Crowdfunding is Banging on Biotech’s Door. Will We Let It In?

Opinion

Xconomy Boston — 

In the summer of 2013, the medical device startup Scanadu made headlines around the world when Scout, its handheld medical diagnostic tool for consumers, raked in an astounding $1.6 million on the popular crowdfunding platform Indiegogo.

That’s all well and good for a medical device, but most biotech veterans remain skeptical that crowdfunding can make a meaningful financial contribution to new biopharmaceutical development. I’ve worked in biopharma for 17 years, and I believe it can.

What’s more, I believe crowdfunding based on donations, as well as on equity, can work. I believe it so strongly that in March 2014, I founded Impatient, a donation-based nonprofit crowdfunding platform for philanthropists who are comfortable with deriving social good from for-profit enterprise. Impatient will exclusively fund Phase 2 trials at biotech companies.

We have chosen donations as our crowdfunding mechanism, and our donors’ “return” is both new medicines for patients and royalties that Impatient will receive on the sales of these medicines. Royalties are the only “cost” to the participating biotech company, and will be donated to other non-profit organizations to pay for access to medicines for people who cannot afford them: a virtuous circle of giving and giving back. (Impatient applied for 501(c)(3) non-profit status from the IRS in July 2014 and, if successful, donations to Impatient will be tax-deductible.)

Yes, biopharma clinical trials require large sums of money, as Xconomy outlined last year. For example, a Phase 2 trial of a promising medicine typically requires more than 10 times the financial investment that Scanadu received from the public for its Scout device. But, in my opinion, the greatest barrier to biotech crowdfunding projects is not money. A much greater challenge is the drug industry’s struggle to connect with patients and their supporters.

There are four distinct mechanisms of crowdfunding: debt, rewards, equity, and donations. Let’s look at the first three mechanisms for a moment in the context of biopharmaceutical development.

Debt seems an unlikely option for biotech given the long wait for a potential revenue stream and the high rate of failure.

Rewards, as pioneered by Kickstarter, are popular outside of biotech. Scanadu also went that route, with the reward being early access to Scout, a device that doesn’t require a prescription. Prescription drugs don’t lend themselves to sneak peeks or beta versions for valued donors. However, with cost-sharing on the rise and patients shouldering more co-pays and co-insurance, I can imagine a not-too-distant future where donors to a biopharma development campaign are rewarded with price discounts for the drug in question if and when it comes to market.

The third crowdfunding mechanism is equity, as described in the 2012 JOBS Act, and I expect it to have a significant impact on biotech within the next 30 months. We’re still waiting for the Securities and Exchange Commission to write the regulations, but many states are leapfrogging the SEC by writing their own equity crowdfunding rulebooks. As Xconomy’s Michael Davidson reported in November, in-state businesses can now sell equity to in-state investors in more than a dozen states.

This is great news for neighborhood businesses. But it won’t do much for biotech. For the time being, the biotech ‘crowd’ remains an exclusive one: accredited investors only (the wealthy, sophisticated ones, not the people we think of as “mom and pop” or retail investors).

The thresholds for membership in the accredited investor crowd in the U.S. have not changed significantly for 32 years and the SEC is conducting a comprehensive review. Whether the review increases or decreases the potential of this funding mechanism for biotech companies is unclear.

Even so, the change in the JOBS Act to allow pre-IPO companies to raise up to $50 million from accredited investors (up from a paltry $5 million pre-JOBS) now makes equity-based crowdfunding a potentially strong investment vehicle for early-stage biotechnology companies. Start-ups like New York-based Poliwogg want to facilitate these transactions.

And while the U.S. rules remain up in the air, other countries are moving ahead with equity crowdfunding. ReWalk Robotics  (NASDAQ: RWLK) is the maker of the first FDA-approved exoskeleton for people with spinal cord injuries. In 2013, ReWalk raised $1.3 million on the Israeli crowdfunding site OurCrowd (which has a $10,000 minimum investment threshold). ReWalk went public 15 months later, and shares more than doubled in value on the first day of trading.

The fourth pillar of crowdfunding is the classic donation-based approach. Charities have historically used donations, offline and more recently online, to raise small amounts of money from large numbers of people.

In the life sciences, disease-focused charity programs have mainly supported academic research, with very little donated money going to biotech companies. In my opinion, this policy is flawed because patient needs are aligned more with the private sector – which does not turn a profit unless a treatment demonstrably improves the patient’s condition – than with the academic sector’s relentless need to publish.

Take for example the 2012 success of ivacaftor (Kalydeco), the first drug to treat an underlying cause of cystic fibrosis. Kalydeco was discovered by a biotech company and funded by the Cystic Fibrosis Foundation, which reimagined the traditional charitable model. Instead of giving multiple small grants to academic researchers, it placed a single $75 million bet on a for-profit company. Despite Kalydeco’s success, many disease-related charities continue to avoid working with the private sector.

But for how much longer? Health-related charities raised over $31 billion from the public in 2013, an amount equal to the GDP of Paraguay. At the same time, my own research indicates that donors increasingly want their money to go to organizations that have a realistic chance of putting effective treatments into the hands of patients by 2025.

This changing donor attitude, alongside the new $50 million limit for equity-based crowd funding with accredited investors, makes me optimistic that both equity- and donation-based crowdfunding will help fund the next generation of medicines. Impatient has chosen donations to allow the crowd to be open and to capitalize on the underutilized Kalydeco model that matches philanthropic capital with promising but unfunded medicines in for-profit companies. Which leads us back to the drug industry’s poor record of connecting with patients, donors and the public at large. Crowdfunding relies on the intrinsic trust people place in shared connections on social networks, and the ratings of other members of their crowd on mainstream websites. And this is where the problem lies for biotech.

Since the 1980s, when the U.S. pharmaceutical giant Merck (NYSE: MRK) was described as the ‘most admired’ company for seven consecutive years in Fortune magazine (a record never equaled before or since), the drug industry’s reputation has declined. If emerging biotech companies are to become accepted by the crowdfunding community, this decline must be reversed. The good news for biotech is that the three principles of effective crowdfunding – displaying transparency, earning trust, and building tribes – can change public perception.

The first of these principles, transparency, is very slowly taking root. The number of companies pushing the envelope are few and far between. One is the aptly-named Transparency Life Sciences (TLS) which develops its protocols through a collaborative relationship between patients, physicians and researchers using an online crowdsourcing tool.

Another is GlaxoSmithKline (NYSE: GSK), where I worked for six years on both sides of the Atlantic. A decade ago GSK became the first pharmaceutical company to publish online the results of its clinical trials, regardless of whether the trial failed or succeeded. Ten years on and the European Medicines Agency is now making clinical data transparency a requirement for companies with drugs approved for sale within the European Union.

Although transparency is slowly improving, industry reputations are not. This is largely because transparency feels as though it is tightly controlled with a distinctly corporate spin.

To earn trust—the second principle of crowdfunding—we need to make transparency personal. Biopharma communication today is primarily a one-way process with stuffy press releases, sterile PowerPoint presentations, and uninterpretable data repositories. By contrast, crowdfunders want online forums moderated by researchers (rather than PR agencies and lawyers), videos of scientists discussing the ups and downs of their research, and social media platforms on which patients and donors are able to interact with researchers.

Impatient is focused on transparency. As with other crowdfunding sites, donors will be able to target their funding to specific projects. This contrasts with traditional charity where donations are pooled and the charity decides how to allocate resources (typically with less than 30 percent of funds used for research). We will provide updates from the lab and will proactively seek the views of patients. Our focus will be individual rather than corporate communications. By earning the trust of donors we hope to build tribes around specific potential medicines. The success of Impatient will ultimately depend on my team’s ability to connect with our crowd. And our crowd is the largest of all crowds. Because we are all patients.

Ros Deegan is the founder of Impatient, a non-profit focused on crowdfunding Phase 2 medical trials, and head of Business Development at Trevena, a clinical-stage biopharma company in King of Prussia, PA. Follow @beimpatient

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