Ophthalmologists are highly dependent on risk-taking entrepreneurs for new medicines and devices to assist in the battle against blindness. In turn, new companies are reliant mostly on private equity sources to fund their development, which CEOs of ophthalmic start-ups generally consider the hardest aspect of their job.1

Nonetheless, an investment in an ophthalmic start-up may be attractive because of the potential for financial payback, perhaps as much as seven to tenfold, if the product “makes it big.”2,3 However, investing in start-up companies in ophthalmology also carries risks as the overall success rate is low, and with failure comes the potential loss of the investor’s funds.4,5 Unfortunately, ophthalmologists are not trained, and it is difficult to find information, regarding how to evaluate an ophthalmic start-up to assess the investment potential.

The purpose of this article is to provide ophthalmologists with basics about how to perform initial due diligence for a potential investment in an ophthalmic start-up developing a medicine. This article is intended to be a primer and is not meant to replace the advice of legal counsel or other consultants/advisors who might help with such an investment decision.

Be Careful!

Even now you may know of a seemingly attractive start-up and feel enthusiasm about its prospects for success. However, be aware that your excitement might lead to a poor investment decision and loss of invested funds. The facts are somewhat scary! Generally, any new undeveloped medication has only a very low chance (one in 10 to 10,000, depending on the development stage) of reaching commercialization.6 Specifically, in ophthalmology alone there are already more than 300 products (publically known) being developed by both large and small pharmaceutical companies (Internal data, PRN PharmaFarm). Consequently, despite your enthusiasm you should make a careful assessment of your potential investment and its chance for success. In doing so ask yourself some important questions.

Does the Medicine Work?

This assessment begins with a close consideration of several vital questions listed in Table 1. Importantly, the answers should be backed by data! The answers are necessary so you can become confident about the narrative your favored product will tell to any potential licensee.

The start-up should have identified a clear indication the medicine can treat. Further, the new medicine should be able to advance therapy for the intended indication in a measurable way, beyond foreseeable competition, that can be articulated succinctly and precisely.

In addition, the new medicine’s mechanism of action should be known on a molecular basis either in reasonable theory derived from prior research, or from actual studies performed by the start-up. Further, how the new treatment alters the disease process also should be known on a molecular basis. Also, initial in vivo or in vitro studies should provide some idea of the safety profile.

The new medicine should have been prepared already in at least a simple formulation. In addition, the start-up should offer evidence from in vivo or in vitro studies that the medicine can reach its site of action by the chosen delivery route, at levels known to activate the protein or enzyme that affects the curative process consistent with the desired indication.

Is short, the new product should tell a clear story. You should be able to succinctly express your product’s story to yourself and others as a safely deliverable medicine that clearly should advance therapy of a precise indication as suggested by animal studies and founded on a molecular basis of the therapy and the treated disease.

If you cannot answer clearly all the questions in Table 1 you probably should be hesitant to invest unless there is a very compelling reason and after consultation with appropriately knowledgeable colleagues. Warning: Do not be tempted to overlook these questions based on the enthusiasm of a CEO or because you feel foolish for not accepting the company’s well-imagined assumptions.

Is It Regulatory Friendly?

This question is answered by considering several important issues. First, as noted already, identify the exact indication. This should be single and precise. Generally, start-ups should be focused on developing only one product for one indication at a time, as their personnel and money resources typically are limited. They may brag about their extensive pipeline but this additional product development should ideally be planned for the future.

Table 1. Initial Questions About the Function of a New Medicine

What is the mechanism of action (on a molecular basis)?
What is the exact indication?
What unique problem does the medicine solve?
What is the molecular biological link to treat the targeted disease?
Can the medicine be delivered to the target tissue in sufficient levels to initiate its therapeutic action?
What are the advantages over current therapies?
Are there any potential safety issues?
Modified from reference #5.

Second, assure the planned indication has a known regulatory pathway. Ideally this pathway should include a short clinical trial duration (months not years) to prove therapeutic value to the regulatory agency. Further, the primary efficacy variable should be clear and reliably measured by a process accepted by the ophthalmic community. If the company does not have a precise indication or primary efficacy variable, or the medicine is too long or expensive to develop, think long and hard before investing.

Lastly, inquire if the appropriate section of the Food and Drug Administration has reviewed the start-up’s plans in a formal meeting or at least in an informal conversation. If not, determine why and the plans to engage the agency. Regulatory agency approval of a company’s development plans, emerging from a harmonious relationship, is vital for success.

Can the Product Be Made?

You should inquire with the start-up regarding potential manufacturing issues. Making the new medicine can be the most difficult part of drug development. The manufacturing facilities are tightly regulated, and every step of the manufacturing process requires carefully planning.

The manufacturing process is roughly divided into two segments: the drug substance (the pure medicine without any additives) and the drug product (the drug substance formulated into its delivery medium).

The drug substance should have a readily available source of material. The synthesis or production of the new compound ideally should have been outlined and be relatively simple in design.

The drug product ideally should be developed into a relatively simple solution. If a more complex delivery system is required (e.g., gel, nanoparticles) then some explanation as to its need and advantage should be offered. All excipients (other materials in the solution apart from the active medicine) should have been used in ophthalmology before and be known to be safe. In addition, the starting compound for synthesis, as well as all reagents, excipients and synthesis steps used in the planned manufacturing process ideally should be described in the United States Pharmacopeia or a like compendium.7

For both the drug substance and product, some evidence of its stability and its ability to be purified and sterilized would be helpful even in early development. Inquire about anticipated manufacturing problems for both drug substance and drug product for clinical trials and scale-up to larger batches for commercial use.

Can It Be Sold?

Once you determine the medicine can function as intended, with a reasonable regulatory pathway, and can be manufactured, consider whether the start-up can actually sell it. Again, this assessment requires critical, realistic thinking. Do not assume that doctors will readily prescribe the new product only because it becomes commercially available. Table 2 provides for a summary of key questions.

The initial question is the easy one—potential market size—or the number of people with the disease within the chosen treatment indication. These data generally are accessible from an Internet search. This is the point where many CEOs stop their analysis.

Therefore, you should consider several additional vital questions: What market penetration can the product realize within the existing patient population, and at what level of therapy will the product be used? These will help you project the rate at which the new product might be reasonably prescribed. Importantly, these questions should be answered by data (i.e., market research), not just the opinion of the CEO or several key opinion leaders.

Also important is a thorough SWOT analysis. Think through not only the Opportunities and Strengths of every product, but also the Threats and Weaknesses, both current and future. The company should provide you its SWOT analysis. Check to assure it is thorough and realistic.

Who will pay for the medicine? Will this be a self-paid product or is it for an indication and price level that will require private and government reimbursement? It may be too early for a detailed analysis but the start-up should have considered the potential payers as part of its profit projections.

If you are convinced that the start-up has a manufactural product, good market date and a good story, the next step is to review its business plan. Although this seems like an arduous task, it will help assure you have understood the company’s perspective and plans regarding its product.

Is It Legally Safeguarded?

Intellectual property is a most important consideration and is typically the basis for creating the start-up itself. A start-up should have a relationship with a reliable pharma-experienced patent attorney to aid in protecting IP through a comprehensive and expanding legal strategy. Ask what patent types have been filed. Usually these are classified generally as composition of matter, a process (or method), or use patents.3 In addition, how long is the remaining patent life? This should typically be 15 to 20 years. In what countries are the patents filed? They should be in the United States and ideally in other major worldwide markets as well. Have the patents been issued?

It is important that the start-up have an exclusive license to the product in the most important market countries for a suitable period to develop and market the medicine. The license should include the current indication and all potential associated indications sto prevent potential competition from a separate license to another company.

Assure also that all patent holders have assigned their rights to the license to the start-up. In addition, check to assure any arrangements with a university and its claims to the patent have been included in a license.

Also inquire about the security arrangements for the IP against hackers. The IP should be protected behind a firewalled server with limited, secure access, central network control and encrypted communications with strong login profiles for both employees and external contractors.

Who Is the Boss?

The CEO is a vital part of your investment decision. Try to speak to him or her personally. The CEO should be personable, non-emotional, professional, perceptive and “hands on” in a prospective manner in directing the company. CEOs should be experienced, knowledgeable and competent enough to manage the fundraising, investors and the board of directors, as well as the various CROs and consultants needed to assist the product maturation. However, they should also be unpretentious enough to know they personally do not have all the answers as they face the inevitable development issues as their product matures. They should be a cheerleader for their product but in a realistic, ethical and thoughtful manner.

Table 2. Market Assessment Questions
What is your potential market size?
What percent of the market can you capture?
At what stage of therapy will the medicine be used?
What is the SWOT analysis?
Who will pay for the medicine?
What are the backup plans should the primary plans fail?
Modified from reference #5.
The CEO position generally is full-time and should not be undertaken by someone too distracted with other major activities. The CEO may be the only full-time employee and all other activities may be outsourced to companies or contractors to save costs.

In most instances the product inventor should not be the person to develop the product and a CEO should have been appointed. The inventor may lack connections in the investment and the development communities, as well as business experience and knowledge, to manage a start-up and mature the product to commercialization or licensing.

What Is the Funding Plan?

Importantly, the start-up should provide a clear and detailed budget to inform investors how their money will be spent, the development stage to which the current investment round should take the company, a description of the next steps to procure additional financing and why investors will be attracted to add financing at the next development stage. Inquire also about any plans and the timing to license or sell the product to a large pharma company. This information will tell you when you can reasonably expect to receive your invested equity from any successful financial deal.

Alternatively the start-up may plan to market the product itself, but this is unusual. If this is the plan you should ask about the logistics since marketing ophthalmics is expensive in cost and personnel. Also, inquire how the start-up’s self-marketing affects your investment commitment.

A good CEO almost always is considering funding needs, not only for current development, but communicating with appropriate larger pharma companies for the potential future license of their product.

Often early investors are concerned about dilution of their ownership interest. Realize that if you are investing early in the development process other private equity hopefully will be enticed to meet future funding needs and so indeed will dilute your percent ownership. However, in a successful company the future investment rounds or an out-licensing agreement should cause your stock to increase in value. Consequently, your shares will be diluted, but with success the share price will appreciate.3  You should discuss the possible extent of dilution versus anticipated stock price valuations with the CEO before investing.

When you decide to invest you should receive a clear term sheet with the investment details specified. Have this term sheet reviewed by a corporate attorney experienced in start-up funding. Don’t be tempted to conduct a deal on a handshake. A detailed agreement will help maintain ordered, harmonious relationships between the start-up and investors in future years and help keep disputes to a minimum.

We hope this review has provided you with the first steps in considering whether to invest in an ophthalmic start-up with an established funding, legal and organizational basis. Persistent, careful attention to administrative and scientific details will help you decide if a new product is worthy of your attention and investment.  REVIEW

Dr. and Mrs. Stewart are co-founders of PRN Pharmaceutical Research Network, LLC, an international ophthalmic clinical study management and consulting firm, as well as PRN PharmaFarm, LLC, which specializes in financing new ophthalmic start-up companies to assist towards product commercialization. Ms. Nelson is a research coordinator for both companies. They received no financial support from any private or government funding source for this article.
Contact Dr. Stewart at (843) 606-0776; e-mail: info@prnorb.com, or visit prnorb.com or http://prnorb.blogspot.com.

1. Stewart WC, Stewart JA, Kruft B, Nelson LA. Challenges facing ophthalmic start-up companies in developing new devices or medicines. Acta Ophthalmol 2013;91:e81-83.
2. http://simplpost.com/blog/what-investors-are-looking-for-in-a-startup/
3. Kolchinsky P. The Entrepreneur’s Guide to a Biotech Start-up. Online at www.evelexa.com/resources/EGBS4_Kolchinsky.pdf
4. Stewart WC, Stewart JA, Nelson LA. The start-up: From dream to reality. Review Ophthalmol 2013 Apr;62-71.
5. Stewart WC, Stewart JA, Nelson LA. First steps in creating a pharma start-up. Review Ophthalmol 2014 Apr;54-62.
6. Invention Success Rates - Odds of Inventor Success. What percent of inventor ideas are successful? What percent of patents make money? What percent of inventions are commercialized? InventionStatistics.com. Online at http://www.inventionstatistics.com/Innovation_Risk_Taking_Inventors.html
7. FDA Guidance for Industry, INDs for Phase 2 and Phase 3 Studies, Chemistry, Manufacturing, and Controls Information http://www.fda.gov/downloads/Drugs/.../Guidances/ucm070567.pdf