An Overview of the Texas and Houston Tech/Life Science

Investment Activity

December 2012

Stephen Banks

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Biotech and Medical Venture Investing 2009 – 2012 (prel)

$ Billions

Source: NVCA/PricewaterhouseCoopers

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Biotech and Medical Venture Investing Texas 2009 – 2012 (prel)

$ Millions

Source: NVCA/PricewaterhouseCoopers

Includes ABT Reata deal ~ $300 M

65% of Life Sciences Investment Flows to California and New England Companies (12 months ending 12/11)

Source: PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™ - 2012

Texas Venture Deals 2011 – 2012

Texas 2011 2012

Software - $275 M $375 M

Industrial/Energy – $397 M $210 M

Semiconductor – $ 48 M $ 73 M

Life Science - $433 M (a) $204 M

Other – $443 M $193 M

Total $1,596 M $956 M

Life Science as Per Cent of Total Investing

National – 26% 23%

Texas - 27% 21%

Few Texas VC Firms Focus on Life Science

Source: PWC Money Tree Data

Includes ~ $300 M ABT – Reata deal

Texas Investment in 2011 by Deal Count171 Deals

Source: PricewaterhouseCoopers/Venture Economics/National Venture Capital Association MoneyTree™

Houston & Texas Life Science Industry 2012 – Selected Current Opportunities

• Pharmaceuticals - – Human – PLX Pharma (coating NSAID), NanoSpectra (Rice & MDACC, gold

nano shell to target cancer)• Biotechnology -

– Human – many CPRIT driven opportunities– Research Tools – n3D Bio (Rice & MDACC, 3D cell culture), Resonant Sensors

(label free bioassay tool for biomolecular screening)• Medical Devices –Monebo Tech (adv cardiac monitor, Austin), Endothelix (vascular

monitor), CardioNexus (Fairway – Panasonic JV), OrthoAccel (dental device) , Houston Med Robotics (Texas Heart Inst, improved vascular access) , Nimbic Sys (surgical site infection protection), TraumaTec (portable cooling for brain), Procyrion (small diameter catheter delivered heart assist device), CorInnova (heart assist balloon pump )

• Health Services – Medical Metrics (software for orthopaedic diag.), MediCode (software to assist creation of ACOs), Blue Box Health (manage CHF patients post discharge)

• Health Information – Spring Medical (EMR for group practice mkt), TECNEX Sys. (EMR for small practice market), Secure Healing (HIPPA compliance tool for IT dept)

Houston Opportunity

• Houston has the medical research base on a par with Seattle or Raleigh Durham

• Two Venture Firms have presence in Texas with focus on Life Science – Woodlands-Essex – national firm (nominal local investment)– Sante Ventures – regional/national firm

• Houston area generates four to six investable life science deals each year

• Few National VC’s prospect the Houston market • An active VC or angel investor can screen these deals

and invest on favorable terms with little competition

Houston Life Science Industry Networking Resources

• BioHouston – www.biohouston.org– Annual Life Science Conference – Feb 2013– Monthly breakfast meetings

• Houston Tech Center – www.houstontech.org– Dedicated life science focus – Deborah Mansfield is the key

contact– Coordinator for Southeast Texas region for Emerging Tech Fund

• BioMed Breakfast Club – www.bmtchouston.org – monthly venue for topical speakers

• Rice Alliance – www.rice.edu/alliance– Co-sponsor of annual BioHouston Life Science Conf– Sponsor of major MBA business team competition – April 2013 – Many excellent tech focused programs

Steve Banks BCMT Record• 14 Companies started in 1987 - 1996 period

– First round investors put in $28M and earned ~ 35 % IRR – Companies raised over $650M– Seven reached Nasdaq listing: ARNX, FFGI, GMED, LDNA,

LEXG, MDLI & ZONA (Total value for BCM & BCMT at IPO of these companies ~ $110M)

– Private merger transactions included Genosys ~ $40M and Meretek ~$12M (total value of each deal)

– Cash back to Baylor & BCMT in excess of $27M from portfolio sales

– Baylor held $25M of securities in these companies at 6/30/03• 17 Companies formed 1997- 2003; these companies raised in excess of $70M

during the 2000 – 2003 period• BCMT companies in Houston area ~ 700 employees• BCM & BCMT portfolio value ~ $42 M - December 2002

Lessons from BCMT a Decade of Growth 1990 - 2000

• Developed ~15 companies during period• Companies raised in excess of $100 M of private capital• Seven companies got to NASDAQ directly or via

acquisition• A board seat was important to keep abreast of activities

at company and to plan financing event• Need staff members that have experience with

developing technology into viable companies to serve as the board member (provide training and guidance to staff member)

Two Academic Liquidity Events

• Lycos – CMU start-up in 1994/5 that went public in1996 – CMU ownership ~ 8% post IPO, total market value ~ $300 M

• Lycos sold to Telefonica in 2000 for $12 B• Lexicon – BCMT start-up in 1995 that went

public in 2000• Lexicon – BCM & BCMT owned ~ 10% of

company post IPO with peak market value of ~ $200 M

Lexicon Genetics

• Baylor scientists contact BCMT in 1994 with concept for mouse genomics company

• BCMT develops business plan in early 1995• Dr. Sands leaves Baylor to become pres. • Private Investor puts up $3 million and subsequent $4 million• Merck Genomic Inst contract April 1997 for $8 million• Raised $31 million with Punk, Ziegel May 1998• IPO April 2000 to raise ~ $200 M net• Baylor/BCMT own ~ 10% of LEXG that at one point is worth

over $200 million

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Lexicon Stock Price

   

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Conclusions

• There will be future technology and biotech booms

• The time to get a new venture going is now• It is hard to develop a big winner from a tech

transfer program – but when you do• It is harder to get officers and institutional

trustees to agree on a plan to sell such a winner• A lot of value can be lost in a bear market like

2001 – 2002

Characteristics of An Investable New Venture

• Disruptive

• Improve quality, reduce cost

• Patient empowering

• Differentiated

• Cloud-based & internet connectivity

Strategies for Building Value in the Tough Financing Environment of 2012

Use a board seat to keep the management focus on:

• Non-dilutive financing

• Revenue

• Managing for early exit

• Anti-dilution clauses

• Co-investment rights

Strategy for Entrepreneur

• SBIRs, STTRs, ATPs

• State & local grants

• Grateful patients

• Less-dilutive financing

– Angel rounds

– Smaller A-rounds

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Revenue

• Cheapest form of capital• Bargain for early revenue

– Push the business plan toward revenue– Reward good management– Avoid long development– Require milestones– Reward advances (stock options)

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Managing for Early Exits

• A large round without clear milestones can lead to a very difficult second round negotiation

• Encourage quarterly mile-stones• No one knows when the IPO market will restart• Encourage company to have strategic partners• An acquisition often is consummated with

immediately tradable paper or cash