Seven Essential Attributes for Investing in Life Sciences

Jody Staggs
President and CEO
SWK Holdings

Investing in the life sciences sector involves more than a simple appraisal of financials; it demands a deep dive into the nuanced intricacies that define a successful enterprise in this challenging field. As financing partners consider potential targets within life sciences, they must evaluate a spectrum of attributes that collectively indicate a company's capacity for sustained growth and innovation. Here we explore seven critical characteristics that mark a promising investment opportunity in the life sciences industry.

Differentiated and moated product portfolio

A compelling life sciences company boasts a portfolio of products that are not only innovative but also protected by strong intellectual property, differentiated clinical trial data, FDA approval, and/or healthcare practitioner acceptance. Such products can drive sustained revenue streams over time by fulfilling medical needs more effectively than existing alternatives. Products that are clearly differentiated and have secured market niches are more attractive to potential partners and acquirers.

Indications of strategic interest

Strategic interest from established players can indicate a promising product or technology, making the company an attractive investment opportunity. The presence of letters of intent (LOIs), distribution agreements, or a history of similar products being acquired signals robust market interest and strategic intent that can propel a company forward. LOIs and distribution agreements often lead to substantial investments in marketing and product promotion while partnerships can foster innovation and enable access to new markets and technologies. A history of product acquisitions and collaborations points to a company's strength in innovation and its potential for future partnerships. These indicators suggest that the broader industry recognizes the company's value and is prepared to invest in its growth through partnerships or acquisitions.

Financial valuation

Companies with sufficient capitalization are often better positioned to attract further investment and partnerships, which are vital for scaling operations and maximizing innovation.This is particularly the case if the company is considering debt. ​​A life sciences company should demonstrate a valuation where the enterprise value is significantly higher, ideally more than twice, the amount of debt it has undertaken. This ratio, supported by LOIs from strategic investors, recent equity rounds, and public trading comparables, indicates not only financial health but also a high degree of investor confidence in the company's future. The financial health of a company also reflects its ability to manage risks associated with product development and market fluctuations.

Proven management team

The capability of the management team is paramount, particularly their track record of success in similar ventures or within the same product lines. A management team that includes executives who have previously led companies to success and who are supported by a network of experienced professionals with similar legacies suggests a high potential for effective leadership and strategic execution. Such a pedigree improves the likelihood the management team can demonstrate adaptability in the face of adversity and effectively navigate obstacles or market shifts. A management team that also boasts deep relationships in the life sciences ecosystem can leverage those connections to build and sustain strategic partnerships to expand market opportunities and enhance returns on investment.

Capability to raise capital

In the resource-intensive field of life sciences, the ability to raise capital is crucial. A company's history of securing funding through equity capital rounds, coupled with supportive documentation such as term sheets and LOIs, reflects its capacity to access necessary resources for growth and development without overly relying on debt. Evidence of capital raise sufficient to sustain long clinical trials and product development cycles – periods without strong revenue streams - indicates wise financial stewardship and strategic planning. The ability to raise sufficient capital also enhances a company’s credibility and provides freedom to pursue strategic acquisitions or form alliances from a position of strength, accelerating market opportunities and making it more attractive to potential investors.

Thoughtful use of capital

Investors should look for companies with a clear and effective plan for capital allocation that promises to expand and improve their operations. Strategic use of funds empowers companies to commercialize existing products, augment research and development, optimize operational processes, and invest in joint ventures that strengthen a company's competitive edge by providing access to broader resources, expertise, and networks. Effective use of capital also enables companies to pursue growth through expansion or bolt-on acquisitions that open new markets or enhance current products.Conversely, overspending on unproductive projects can lead to financial distress.

Financial acumen and controls

Strong financial management ensures that a company can efficiently manage resources, accurately forecast finances and cash needs, and comply with regulatory requirements. A life sciences company should exhibit robust financial controls and a competent financial team, led by an adept CFO. This team must demonstrate the ability to forecast revenue and manage cash flows accurately, a crucial factor during investment evaluation. A knowledgeable CFO helps companies optimize their financial performance by making informed decisions about investments, cost management, and funding strategies. While audits can be beneficial, they are not always mandatory if the company's financial governance and projections meet high standards.They are also backwards looking and often do not signify the company has appropriate financial forecasting competencies.

Life sciences investment is intricate and layered, demanding more than a cursory financial evaluation. It requires a comprehensive analysis of intangible assets and human capital, from groundbreaking product portfolios to strategic market positioning and adept leadership and financial governance. By thoroughly assessing these seven critical attributes, investors will be better positioned to identify companies not only capable of thriving in the current market but also equipped to navigate future challenges and opportunities.

Jody Staggs is president and CEO of SWK Holdings, a life science-focused specialty finance company catering to small- and midsized commercial-stage companies.