Biotech Is Raising More Cash, But Don’t Be Fooled: Startups are Hurting

1/23/12Follow @xconomy

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have all the answers, because they can’t develop everything in-house, no matter how many mega-mergers they do. Biotech companies generally realize they can’t raise a billion dollars, and wait 15 to 20 years for a payoff, in hopes of becoming the next Genentech. More and more R&D functions—chemistry, toxicology, formulation work—can easily be outsourced to contract research organizations who can do it faster and cheaper.

Since we’re talking about experiments, some will pan out, some won’t. But ultimately, these ideas need to be tested in startups if we’re going to make real progress. I’m reminded of the time biotech pioneer Leroy Hood told me that “new ideas need new organizations.” He brought this up while telling the story about how nobody in industry wanted his technology in the 1980s for an automated gene sequencing machine. Big companies just had too many other projects going on, and didn’t believe it would work. Somebody needed to come along and take the risk to finance Foster, City, CA-based Applied Biosystems, now part of Life Technologies. And we’re lucky that somebody did, because that company made the workhorse machines that made the Human Genome Project possible in the 1990s and early 2000s.

We’re at a point now where there are lots of good ideas, perhaps some even as good as high-speed gene sequencing was in the early 1980s. The question is whether we as a society will recognize the challenge we are facing with early-stage biomedical R&D, and step up to solve it. If we don’t, we’ll never know which of today’s ideas will turn out to be great advances for medicine.

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  • Nessan Bermingham

    Luke – you hit on a very important issue our industry is facing today. Our biggest challenges revolve around R&D risk and capital requirement. When compared to alternate asset classes the IRR for early stage venture investing has been disappointing. Liquidity today requires human PoC with a clear FDA pathway to approval, & reimbursement. Acquisitions are milestone based with the true upside for investors coming much later after acquisition – with a 10 year lifecycle for a fund this is an issue. With the dwindling number of venture investors in an environment of smaller funds we face unprecedented challenges. As an industry we need to work with academics, regulators and industry to start to design models that are viable long term – the Atlas and Third Rock approach are certainly steps in the right direction but they are not the complete answer. One shouldn’t forget that the markets are cyclical, our industry will survive however, for it to prosper we need to accept the new world we live and work in, developing appropriate ways to address it and truly developing innovative, game changing therapeutics.

  • Nessan Bermingham

    Our biggest challenges revolve around R&D risk and capital requirement. When compared to alternate asset classes the IRR for early stage venture investing has been disappointing. Liquidity today requires human PoC with a clear FDA pathway to approval, & reimbursement. Acquisitions are milestone based with the true upside for investors coming much later after acquisition – with a 10 year lifecycle for a fund this is an issue. With the dwindling number of venture investors in an environment of smaller funds we face unprecedented challenges. As an industry we need to work with academics, regulators and industry to start to design models that are viable long term – the Atlas and Third Rock approach are certainly steps in the right direction but they are not the complete answer. One shouldn’t forget that the markets are cyclical, our industry will survive however, for it to prosper we need to accept the new world we live and work in, developing appropriate ways to address it and truly developing innovative, game changing therapeutics.

  • http://www.xconomy.com/author/sfriend/ Stephen Friend

    Exceptionally cogent description of the reality provide yet again by Luke. Until we question how we work together, how we construct a better social value chain, and until we foster new public private partnerships- 2012 for biotech’s will look like a bad year compared to 2002– but be ready for even harsher times to move in within the next decade as overall US prosperity erodes further. Seems like a crime when so many of the new biotechnologies to drive innovation are beginning to blossom.

  • Adam Michael

    Interesting article. In response I don’t have a Mark Twain quote on three types of lies, but I do have quotes from three biotech Venture Capitalists I’ve been talking with recently – and they’re mostly the same:

    “If you think it’s hard to raise capital for a start-up right now…try raising capital for a new venture fund!”

    And herein lies the issue. For sure the venture funds can see new opportunities…but they have to complete what they have already begun. Existing portfolio companies must be prioritised and be taken through to fruition, to maintain credibility with the LPs behind each venture fund.

    Not following this path, and failing to deliver on existing investments, is a guarantee of never having another fund.

    Nessan’s comments point to a collective solution, that could bring in more parties to back our latest biological discoveries. No single group will, or can be expected, to do this alone.

    =A=

  • http://www.xconomy.com/author/ltimmerman/ Luke Timmerman

    Here’s a new blog post from Atlas Venture’s Bruce Booth, who did his own analysis of the MoneyTree data, which he says led him to a more positive conclusion about the state of early-stage financing. I’m still concerned about the state of the early-stage biotech community, but Bruce is a keen observer of this part of the ecosystem, and an insider, so I’d encourage you to check out his take.

    http://lifescivc.com/2012/01/startup-biotech-paradox-data-positive-press-negative-huh/

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