Investing in Biotech Isn’t Just for Investors Anymore

4/9/12Follow @xconomy

There hasn’t been much to crow about for years in the world of biotech financing. There’s no getting around the fact that new drugs still take a long time and a lot of money to develop, and they usually fail. It doesn’t fly in an instant-gratification economy, where people take extraordinary technical achievements—like, say, streaming video on your laptop—for granted.

No technology has emerged to improve drug development in the profound way that cheap cloud computing and broadband has done for high-tech startups. Until that happens, the industry is going to have to get by on channeling creative energy into new biotech business models that are better at sharing risks and rewards. And the good news is that despite the challenges with drug development, there are ideas emerging that could keep long-term, committed money flowing into life sciences innovation.

Before going too far down this road, it’s worth noting that if you look at the usual short-term financial metrics, business as usual looks OK this year. The NASDAQ Biotech Index was up 18 percent in the first quarter, roughly on par with the broader NASDAQ Composite. Total venture capital financing was up 34 percent in the first quarter compared with the same period a year earlier, according to BioWorld. A few decent acquisitions have occurred this year, including Amgen’s takeover of Micromet, Biogen Idec’s buyout of Stromedix, and Celgene’s acquisition of Avila Therapeutics. Four biotech IPOs have happened so far, which isn’t much to brag about, but it’s better than last year’s performance.

What’s more interesting, and potentially more important for the long term, is a fundamental re-thinking of biotech financing that’s occurring in government, charitable foundations, venture capital boardrooms, and Big Pharma.

This past week, Burrill & Co. put its finger on this trend with a report that tallied up $2.6 billion worth of new biotech financing initiatives since the end of February. Names like Merck, Domain Associates, the Russian government, the Wellcome Trust, the Welsh government, and Cleveland’s University Hospital were some of the various characters working on serious life sciences initiatives.

These types of groups are pooling their resources in new networks partly because they know that venture capital can’t support the innovation ecosystem the way it once did. The venture capital business is going through a historic shrinkage: there were 1,022 active venture firms in the bubble year of 2000, and just 462 a decade later, according to the National Venture Capital Association. The biotech venture business is in the midst of a major shakeout, as many firms have been unable to deliver the investment returns they need in order to continue raising new funds to back startups.

The shrinkage of the biotech venture world has had a profound impact on the biotech industry for years now. Biotech companies once dreamed of becoming the next Amgen or Genentech, with R&D, marketing, manufacturing, and more all under one roof, but those days are largely gone. It takes too much time, too much money, too much risk, and provides too little return for those who dare to try.

So if traditional investment models are going to play less of a role in financing biotech drug development, and society still values development of new medicines, then the question becomes: How will we pay for it?

One of the creative models we’ve seen was crafted more than a decade ago by San Diego-based Aurora Biosciences and the Cystic Fibrosis Foundation. The CF Foundation put in about $75 million of its money, and harnessed its network of physicians and patients, to help this for-profit company develop a drug for a deadly lung disease that no investor wanted to support. Bob Beall, president of the CF Foundation, “was the only one who believed in us,” said John Mendlein, an architect of the deal at Aurora in 1999 and now the CEO of San Diego-based aTyr Pharma.

John Mendlein

The CF Foundation had that kind of dough partly because it was good at fundraising, but partly because it has a long history as a shrewd, and patient, investor. Back in the 1990s, way ahead of most other charities, the CF Foundation helped support the development of an inhalable antibiotic, Novartis’ tobramycin (Tobi). That product generated a healthy cash flow to the nonprofit in the form of royalties. The CF Foundation then turned around and invested some of that money on Aurora’s drug. That drug, which Vertex Pharmaceuticals acquired and drove through development, recently won FDA approval and is expected by analysts to generate more than $500 million a year in sales. The CF Foundation, in line to collect more lucrative royalties, can now choose to plow even more money into the development of innovative new drugs like Vertex’s ivacaftor (Kalydeco.)

There are plenty of ways these relationships can break down, just like … Next Page »

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  • Former CF Marketer

    I was talking to Bob Beall once about why and how he got into financing emerging products for CF. Bob relayed to me a conversation he had with Art Levinson, CEO of Genentech, where Art said if Genentech tried to develop a new product for Cystic Fibrosis today (Genentech developed one of the most used CF biologics, Pulmozyme) the commercial and technical risk evaluation would likely not lead to it getting commercial support. According to Bob, it was at this time he determined if the CF community wanted to see more products in development to treat the disease, he had to find a way to support it regardless of the conflict of interest challenges.

    Since that time, the industry has established a higher ceiling for prices of orphan drugs making their development more viable which is positive. However, now with financing shrinking this “interested party” financing should flourish more. Those organizations who are considering this model should look into the details of recent CFF financing support. They have developed a sophisticated view to investment, expected return, and IP rights in the event of failure or lack of support. These are great issues to consider when thinking of support.

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  • http://itsasmallerworld.blogspot.com/ Nathan Meryash

    “No technology has emerged to improve drug development in the profound way that cheap cloud computing and broadband has done for high-tech startups.”

    True, but the human on a chip effort will hopefully be one of the enabling developments that change that. It will be a combination of emulation developments (the human on a chip model being one) as well as better computational simulations (take simulations like folding@home for instance).

    Source: http://blogs.fda.gov/fdavoice/index.php/tag/human-on-a-chip/

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  • kennethnobls

    Its almost out of scene now. Hardly investors consider it while considering the investment options.

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  • nadeem khan
  • patrick

    Investing in biotech isn’t about hitting that one homerun. To be successful, you need to manage your risk properly.

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