Monday, 27 February 2012

Future View of VC investing in early Pharma / Biotech: Imperial Innovations

Networked Pharma – Finance (NWkRx F2)

I recently spoke with Nigel Pitchford,  Managing Director of Healthcare, for Imperial Innovations (, one of a new breed of early stage Biotech VC investors, regarding the future funding model and open innovation for Pharma innovation / Biotech start-ups.  Before joining Imperial in 2011, Nigel was a traditional venture capitalist in the biotech space, at 3i Cambridge and latterly DFJ Esprit.

Below is a summary of our discussion.  The take-home messages are;
  • Early stage funding model for biotech’s needs to change
  • “Patient Capital” (as in prepared to wait) is necessary for successful “biotech” investment.
  • Tax incentives for investors and more translational funding are required.
  • A new approach to translational project funding in universities is needed, that avoids excessive overheads or the need to spin-out.
  • Open innovation is generally a good idea, and would be greatly facilitated by a new form of marketing exclusivity for first exploiters of products arising from such initiatives.

Funding models
Nigel agreed that the early funding model [for biotechs] needs to change. Without access to public markets VCs are left with the dilemma of funding biotech companies for longer and with ever increasing amounts of capital, hopefully towards a trade sale exit. This continued funding model is directly at odds with what most of their Limited Partners want to see – creating a problem for VCs themselves when it comes to both fundraising, and then later in deploying that capital.  

There is a fundamental mismatch, of both timescales and quantity of money needed, between the needs of early stage biotech’s to discover and develop drugs and so build a company to a reasonable business/valuation; and the requirements of  the VC’s Limited Partners. Hence once new companies were established, insufficient funds were available for follow-on funding rounds (resulting in dilution or fire-sales) and exit was required too soon, so that decent companies with good critical mass could not be built and “the buyers got a good deal”! 

One reason why Nigel joined Imperial Innovations, is it is an evergreen fund with
“Patient Capital” (i.e. willing to wait)
They invest off of their own balance sheet, and have investors that are patient (willing to wait), so that sufficient time is available to develop the drugs, and sufficient funds available for later funding rounds, allowing a solid company to be grown, and “with size comes value”.

Similarly, the Major Pharma Corporate VCs (“CVC”), who are funded by corporate parents, and invest with alignment with their strategic imperatives, have both
“Patient & Plentiful Capital”
And so are more open to funding early stage innovation.

Regarding future funding of early stage innovation, Nigel made several observations;
  • Further tax incentives for early-stage investors would assist with bringing vital start-up capital to fledgling biotech companies.
  • More translational funding is required for the gap between the scientific discovery and sufficient proof of concept for either spin-out or licensing to take place.  Previously there has been tendency to spin-out too soon, but trend is now to keep in-house (university etc) longer, which is good thing.
  • However, if VC or CVC wants to fund some translational or earlier work, it costs more than twice what a research council would pay, because of FEC (full economic costing) and/or start-up costs for spin-out including legal fees etc.  [This is nonsensical, given the risk profile and dearth of risk capital, as money is wasted that could have been used for another opportunity].  A new approach to project funding with a sensible [equitable] costing structure is needed.

Open Innovation
Nigel believes open innovation to be a good idea, not competitive to VCs, and that the sharing of failures would be very beneficial - e.g. avoiding a company repeating another’s mistake (with a drug etc) [or showing up a profiling opportunity].

However, IPR ownership is of course key.  Or rather, it’s the ability to exploit exclusively that is necessary (to get ROI).  Traditionally this is via ownership of IPR, but increasingly there are now mechanisms for marketing exclusivity other than IPR ownership - namely Patent term extension and orphan drug legislations which provide for marketing exclusivity.  Nigel’s suggestion is for the government to introduce a form of market exclusivity for products / services arising from open innovation [where IP ownership is complex or unclear, or IPR absent] – perhaps a form of first to exploit protection.

BioSpring Ltd is a member of Networked Pharma Partnership, a not for profit organisation dedicated to assisting development of a new paradigm for drug discover & development

Networked Pharma Partnership; Building Innovative Networks in Drug Discovery & Development

A series of workshops are being run during 2012, leading to an international congress in early 2013, which will bring together all stake-holders (Corporate Pharmas, SMEs, CROs, Universities, VCs, CVCs, Research Councils, Charities, Regulators & Government bodies etc.) to formulate the new business model(s) for the future success of the industry.

Follow us:
Twitter @NWkPharma,      #NWkRx

No comments:

Post a Comment