Wednesday, 20 June 2012

Future View of VC investing in early Pharma / Biotech: The CVC Perspective

Networked Pharma – Finance (NWkRx F6)

 I recently spoke with one of the more active Corporate VCs (CVC) regarding the existence 
of the funding gap in early pharma discovery, the reasons for it, and what the future holds.

There is a funding gap in early drug discovery - but not an insurmountable one!
Previously the investment model in Europe for general VCs assumed funding to a proof of principle and then floatation on a public market or trade sale to Pharma company.  However as the public markets do not understand biotech (nor do generalist VCs) share prices are highly volatile and single poor trial results are catastrophic for share prices.  Hence appetite for biotechs became poor in early 2000’s, and so VCs could see no exit that way.  Also Big Pharma have stringent requirements for in licensing and often VCs were not able (insufficient funds) or unwilling (required cost of capital by their investors necessitates shorter timescales) to continue funding sufficiently to achieve the proof needed by Pharma.

Part of the problem was “naive money” ie from general VC’s inexperienced in the sector.  There is now a gap in early funding as the general VCs have pulled out of the sector, although some still have portfolio company legacies.

Being a “Biotech VC is completely different from other VCs, including Tech.”

So what of the specialist funds?  There are (in the interviewees view) a small group of “tier one” specialist biotech VCs that are, or will be, active:
·       VC:
Abbingworth, Imperial Innovations, Index, MVM, Phase4ventures (ex.Nomura), Sofinova, SVLS (Shroders).
·      Corporate VC (CVC) – those that are wholly or largely independent from Pharma HQ influence:
Lundbeck, Novartis, Novo, Pfizer, SR One.

These generally have longer timescales and larger pots of money for investment.  However at present most of the Biotech VC have either run out of money, or are at 5yr+ stage of 10 year fund and so have to keep funds for follow-on investment.  So few are investing (e.g. Sofinova & SVLS who both have ~7 years left on their funds, and Imperial with its longer term approach).  The rest are actively fundraising early stage funds.  Hence the gap is [at least in part] temporary, awaiting fundraisings. The CVCs are actively investing and moving to earlier stage opportunities.

Another issue has been that companies spin-out too soon, with small investment from small funds, Angels etc and then have to find more money to develop further.  The incumbent investors have insufficient funds and as the technology is still not sufficiently demonstrated, so
1.      Larger VCs are not interested or only so with terms which dilute the existing shareholders so much that they will not agree,
2.      Pharma is not yet interested in licensing, or a very poor set of terms is achieved, and/or
3.      Company has to switch to a much lower-value service model to survive.
None of which is a desirable situation for anyone.

The CVC would prefer companies to be incubated longer in universities “until they are really ready”, perhaps with a £50-100k “investment” from a CVC to enable some critical proof of concept work (with a gentlemen’s agreement for first chance to discuss next steps assuming success), and then spin out with major investment by party(ies) with deep enough pockets to see it through to exit (trade sale).

So what are they looking to invest in?   Something really new, which may be a service business, but more likely a game changing innovation that has potential to satisfy unmet medical need, is likely a new mode of action, and most certainly is not only approvable but also reimbursable!  The latter needs a step change in clinical outcomes.  So no longer improvements on existing drugs e.g. new delivery methods or me-toos, as Big Pharma will do this themselves.  Regarding reprofiling: there is still a short window of opportunity, but eventually Big Pharma will be doing this. 

What Big Pharma ultimately want to acquire is the game changing new drug, and so that is what the VCs want to invest in.  This will be high value, with a high hurdle rate, necessitating large investment.  The VC has to consider all risk, not just the technological (R&D) risk that is mainly considered- including ability to exit, and shareholder dynamics risk (sufficient funds, dilution etc).  Hence there will be fewer investments, of great amounts, with funds being more focussed. 

Imperial, MVM and SR One are all speaking at Networked Pharma’s Funds & Fundability workshop on June 28th in London, and will share the panel discussion with serial entrepreneurs Andy Richards and Julian Gilbert.

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 PartnershipBuilding 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.

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