LONGWOOD  CAPITAL  ADVISORS    

EQUITY  INVESTMENTS  IN  BIOTECHNOLOGY  

 

 

 

INVESTOR  PROSPECTUS    

OCTOBER  5,  2015    

 

Longwood Capital Advisors, LLC

Email: info@longwoodcapitaladvisors.com    

Longwood Capital Advisors, LLC

Contents:

1) Executive Summary 2) Trading Strategy 3) Business Operation 4) Founding Partners 5) Historical Returns

i) Risk Mitigation Strategy 6) After Tax Return

7) Corporate Structure

8) Market Research and Findings

i) Performance of Biotech Industry ii) Current State of the Biotechnology Industry and Small-Cap Companies iii) Clinical Trial Timeline and the FDA Review Process iv) Trends in Small-Cap Biotech Stock Movement in Relation to the FDA Review

Process

9) Benefits of Investments 10) Risks of Investment 11) Summary and Contact Details

Executive Summary Longwood Capital Advisors (LCA) intends to raise funding from a small group of private investors for the purpose of generating profits from investing in public biotech and pharmaceutical companies. LCA leverages its partners’ expertise in the medical and biological sciences to specialize in evaluating and investing in small-to-mid cap biotech companies (average market cap < $1B). LCA specifically focuses on companies with small-molecule drugs, biologics, or devices that are either in late-stage clinical trials or have successfully filed a new drug application (NDA) with the Food and Drug Administration (FDA) pending approval. The large cost associated with drug development in the pharmaceutical industry, which has been estimated at US$403 million (dollars valued in 2000) per new drug1, has led to an increasing number of large-cap pharmaceutical companies to move away from internal R&D in favor of partnering with or acquiring promising drug candidates from academic laboratories or small-cap biotech companies2. This R&D shift has led to emergence of small-cap biotech companies focusing on establishment of a particular technology or development of few drug candidates. For these companies, the future depends heavily on the success of their product pipeline, which is based on results from clinical trials and eventual FDA approval through the New Drug Application (NDA) process. While a positive outcome implies potential acquisition, generous milestone payments, or future blockbuster revenue, a negative outcome may signal an ultimate Chapter 11 filing. Therefore, the value of small-cap biotech companies is highly sensitive to events such as clinical trial data release and FDA decisions. While clinical trial outcomes and FDA decisions are unpredictable, our understanding of biomedical science, experimental data analysis, clinical medicine, and the regulatory process allows LCA partners to forecast the likelihood of success or failure of a drug candidate. LCA focuses on evaluating drugs in late-stage development due to the availability of Phase II and Phase III clinical data as well as the greater probability for these companies to survive the FDA approval process1. In assessing the risk/reward potential of a candidate investment, we critically review the efficacy and safety of the product in the context of the particular disease, compare it to the existing gold-standard of therapy, estimate the potential revenue derived from the patient population, and assess the discrepancy between likely drug performance and current market expectations. Based on our risk/reward assessment of the companies, we take long and short positions on equities and options to help clients achieving their financial objectives.

                                                                                                                                       

1Dimasi  JA,  Hansen  RW,  Grabowsky  HG.  The  price  of  innovation:  new  estimates  of  drug  development  costs.  Journal  of  Health  Economics.  2003;22:151-­‐185.  

2  Miller  G.  Is  pharma  running  out  of  brainy  ideas?  Science.  2010;329(5991):502-­‐4.  2  Miller  G.  Is  pharma  running  out  of  brainy  ideas?  Science.  2010;329(5991):502-­‐4.  

Trading Strategy Unlike many other industries, the information that drives the biotechnology industry is made publicly available. The data generated by clinical trials, as well as their design and methodology, are released through press conferences, poster presentations, and journal publications. By using this information, LCA can evaluate whether a drug will likely pass or fail the next stage in its clinical development. This is most effective for drugs undergoing phase III trials or pending FDA approval. For drugs undergoing a phase III trial, we can use the previously released data from phase II trials, or in some cases prior phase III trials, to assess the drugs’ prospects in the current phase III trial. For drugs awaiting an FDA approval decision, LCA can refer to the drugs’ entire clinical trial history to evaluate whether the FDA will grant approval or issue a Complete Response Letter (CRL) asking for further clinical trials to be performed. However, for drugs that are undergoing phase I or phase II trials, it is usually not possible to make a prediction based on the limited amount of clinical data that has been generated thus far. Therefore, LCA focuses our efforts on evaluating companies with at least one drug in phase III trials or awaiting an FDA approval decision. In addition to evaluating a drug’s likelihood of clinical trial success or FDA approval, LCA also estimate the potential revenue that the drug would generate, if approved. Factors such as the total patient population for the disease treated by the drug, the duration of the disease, and the availability of pre-existing FDA approved treatment options would be used to predict the potential market size. Once LCA has estimated the intrinsic value of the company based on its pipeline, LCA can compare this value with the company’s current market price in order to judge whether it presents a lucrative opportunity. When LCA finds that a company has a drug that will likely succeed, and that its current market price is still undervalued, we long equity or buy call options depending on the risk/reward ratio. However, if LCA believe that a company’s prospects are poor, we would purchase put options only. To further maximize investment gain and minimize potential risk, LCA employs statistical modeling to optimize the timing in establishing or closing a position in response to news including NDA announcements, Advisory Committee recommendations, and FDA decisions. To minimize risk, LCA will invest in a diverse array of companies and limit equity investment to no more than 10% and options to 5% of the total fund value. To limit loss from unforeseeable events a stop loss order will be placed for each equity position.

Business Operations The business commenced operation on January 1st, 2013, which marks the beginning of the first term of LCA investment cycle. The length of each term is 1 year. Clients may commit capital contribution, in the multiples of $10,000, to LCA before the commencement of each term. All investor capital are pooled into a general fund used for investment and operating activities. Profits and losses are tallied at the end of each term and proportionally distributed according to the share of an investor’s contribution at the beginning of the term. At the end of each quarter, a financial statement is made available reporting the current market value of the client’s contributed capital. At the end of each term, an annual report commenting on past year’s performance is also issued to the clients. Capital contribution to LCA may be withdrawn at the end of each term. In the case of a partial or full withdrawal, payment will be made in cash. Where cash is transferred, LCA shall transfer to the client withdrawing a portion or all of his interest in LCA, an amount equal to the value of the capital account being withdrawn. The amount being withdrawn shall be paid within 10 business days after the end of the term. The contributed capital remained in LCA will automatically be reinvested into the next term. The clients is charged no fees except for the performance fee. The performance fee is 20% of the profit generated by clients’ contributed capital. The performance fee includes a "high water mark" (or "loss carry-forward provision"), meaning that the performance fee only applies to net profits (i.e. profits after losses in previous years have been recovered). LCA will abide by commonly accepted accounting standards in preparing its financial statements.

Founding Partners Longwood Capital Advisors was founded by five partners in 2012. A short biography is included below of each founding partner. Andrew Koo, Ph.D. Dr. Andrew Koo finished his Ph.D. in Bioengineering at Massachusetts Institute of Technology. He has over nine years of biomedical research experience working in laboratories focusing on metabolic channeling, organic drug synthesis, and cardiovascular pathology. Mr. Koo has also completed a Minor in Finance at the Sloan School of Management, MIT, and holds a B.A. in Biochemistry and Molecular Biology, Summa cum laude, from Washington University in St. Louis. Mr. Koo has been investing and conducting biotech equity research since 2008 and is a Level II Chartered Financial Analyst (CFA) Candidate. Soutrik Pramanik, B.A. Mr. Soutrik Pramanik is a graduate of Cornell University’s College of Engineering. At Cornell, he started his own company, was a Resident Advisor for first year students, and was a Teaching Assistant in entrepreneurship and private equity (NBA 300/564), being the only undergraduate TA in a class taught to undergrads and MBA students. After Cornell, he joined Blackrock in their New York office as an analyst in their graduate training program in their Portfolio Analytics Group. At Blackrock, he rotated across several desks including the Muni desk (which managed 73 BN) and the Financial Institutions Group (which managed 173 BN). The Portfolio Analytics Group was critical in helping JP Morgan price over 30BN in MBS securities when they bought our Bear Stearns in the depth of the financial crisis. He has experience across a wide range of finance roles, working at Oliver Wyman and Morgan Stanley. Mr. Pramanik is currently at Citigroup in their Global Strategy Department. Carl Qiu, M.D. Dr. Carl Qiu graduated with an MD degree from the Johns Hopkins University School of Medicine in 2011 and is currently completing his residency in Radiation Oncology. Dr. Qiu is the author of several published manuscripts including clinical research of chemoradiation for prostate, pancreas and rectal cancer and basic science research of the epidemiology of Norovirus. His research has been featured at national meetings including the annual conference for the American Society for Radiation Oncology (ASTRO) and American Society for Clinical Oncology Gastrointestinal Cancer Symposium (ASCO-GI). During medical school, Dr. Qiu completed a summer internship at Leerink Swann where he analyzed the market for spinal surgery devices. Dr. Qiu also graduated in 2007 from Cornell University with a degree in Biological Sciences concentrating in Biochemistry. Luis Ramos, M.D.

Dr. Luis Ramos graduated from Harvard Medical School in 2011 and is currently completing his Urology Residency at Montefiore Medical Center. While at Harvard, he researched the biological factors that predicted prostate cancer detection in men who had initial negative biopsies and was sent for publication in the Journal of Urology. Dr. Ramos was also the founding member of Society of Innovators in Medicine, a medical student-run organization that discussed companies that were ready to take their products for FDA approval. His success in this organization eventually led him to be a founding member of Longwood Capital Advisors. Albert Yeh, M.D. Dr. Albert Yeh graduated from Harvard Medical School in 2013 and is currently completing his Internal Medicine Residency at the Massachusetts General Hospital. He has over seven years of biomedical research experience in laboratories focusing on studying ischemia/reperfusion injury, orthopedic surgical techniques, and cancer cell proliferative heterogeneity. Dr. Yeh has pursued a combined 6-year medical and research program as a two time recipient of the Howard Hughes Medical Institute fellowship and holds a B.A. in biochemistry, Magna cum laude, from Harvard College. His research has been published in several high-impact journals including Proceedings of the National Academy of Sciences and Cancer Research.

Historical Returns Since the fund’s inception in Q2, 2012, LCA has generated an average annual return of 28.8%.

Source: Longwood Capital Advisors, LLC Risk Mitigation Strategy Even though we believe we can generate a greater annual return than 20-40%, we will reduce our risk profile to target potential returns at lower volatility. For example if we have a target investment which has increased 50% in value, and the FDA decision is coming out in two weeks, and we have a 75% confidence level that the target drug will be approved, we would rather lock in this investment gain, than take the risk of FDA non-approval and have a significant loss. As investment professionals, we will act as stewards of our clients’ capital, and whenever possible, attempt to minimize risk to this capital. LCA will not hold more than 10% of our entire capital in one particular equity investment and no more than 5% in stock options. We will also have an automatic sell order in place for any investment that loses more than 20% of its value. After Tax Return We have determined that the limited liability company model provides the most flexible tax return options as profits can flow through to the partner, without first being taxed at the corporate level. Corporate Structure

The corporate structure of Longwood Capital Advisors is set up as a partnership with the overarching legal structure of a Limited Liability Company (LLC). The legal entity is Longwood Capital Advisors LLC and is incorporated in the state of Massachusetts. Each founding partner has equal decision making power in the legal entity. This LLC provides a vehicle to pass through any profits to the general partnership, which distribute any profits to the General Partners (GP).

Market Research and Findings In this section we will first look at the overall performance and structure of the current stock market in the United States with a particular emphasis on the performance of small-cap companies (market cap <$1B). We will then explore the current state of the biotechnology industry, examining key factors affecting company’s performance including the drug development pipeline and the FDA timeline. As we primarily focus our investments on companies in late-stages of drug development, and in particular drugs that have undergone filing of the FDA new drug application (NDA), we will analyze general trends in the market value of companies undergoing this process. Performance of NASDAQ and Russell 2000 Composite Indices For comparison to market performance, the NASDAQ Composite Index and Russell 2000 Small Cap Index is shown below over the past 3 years (2012 Q2 to 2015 Q3), the timeframe of LCA’s existence. Notably, the stock market has had a particularly strong performance over 2013-2014.

 

    Current State of the Biotechnology Industry and Small-Cap Companies As the biotech industry has matured over the past decade, the changes in expectations have caused access to public markets to become increasingly difficult until products have reached later clinical-stage development. Private investors have generally also been participating in later stages of development with the hope of maximizing the likelihood of success. This has caused biotech startups that emerged in the late 2000s to be on a whole more virtual, often having little or no laboratory space (due to outsourcing of bench research), operating with a smaller group of employees, and developing only one or two candidates at a time. These factors, coupled with the

Nasdaq Composite Index (2012-2015)

Russell 2000 Small Cap Index (2012-2015) Source: www.marketwatch.com. Last accessed 10/5/15.  

NASDAQ Composite Index Annual Returns 2012: (-4.2%) 2013: +40.4% 2014: +15.6% 2015: (-0.01%) Yearly Average: +23.0%

Russell 2000 Small Cap Index Annual Returns 2012: +0.01% 2013: +39.5% 2014: +4.7% 2015: (-8.3%) Yearly Average: +9.0%

huge expenditure and length of time that it takes before a biotech company can derive meaningful revenues from its pipeline, have resulted in the reliance on structured acquisition for the exit of many small-cap biotech startups that are contingent on the success of later-stage clinical and commercial development3. The following figure depicts the increasing percentage of pipeline compounds that originate externally from Phase I to Phase III clinical trials.

Despite the enormous expenditure associated with conducting clinical trials, results of which may take several years to manifest, it has been estimated that approximately 65% of small-cap biotech companies (market cap < $250M) have less than one year's cash on hand4. The small buffer creates a situation where the value of these companies is intricately tied to clinical trial results and ultimately to the likelihood that it will succeed in the FDA approval process. Clinical Trial Timeline and the FDA Review Process Following enactment of the Prescription Drug Use Fee Act of 1992 (PDUFA), the mean duration of the approval phases of drug development declined by more than 1 year over the 30-year period—to a low of 1.2 years in 2005–2009—whereas duration of the clinical phases has increased5. The figure below depicts the mean clinical phase time (IND filing to NDA/BLA submission) and approval phase times (NDA/BLA submission to approval) for new molecular entities and significant biological approved by the FDA, 1980-2009, in 5-year periods. BLA (biological license application), IND (investigational new drug), NDA (new drug application).

                                                                                                                                       

3Eheman  KE.  Planning  for  the  Exit.Nature  Biotechnology.  2012;30(2):132-­‐134.  

4Kessel  M.  A  lifeline  for  the  biotech  sector.Nature  Biotechnology.  2009;27:123-­‐124.  

5Kaitin  KJ,  DiMasi  JA.  Pharmaceutical  innovation  in  the  21st  century:  new  drug  approvals  in  the  first  decade,  2000-­‐2009.  ClinPharmacolTher.  2011;89(2):183-­‐8.  Review.  

Source: EvaluatePharma database, Feb 2007 and May 2007; McKinsey analysis.

The number of new drugs approved in each of these 5-year periods is shown below for both standard and priority review classification. Note that the peak in approval from 1995-1999 was likely affected by the initial implementation of PDUFA in 1992.

The overall probability of success for a lead compound from the start of Phase I clinical trials to FDA approval is approximately 9% between 2003-20106. A detailed breakdown of the success rate of each clinical trial phase is shown below, based on a study of 4,275 drugs for 7,300 indications.

While the overall success rate of new drugs applications, after taking into account all subsequent resubmissions,approaches 80%, first-time submissions for new molecular entities (NME) and lead indiciations is only 49% and 51% respectively over the same time period. The figure below

                                                                                                                                       

6  Hey  M,  Rosenthal  J,  Thomas  D,  Craighead  J.  BIO/BioMedTracker  Clinical  Trial  Success  rates  Study.  Bio  CEO  and  Investor  Conferences,  Feb.  15th,  2011.  

Source: Kaitin KJ, DiMasi JA. Clinical Pharmacology and Therapeutics2011;89(2):183-8.

Source: Hey M, Rosenthal J, Thomas D, Craighead J. BIO/BioMedTracker Clinical Trial Success rates Study. Bio CEO and Investor Conferences, Feb. 15th, 2011.

Source: Kaitin KJ, DiMasi JA. Clinical Pharmacology and Therapeutics2011;89(2):183-8.

illustrates the cumulative percentage of approved drugs after the first through fifths attempts from NDA filing.

Trends in Small-Cap Biotech Stock Movement in Relation to the FDA Review Process Analysis of the trend in stock movement of 74 randomly chosen small to mid-cap biotech companies (market cap < $1B) over the last 4 years in response to FDA decision suggests that accurate prediction of the FDA decision-making process can result in positive alpha, though the price change is generally unidirectional. The figure below suggests that while a negative FDA decision results in a significant drop in stock price, a positive decision results in minimal gain. All stock prices are normalized as a fraction of each company’s stock price at the time of successful NDA filing. 95% confidence intervals are depicted as error bars.

Positive  FDA  Decision Negative  FDA  Decision

Weeks  with  respect  to  PDUFA  (t=0)

Normalize

d  stock  price  

with

 respect  to  NDA

 value

Source: Hey M, Rosenthal J, Thomas D, Craighead J. BIO/BioMedTracker Clinical Trial Success rates Study. Bio CEO and Investor Conferences, Feb. 15th, 2011.

Source: Longwood Capital Advisors, LLC

The minimal movement in response to positive decision compared to that seen in a negative decision can likely be accounted for by the expectation of drug approval in many instances. Of particular note, regardless of outcome, the average stock price of each company prior to FDA decision making is approximately 140% to 150% that of the price upon successful NDA filing. The positive trend in stock price as the FDA timeline progresses towards the decision date was recently described in detail by Leerink Swann in their efforts at quantifying the “binary event” trading phenomenon in healthcare equity7. However, internal analysis by LCA has suggested that this price increase simply reflects a larger beta of biotech companies during periods of general economic growth, as stock price fluctuations during general periods economic downturn, show a generally negative trend. This can be seen when we analyzed the trend of 14 randomly chosen small-mid cap biotech companies during a period of general market downtrend (9/2007 – 2/2009)

The above analysis suggests that during periods of general economic growth, the average performance of companies progression through the FDA review process offers superior return compared to the general market and is a relatively safe investment if the investment is liquidated prior to the PDUFA decision date. Additional risk in predicting the actual PDUFA outcome may not offer as much benefit as a positive decision on average results in very minimal price change.

                                                                                                                                       

7Schimmer  J,  Hite  WR,  Sullivan  JL,  Avanian  AC.  Biotechnology  healthcare  strategy:  Trends  in  biotech  binary  event  investing  –  Identifying  alpha.  Leerink  Swann  Insights  and  Outlook.  October  1st,  2009.  

Weeks  with  respect  to  PDUFA  (t=0)

Normalize

d  stock  price  

with

 respect  to  NDA

 value

Price  Movement  to  PDUFA  Date (9/30/07  –  2/1/09)

Aggregate  Trend Individual  NDAs

Source: Longwood Capital Advisors, LLC

Trends in Relation to the FDA Advisory Committee Panel A subset of NDAs are presented before the FDA Advisory Committee Panel (ADCOM) approximately 1-2 months before the final FDA decision. Analysis of the trend in stock movement of 23 randomly chosen small to mid-cap biotech companies (market cap < $1B) over the last 4 years in response to ADCOM decision suggests that unlike PDUFA decisions, accurate prediction in either direction of the ADCOM decision-making process can result in positive alpha (i.e. companies with NDAs receiving a positive ADCOM vote on average gain over 50% of its original value while those who receive a negative ADCOM vote on lose nearly 40% of its value).

Our analysis suggests that accurate prediction of ADCOM decisions offers a window of opportunity for generating alpha. As these decisions rely on a combination of factors including a particular drugs’ safety and efficacy from prior clinical and pre-clinical trials, the level of need and urgency for a given medical indication, the profile of other drugs in similar class, LCA is in a unique position to leverage its member’s expertise to assess these and other factors.

Weeks  with  respect  to  ADCOM  (t=0)

Normalize

d  stock  price  with

 respect  to  NDA

 value

Positive  ADCOM  Decision Negative  ADCOM  Decision

Source: Longwood Capital Advisors, LLC

Benefits of Investment An Exciting Time in Bio-Medicine. Sequencing of the human genome in the early part of this decade has opened up new frontiers in the struggle against disease. Understanding illness at the molecular level has allowed scientists to dramatically increase the supply of rationally develop agents that are targeted against the specific cellular defects responsible for disease. At the same time, progressive aging of the population in the developed world, especially of the US “Baby Boom” generation has created increased demands for products that will maintain health and prevent illness. These two factors have created an unparalleled expansion of healthcare’s share in today’s economy. LCA was formed to take advantage of this explosion in healthcare by investing in and profiting from the most promising companies of this generation. Expertise in Medicine and Biological Sciences LCA focuses on investing in early stage biotechnology companies with promising products that are undergoing late phase clinical trials. We concentrate on small cap firms that generally do not have any source of revenue. Instead the success of these firms is purely based upon the performance of their experimental drug or device in clinical trials and their eventual approval or rejection by regulatory bodies such as the US FDA. This strategy allows us to maximize the expertise of LCA partners in biomedicine while avoiding the economic complexities inherent in the commercialization of products post-regulatory approval. Of the five partners in LCA, three have already obtained MD degrees from prominent medical schools (Harvard and Johns Hopkins) and one has obtained a PhD from MIT. Our fifth partner rounds out the firm with his intimate knowledge of finance garnered from years of experience working at well-known financial institutions in the US such as JPMorgan and Citigroup. Proprietary Statistical Modeling Although positive scientific data form the basis of success for early stage biotech companies, experience has shown that a variety of other factors can markedly influence a biotech’s stock price as it navigates the path to regulatory approval and commercial success. Based on analysis of stock prices for a large number of biotech companies over several years, LCA partners have derived statistically significant predictors of a companies’ stock price based on factors beyond successful clinical trials data. These factors can include the timing of New Drug Application (NDA) filing in relationship to FDA advisory committee meetings (ADCOM) and final regulatory decision dates (PDFUDA). Combination of these non-clinical factors and LCA’s established expertise in evaluating a drug’s clinical success has markedly enhanced LCA’s ability to predict a company’s likely stock price. LCA also refines its predictions over time by building regression models for its partner’s decision making process. Risks of Investment Inherent Volatility of Small Cap Firms

Unlike well-established pharmaceutical companies with a defined revenue source, the companies that LCA focuses on often only have one or two experimental drug candidates. The stock price of these small cap firms fluctuates extensively based on actual or expected results of clinical trials or regulatory decisions. Companies may double or halve their stock price in a single day. Investors should be prepared for this volatility. LCA has established risk mitigation protocols as outlined previously that limit the amount of capital which can be invested in a single company. In addition, we have defined strict criteria in which securities must be relinquished in order to minimize ongoing losses. By investing in a large basket of companies and defining stop loss measures we hope to limit the amount of capital at risk. Political and other Non-Scientific Influences on the Regulatory Approval The Commissioner of the US FDA is a political appointee that serves at the pleasure of the president. Political pressure following certain events especially when publicized by the media can cause unexpected decisions by the FDA not predictable from analysis of clinical or scientific data alone. LCA will attempt to include estimation of these events into our analysis but they are inherently unpredictable and investors must be prepared. General Market Conditions LCA concentrates on investing in firms listed on US stock exchanges. Therefore, the general state of the US economy will greatly influence LCA’s profitability. Uncertainties including debt default by certain members of the European Union and more restrictive monetary policy by the Federal Reserve may markedly reduce general market returns. Reduced Budgets for Healthcare Expenditure and R&D Growing expenditures have led to government push back against ever increasing healthcare costs. Experimental and innovative therapies are generally more costly than established standards of care and often do not have good evidence demonstrating clear cut superiority. The US and other developed nations have generally tolerated increased costs as the necessary price for innovation. However, given increasingly severe budgetary shortfalls, governments may not be as generous towards costly and unproven therapies in the future. This may mean more stringent criteria for regulatory and reimbursement approval and resulting decreased profits.

Summary and Contact Details Overall our investment strategy is very straightforward: we leverage our expertise in the biomedical sciences to evaluate late-stage drug candidates in development through examination of publically available clinical trial data. We limit our focus to small-cap companies because their market value depends heavily on the success or failure of individual drug candidates. We have the financial and computational expertise as well to assess the potential risk of each company by examining their cash flow analysis and also to model overall trends in the behavior of stock price movement throughout the FDA process. For further information on investment in this opportunity please contact: Longwood Capital Advisors Email: info@longwoodcapitaladvisors.com