The Case for Investing in Orphan Drugs

Investing in biotech companies developing therapeutics seems like a natural for physicians and other healthcare providers. One area that should particularly be considered are “orphan drugs” — products being developed for a rare disease. A disease is classified as a “rare disease” if the patient population in the US is less than 200,000 patients. It is estimated that there are over 7,000 rare diseases and that 10 percent of the US population has one of these rare diseases.

 

In total, not so rare at all.

 

Investing in companies developing a drug for a rare disease may align with the personal interest of health care practitioners. Individuals in the medical field have a deeper level of scientific knowledge than a typical investor, and they have a broader appreciation for the medical consequences of the disease and for therapeutic alternatives.  In addition to their medical background, there are some other compelling reasons to consider companies developing drugs for orphan diseases.

 

Orphan Diseases represent a very attractive sector of the pharmaceutical industry. Big pharma continues to rely on licensing or acquisition of smaller companies to supplement their portfolios.  This trend bodes particularly well for startup companies developing products for these rare diseases. Orphan drugs are expected to account for over $200 billion in worldwide revenue by 2022, this represents an 11 percent annual growth rate, over twice the industry average.

 

Here are some orphan drugs facts showing why orphan drug companies may be a valuable addition to an angel investment portfolio:

  • Orphans drugs account for 1/3 of all new FDA drugs approved.
  • The likelihood of approval for an orphan drug is much higher than for a traditional pharmaceutical drug.
  • 30 percent of orphan drugs generate over $1b in annual sales.
  • Orphan drugs cost less to develop (a bit less than ½ as much).
  • The FDA registration trials require fewer patients and the trials are frequently quicker.
  • Physician adoption following FDA approval is faster for drugs for rare diseases.
  • Typically, orphan drugs enjoy easier market access with lower price resistance from payers (the average orphan drug in the US is priced five times higher than a non-orphan drug).
  • Partnering deals for orphan drugs on average are 30 percent above non-orphan products.
  • Companies developing orphan drugs receive tax benefits and other financial incentives.

Drugs for orphan diseases, are a major trend in the pharmaceutical industry today. There are many companies developing highly specialized drugs for very specific diseases.  Many of these companies represent a novel investment thesis for angel investors, and potentially provide a great leap forward in medical care while providing attractive financial returns.

 

Sources:
Evaluate Pharma: Orphan Drug Report 2017, June 2017
Hughes DA, Poletti-Hughes J (2016), Profitability and Market Value of Orphan Drug Companies: A Retrospective, Propensity-Matched Case-Control Study. PLoS ONE 11(10): e0164681. doi:10.1371/journal.pone.0164681

 

 

Craig W. Philips, Entrepreneur-in-Residence University of Washington
Contact: philips2@uw.edu

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An Introduction to Private Equity

Private equity is an asset class that involves buying stake in companies that are not publicly traded. It is generally purchased through a private equity firm, a venture capital firm, or an angel investor. Investing in the right company in its infancy can be extremely lucrative but knowing about private equity is essential in this process. Getting involved with private equity investment today means getting involved in the newest investing trend and making a potentially fruitful investment.

 

Investing in private equity is an alternative way to participate in primarily long-term investments. In the modern market, this asset class has a much higher ceiling for ROI due to traditional stocks being rather subdued. While the price volatility and risk involved with private equity are higher than those in their public counterpart, the median 10-year return in private equity from 2005 to 2015 was 11.8 percent whereas the S&P 500 had only increased 6.8 percent in that same span according to the Private Equity Growth Capital Council.

 

A private equity investor having industry knowledge as well as diligence can provide a huge advantage over others. This is the result of a company potentially being critically undervalued due to the lack of valuation on many private companies. An investor can then do their own analysis and make a decision based on the product or service offered by the firm, possibly making the choice to invest.

 

Much of the success (or lack thereof) of these assets is due to the quality of company management. Upper quartile managers massively outperform the public MSCI World–Morgan Stanley’s index of 1,650 companies from 23 countries. This gives savvy investors another tool to beat the market: by identifying private companies with top managerial talent.

 

Private equity can also allow investors to take on a role with the firm they are funding. Because of the smaller size of private companies, each investor could play a much more significant role as a shareholding decision maker.

So, What’s the Catch?

Arguably the most significant issue with privately-traded companies is that only about one in six ever become profitable. While investing always comes with risk, private equity comes with more than most. However, with the proper research, the potential rewards are very high as well.

 

Another difficulty of private equity investing is a lack of liquidity. Investments often take five to ten years before there is any return. Because of this, a potentially large amount of money can be unavailable to the investor for a long time.

 

Sometimes information can be hard to find as well. This can make private equity perilous, as accurate information is critical to picking investments. This is amplified when company managers have technical backgrounds, but are not familiar with what information investors need.

Private Equity Today

Private equity investments are increasing in both frequency and size. Last year, private equity investing hit an all-time high of $681 billion, a nine percent year over year increase.  At the beginning of 2017, Forbes predicted that the upward trend would continue and that the 2015 record of $681 billion would be surpassed for another record-breaking year.

 

Today institutional investors are targeting companies that they predict will produce an exit via acquisition, resulting in a payout for investors. According to a study done by Provitas Partners, in the past 10 years there has been an increase from 45 percent to 77 percent of institutional investors that target middle-market buyouts, as well growth from less than 25 percent up to 56 percent looking for small-market buyouts.

 

The United States has always been the frontrunner for the most private equity investments simply based on the ease of starting businesses here, however new markets are emerging.  According to a survey of 84 institutions, the most anticipated market that they will be investing in is China, followed by four other countries in Asia. The sixth most positively forecasted market is Brazil. This is a reflection of globalization in finance and the development of international markets.

 

The risk involved with private equity is certainly higher than with publicly traded stocks, however this risk can be — to a degree — mitigated by knowledge of a sector and due diligence on the part of the investor. The potential returns that come with the private sector are extraordinarily high and can outweigh the costs.

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Funding Beyond Borders: Visualizing the angelMD Network

It’s no secret that startup funding is largely confined to a select few regional markets. As recently as 2015, 78 percent of startup financing was confined to the metropolitan markets of New York, Boston, San Francisco, and Los Angeles.

For companies outside of these areas, there has been a very limited ability to reach potential investors. While many of our startups are located in these major markets, it is clear that innovation knows no bounds on angelMD. To illustrate this, check out the map below to see the 43 states, as well as more than 20 countries, where angelMD’s startups are located.

(Our office locations are marked by the angelMD logos, recently funded companies on our platform are marked by green check marks, and $ symbols represent active syndicates)


Our office locations in Seattle, Houston, and Denver, are all strategically placed to help us become involved in markets where entrepreneurial culture and health-tech innovation intersect.

Our first location was strategically placed in Seattle. Seattle is the #10 city in the world for startup funding, and is also home to world class hospitals and medical schools.  Seattle has long been a capital for neuroscience and tech innovation, and we love being able to connect to talented innovators in this dynamic community.

Our second location is in the Texas Medical Center in Houston.  The Texas Medical Center is the largest medical center in the world, and is home to 106,000 employees that connect with over 10,000,000 patients per year and perform over 180,000 surgeries.  By being able to connect with groups inside of the TMC such as the TMC Innovation Institute, we have seen firsthand the type of medical innovation that is coming out of this massive, talented community.  angelMD sees TMC and the greater Houston area as drivers in change for healthcare and is firmly invested in continuing to facilitate health-tech growth in the area.

Our third office is located in Denver, which has become increasingly a hub for private equity investment.  Colorado managed to fund startups with over $340M of funding in Q1 of 2017 alone, which placed the state fourth in the nation for venture capital funding. We see Denver as an emerging powerhouse in the private equity realm with great potential for growth.

While our offices are located in these three cities, angelMD’s mission is to connect with a diverse group of physicians and startups from all across the world.  Our platform has a powerful ability to provide the same kind of funding support that was once limited to a few major cities, on a large and virtual scale that is as accessible to a company in New York as it is to a company in rural Nebraska.

We believe that innovation in healthcare knows no bounds, and can back that belief up through our network of 4000+ physicians and startup founders.  We see immense value in not only connecting to startups across regional markets, but to physicians and investors across the United States, and increasingly across the world. Check out the virtual tour of our network below to see the dispersion of physicians, investors, and startup founders on our platform:

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The Startup Capital Gap

The conversation about capital availability for startups is often completely mis-framed. The argument usually centers around the notion that startups are desperate for capital; and the conclusion is that more venture firms are needed. This was the central thesis of a Houston Chronicle article from June 6 entitled “Houston startup community struggles to attract venture capital” It cites a study that listed a single semi-recent Houston-based startup that raised venture capital and went on to go public.

Does Success Mean Going Public?

In the past 20 years the number of publicly traded companies in the US has dropped from roughly 4,000 to approximately 2,000. IPOs used to exceed 500 a year and now hover in the 100 per year range.

Why the resistance to public markets? Too much regulation!

Sarbanes Oxley, Graham Dodd, and other complex matrices of rules have created a massive disincentive to go public. Further, the JOBs Act opened up a more favorable framework to remain private. The number of shareholders allowed in a private company was raised from 500 to over 2,000 and the ability to raise larger amounts of capital in the private markets has become a more viable option than years past.

Additionally, the venture model has viability issues. Aside from the math that in a given year approximately 50,000 companies seek venture capital and only about 1,000 receive it, the lens of the investor is even more important.

Almost half of venture funds don’t even return investor principal. Almost all profits in venture capital are realized by less than 5 percent of the firms. If you are a savvy investor you don’t like that math. After fees, the likelihood that you are going to come out ahead is not good.

The Road Less Traveled

Ok, so the IPO and VC combo is not exactly healthy. So what’s the alternative? It’s the community. It’s the tidal wave in the finance community referred to as crowd funding.

Investors looking for upside in their portfolios are flocking to alternative investments over the tumultuous public markets. They are seeking what investment professionals call “Alpha” or better than average returns.

With the passage of the JOBs Act, members of the community can now participate in early stage private investing often referred to as angel investing. It’s the democratization of investing in which individuals can leverage the availability of information formerly only available to brokers and investment houses.

Take Houston as a perfect example. Specifically, we’re going to look at healthcare startups. Programs like TMCx are attracting and building a startup pipeline that is growing each year. Reliance on venture capital funding has not, and will not, supply the capital needed to support the most promising startups out of this program.

But one mile from the TMCx facility are thousands of physicians and scientists who have expertise and small amounts of capital to put to work. Individuals from the energy and real estate sectors are learning they too can participate in the growing healthcare startup ecosystem as they seek to diversify their portfolios. The result? Houston will never need another dime of venture capital money from Palo Alto or Boston.

The ability to effectively grow and finance startups at home and ensure that their windfalls remain at home is growing. The more the community learns about this opportunity the more powerful it becomes.

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Investing in Healthcare: the edge physicians have over other investors

Healthcare is one of the most challenging industries for a common investor to analyze and get a solid return in. Many of the drugs, procedures, and tools that form the basis of a potential investment are complex and difficult to understand without a formal education in the field. Because clinical trials are of such high importance to these technologies, knowing the implications of the reported results is incredibly beneficial for the investor. Physicians can take advantage of the information gap between medicine and be investing to maximize their investment potential.

This was demonstrated by the recent founding of Thessalus Capital LLC, which is headed by two medical students. The company reported a lucrative 44 percent return in 2016.  By way of comparison, the S&P 500 showed a return of only 8.53 percent for the year, while the healthcare segment faltered to a four percent loss.

Healthcare companies are uniquely positioned for fast expansion upon completing certain milestones. An FDA approval or successful clinical trial can lead to a rapid increase in value for an organization. Unfortunately, the initial capital required to get that approval or trial is often the most significant roadblock that a company will face.

Physicians have the distinct advantage of understanding what is required for a product or service to find success in healthcare. As such, they are ideal candidates to invest in the space. This emergence of so-called “doctorpreneurs” holds the power to shift the way in which medical technologies are funded and developed.

For help finding investment opportunities in healthcare join us at angelMD.co

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