Today, Bruce Booth published yet another terrific post, where he discusses the current biotech investment bubble from the private word of venture backed biotechs (and, he puts many mainstream journalists to shame with this analysis).
We think one of the more interesting insights in the post is this one,
One would think with a big spike in aggregate funding that lots more biotechs would be getting financed. As the chart below reveals, the same number of private biotech companies got funded in venture rounds during the lean bunker-mode of 2009 as got funded in the bubblicious climate of 2014…So with the increase in funding and steady number of funded biotechs, the same number of companies simply raised more money (our emphasis added).
As part of our new relationship with Ventac Partners, we’re knee-deep into a year-long plan to start a new life science company from a university technology or asset. You can review the current portfolio here.
A major portion of our time is being spent reviewing technologies from universities and research institutions here in the US. Even with our focus on a selected number of therapeutic areas (gastroenterology, ophthalmology, and dermatology), there is no shortage of ideas.
So what’s the problem?
From the buy side perspective, we’re noted a few reasons why there is a discrepancy between funding and new company formation:
Shortage of Fundable Assets – There are assets, and then there are fundable assets. By fundable assets we simply mean that an asset has to move beyond a patent or a research paper in order to be fundable. Even basic things such as competitive and pipeline analyses are not a routine part of the data packages we are seeing. This means someone, either within technology transfer or an entrepreneur with an option on the technology, has to put the data package together. This takes time, money, and expertise.
Importantly, we’re not simply suggesting that a competitive analysis will result in more companies being formed. There is a surprising number of academic research programs which are simply not competitive compared to products already on the market.
The current trend of pharma and biotech professionals going to work in university technology transfer offices is a very positive step in this regard.
Biology Is Hard – I love this quote from a post by Michael Gilman,
The last two or three decades of immunology have been about finer and finer subdivisions — of cell types, of ILs, of CDs. In drug development, that kind of precision can stop helping you. After all, most of our successful immunological drugs are pretty blunt instruments, taking out whole swaths of the immune system. Although elegance and selectivity are intellectually compelling, when it comes to an enemy like autoimmune disease you need heavy weapons (our emphasis).
He’s quite right. When I studied undergraduate immunology, it was fairly straightforward. Even the one graduate-level course was certainly manageable for a non-immunologist like me.
But our increasing level of understanding of biology in general leaves us both in awe at its elegance and its complexity. Gone are the days when you can dose beta blockers and measure blood pressure in rats. Now you read a paper and there is a single sentence on the knock out mouse created for that particular experiment, almost in passing, as if creating a new life form is another routine assay system.
It’s amazing what we can do scientifically, but this all comes back to the same issue that the lay press simply cannot understand; that biology (and hence, drug discovery) is damned hard.
The advances made in genomics, combinatorial sciences, robotics, genetics, etc., etc. have reduced R&D productivity across the board because the more we understand, the more we realize how difficult drug discovery and development are.
Now smart investors know all this. VCs hire smart people and retain smart consultants to help them make sense of it all. Since they have to be smart about the bets they place (because they have LPs who demand ROI), they have to be very picky. And, since there are a limited number of VCs (especially early-stage VCs), it’s even tougher to find novel, investable biologies.
Take the Michael Gilman post mentioned above. Even with the years of work already done to understand PADs, the first issue his company had to address was whether or not PADs are druggable. Now stop and think about this. Years of work has taken place to understand a very specific biology, and yet we do not know (at least not publicly) if this is even a druggable space. So we are still years away from a commercial PAD inhibitor.
And we’re not even addressing the issues of predictive models, regulatory challenges, etc., etc.
Even in our own little corner of the industry, it’s difficult. Take diabetic retinopathy, for example. Chronic hyperglycemia leads to AGE formation, oxidative stress, and vascular damage. But AGE formation is not the only mechanism which can do this. In fact, there are at least four others that we can find in the literature.
So how do you choose? Where do you place your bet? How much would it cost to perform the “killer” experiments to sort this biology out? And who is willing to finance that bet?
But that’s the nature of biology/pharmacology/drug discovery. It’s hard, rarely successful, risky, and therefore valuable and precious when successful.
Talent Shortage – There are a few ways to look at this issue. One, it’s never as simple as grabbing 4-5 ex-pharma execs and handing them the keys to a new company. Going from a large company to a very small one is never easy. Secondly, investors are rightly biased towards corporate executives who they have worked with before, thereby reducing the opportunities for first-time C-level executives. Investors have a lather/rinse/repeat attitude when it comes to management teams, reducing the pool of talent that would even be considered for a new company.
So this year, as our Inboxes burst with the latest news on “monster rounds,” IPOs, etc., let’s keep things in perspective.
Let’s remember that for all of the new companies which are financed, a much larger proportion of them are not financed, and many will shut down.
Similarly, for every drug approval, there are hundreds that are not …and patients pay the price for lack of therapeutic options.
So let’s celebrate drug approvals, remember that financings are just that, financings, and try not to get too distracted by the CTR-driver journalists in our industry.