, as the technology is dispersed internationally and funds now look to ventures in Asia, particularly Korea, China and India.  Certainly tightening FDA regulatory oversight, a perception shared by all, helps to drive those deals out of the United States, a trend not at all restricted to the life sciences.

Life Science Investing

Jeff Leerink is founder and CEO of Leerink Swann & Co., a boutique investment bank with its home office in Boston and an investment banking practice wholly centered on the life sciences.  Given the shrinking venture capital commitment to the life sciences, and the uncertainty in the investment community generally, I asked Jeff his thoughts on the life science marketplace.

Disclosure: Jeff is an old friend but we don’t always agree. Jeff’s participation does not indicate that he agrees with my politics, and parenthetically I can assure you that he does not.

Leerink’ view is that robust investments will continue in healthcare, but will be directed towards products and procedures that drive down costs and improve healthcare outcomes.  He sees a continued focus on filling unmet needs, including in further drug development.  In response to questions concerning which pharma companies are most likely to get funding, Leerink cautiously noted that today, notwithstanding high costs and long lead times, some companies are getting selectively funded even at the phase 1 level.

Leerink is a great believer in fostering the application of information technology and data mining to the delivery of life science products and services, and sees delivery of the medical arts in the 21st Century assisted by the use of electronic medical records.  He believes that effective, deeper data mining will create “less friction” in the understanding of medical situations and therefore foster better outcomes.

The day after my conversation with Leerink I attended the Massachusetts Medical Device Industry Council seminar on “Catalyzing Innovation.”  Several Leerink points were echoed by the speakers, who included representatives of universities, venture capital funds, and large medical device companies.  Noting that 18% of the gross domestic product of the United States presently is allocated to healthcare, an unsustainably high proportion, the emphasis was on identifying life science ideas that would reduce costs, if only by substitution, provided there is no deterioration in outcomes.  To the extent outcomes can be improved at reduced costs, that is a “better idea.”  The real rub comes when an idea does not reduce costs, but does improve outcomes.  Then the benefit of the improved outcomes must be weighed against the continuing costs involved, an analysis which fall somewhere between “rationing medicine” and comparing apples to oranges (or, perhaps more accurately, apples to machine guns).

The Mass Med Conference also struggled with the linkage between venture investment and the development of emerging companies.  With the FDA approval cycle lengthening, thereby driving up costs, what deals will catch the eye of the investor?

The Conference panels noted that the size of the market, the ease of working with the investigators to find a path from the laboratory to the market, proof of usefulness and, as noted by Leerink, reduction in costs would be the keys.  Some venture capitalists noted that they now expected life science entrepreneurs to have identified the size of the market, the regulatory and market hurdles, and the posture that a product or procedure will have in the reimbursement scheme.

These issues, coupled with the growth of overseas centers of life science expertise, caused the panels generally to be leery of the loss of United States predominance in the life sciences in the midterm.

What does Jeff Leerink recommend as an investment, if appropriate life science investments cannot be found or if one is scared away from the life sciences by reason of some of these factors?

Leerink still believes that healthcare in the near, mid and long terms will remain key growth drivers in our economy, but notes that there is an opportunistic counter-strategy that may appeal to some investors: anything that is for sale in any asset class that is depressed.  Leerink recommends buying anything that “everyone is running away from.  I sell euphoria, buy on depression.”

Occupy as a Seminal American Event

It is always dangerous to write something that could function as a putative “history” at a point in time close to the events being discussed.  One lacks the perspective of time, and the information that future events provides to illuminate those events.  The modern penchant for immediate analysis is good dialog but not necessarily conclusive analysis.

So it is with trepidation that I return to the Occupy movement and speculate on its importance.  Not only is the movement of recent memory, but also it is an ongoing event; NPR reported this morning that Occupy is setting up an igloo encampment even now at Davos, in advance of the worldwide economic conference annually held there.

But I am almost compelled to do so if only because, in glancing out my window just now at the snow-coated grass plot that until recently was the Occupy Boston site, I see traced in the snow-cover, in block letters that must be 30 feet high, the word “LOVE” facing away from me, but directly at the Federal Reserve Bank.  (I wonder if the City will come to erase the message before the polity is further polluted by such things.)

At the end of Occupy Boston I made bold to suggest that the residue of Occupy would, at a minimum, be a palpable contribution to the national dialog on who we are and what we ought to do about it.  I think I was correct.  Those who know me also know that I am not beneath an occasional “I told you so,” particularly since my being correct is such a random, rare event.

Last week’s Sunday New York Times  ran a detailed article about locating the 1% and understanding what it took to find those people within our borders.  The stunning (to me) graphic was a map of the United States made up of City names, and under each City the amount of earnings per year it took to be within the highest 1% of annual income.

The range was remarkable; over $900,000 on Connecticut’s Gold Coast, below $200,000 in some forelorn Cities (if I recall correctly, Jamestown New York and Flint Michigan).  The high numbers were concentrated along our coasts (save Chicago).  A rich man in Mississippi cannot ante in a poker game in Darien.  While we cannot necessarily equate annual earnings to true wealth, the map gives us a clue that the country is not at all a unity, but rather a conglomeration of diverse localities that have fared very differently in the face of economic developments.  There are numerous economies alive in the United States, perhaps something not surprising to affectionados of the House Hunter series on television (I am addicted, and I watch almost no other television; I love to see houses much nicer than mine being sold in Keokuk, Iowa for less money than it takes to maintain my lawn for a year in Newton.)

And this past weekend’s Wall Street Journal (Review section) again discussed America in Occupy terms.  Author Charles Murray, writing a feature article extracted from his upcoming book on wealth disparity in our country, tracks fifty year trends in our collective perceptions of who we are as a country in a piece entitled “The New American Divide.”  Expressly noting Occupy, and beginning his article with the words “America is coming apart,” Murray chronicles the division among Americans that is partially financial and partially social.  He notes that we have not only differences in wealth, but also cultural differences in what we eat, how we get educated, whether we marry or pray, whether we have children of unmarried women, whether we are working or idle, all based on fundamental differences between our world views.

I look forward to the January 31 publication date of the book, entitled “Coming Apart: The State of White America, 1960-2010,” which analyzes, prototypically, the upper middle class town of Belmont, MA and the depressed Fishtown neighborhood of Philadelphia, PA.

Differences in economics over time drive differences in culture in a way never before experienced here.  Occupy gave voice to these differences.  In a way, Murray’s analysis answers the question raised by many as to what the message of Occupy really was, or the criticism that the message was so garbled as to be meaningless.  Occupy reflected the wide panoply of differences on many issues that reflect the division of America along deep cultural lines.  Money is a leading cause and indicator of that division, but all the ancillary complaints and causes espoused at Occupy really were of a single cloth:  different aspects of the two countries we have become.

Murray’s suggestion to bridge this gap is for the “new upper class” to engage themselves and their families in breaking down the cultural isolation.  I am not quite sure what he has in mind, and must await the book to learn more, but it doesn’t sound so different from applying the big block letters in the snow visible outside my window, left anonymously by some prophet of   cultural detente.

The Modern Corporate Director

Karen Kaplan is President of the advertising agency Hill Holliday, chair-elect of the Greater Boston Chamber of Commerce, and has had a solid background of board service (presently she serves as Trustee at Fidelity Investments and a Director of DSM [Delta Dental, Doral, DentaQuest]).  She believes that the time has come for redefinition: we need the “modern director.”

The modern director not only hears what is being said by various constituencies (not just shareholders) but also listens and takes action.  In remarks before the New England Chapter of the National Association of Corporate Directors, Kaplan noted today that social media and speed of information moving in the marketplace require immediate corporate response to crises, and in fact no company is fast enough to do effective damage control.  Rather, it is the task of the board to get ahead of the public by being responsive to their expressed perceptions before corporate actions run afoul of those perceptions.

Kaplan claimed that statistics showed that consumer loyalty was driven more by public perception of the selling company than by product features.  She pointed out how quickly the public perception can force reversal of a corporate strategy: Verizon abandoned its $2 charge for on-line payments within 24 hours of adoption in the face of viral outrage at what was seen as corporate greed.

Which constituencies must be listened to?  Time Magazine’s Man of the Year was a protester!

How do you recruit directors who are attuned to reading the input from the various constituencies that can affect profit and stock price?  How do you get ahead of the 99% and direct a company away from disaster?  Kaplan suggests that adding women and minorities and  people with very different backgrounds can help.

Discussion at the meeting included references to the Occupy movement; how long, it was asked, until the Occupy people, the 99%, buy a few shares of stock and start showing up at corporate annual meetings?  Followers of my blog posts know that I believe the Occupy movement did have clear primary focus and that its perceptions have inevitably entered into the national discussion at least in substance if not by direct attribution, but somehow I just don’t see most Occupiers I met waving their ten share certificate and asking to be recognized by the chair.

Although it IS an interesting thought….

Interview on Occupy Boston Legacy

Recently I was asked for my take-aways from the Occupy Boston movement, about which I have blogged several times; the Occupy site was just below my office window and I spent some lunchtimes talking with the tent people and taking an occasional march with them.

You can link to my interview here, or watch it below.  After the passage of time since the tents came down, I summarize preliminarily what we have learned from Occupy Boston.

Those around Boston who miss the Occupy experience can still subway to Harvard Yard, where a tent enclave is visible through the iron gates.  Alas, those gates are chained shut, and beefy security folk are checking University ID at the few open portals.  Seemingly you need a Harvard education to get close enough to glimpse the bed-rolls; just what is happening in front of Harvard Hall remains a mystery to those of us without current University credentials.

Disappearing Act

Reagan made famous the phrase “there you go again” and I am guilty.  One day after I promised myself not to post about the now-closed Occupy Boston site, I am compelled to do it again.

From my office directly above the site, a modest irregular parcel across the street from the austere and graceful Federal Reserve Bank tower, I look down expecting to see the trash clean-up, and perhaps something of a mini-construction project.  Instead, I see — green.

Here in Boston, where the heart of downtown was torn up for three years in front of the historic old State House (where zillions of tourists each year congregate); here in Boston, where the interminable Big Dig scarred half the city for a decade; here in Boston, where police details are required to direct traffic away from the supervisors who supervise the sub-supervisors who tell the foremen to stand close to the worker on any public works job to make sure he doesn’t move too fast, we have virtually erased the Occupy site in less than one work day.

Loads of bright green sod, fully grown grass squares, have been carted in and cover a good deal of the carefully raked rich brown loam.  Hoards of orange-clad workers jump to the task of covering the offending brown.  Well over half the site has been cleansed and reclad; even now a new truck is disgorging another load of green forgetfulness.

It is almost as if —  dare I say it — someone very high up in the city government decided it was an absolute highest priority to erase every vestige of Occupy from the face of the polity.  Very important to renew this vital plot in the heart of the city (although for over two months the Occupy tents dwelt there without interference with commerce, the offices, the commuters crossing the site to South Station).

I am glad the city can replant an acre in a day.  Why it takes ten months to restore working escalators to handi-capped inaccessable subway stations is I guess a different matter.

And while I (may) have your attention, a parting shot at a column in today’s Boston Herald that to my mind focused the anomaly of Occupy.  The columnist predicted that without physical presence the Occupy movement would become a memory; he may be right.  But he continued that Occupy proved we had raised a generation of spoiled brats; apparently a discarded placard declared that student loans were the equivalent of slavery.

So let me get this straight.  Business can pay lobbyists to get tax breaks so they need not pay for the costs of government.  Businesses can set up multi-national structures to avoid paying US taxes.  Wealthy folks tax-plan within the law to reduce taxes and preserve personal wealth.  But if a student asserts that education should be free, a proposition by the way that is a given in many places and represents a rational proposal for how to run a society in an education-dependent world, he or she is a spoiled brat.

Seems to me that whoever controls the nomenclature defines the playing field.  The people who were at Occupy and argued for free tuition or other social welfare benefits are of equal moral footing with the business people, the banks, the corporations who express also the very human desire that, all things being equal, they would rather have benefits at lowest possible net personal cost.

Are the business people spoiled brats by reason of their parents? Of course not.  It is legitimate, if within the law, to run a business as a business, to lobby and to plan.  But it does not follow that the same type of efforts by non-organized, non-business-related constituencies are unworthy of expressing and attempting to achieve THEIR own legal goals; if they are selfish goals, they are no less worthy than the legitimately selfish goals of the business community.

The only difference here is that business folk don’t need to carry a sign to accomplish their lobbying.  They have people to carry their signs for them.

The Law of “Occupy”

On December 7, Suffolk County Superior Court Judge Frances McIntyre issued an opinion that was reported as adverse to the Occupy Boston movement.  While the effect of her ruling will be the dismantling of the encampment, the ruling reflects a broader appreciation of the issues involved and deserves more careful analysis.

Before suggesting that analysis, a few words about what is happening in Dewey Square, which is directly below my office window.   Yesterday, based on the court ruling that ended the injunction against the city taking removal action, the Mayor announced that the occupation must cease by midnight yesterday, Thursday, or the city might take action against remaining protesters.  The police during the day circulated notices from the Rose Kennedy Greenway Conservancy, which owns the land underneath the tents, reflecting the same message.

Importantly the notice did not bar assembly or speech.  It stated that the park was closed from 11pm to 7am and that structures and personal property could not be left on site.  There was no suggestion that people could not assemble or speak, daily, while the park was open pursuant to standing park regulations.

During yesterday, debate and confusion filled the Occupy site and around 11pm last night some protesters promised to form a human chain around the site to protect if from police.  The numbers of people at the site actually increased by reason of the arrival of activists from other, closed Occupy city locations.  But meanwhile, very many tents were struck and removed.  Garbage trucks, some paid for by protester pooled funds, arrived to assist in the partial clean up of the debris.  Many protesters, true to their fundamental values as law-abiding folks, literally folded their tents and left, although some stayed to line up across the street and chant support.

Meanwhile, the Massachusetts Civil Liberties Union had lawyers on site and distributed information about the rights of anyone who was arrested; they counseled the writing of a lawyer’s phone number on one’s body because upon arrest all personal property was likely to be confiscated.  The Civil Liberties Union and the Massachusetts Chapter of the National Lawyers Guild contacted the Mayor’s office and counseled restraint in Boston, which was described as a city with a long and honorable history of free speech and dissent.

The press arrived in force and there was extensive Boston news coverage; trucks from the three traditional networks, from Fox and from New England News Network pulled up onto the public sidewalks (no doubt an illegal act) and sent reporters and cameras into the site, where they were freely admitted by the reasonably small number of police and moved without confrontation among the protesters.  The reporters, who noted without irony that many people had seemed to appear as mere voyeurs while they themselves were of the same ilk and were distinguishable only in that they were being paid for their voyeurism, generally reported fairly about the factions within Occupy, those who did not want a police record and were leaving, those who were defiant and wanted to stay and be arrested to enforce the message.  There were, notably, no interviews I saw with the so-called “student anarchists” who reportedly were fomenting violent resistance and who were described as wearing black hats and masks.

Wooden pallets were piled up like barricades, then mostly placed flat and carted out to garbage trucks.  Last night trash was everywhere, and belongings were loaded into many large green trash bags that seemed to sit in the walkways unattended.  Two people dragged a tent into the middle of the street and asked to be arrested, and indeed were so obliged, but otherwise the police seemed to take no action.  Their restraint to date has been notable and in sharp contrast with prior Boston police actions concerning social protests; since the same police have been hanging around Occupy for a couple of months, I suspect that some sense of mutual respect, or at least tolerance, may explain in part this restraint.

This morning I walked around and then through the center of the Occupy site.  There were four police cars on the plaza, but no uniformed police inside the outline of the site.  Perhaps two thirds of the tents were gone.  There were no people within the tents or walkways, and very few on the plaza; much of the trash was cleared, and a couple of men from Occupy were loading handfuls of trash and tarps into the back of a garbage truck that was blocking one of the lanes on Atlantic Avenue.  The rumor was that the City was going to give the protesters until Sunday to clear out entirely, although there was no way to confirm that rumor.

Rimming the site were protest signs; not that many, some defiant, some melancholy.  My favorite, based on the stated intent of some of the organizers to move to the Boston suburbs, read “Occupy Everything.”

The Mayor on morning radio, the same Mayor who once expressed support for Occupy and said there were no plans to remove the tents, expressed the wish to put this behind us and get on to the next step, “whatever that may be.”  His employees had argued in court that the tents were a fire and health hazard at the same time he was saying there was no plan to clear them; but the court decision did not turn on those arguments.

The court decision was sympathetic with the purpose of the Occupy movement, which it characterized (I believe correctly) as an invitation to an important national dialog on the economy, the impact of concentrated wealth on the national social compact, and the need for government to focus on these issues notwithstanding the partisan turn of our national debate.  But the law is, as they say, the law and courts are of course the arbiters of that law.  High points of the decision:

*protesters have the right to assemble and speak, under the Constitution, and that includes certain actions (not just words) which are treated as “conduct-which-speaks.”

*but what is protected is speech and assembly to speak, not the actual occupation which the court said “as a matter of law, is not speech.  Nor is it immune from criminal prosecution for trespass or other crimes.”

*Occupy is subject to City and Park regulations, which the court found to be valid, although the setting up of tents and sleeping is expressive and symbolic conduct.

*The decision permits the protesters to vacate the site “and request permission to set up tents or other equipment for expressive purposes,” although such actions must exclude overnight structures and sleeping in Dewey Square as same violates Conservancy guidelines.

While enforcing the law in logical fashion, the court diverted from strictly legal issues to make some social and political observations.  To say that Occupy lacks focus or solutions is to be, simply, wrong.  Every such social expression attracts all sorts of people and causes, but the theme of Occupy is and has been clear and has been consistent with reportage in all major news outlets which analyze the current reality of our country:  economic justice is in trouble today in America.  Let me quote the court itself:

“There can be no doubt that at this writing in Boston, and perhaps throughout the country, an enclave of tents and in a public park connotes the Occupy movement and their 99%/1% view.  Matters of finance and the present economic situation are of intense concern to many people.  There is considerable media attention devoted to Occupy sites, and most articles, per journalistic custom, restate the Occupy position. The media has clearly understood the plaintiffs’ [protesters’] contribution to the national conversation.”

Could have been written by one of the Occupy organizers….

The Horizontal City

I keep anecdotal track of Boston, the horizontal city.

I know this is unscientific and subjective and smacks of the imprecision that I abhor on the internet and particularly with respect to bloggers, who have a free fire zone regardless of hard facts.  But I am nonetheless guilty, and plead in my defense as follows: I have made full confession here; I have a day job and no paid fact checker.

I started tracking the horizontal way in which Boston operates from my very arrival, when I observed that Boston was palpably divided into sharp horizontal layers along racial and economic lines.  I have observed over the years the rigidity of these divisions: the absence of people of color from: the business world,  the ranks of business attorneys,  attendance at sporting events,  nicer restaurants, neighborhoods in which I have lived and now live.

I think that about half of Bostonians are members of a racial minority.  None of my best friends come from any minority community.   I deserve no credit for this, but accept no blame.  It is a derivative of the horizontal city.

On City Hall Plaza there is a large tent which, until year-end, houses a lavish production of Peter Pan, which is the story of a rich Victorian British family whose children hang out with a flying boy of little known merit.  Attendance at this production is very expensive; our seats this past Saturday were over $100 each, no discount for children.  My anecdotal report: the kids were almost all white.  I am not allowed by my wife to actually count people of color, which is politically incorrect and smacks of profiling, but suffice it to say that the fingers of one hand would cover the task; this out of many hundreds.

I do not think that what is wrong with Boston resides in the Peter Pan tent, nor indeed in the tents of Dewey Square’s Occupy population.  All of these tents are symptoms only.  But Peter Pan, you may recall, flies back to Neverland while leaving the Darling children to grow up, suffer, fight in wars, raise children and endure the indignities of what we call life.  Peter is immune to the realities around him, in the same way as is much of Boston.  There indeed are many dedicated people who work on behalf of our poorer constituents, it is not like there is a lack of caring.  But there is a lack of real community in Boston as a city; Peter Pan is live and well in the fabric of Boston.

One is reminded of the very tired joke that goes: “Aside from that, Mrs. Lincoln, how did you enjoy the show?”   Well, Boston’s Peter Pan was a wonderful production, it reminds me of my very first theater experience, in New York in the mid-fifties, seeing Mary Martin fly as Peter.  I do not recall the audience demographics at that event, which is yet another advantage of being a child.

Poor Red Sox

I am surprised that it is so late in the year and still no startling news from the Sox front office.  No one buys season seats because Bobby Valentine is manager, and we are getting very close to the deadline for our checks (this allows the club to have our cash interest free for several months; always pleased to help out the poor fellows).  By now, we should have had a couple of breathless announcements of signings, perhaps as fortuitous as our signing Carl Crawford.

And the Sox are in trouble in the American League East, make no mistake about it.  We have lost the best closer in the game to Philly; you many not like Papelbon but based on performance, age and durability he is the best closer around, and if he is overpriced by a few million we should not care, we have spent more than that on pure speculation.

One of the folks with whom I correspond privately about baseball is very knowledgeable [and indeed I assiduously keep private my interchanges with truly knowledgeable folks lest my own ignorance become (even more) publicly known.]  My secret correspondent notes the paucity of replacements for Papelbon, replete with analysis of records, age, salary and value placed on these closers by their present teams; the picture is not pretty.  K-Rod, Madson, Lidge, Cordero are all in the hunt but two are 35+, two are with the Phillies who nonetheless opted for Papelbon, three already made Papelbon-type money last year, one has only one season as a closer; the list goes on.

Can Bard close?  I thought this was his year to grow into it and I did not see it.  My expert tells me he has only two pitches which is one more than I noticed.  He does not seem to have a thirst for the ball.  Papelbon reminded me of Larry Bird, or Y. A. Tittle:  “I know the game is on the line and there is no room for error, so why the hell are you delaying, just give me the friggin’ ball.”  When Bard picks up the ball I think he is thinking “ouch, this thing is really really hard….”

We are likely also to lose our second-best hitter last year, Big Papi; the Big Man was grateful that Valentine flew to the DR for that golf tournament, but if you scrolled down Papi’s pronouncements you found, buried in the back pages of the Boston Globe, the admonition that it was still indeed all about the money.  Such candor could be lauded were it not so painfully venal.

We don’t have a left fielder you would have walk your dog.  We don’t have a right fielder who does not yet look different from your dog.  You have a ninety year old, much-loved starter who wants another year to watch his knuckler flutter up the plate and thence flutter up into the Monster seats (okay, he is only fifty-ish).  You have a hospital ward for the rest of your starters except for those headed for Weight Watchers (do you know how many points there are in fried chicken, guys?  it’s as bad as Twinkies).

What?  Oh, yeah, I did send in my check to the Sox for next year….