Earlier this week, BIO released what we think is a valuable and important report.
Entitled Venture Funding of Therapeutic Innovation, the report analyzes data on venture funding in R&D by therapeutic area, by NCE vs. reformulation, and over time.
Bruce Booth has a nice summary here, and you can download the report from here. BIO also has their own summary here.
The authors have done a nice job aggregating data from multiple databases, which is no easy task. Importantly, they have addressed what we think are two important issues which impact anyone attempting to raise capital or out-license an asset:
1. There are huge differences in how our industry treats different therapeutic categories. So a frothy market in one therapeutic area does not necessarily translate into an ebullient market in another area.
2. The so-called “valley of death” exists for some companies in some therapeutic areas, but not others.
As we read through the report, here are a few findings we found interesting:
First, nearly 80% of US VC went to novel R&D, with 20% to reformulation. Now there are exceptions. Take Pain for example. In pain, 67% of invested dollars went to reformulation, suggesting that we simply don’t have good mechanisms or NCEs for pain.
This is good news for new companies with novel assets if they are in the right therapeutic areas. But, it also means that reformulated products may have to reach the market (and hence be generating cash) before garnering investor or acquirer interest (such as the Pfizer acquisition of NextWave and their liquid methylphenidate product). Other areas where reformulation has a chance at external financing include Endocrine, Dermatology, and Oncology.
We can’t emphasize this enough…the so called “valley of death” does exist for selected therapeutic areas, but not others. So anyone who complains about a lack of funding has to simply look at their own asset first and ask some hard questions, such as:
- Does this asset match what Big Pharma is looking for?
- Is my process for seeking financing or a licensing partner being run well?
- How do I know which is the problem, or if it’s something else?
Speaking of which, Oncology was the largest of the disease categories, accounting for nearly 25% of total venture capital raised. Interestingly, the authors note that 66% of oncology R&D funding occurred at the Preclinical and Phase I stage.
This makes Oncology deceptively attractive for entrepreneurs and investors, because Oncology can yield great exits if there is very novel technology and a good Phase I package.
Additionally, there are some very high Prevalence and important areas which are receiving little venture investment, such as Alzheimer’s, Depression, and Antibiotics for Gram Negative bacterial infections (E. coli, Pseudomonas, Klebsiella, etc.).
Some Big Pharma/GP/PCP therapeutic areas, have seen a big drop in venture investing, such as Type II Diabetes, Arthritis, IBS, IBD, Asthma, and Cardiovascular (especially hypercholesterolemia and hypertension). Conversely, other GP/PCP areas, like Obesity, are experiencing an increase in venture funding.
Why?
Again, it’s because these data reflect what Big Pharma is looking for…shifting away from GP/PCP indications and towards specialties and niches within the larger therapeutic segments.
Genetic Disorders, for example, nearly doubled, with 100% of funding going into novel R&D. As BioMarin and Genzyme have shown, one can build successful companies around highly selected niches.
Similarly, Ophthalmology is one of the few areas where the number of companies receiving funding has increased more than the actual dollars invested.
One minor point which the authors acknowledged, but did not expand upon is the decreasing number of biopharma venture investors that exist today compared to 2007.
Taken together, the entire financing environment is characterized by a few key factors:
- Concentration in some therapeutic areas over others
- Driven by Big Pharma interests for innovation and market niches
- Fewer, increasingly selective early-stage investors