Last month, Ocunova, a spin-out from the Penn State University College of Medicine in Hershey, Pennsylvania, secured $500,000 in seed capital from the Life Sciences Greenhouse and Ben Franklin Technology Partners. Ocunova's drug candidate, OCU-001, is designed to address the underlying cause of dry eye disease in diabetes patients. After the research and development has been completed, the drug will go through clinical trials.
Last year, ChromaTan, a State College- based life science startup, received a $2.5 million contract from the FDA to develop a new continuous purification system for manufacturing biologics used to treat diseases such as multiple sclerosis, Crohn's disease, psoriasis, psoriatic arthritis, chronic pain and some forms of cancer. ChromaTan also received funds from individual investors, grants from the National Institutes of Health and Pennsylvania state funds. The company's purification system is expected to go to market next year.
Ocunova and ChromTan are two of the lucky ones — 80 to 90 percent of life science startups fail before their product reaches the market. For example, for every 5,000 drug compounds tested, only five make it to clinical trials. A survey of failed startups showed that 42 percent identified the "lack of a market need for their product" as the main reason for their failure.
How do you get your proposal accepted?
"The world is awash in technology, but not every technology has a home in the market," said Mel Billingsley, Ph.D., president and CEO of the Life Sciences Greenhouse, professor of pharmacology at Pennsylvania State University Milton S. Hershey College of Medicine, and professor of biotechnology and entrepreneurship at Penn State Harrisburg.
"As an early stage venture capital company, the Pennsylvania Life Sciences Greenhouse has a very strong due diligence process where we reject many more projects than we accept.
"Because life science startups are risky ventures, bioentrepreneurs need to have a strong value proposition, that is, a very good reason for a customer to buy their product, and a solid exit strategy, usually being acquired by a strategic investor such as a big biopharmaceutical company.
"We invest for returns, but unlike some venture groups, we were originally set up as an Evergreen Fund by the state for the purpose of gradually infusing capital into a new life science companies.
Securing seed funding for a life science startup is an elaborate procedure and involves initial contact awareness, a formal presentation, and, if the company is selected, a full blown due diligence process.
"It's Shark Tank on steroids with much more discipline and scrutiny," said Billingsley.
The first "M" stands for market.
"Is what you plan to develop going to solve somebody's problem, and if so, will they want to buy it?" asked Billingsley.
"Marketability is probably the most crucial factor in funding startups, so we examine the market potential pretty seriously upfront.
For example, with ChromaTan, its customers are biotech and pharma companies making biologic therapeutics. The Life Science Greenhouse review team asked those potential customers what they thought of ChromaTan's bioprocessing solution. Is it one that they would buy, and if so, for how much and for how long, and what did they like about the product, and what didn't they like?
The second "M" stands for the management team.
"The management of a life sciences start- up is unique, because it's very stage specific, so we look closely at the team involved – their strengths, their weaknesses, and how far is the company going to get with the current management team, and for later stages, how will they have to build out the team?" asked Billingsley.
The "T" stands for technology.
"We look at the technology by asking if it's protected, if so, how good are the patents, are they enforceable?" asked Billingsley.
Other technology-related questions include: Who are the competitors? What's the patent analysis look like, and how much patent life is there? Is it a broad or narrow patent?
The "F" stands for financials.
"How much is it going to cost to get at the value infection points?" asked Billingsley.
"Of the various funding mechanisms, the most important for most of these startups is non-dilutive federal capital in the form of Small Business Innovation Research grants, SBIR, and Small Business Technology Transfer, STTR, grants, which are the lifeblood of early stage companies," said Billingsley.
Life science startups usually get their grants from the National Institutes of Health and the U.S. Department of Health and Human Services.
"The grant application process is time consuming, but it does two important things," said Billingsley.
"First, the scientific peer review process provides validity to the technology and the team, because the product is reviewed by peers who compare it to similar technologies across the U.S. and, if all goes well, give it their seal of approval, which makes it more appealing to investors.
"Second, the grants can provide up to $300,000 for early stage R&D, and being a grant, it's not an encumbrance on the company's finances.
"If the company succeeds with phase one, and it's getting toward phase two, the next stage funding can be between $1 million to $2 million.
"Getting a million or two million dollars in non-dilutive, certified reviewed, public capital is a great way to launch life science companies.
However, it could take more than small private investments and million dollar- grants to get a product or drug to market, especially if clinical trials are needed for approval.
"As more and more money is needed in different rounds, the net effect on the angel investment is to dilute that investment downward.
"If you've invested $5,000 early on and now you're a 1 percent owner, the company has got to sell its product for quite a bit of money or sell many, many units to see a return.
"So, the ultimate step you hope with such emerging life sciences companies is for them to be bought by some Big Pharma or Big Biotech company such as GlaxoSmithKline or Esperion Therapeutics," said Billingsley.
"Since attractive life sciences companies are often acquired for billions of dollars, not only could an acquisition earn the owners a lot of money, but their product or drug would be assured of being marketed and helping people with health problems, which was the original goal of starting the company." .