CNS Angel Investment Business Plan
The Center for Neurologic Study, a non-profit organization, provides investment capital, strategic advice, and mentoring to early-stage technology companies and academicians involved in research leading to the development of therapeutics or diagnostics in the field of neurodegenerative diseases. Specifically, these diseases include amyotrophic lateral sclerosis (ALS, or Lou Gehrig’s disease), multiple sclerosis, Parkinson’s disease, Alzheimer’s, and Huntington’s disease. Other diseases leading to neuromuscular or cognitive decline will also be considered, as will traumatic brain injury and CNS infectious disorders that impact cognition and neuromuscular functions. Our mission is two-fold: to advance treatments for neurological disorders that have been underserved or overlooked by the research community and to provide a financial return for our organization and those that partner with us.
Across all therapeutic areas, drug discovery and development is a lengthy, expensive, and risky process. Nowhere, however, is this more true than in the area of central nervous system therapeutics, particularly those which would impact neurodegenerative diseases. Despite the fact that the prevalence of these disorders is growing, account for disability and substantial economic burden worldwide, and exact a significant emotional toll on both patients and caregivers, there are today few significant disease-altering therapies for treating neurodegenerative and kindred disorders. Although this area of drug discovery has the potential for significant commercial success, many pharmaceutical companies have either reduced their involvement or else have withdrawn completely from the field. The average cost of bringing a new drug to market in any disease area has been estimated to be greater than $1 billion. Even when successful, the time from the start of a discovery program to regulatory approval can take 12 to 15 years. Drugs intended to treat neurologic (or psychiatric) disorders, on average, have longer mean times to complete clinical trials and longer times to obtain regulatory approval. Moreover, compared with other disease areas, the failure rate for CNS drugs in late clinical stages is disproportionately high. This has resulted in a much lower regulatory approval rate for CNS therapeutics. No doubt, part of this is due to the complexity of studying the human brain, the difficulty of examining it directly in living patients, as well as a lack of predictive animal models and molecular biomarkers that can be used to evaluate safety and treatment efficacy. Overall, these scientific challenges together with the financial risks have discouraged new investment in treatments for brain disorders both in the United States and globally.
Angel investing fills a gap in the drug development funding cycle, positioning itself after initial personal as well as “friends and family” capital deployment by the entrepreneur, and prior to the venture capital funding stage. Angels invest their own funds directly in ideas or startups
while venture capitalists generally invest money from other sources (e.g., foundations, pension funds, insurance companies, etc.). Venture funds invest larger amounts at later stages of the business development cycle, typically $2 million and up in the initial financing round, while individual angels make smaller investments, on the order of $5000-$100,000. Angel groups (syndicates) can make investments in the mid-range.
According to the most recent (2016) HALO report on angel investing trends in the United States, syndication continues to be a tactic that angels are using to fund deals and provide sufficient capital to budding entrepreneurs. The median angel group investment in 2016 was $127,000, while the median round size was close to $1 million (on a median pre-money valuation of $3.65 million), meaning it either takes multiple angel groups to fund most deals, or else closer association with venture funds and other income sources such as foundations. Interestingly, convertible notes are increasingly being used by angels as a funding vehicle on first-time investments, possibly due to an inability of investors and entrepreneurs to determine the correct pre-money valuation and terms required to get a deal funded.
The most popular industry for angel investments in 2016 was software (34.3% of all deals), followed by healthcare deals at 17.3%. California is by far the leading state for angel investment-backed deals, accounting for 30% of all deals in the country, with New York second at 11%. Within California, software related business ventures accounted for 43.1% of angel deal flow, followed by business products and services at 15.1%, and healthcare-related deals taking third place at 12.4%. The epicenter of California angel investing (as well venture capital investing) is Silicon Valley, which is playing an even more prominent role in backing new deals than it did in the 1980’s. Although both here in California as well as nation-wide there are numerous angel investing groups that include biotechnology ventures in their portfolios (e.g., the Angel Capital Association, Keiretsu Forum, Tech Coast Angels) few (if any) groups focus exclusively on neuroscience investments, let alone those investments that would target neurodegenerative diseases.
The Center for Neurologic Study(CNS) is a 501c non-profit organization headquartered in La Jolla, California. CNS was founded in 1979 for the purpose of conducting clinical research and providing support to patients and families suffering from neurodegenerative disorders, especially those afflicted by Lou Gehrig’s disease (ALS).
To our knowledge, few institutions have attained the commercial success of the Center. CNS, through the efforts of its director, Dr. Richard Smith, was directly involved in the development and subsequent FDA approval of Nuedexta for the treatment of emotional lability (pseudobulbar affect, PBA). Although Nuedexta was approved for treating PBA in ALS patients (and others suffering from neurologic deficits), a clinical trial recently reported in JAMA demonstrated the utility of treating agitation in Alzheimer’s disease with Nuedexta. This represents a huge market opportunity if subsequent trials confirm the initial result. Equally significant is the recent report that Nuedexta is effective in treatment-resistant depression, a market in excess of $800 million in 2015, and estimated to reach $1.1 billion by 2024.
Additionally, through a direct collaboration of CNS with Ionis Pharmaceuticals and the University of California, San Diego, two additional drugs have now entered clinical trials. Biogen is currently conducting a trial with an antisense product that targets the SOD-1 variant of familial ALS. A similar product is being tested for Huntington’s disease by Roche Pharmaceuticals. Dr. Smith’s efforts in establishing the utility of using antisense products to treat central nervous system disorders were foundational to the success of these two new clinical efforts and the recent approval of Spinraza for the treatment of Spinal Muscular Atrophy.
Reflecting on CNS’s history since its founding, the Center is redirecting its commitment to advance the treatment of incurable neurological disorders. At its inception CNS established laboratories and conducted basic research. While this was highly successful, it wasn't sustainable primarily because its researchers, once established, were recruited to larger and better funded institutions. Clinical research proved to be more susceptible, and with the move to Scripps, CNS established itself as a leading clinical research facility. But as the climate for this activity became more difficult CNS once again altered course, in great part because its own success was no longer dependent on asking others to support its programs. It is now in a position to support others. And while this in and of itself is not unique, we are unique in that most angel investing organizations have been motivated by a personal attachment to the cause(s) they support. Our motivation is a response to the personal experience of our researchers whose grants were turned down and whose novel ideas didn't dovetail with existing dogma and so forth. In short, our mission is to support novel ideas, some of which might never get a chance to be tested unless we give their originators a chance to develop them.
The CNS Investment Biosphere/Generation of Deal Flow
Discovering and meeting visionary entrepreneurs and scientists engaged in cutting-edge neuroscience projects is a critical step for angel investors. This is most easily accomplished in biotech “hubs” that contain a rich biopharmaceutical and academic research infrastructure, but CNS will fund compelling projects irrespective of their geographic locale. For practical reasons, communities such as San Diego, San Francisco, and Boston provide a rich opportunity for investment.
For example, our own backyard, San Diego County, is home to more than 1100 life sciences companies, and more than 80 independent and university-affiliated research institutes, including world-renowned organizations like Scripps Research Institute, the Salk Institute for Biological Studies, the J. Craig Venter Institute, and Sanford Burnham Prebys Medical Discovery Institute. Major pharmaceutical companies including Pfizer, Takeda, Eli Lilly, Illumina, and Genentech maintain a presence in San Diego, and this in turn helps foster collaboration with research institutes, universities, and smaller biotechnology companies. These interactions are further supported by a growing number of incubators, accelerators, and entrepreneurial mentorship programs, (e.g., Biotech and Beyond, UCSD Connect, Janssen Labs, Hera Labs) which help encourage the commercialization of promising scientific and technical discoveries. The San Diego life science sector is additionally represented by an exceptionally strong public policy and advocacy group, Biocom, which represents more than 900 member organizations, and is active in connecting these member organizations with venture capital and other sources of funding. This unique ecosystem houses arguably one of the most talented workforces in the world, and contributes to San Diego’s status as one of the country’s top life sciences markets, which in turn attracts investment capital. In 2015, for example, venture capital investment in life sciences in San Diego County totaled more than $660 million. More or less, the same environment characterizes other biotech-rich communities.
As noted above, the Center intends to capitalize on these business and scientific environments. The organization is well-connected with neurologists, neuroscientists, and key decision-makers in the biopharmaceuticals industry, and will use this network to uncover promising investments. Since we envision many of our deals to be done in syndication with other angel investors, networking with angel groups that have an interest in biotechnology deals will also be key. The most likely of these organizations are Southern California’s Tech Coast Angels and the nationwide Angel Capital Association.
The board of directors for the Center for Neurologic Study ultimately has responsibility for overseeing and approving all programs sponsored by the Center, including those involving angel investing. While CNS’s board will provide general oversight of its angel investing commitments, the decision regarding individual investments will be made by the Director of CNS and a committee consisting of 5 members drawn primarily from the biotech community.
The amount to be invested will be determined annually by the CNS Board of Directors based on the yearly investment returns of the CNS endowment. Based on this overall general funding level, the number of individual investments for the calendar year will be determined. In general, it is anticipated that CNS should be able to fund $300-500,000 of angel investments per year. Depending on the actual amount, this could result in funding of 5-7 individual investments. Yet to be determined are the requirements for monitoring these investments. At a minimum, funded companies will be required to provide an annual progress report.
The Center will invest primarily in seed-stage biotechnology projects in the CNS therapeutic space. Although we favor opportunities in “target rich” biotechnology communities, we will consider investments worldwide, as long as the therapeutic opportunity fulfills our investment
criteria. Our goal is to fill the gap between “friends and family” funding and traditional venture capital financing for companies seeking to develop drugs or diagnostics impacting degenerative central nervous system disorders. We are looking to invest in projects that would address significant unmet medical needs in this space. Specifically, we will seek investment opportunities having:
--A proprietary technology or other strong barriers to entry.
--A potential for providing a solution to a significant unmet medical need in the CNS neurodegenerative disease space.
--A compelling, well-articulated strategy for capturing significant market share.
--Strong management with relevant experience, a successful track record, desire for advice and coaching, and a willingness to listen.
--A market opportunity sufficiently large to create a business with at least $25-$200 million in annual revenues.
--A viable exit strategy for CNS (and other potential co-investors).
--A company valuation that fits within a predetermined risk/reward calculation for the investment.
In situations in which CNS partners with, others CNS will look for situations in which the company is seeking approximately $1-2,000,000. This, more or less, follows the usual VC capitalization of round one funding. It is unlikely we would participate in a second round of funding.
Investment Application Process
Initially, applicants for CNS funding are required to complete an online application. The application consists of the following items:
1) Executive summary (500 words max)
2) Business development plan, including figures and key data. Applicants should use this section to explain the market opportunity involved, the background science and rationale, work completed to date, the amount of funding being sought, and what the funding will be used for. Technical methods, a broad experimental plan, and a description of current facilities and equipment needs should also be provided.
3) Innovation and impact—position the project within current medical practice and/or the scientific literature to highlight what is novel and innovative. Additionally, describe the potential clinical, medical, and commercial opportunity of the project.
4) Scalability—what is the potential of the research being funded being scaled into a larger commercial opportunity?
5) Intellectual property—discuss the current status of relevant IP.
6) Budget—how much money is being sought and what will it be used for?
7) SWOT analysis—provide a brief and concise analysis of the strengths, weaknesses, opportunities, and threats surrounding the proposed business.
8) Anticipated exit event/timetable/project milestones.
9) Primary applicant’s biographical sketch/resume.
10) Additional project personnel/roles/brief background statements.
Each application to CNS will be evaluated as follows:
1) Application does not meet investment criteria. Applications that do not meet the predefined investment criteria will be notified via email that their investment opportunity does not meet the core investment parameters of CNS. When appropriate, CNS may choose to refer the entrepreneur to one or more of the entrepreneurial support entities with which it is familiar.
2) Application meets initial investment criteria. Promising opportunities will tbe presented to the Investment committee chaired by the director of CNS. If appropriate, other potential co-investors will be invited to participate and evaluate the opportunity based primarily on the submitted application and a review prepared by CNS. If a decision is made to proceed, a preliminary term sheet will be prepared and presented to the applicant. If accepted, further due diligence may be undertaken. This most likely would entail a meeting in which the applicants would make a formal presentation to CNS or CNS committee members would make a site visit to the applicant’s facilities. Following this a final term sheet would be presented to the applicant and, if approved, the applicant would be funded.
Return on Investment/Exit Strategy
Although the Center naturally favors opportunities where liquidation can be affected as expeditiously as possible, we realize that the CNS drug discovery and development process is a lengthy one, and may require seed funding that spans the course of a number of years. Although initial public offerings are always a possible exit event, the most likely exit event for the Center is a buy-out by a venture capital firm or a pharmaceutical company looking for a promising investment.