Investing in Biotech Isn’t Just for Investors Anymore
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.
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 any partnership in business. “Everybody has got to be in it for the long haul. That’s one of the most difficult things,” Mendlein says. “You want to build a relationship that’s sustainable, that weathers the ups and downs you are guaranteed to encounter in drug development.” He noted that Vertex’s Vicki Sato and Josh Boger, as well as the CF Foundation’s Beall, all deserve credit for keeping the program from going off the rails. “There was magic in that relationship, real trust and mutual respect. They created a very enduring program,” Mendlein says.
There are tricky ethical questions that have to be addressed whenever nonprofits and for-profits do business together, and I would hope that people are thinking long and hard about how to manage the potential conflicts. Disease foundations have a mission to advocate for the health and well-being of their member patients, not to make money. Government agencies have an obligation to look out for the overall health of their citizens and the economic growth of their territories. Pharmaceutical companies have a responsibility to make money for their shareholders, but also to put out safe and effective drugs that the medical community can depend on.
There’s a lot of mission overlap in all three of these groups, and some points where the missions are at odds. Government needs to keep bad drugs off the market. Disease foundations similarly have to stand up for their members if they have been wronged by a company that overzealously markets a drug for an unapproved use or tries to hide negative data about side effects. Can government and nonprofits do their jobs as effectively when they are invested in the drug companies?
This is thorny stuff, but I think the minefield can be navigated if people are thoughtful about it. The reality is that society benefits from developing new medicines that help people live longer, healthier lives. The Wall Street-driven investment marketplace in its current form fails in many ways—it’s why no pharma company has ever successfully developed a malaria vaccine. Governments and foundations have the money and long-term outlook that it takes to support much this kind of endeavor, whether it’s for developing vaccines for poor people in the developing world, or treatments for people with various rare diseases that investors won’t really support.
There are some bright and motivated people at foundations like the Multiple Myeloma Research Foundation, the Michael J. Fox Foundation for Parkinson’s Research, the CHDI Foundation, Accelerate Brain Cancer Cure, and the National MS Society, to name a few. Those groups can make a difference for patients by properly deploying their talented scientific advisory boards, and, yes, their money. The same goes for folks in government at the National Institutes of Health—which already supports a lot of early development work at companies—and at various state and local government agencies around the world.
My feeling is that a lot of smart people are coming around to this idea, that deals like the Vertex/CF Foundation collaboration are just the beginning of a broader financing network for biotech. It might just be the best hope to support drug development in the 21st century. And if it catches on, we’ll keep score on financing trends by doing a lot more than just looking at the NASDAQ or the quarterly VC financing stats. We’ll start to see more products win FDA approval, and get out in the marketplace to help patients.