More Global Health Business News (No. 6)

Auritec Pharmaceuticals is a very-low-profile drug delivery company in Pasadena, CA, and is part of a group of academic institutions that recently received a $20 million NIH grant to develop a vaginal ring for microbicide and anti-viral drug delivery (FierceDrugDelivery article). Auritec did not issue a press release on the grant, to be given over five years, but it is co-located with the grant’s lead institution, the Oak Crest Institute of Science, whose press release noted the program will test the delivery of up to five drugs in combination, an important goal for achieving compliance-independent HIV control and treatment (Oak Crest press release).

As I noted in a previous newsletter, GlaxoSmithKline (GSK) is leading a crash program to develop an Ebola vaccine.   Earlier this month, GSK published the results of a study in primates that showed the candidate vaccine was effective in preventing infection but that a booster shot was needed for longer (greater than ten months) protection (FierceVaccines article). It is expected that the NIH will start trials of the experimental vaccine, acquired by GSK when it purchased the biotech company, Okairos, for $325 million, this month.

Also on the Ebola front, the Bill and Melinda Gates Foundation is putting $50 million into immediate efforts to control the outbreak and into grants for drug, vaccine, and diagnostic development. The Foundation’s press release noted that $12 million was being distributed to the WHO, CDC, and UNICEF and the remainder was to-be-granted.

In the “still-not-getting-any-good-press” category, Gilead Sciences, Inc., reported completion of the licensing of rights to manufacture and sell its blockbuster anti-hepatitis C drug, Solvadi (sofosbuvir), to seven Indian generic drug manufacturers (Gilead press release in FiercePharma).   Gilead anticipates these agreements will bring low-cost sofosbuvir to 100 million patients (54% of the world’s total) in 91 countries (Gilead HCV Fact Sheet). As I noted in my blog posts, Gilead’s generic licensing program could be an effective model for other pharma companies wanting (needing) to increase access to their products.

I first wrote about Vaxxas, a Cambridge, MA-based vaccine delivery company, when it started back in November 2012 (“Vax Patch”) and have occasionally checked for progress, of which there has been none, at least made public. That changed last week when the company announced it had received funding from WHO for a pre-clinical and pre-manufacturing project aimed at applying its Nanopatch delivery technology to the polio vaccine (Vaxxas press release). Vaxxas has one commercial partner, Merck, and I expect/hope its BD team’s efforts pay off soon.

Also, I wrote about the Japanese Global Health Innovative Technology Fund in May 2013 (“GHIT Ready”) and posited that its award criteria were biased against smaller, more innovative companies, its awards were too small to have a real impact, and its bureaucracy extensive and inexperienced in product development. The Fund announced its second round of grants last week; $15+ million will go to seven preclinical or early clinical projects for drugs or vaccines for dengue, malaria, or Chagas. The recipients were the usual suspects- established academic and research groups with the occasional corporate partner- but no innovative, low-overhead, and hungry start-ups.

 

Global Health Business Weekly (No. 5)

What does it cost in time and money to run a crash vaccine program against a deadly but infrequent disease that occurs in uninsured and underserved people outside the US? The disease, of course, is Ebola, and the program was announced two weeks ago (GSK press release in FierceVaccines). The program’s goal is to complete safety and efficacy tests in about three months, and its costs will be met in part by a $4 million grant from private and government (UK) sources, GSK, and the US NIH. GSK will also receive funding to manufacture 10,000 doses of the candidate vaccine in parallel to be deployed by WHO if the trials are successful. Such success will not only save lives but may provide a model for crash vaccine development programs against other infectious diseases in the rest of the world which have no or limited vaccines like hepatitis C, malaria, and TB.

An effective drug for treating Ebola is also needed, and recently the US Biomedical Advanced Research and Development Authority announced commitment of up to $42 million (10x what is going into the vaccine program) to tiny Mapp Biopharmaceuticals, Inc. for further testing and manufacture of its candidate drug, ZMapp (FierceBiotech article).

At the other end of the funding spectrum, OncoSynergy, Inc. recently announced the start of a crowd-funding campaign to raise $5,000 to test an antibody it is developing to treat cancer against Ebola (FierceBiotech article FierceBiotech article, OncoSynergy press release, and Experiment.com funding page ). My skeptical side says “PR stunt” but I hope I’m wrong and the company has positive results in its in vitro demo.

In the “Nature doesn’t take a day off” category, FierceVaccines reported that an academic study of the polio virus associated with a 2010 outbreak in central Africa found a new, mutated form (FierceVaccines article). The scary part is that the mutated form was not neutralized in vitro by antibodies generated by the current vaccine. Even more scary was that the outbreak had a 50% mortality rate and it was estimated that half of those affected had been vaccinated. Of course, everyone knows that polio was common in the US with 35,000 cases per year in the 1950s and about 1% resulting in limb paralysis until almost universal vaccination was introduced (CDC Polio FAQ).

In the “lost in the noise” category, Gilead mentioned last week that it is in discussion with six generic drug companies about licensing its anti-hepatitis-C drug, Sovaldi (FiercePharma article and Bloomberg article). According to Gilead’s EVP Gregg Alton, the agreements will bring the drug to about 80 developing countries, and the licensing is in addition to Gilead’s plans to sell Sovaldi in India and other countries for $900 per treatment course. The noise, of course, is that Gilead has priced the same treatment in the US at $84,000 which has generated approbation by some payers and members of Congress. Alton noted, however, that this price is the same as that paid by the payers for the older, less effective regime. So I guess the payers are upset not by the cost of treating (and curing) a patient but by the potential demand for the drug. So the overall cost of the drug is the fault of patients and their doctors.

In the “emerging start-up opportunity” category, MIT reported that researchers of the Singapore-MIT Alliance for Research and Technology had built an MRI-like prototype device for detecting the malaria waste product, hemozoin, in blood (Fierce Diagnostics article and MIT press release). The team is starting a company to develop and test a cheaper, portable version that may be faster and more reliable than the current microscopy-based detection. Not mentioned was another diagnostics company founded by an MIT alum, Disease Diagnostics Group, that is using a simpler technology to detect hemozoin and that its prototype is in field testing (Boston Globe article).

Getting Crowded Replay

I’m still sorting things out, so here is a post I put up last January on early-stage funding:

While I am still skeptical about the idea of researchers using crowd-funding to fund their projects (which typically need more than tens of thousand of dollars over at least a year to get results), I am very pleased to report that the project I wrote about last month was fully funded by its deadline. As I wrote in “Shameless Plug”, Dr. Michael Polastri, associate professor of chemistry at Northeastern University, is starting a web-based portal for sharing data and ideas among medicinal chemists to accelerate the discovery of new drug candidates for treating the neglected diseases/diseases of poverty. Through a website specifically for crowd-funding science projects called Microryza (Mike’s page is at Collaboration for NTD), he raised a seed fund of $25K- congrats, Mike, and thanks to all who contributed!  [For an update on the project, see NTD Collaboration Project.]

Given the popular crowd-funding buzz, I wondered what is its potential for entrepreneurs starting life science product development companies, especially those developing products for global health?   In my experience, such start-ups need a minimum of a couple hundred thousand dollars for the essentials: completing convincing proof-of-concept studies to leverage into a real fund-raising round and paying the living expenses of the founder or founders, at least one of whom needs to put full time into the venture. While it helps to have a fully-employed spouse, generous and supportive friends and family, and access to grants, loans, and free advising, the founding team has the major task of finding and convincing knowledgeable investors that it has a viable plan to make and sell a product and to create a successful business that will repay investors in excess of competing opportunities. Of course, global health-oriented companies have the added challenge of educating potential investors on their value, not easy since investors prefer business models that have worked for them before. Call me old-fashioned, but I think the best (only) way to tackle this task is in person and not through the ether.

But, as it is said, there may be an app for that. As I learned last May from a FierceBiotechIT article and a Wall Street Journal blog post, there are now two sites set up to sell shares in life sciences start-up companies to qualified investors. Since the SEC rules allowing the sale of equity in companies via internet “portals” are still pending (the SEC draft rules were released last October), these sites are not really crowd-funding but require potential investors to register and assert they are “accredited investors” under the existing SEC rules for stock offers. The one is Healthfundr, which “makes it easy to discover, screen, and invest in the most promising health companies.” I could not find any information on how successful this group been in raising money for itself or others, but in a December blog post one of its founders stated that they have now figured out their business model they are starting to execute (Schantzen post), not a reassuring comment. More promising effort seems to be VentureHealth since the founders are successful investors who will be evidently also co-investing. The company’s launch press release indicated that it is aimed at angel investors and companies seeking an alternative to VC funding. It also noted the successful raising of $875,000 for multi-million Series B round for Channel Medsystems, a California medtech company, which is nice, if unfulfilling. The WJS article also mentioned a third site, Medstartr (I guess dropping the “e” is required for crowd-funding sites). As far as I could tell, the site has almost only projects (companies?) developing health care IT products, seeking small amounts (under $10K), and offering a nice “thank you,” not equity, as a return for “investors.” Medstartr states it provides its users “events, mentors, experts, challenges, partners, packaging, promotion, and optimization services to create a model that maximizes the chances of success for ideas in healthcare” and claims to have raised $250K “online” (less Medstartr’s 5-8% take) and $8 million “offline,” whatever that means.

So it looks to me that for now that crowd-funding offers only small amounts of short-term funding to global-health start-ups, but, when the SEC rules are final and if a investment portal can wrangle angel investors with a philanthropic streak, equity-based crowd-funding may be possible. But then again, I may be wrong. Last month I noted that an organization called the Immunity Project started a donation-type crowd-funding campaign to raise $1 million to advance a vaccine for HIV. Since its founding in 2010, the California-based Project, which describes itself as a “non-profit initiative” (I guess the founders thought “company” has a negative connotation), has identified HIV epitopes used by the rare humans able to control HIV infection (FierceVaccines article), got a $1 million grant from Microsoft, and conducted animal studies (sparse details are at Immunity Project). The Project director, Reid Rubsamen who is also CEO of a medical device company, told the San Francisco Business Times that the goal is to complete the funding this coming summer and have an inhaleable candidate vaccine to test in humans in 2015, while continuing to raise the $25 million he estimates is needed to complete testing and registration (SFBT article). As for manufacturing and distribution, he was quoted: “You pretty much need to be thinking about free distribution because the commercial reality is it’s a multibillion-dollar industry. For HIV, the Mount Everest is if we see some really good results, we can rally people around this to do large-scale manufacturing and distribution.” So crowd-funded manufacturing and distribution, too?

I wish him well, but I’m not sure if $25 million more will be enough. HIV is a challenging vaccine target (see a HealthLine article) and the trials expensive. I saw one estimate of the costs of a Phase III trial as $70 million (another FierceVaccines article). I respectfully suggest the Project’s management raise whatever money is needed to generate proof-of-concept data, develop a rationale for why the Project’s vaccine will succeed where others have failed, and use old-fashioned person-to-person salesmanship to find a corporate partner with the expertise and money to test, register, and sell an affordable vaccine. Crowd-funding may be one way to generate seed money but it may also divert and dilute the founders’ efforts to find people and resources needed for the long-term.

[Update: The Immunity Project team is now posting the results of its in vivo preclinical work at Immunity Project blog which is a great idea and will allow researchers familiar with the science (not me) to offer critiques and improvements.]

Soft Sell

Last week I revisited my student days and participated in MIT’s Independent Activities Period, a one-month intersession in which students, faculty, and affiliates offer and take classes and activities ranging from the fun (as in “Build your Own Electric Guitar”) to the thoughtful (“The Cost of Cosmic Real Estate:  Galaxy Evolution in Dense Environments”).  I took a four-hour “Sales Boot Camp” given by two fellow VMS mentors who are also successful salespeople and entrepreneurs (Camp Description), and it was quite worthwhile.  My corporate experience has been in business development which has much in common with sales, the former having a less-frequent but bigger pay off and presumes having a business (with revenue) to develop.  Because the instructors oriented their presentation toward sales for start-ups, what I learned will be useful to me in my volunteer mentoring.  I should note that the course focused on sales of technical products or services to sophisticated customers, so called business-to-business (B2B) sales, not selling to consumers.

The instructors emphasized several main themes.  The first was making sales are very important to an early-stage company, not only to generate revenue to offset expenses but also to market test and validate the product; in fact, the process of selling provides critical feed back to the company as it is developing its product and marketing materials.  In investor-backed companies, making the first sale also helps the founders manage and calibrate investor expectations.  And the first sales should be aimed at obtaining an anchor or reference customer that will be recognizable to other potential customers.  An important caution, often over-looked by start-ups, is that the sales plan and the cost of selling need to be in line with the product price; it’s possible to make lots of sales and still be unprofitable.

The second theme was that companies need to develop a sales culture.  Since the success of the company is tied to successful sales, all the employees need to recognize their roles in supporting the sales function.  In a start-up, while the founders are the lead sellers, the entire team, including the engineers developing the product, should contribute ideas and effort toward selling.  To build this culture, the instructors recommended that the lead salesperson hold weekly meetings to describe his/her progress, provide ideas from interactions with potential customers, and solicit input from the rest of the company.

Another theme was that sales is a process that needs to be managed.  The process starts with qualification and solicitation of potential customers, advances to educating and building trust, and ends with securing a purchasing decision.  It is non-linear, personality-dependent (both the sales person and the customers), and “failure-driven” in that one in one hundred contacts will lead to a sale with the other ninety-nine proving helpful feedback and new leads.  An important first step is the profiling of potential customer businesses, followed by profiling the potential buyers within the businesses (individuals responsible for a purchasing decision) and by building a rationale for a purchase for each business.  And the salesperson needs to do all this in a time-efficient way while operating with incomplete information.  It was not a surprise that the instructors described the personality traits needed for a successful salesperson as being knowledgeable of the product and industry, highly organized, methodical, competitive, a team-player, empathetic, resiliency, integrity, and having good people and listening skills.  Of course, also emphasized was the need to provide good customer support after a sale to build a relationship that may lead to up selling (selling follow-on products) or cross selling (selling to other groups within the customer organization).

The instructors also covered the differences between B2B sales and sales to government agencies.  In the latter, there are a multitude of procurement processes and each is highly bureaucratic (no surprise).  Also there are barriers to entry including the process for being qualified to bid and providers who have a built-in advantage, having the internal staff to support the bidding process and name-recognition among the purchasing agents who tend to be cautious buyers.  On the plus side is that government agencies are explicit about their needs (spelled out in requests for proposals [RFPs]) and relatively transparent in their decision-making.  The instructors also noted that a successful tactic in government selling is to include training in a proposal, to offer the agency at route to independence from the contractor (at least for that product and service).

Of course, I am not doing justice to the depth and breadth of the course.  For example, the instructors gave some time to describing the sales tool kit and its components (marketing materials, prototype/demo, customer relations management (CRM) applications, internet resources, etc.).  They also provided a number of case studies and took questions from the participants.  Overall, quite worthwhile and I recommend it to anyone contemplating starting or currently building an early-stage company.

So what were the take-home lessons for entrepreneurs starting up a technology-based global health product or service company?  The first is that it is never too early to think about sales, to develop a sales plan and run it past advisors.  Such a plan has more depth than that found in a business plan and is invaluable in helping the founders understand (or design) a path to revenue, that, although it may seem to be in the distant future, is key to a viable and sustainable business.  Such a plan also helps the founders identify key issues that need to be addressed sooner rather than later, e.g., if the plan is to sell to government agencies, what is required to qualify and if this is too challenging, what are the options for sales through intermediaries (“channel sales,” see my post, “S and M”).  Identifying potential purchasers also will help sharpen up the product specifications and features to differentiate it against alternatives and competitors.  A second take-home is that the founders should agree among themselves who will be taking the lead on building and implementing the sales function, again, even if distant, not having this as an explicit role risks missing connections and relationships that will be important in the future.  A third is that a global health start-up may need to recast its product to include a service, e.g., adapting the product to a customer’s needs or offering its (newly-gained) knowledge of its product’s market segment to customers looking for new markets.  Lastly, a sales emphasis early on pushes the founders to map a route out of a overly-long and grant-supported product development process and into the world of commerce.

Getting Crowded

While I am still skeptical about the idea of researchers using crowd-funding to fund their projects (which typically need more than tens of thousand of dollars over at least a year to get results), I am very pleased to report that the project I wrote about last month was fully funded by its deadline.  As I wrote in “Shameless Plug”, Dr. Michael Polastri, associate professor of chemistry at Northeastern University, is starting a web-based portal for sharing data and ideas among medicinal chemists to accelerate the discovery of new drug candidates for treating the neglected diseases/diseases of poverty.  Through a website specifically for crowd-funding science projects called Microryza (Mike’s page is at Collaboration for NTD), he raised a seed fund of $25K- congrats, Mike, and thanks to all who contributed!

Given the popular crowd-funding buzz, I wondered what is its potential for entrepreneurs starting life science product development companies, especially those developing products for global health?   In my experience, such start-ups need a minimum of a couple hundred thousand dollars for the essentials:  completing convincing proof-of-concept studies to leverage into a real fund-raising round and paying the living expenses of the founder or founders, at least one of whom needs to put full time into the venture.  While it helps to have a fully-employed spouse, generous and supportive friends and family, and access to grants, loans, and free advising, the founding team has the major task of finding and convincing knowledgeable investors that it has a viable plan to make and sell a product and to create a successful business that will repay investors in excess of competing opportunities.  Of course, global health-oriented companies have the added challenge of educating potential investors on their value, not easy since investors prefer business models that have worked for them before.  Call me old-fashioned, but I think the best (only) way to tackle this task is in person and not through the ether.

But, as it is said, there may be an app for that.  As I learned last May from a FierceBiotechIT article and a Wall Street Journal blog post, there are now two sites set up to sell shares in life sciences start-up companies to qualified investors.  Since the SEC rules allowing the sale of equity in companies via internet “portals” are still pending (the SEC draft rules were released last October), these sites are not really crowd-funding but require potential investors to register and assert they are “accredited investors” under the existing SEC rules for stock offers.  The one is Healthfundr, which “makes it easy to discover, screen, and invest in the most promising health companies.”  I could not find any information on how successful this group been in raising money for itself or others, but in a December blog post one of its founders stated that they have now figured out their business model they are starting to execute (Schantzen post), not a reassuring comment.  More promising effort seems to be VentureHealth since the founders are successful investors who will be evidently also co-investing.  The company’s launch press release indicated that it is aimed at angel investors and companies seeking an alternative to VC funding.  It also noted the successful raising of $875,000 for multi-million Series B round for Channel Medsystems, a California medtech company, which is nice, if unfulfilling.  The WJS article also mentioned a third site, Medstartr (I guess dropping the “e” is required for crowd-funding sites).  As far as I could tell, the site has almost only projects (companies?) developing health care IT products, seeking small amounts (under $10K), and offering a nice “thank you,” not equity, as a return for “investors.”  Medstartr states it provides its users “events, mentors, experts, challenges, partners, packaging, promotion, and optimization services to create a model that maximizes the chances of success for ideas in healthcare” and claims to have raised $250K “online” (less Medstartr’s 5-8% take) and $8 million “offline,” whatever that means.

So it looks to me that for now that crowd-funding offers only small amounts of short-term funding to global-health start-ups, but, when the SEC rules are final and if a investment portal can wrangle angel investors with a philanthropic streak, equity-based crowd-funding may be possible.  But then again, I may be wrong.  Last month I noted that an organization called the Immunity Project started a donation-type crowd-funding campaign to raise $1 million to advance a vaccine for HIV.  Since its founding in 2010, the California-based Project, which describes itself as a “non-profit initiative” (I guess the founders thought “company” has a negative connotation), has identified HIV epitopes used by the rare humans able to control HIV infection (FierceVaccines article), got a $1 million grant from Microsoft, and conducted animal studies (sparse details are at Immunity Project).  The Project director, Reid Rubsamen who is also CEO of a medical device company, told the San Francisco Business Times that the goal is to complete the funding this coming summer and have an inhaleable candidate vaccine to test in humans in 2015, while continuing to raise the $25 million he estimates is needed to complete testing and registration (SFBT article).  As for manufacturing and distribution, he was quoted:  “You pretty much need to be thinking about free distribution because the commercial reality is it’s a multibillion-dollar industry.  For HIV, the Mount Everest is if we see some really good results, we can rally people around this to do large-scale manufacturing and distribution.”  So crowd-funded manufacturing and distribution, too?

I wish him well, but I’m not sure if $25 million more will be enough.  HIV is a challenging vaccine target (see a HealthLine article) and the trials expensive.  I saw one estimate of the costs of a Phase III trial as $70 million (another FierceVaccines article).  I respectfully suggest the Project’s management raise whatever money is needed to generate proof-of-concept data, develop a rationale for why the Project’s vaccine will succeed where others have failed, and use old-fashioned person-to-person salesmanship to find a corporate partner with the expertise and money to test, register, and sell an affordable vaccine.  Crowd-funding may be one way to generate seed money but it may also divert and dilute the founders’ efforts to find people and resources needed for the long-term.

Halloweenie

Those of you familiar with the jargon of drug development know the phrase, “Valley of Death,” used to describe the transition a candidate drug faces between its preclinical and clinical stages.  The gist is that many wanna-be drugs vanish in the valley after promising studies in animals but before proof-of-concept studies in human demonstrate a possibility of a therapeutic effect.  Cause of death is lack of funding due to the large uncertainty of animal to human extrapolation and the high cost of clinical testing.  For the big pharma companies, it’s a question of allocating resources to internal programs, and their current approach is “fail fast and often” o get their trickle of candidates.  For biotech companies, funding to cross the valley typically comes from a $10-20 million Series B round from current or new investors, or, with good selling skills, finding a big pharma for a “structured deal” (a rare option, see Bruce Booth’s blog) or, with lots of luck and chutzpah, going to the public market (very rare, see FierceBiotech special report).  For companies that have used up their Series A funds or academic groups or not-for-profit orphan drug or global health product development programs (PDPs), the valley looms large.

Last week though, I saw mention of a new program to help companies in the diabetes space cross the valley.  The Juvenile Diabetes Research Foundation (JDRF) and PureTech, a Boston-based venture company, announced the initiation of T1D [Type 1 Diabetes] Innovations, “a novel venture-creating entity designed to accelerate the development of innovative T1D therapies” (JDRF press release).  T1D Innovations is essentially a fund started with $5 million from JDRF that PureTech will manage and use to identify a promising T1D preclinical programs and, after sprucing them up, use as the bases for start-ups.  PureTech will then round up additional funding from “other leading not-for-profit, strategic, and financial investors” (none are named in the press release) to move a company and its therapy through to trials.  The release lacked additional details on T1D Innovations, but Alex Lash writing in In Vivo Blog noted that, to access the JDRF funds, PureTech must raise at least a matching amount with a goal of about $30 million which the principals estimate will allow the funding of 10 companies (In Vivo Blog).

The founding of T1D Innovations is an important step for the JDRF which is a powerhouse in raising money for and funding diabetes research.  JDRF is currently sponsoring $530 million in research including about $25 million granted to 22 companies through its Industry Discovery and Development Partnership program (IDDP), but it has not been an investor in companies.  As for PureTech, the release noted that T1D Innovations is part of the company’s “Valley of Life” initiative, a new program to me.  Web pages for PureTech and the Valley of Life offer general statements (“The Valley of Life is a new funding vehicle dedicated to developing cures by enabling foundations to make mission-driven investments alongside strategic and financial partners ….”) but few specifics, e.g., investment criteria and selection process.  The program apparently started in 2012 with PureTech’s David Steinberg as primary manager.  He provided a quote on the program’s mission in a Nature Biotechnology article: “Our whole idea is to enable new technologies to escape that academic orbit … To close the venture gap, you have to go out and proactively create new companies.” (Weintraub 2012).

PureTech is an early-stage company specialist, calling itself a “venture creation” company rather than a venture capital company, the difference being that it has been willing to put small amounts of money (seed capital in the 100s of thousands of dollars range) into multiple academically-based projects over several years until the technology-to-product path is clear and before bringing in more substantial funding from VCs and other investors.  Over its more than ten years of operation, PureTech has started about 15 companies in a range of areas (pharma, drug delivery, diagnostics, digital, consumer; see PureTech Pipeline), and at least four have attracted wider funding.  According to a 2011 Xconomy interview with CEO, Daphne Zohar, PureTech reviews about 800 academic projects and forms two-four companies each year (Xconomy interview).  PureTech and David Steinberg were also the founders of another unique venture platform, Enlight Biosciences.  At the time of its initiation in 2008, Enlight was focused on founding start-ups developing drug discovery technologies that were to be accessed by its big pharma corporate funders and collaborators, initially Eli Lily, Merck and Pfizer (Xconomy article, Xconomy article).  Enlight has been successful in that it has added five more corporate partners and has spun out five companies (Enlight portfolio), although it has broadened its purview beyond drug discovery to general health technologies, like video games for treating cognitive impairment.

It is too early to tell if PureTech and T1D Innovations will succeed in generating start-ups that can attract additional OPM (other people’s money), but I’m interested in it as a model for engaging foundations in investing in early-stage global health product development companies.  I posted previously on how the Bill & Melinda Gates Foundation may be slowly moving into funding venture funds (“More Not Less”) and how the Gates has been instrumental in starting a mezzanine fund for companies with global health clinical stage products (“Tossed from the Balcony” ).  A “GH Innovations” entity would have the advantage of providing a buffer between foundations and start-up companies and, with the participation of a company like PureTech, would bring in professionals with company formation skills and credibility.  But unlike T1D Innovations, it would have a tough sell convincing investors that there is an exit and ROI at the end of the valley.  GH Innovations could leverage the billion dollars or so the Gates Foundation and other entities have put into research for global health over the past ten years and could increase its chances for success by focusing on products that may have both developed and developing world markets.  Additionally, it could go after investment by the big pharmas that have internal global health/neglected disease programs and believe that start-up/spin-out companies are needed to commercialize products.  Clearly, I need to look at both the investor and the investee sides to see if this skeleton has any legs.  Maybe someone at PureTech has some ideas.

Off on the Right Foot

In one of my funner activities, I offer my two cents of advice to start-ups coming out of MIT as a volunteer mentor in its Venture Mentoring Service.  For ventures just getting started, a common topic of discussion is what legal identity the venture will adopt.  This is an important step since it indicates the seriousness of the founder(s) and her/his/their commitment to the enterprise, establishes credibility, and is a signal of how the business will operate.  Most founding teams will opt for one of the traditional forms for a corporation (see below), but occasionally a team will be interested in forming a non-profit organization.  The reasons are usually because it equates the non-profit label with a mission to do social good and/or intends to fund the company with personal gifts or grants from foundations which typically have policies of giving money only to non-profits.  In response, I point out that a for-profit can have a social mission (it just puts it some or all of its revenues above expenses back into its mission as opposed distributing it to shareholders) and that an organization’s incorporation should reflect the best way to accomplish its mission as opposed to how it expects to be funded.  I also point out that most start-ups operate without profits and sometimes revenue for several years (or longer if the venture is developing a technology-based product), so practically, the for-profit/non-profit dichotomy is a false one.  I also note that nonprofits tend not to have a clear understanding of whom they intend to help or how and often make the grantors their customers, neither of which lead to a viable enterprise.

While I’m clearly not an expert in incorporation, I thought it would be worthwhile to write on what I did know and posit what mode a venture that is developing products for global health may consider.

Starting with nonprofits, a nonprofit is usually required to register as charity at the state level, can solicit donations and grants, and avoid paying taxes by receiving a 501(c) designation from the Internal Revenue Service.  The application process costs several thousands of dollars in fees and legal assistance and takes several years or longer, since the IRS has a large back load and unclear criteria for eligibility that it applies unevenly.  Again, I think there are alternative sources of start-up funding other than gifts and, to many people, nonprofit is equated with non-revenue which makes long term viability problematic.

A for-profit is registered at the state level in the states in which it does business (for most start-ups this is the state where the founders live).  It can raise pre-revenue funds through friends/family, foundations (rarely), governmental grants, and investors who expect (hope) to get their money plus a profit back at some time; however, most start-ups are a long way from being attractive to investors.  For-profit companies typically incorporate as either “C” or “S” corporations, although there other structures such as partnerships, used for short-term business efforts, and limited liability companies (LLCs), used for service businesses.  The latter have various tax and liability advantages that are too deep for me but I found useful explanations and comparisons at Incorporate.com.  Incorporation is done with a home state government or in Delaware due to its business-friendly courts by filing an incorporation document and by-laws and paying a fee.

As I understand it, the C (or general) corporation has the advantages of limiting the liability for directors, officers, shareholders, and employees and the ability to sell stock with no limit on the number of shareholders, although it is required to register with the SEC when it reaches $10 million in assets or 500 shareholders.  The profits of a C corp are taxed as corporate income and as dividend income of its shareholders.  An S corp is a C corp that has elected with the IRS to have its profits and losses “passed through” to the owners/shareholders apportioned by ownership, theoretically reducing the total tax paid.  Also, the owners/shareholders report the profits and losses on their personal income taxes, simplifying the company’s paperwork.  S Corporations have a number of restrictions, e.g., it may be owned only U.S. citizens or permanent residents, may not have more than 100 shareholders, and can issue only one form of stock.  This last point makes the structure unappealing for companies seeking venture capital since early investors want “preferred” stock with its benefits.  So for a global health start-up, incorporation as a C corporation makes sense.

In a previous post, “More Fun and Profit”,” I noted a new structure, the “B” or benefit corporation, that is available in six states including California and New York.  This structure allows the company to make decisions needed to meet a social mission, like improving he environment or global health, rather than on profit maximization for shareholders.  A B corp has the structure and requirements of a C/S corporation, but assures that the owners, managers, and shareholders accept the primacy of the mission over profits.  For a discussion of the B corp for life sciences companies, see a recent Bioworld article, and for a whole lot more on the B-corp movement see B Lab.

This is obviously a very broad-brush summary of incorporation options, but it seems to me that the C corp, with the B modification, if available, is the route for global health start-ups.  But I’m happy to be enlightened by those with more experience.