Best to take broad view early with focus on mutual wins

Print 23 September 2016
Randy Osborne / BioWorld

BOSTON – In moving a startup along, "I don't think [valuation] is where you start," Sentien Biotherapeutics Inc. CEO Brian Miller told attendees of Biopharm America. "I think you have to almost end there." In establishing valuation anyway, he said, "there's mostly fiction, and a little bit of fact, and usually the facts are underpinned by fiction. At the end of the day, this is going to be a negotiation," and the CEO's persuasive power will play a major role.

"I think it's important to lay out with the potential investor what the risks are" up front, Miller said, calling valuation "one component of the overall discussion around alignment for the company [with any would-be backer]. The more you can be aligned on where the risks are and where the opportunities are, the [more easily the] valuation can find its way."

From the founder's perspective, "you want to have an understanding of what your goals for the valuation ought to be," but this involves a number of elements, Miller said. "I think it needs to be more thought than just, 'Get as high a valuation as I can possibly get,'" an approach that could alienate investors rather than lure them. "You want to take a longer-term view, and understand what your valuation strategy is going to be, and how that corresponds with your overall financing strategy. [If] you can map that out collectively, you're going to be aligned much sooner than you might otherwise be," he said, falling back on "something my dad taught me when buying my first house: Don't quibble over that last $5,000."

Miller, as it turned out, was joined on the Wednesday panel by Martin Heidecker, director and investment manager with the venture fund operated by Boehringer Ingelheim (BI) GmbH, of Ingelheim, Germany. It was BI that took part in the summer 2015 series A round for Medford, Mass.-based Sentien in an undisclosed amount, joined by Portage Biotech Inc., of Toronto. Sentien was to use the proceeds to fund activities through a planned phase I study with its lead product, the Sentinel, a cell-containing dialysis device for the treatment of acute kidney injury.

Device or drug, "it's pretty much always the same issue, right?" BI's Heidecker said. "When you engage early with a founder, typically this person is coming from a hospital or a university lab, and he's spending quite some time on the technology before it's ripe enough to actually start a company. There's an emotional connection [he has] to what the guy's doing, and obviously his perception of what the value is – spending so much time with the technology – potentially different from how you value the opportunity." The would-be investor's view is unclouded by sentiment, he said, and constantly asking: "What is needed to generate value in a way that I exit it, and if I exit it, how much do I get for it, what's my multiple?"

Also on the panel was Ryan Muldoon, CEO of London-based Prep Biopharm Ltd., which closed its series A round of £21 million (US$27.7 million) in November 2015. The funds were to complete ongoing phase IIa development of Prep's lead compound, Prep-001, a nasally administered, broad-spectrum agent said to leverage the innate immune system to prevent upper respiratory tract viral infections, i.e., colds and influenza. A successful human proof-of-concept trial with the compound had already been completed. Lead participants were Hvivo plc, of London, and Johnson & Johnson (J&J) Innovation – J&J Development Corp., of New Brunswick, N.J., and U.S.-based angel investors.

TEST WITH NONINVESTORS

"You should always have a sense of where you are, what's going to create the most value and how far along that continuum [you are]," Muldoon said, so that the company can stay flexible in talks with varying deep-pocketed entities. "When you have a strategic investor or a family office where it's their own money, the valuation discussions – if they're sold on the concept, the science, and your organization – are going to be less tight than with a venture capital firm. Doing your own homework" helps, he said, although "sometimes for transformational science, there aren't great benchmarks. Nobody's doing quite what you're doing." If any comparable firm can be found, "it sets you up for those discussions [with potential backers] very well," he said. "Do we see value in the same places? What does that look like over time?"

Heidecker talked about the variations and BI's practice. "Typically, when we invest, there's preclinical data there, but not very much. I try not to focus, and waste, actually, too much time on the valuation discussion, because you can spend endless hours. Often I even engage in term sheets, and there's some value [apparent to the would-be partner], and maybe it's higher than I think. I say to the partner, 'Let's go out, let's check the market, let's listen to other people,'" and maybe rethink the value. "It never happens that a founder comes to me and the value is much lower than I would anticipate," he added wryly.

"Often, when I talk to a very early company, they come with market research data and say, 'Oh, this market is that big,'" Heidecker said. "I'm not very keen on seeing those, because typically the resources that we would have, coming from the buyer's side, are much better than [those] the small companies would have. The value drivers when I invest early are the science and the team. I don't care so much how many thousand patients are out there. That's a checkpoint, but it's so early and the likelihood of failure so high, [the patient population] doesn't really make a difference."

Geography and competition can influence valuation, too, Heidecker said, and Miller confirmed as much. "Early on, before we did the deal with BI, I spoke to a sovereign wealth fund," he said. "They had very little experience in life sciences and were just getting into the U.S. market. We talked about terms, and their willingness for valuation was through the roof. We were talking very high valuations, to my – at that time – glee and surprise. We didn't end up going for that deal, and I think in the end it probably worked out better for us for a multitude of reasons," including the fund's plan to use the deal as a way to gain insight into the U.S. market. "You have to look at that and offset the risk from your financier," despite the sky-high valuation that may be on offer. "There are multiple pieces to the puzzle," he said.

Objectivity about one's firm is important. "If you have investors that you know that are not likely to invest in your company, that's a great resource to really ping them quite a bit and say, 'Help me understand how you view this company.' Then you're more prepared for the investors that are actually going to be thinking about investing," he said. The Biopharm America meeting runs through Thursday.

Source

Return