Guest col­umn: The 3 big waves re­shap­ing in­vest­ment strate­gies in ear­ly-stage biotech


We are at a time in life sci­ences when sig­nif­i­cant strides are be­ing made to solve some of the most com­plex med­ical chal­lenges. Rapid ad­vance­ments in sci­ence and tech­nol­o­gy cou­pled with abun­dant cap­i­tal are lead­ing to new in­vest­ment strate­gies that may per­ma­nent­ly change how com­pa­nies at the cut­ting edge of drug de­vel­op­ment are fund­ed.

Let’s take a step back. For years, ear­ly-stage in­vestors and drug de­vel­op­ment com­pa­nies faced im­pos­si­bly high fundrais­ing hur­dles, ham­pered by the high cost of cap­i­tal, low clin­i­cal suc­cess rates and a long reg­u­la­to­ry process that might stretch years.

Now, this is all chang­ing. Bio­phar­ma in­vest­ing over­all is on pace to reach new heights in 2018. In par­tic­u­lar, bio­phar­ma Se­ries A in­vest­ments are ex­plod­ing; by mid-year 2018, these have al­ready ex­ceed­ed full-year 2017 to­tals. Some ear­ly-stage com­pa­nies are now at­tract­ing in­vest­ments at lev­els once seen on­ly in lat­er-stage deals.

Source: SVB “Trends in Health­care In­vest­ments and Ex­its 2018,” Pitch­Book, SVB Pro­pri­etary Da­ta

Click on the im­age to see the full-sized ver­sion


Move to port­fo­lio-style in­vest­ing

What is dri­ving this shift in in­vestor con­fi­dence and fu­el­ing new bio­phar­ma com­pa­ny cre­ation? For­ward-think­ing in­vestors and en­tre­pre­neurs are look­ing at ear­ly-stage drug de­vel­op­ment op­por­tu­ni­ties from a mu­tu­al fund per­spec­tive. Their goal is to in­crease the odds of a large re­turn from a sin­gle suc­cess­ful drug in­vest­ment, while re­duc­ing the typ­i­cal­ly high risk of a sin­gle ear­ly-stage in­vest­ment. They achieve this by build­ing and in­vest­ing in a port­fo­lio of drug de­vel­op­ment as­sets that, when pooled, car­ry a low­er cor­re­la­tion of risk and a high-enough prob­a­bil­i­ty that at least one will reach clin­i­cal and reg­u­la­to­ry suc­cess. The odds are im­proved by that fact that life­sav­ing ad­vances are be­ing made to un­lock mech­a­nisms un­der­ly­ing many spe­cif­ic dis­eases, lead­ing to more ef­fec­tive treat­ments.

While this new mod­el re­mains cap­i­tal-in­ten­sive, it works to spread the risk and, by ex­ten­sion, pro­vides a more pre­dictable pat­tern for re­turns. As a re­sult, pri­vate eq­ui­ty and deep-pock­et­ed in­vestors now have more con­fi­dence in ear­ly-stage bio­phar­ma — in a few cas­es enough that some port­fo­lio as­sets are be­ing spun out as in­de­pen­dent com­pa­nies.

This shift in ear­ly-stage bio­phar­ma in­vest­ing, in fact, has evolved in three waves.

Source: Com­pa­ny web­sites and press re­leas­es

Click on the im­age to see the full-sized ver­sion


First wave: Spin off a sin­gle as­set

In the first wave, ex­em­pli­fied by Adimab and Nim­bus Ther­a­peu­tics, small­er com­pa­nies di­rect­ly took on the risks of drug dis­cov­ery. For ex­am­ple, Adimab launched as an LLC with no clear in­ten­tion of ever ex­it­ing as a whole com­pa­ny, an event that tra­di­tion­al­ly would have led to a big lump-sum pay­day for in­vestors. In­stead, Adimab’s busi­ness mod­el cen­tered on de-risk­ing the ear­li­est stages of drug dis­cov­ery for larg­er bio­phar­ma and prof­it­ing from the over­all de­creased un­cer­tain­ty. This pro­vid­ed in­vestors with a some­what pre­dictable div­i­dend stream from reg­u­lar as­set-li­cens­ing deals, and the large bio­phar­ma as­set pur­chas­er with a source of less risky as­sets. Still, the larg­er bio­phar­ma com­pa­ny had to move ear­ly to ac­quire the as­set, and as a re­sult as­sumed a rel­a­tive­ly high risk of fail­ure. With­out trans­fer­ring all the risk, the in­vestors were left with some con­straints that lim­it­ed their re­turns.

Sec­ond wave: Build to buy

The next wave took the con­cept a step fur­ther. In­stead of de­vel­op­ing a sin­gle drug can­di­date, “build-to-buy” com­pa­nies were es­tab­lished around each as­set and spun out as new com­pa­nies. Ver­sant Ven­tures’ In­cep­tion Sci­ences, a drug dis­cov­ery in­cu­ba­tor that spawned young com­pa­nies, and or­phan drug com­pa­ny Daunt­less Phar­ma­ceu­ti­cals are prime ex­am­ples. Very ear­ly on, they part­nered with a big bio­phar­ma com­pa­ny that gained the ex­clu­sive ac­qui­si­tion rights at pre­set terms. How­ev­er, ear­ly-stage in­vestors had to take a small­er re­turn on their in­vest­ments to com­pen­sate for the low­er risk as­so­ci­at­ed with a pre­de­fined ex­it. On the flip­side, strate­gic part­ners were will­ing to pay slight­ly more than nor­mal be­cause they were ac­quir­ing more-ma­ture as­sets, of­ten with sci­en­tif­ic teams in place to help bring the drug can­di­dates to the fin­ish line, in­stead of hav­ing to ded­i­cate their own R&D staff.

Third wave: Port­fo­lio-the­o­ry ap­proach

Now, in­vestors are ex­per­i­ment­ing with a full port­fo­lio-the­o­ry ap­proach, which is par­tial­ly based on an in­vestor the­o­ry called “re­search-backed oblig­a­tions,” de­vel­oped by eco­nom­ics pro­fes­sors An­drew W. Lo and Roger Stein of the Mass­a­chu­setts In­sti­tute of Tech­nol­o­gy. Most in­vestors are fa­mil­iar with the con­cept, known as port­fo­lio in­vest­ing. It works like this: The goal is to own a con­trol­ling in­ter­est in a large num­ber of high-risk, po­ten­tial­ly high-re­turn ear­ly-stage com­pa­nies built around sin­gle as­sets. The idea is to spread the risk across a large enough num­ber of com­pa­nies that the bi­na­ry risk of fail­ure is re­duced, in the hopes that one com­pa­ny will sig­nif­i­cant­ly out­per­form.

To do this to­day in bio­phar­ma, an in­vest­ing en­ti­ty needs mas­sive sums of cap­i­tal, which in the past was tar­get­ed on­ly to late-stage com­pa­nies. As a re­sult, the pi­o­neers in port­fo­lio in­vest­ing with ear­ly-stage com­pa­nies have very deep-pock­ets. For ex­am­ple, Bridge­Bio is backed by pri­vate eq­ui­ty firms KKR, Viking Glob­al In­vestors and Per­cep­tive Ad­vi­sors. Bridge­Bio has fund­ed sub­sidiary com­pa­nies work­ing on a va­ri­ety of drugs to treat every­thing from skin con­di­tions to in­her­it­ed heart dis­or­ders, most of which are ear­ly-stage. In these cas­es, the in­vestors may be pre­pared to take a loss of tens of mil­lions of dol­lars in the short term with the ex­pec­ta­tion that clin­i­cal break­throughs will lead to at least some of these bets pay­ing big re­turns in the end.

The fu­ture of bio­phar­ma in­vest­ing

Oth­er com­pa­nies are ap­ply­ing a port­fo­lio-the­o­ry ap­proach to bio­phar­ma R&D with a broad­er strat­e­gy be­yond pre-clin­i­cal R&D. Ve­loc­i­ty Phar­ma­ceu­ti­cal De­vel­op­ment (VPD), for ex­am­ple, is based on in­vest­ing in un­der­fund­ed or shelved drugs. VPD es­tab­lished a “project-fo­cused com­pa­ny” around the as­set. Sim­i­lar­ly, Roivant Sci­ences, which in­cu­bates and launch­es new sub­sidiaries known as “Vants,” is pool­ing as­sets and has at­tract­ed some mas­sive in­vest­ments. As its first bio­phar­ma in­vest­ment in Au­gust 2017, Soft­Bank Vi­sion Fund made a $1.1 bil­lion in­vest­ment in Roivant Sci­ences, not its sub­sidiaries. Mereo Bio­Phar­ma Group is an­oth­er port­fo­lio play that keeps de­vel­op­ment of clin­i­cal-phase as­sets un­der a sin­gle en­ti­ty.

Look­ing ahead, as the port­fo­lio-the­o­ry ap­proach evolves we en­vi­sion large pools of low-cor­re­la­tion risk as­sets com­bined with a more pre­dictable fi­nan­cial re­turn mod­el, at­tract­ing huge new sources of cap­i­tal from in­vestors, even re­tail in­vestors. This has the promise of fu­el­ing new drug de­vel­op­ment at ear­li­er stages and solv­ing med­ical chal­lenges faster. These mod­els al­so lend them­selves to very so­phis­ti­cat­ed cap­i­tal en­hance­ments, such as lever­age and se­cu­ri­ti­za­tion. We could be at the very be­gin­ning of a new in­vest­ing strat­e­gy that may lead to ma­jor dis­rup­tions in tra­di­tion­al sci­en­tif­ic in­vest­ing as we know it.


Jen­nifer Friel Gold­stein, BSE, MB, MBA, is the head of Sil­i­con Val­ley Bank’s West Coast life sci­ence and health­care prac­tice. An­drew Ol­son, PhD, is a se­nior man­ag­er lead­ing mar­ket re­search in sup­port of Sil­i­con Val­ley Bank’s life sci­ence prac­tice.

Part club, part guide, part land­lord: Arie Bellde­grun is blue­print­ing a string of be­spoke biotech com­plex­es in glob­al boom­towns — start­ing with Boston

The biotech industry is getting a landlord, unlike anything it’s ever known before.

Inspired by his recent experiences scrounging for space in Boston and the Bay Area, master biotech builder, investor, and global dealmaker Arie Belldegrun has organized a new venture to build a new, 250,000 square foot biopharma building in Boston’s Seaport district — home to Vertex and a number of up-and-coming biotech players.

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Novotech CRO Ex­pands Chi­na Team as Biotech De­mand for Clin­i­cal Tri­als In­creas­es up to 79%

An increase in demand of up to 79% for clinical trials in China has prompted Novotech the Asia-Pacific CRO to rapidly expand the China team, appointing expert local clinical executives to their Shanghai and Hong Kong offices. The company is planning to expand their team by 30% over the next quarter.

Novotech China has seen considerable demand recently which is borne out by research from GlobalData:
A global migration of clinical research is occurring from high-income countries to low and middle-income countries with emerging economies. Over the period 2017 to 2018, for example, the number of clinical trial sites opened by biotech companies in Asia-Pacific increased by 35% compared to 8% in the rest of the world, with growth as high as 79% in China.
Novotech CEO Dr John Moller said China offers the largest population in the world, rapid economic growth, and an increasing willingness by government to invest in research and development.
Novotech’s 23 years of experience working in the region means we are the ideal CRO partner for USA biotechs wanting to tap the research expertise and opportunities that China offers.
There are over 22,000 active investigators in Greater China, with about 5,000 investigators with experience on at least 3 studies (source GlobalData).

H1 analy­sis: The high-stakes ta­ble in the biotech deals casi­no is pay­ing out some record-set­ting win­nings

For years the big trend among dealmakers at the major players has been centered on ratcheting down upfront payments in favor of bigger milestones. Better known as biobucks for some. But with the top 15 companies competing for the kind of “transformative” pacts that can whip up some excitement on Wall Street, with some big biotechs like Regeneron now weighing in as well, cash is king at the high stakes table.

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Dokomajilar notes:

We’re going to need a ‘three comma club’ for the deals with over $1 billion in total upfront cash and equity. The $100 million-plus club is getting crowded at 164 deals in the last decade with new deals being added towards the top of the chart. 2019 already has 14 deals with at least $100 million in upfront cash and equity for a total year-to-date of over $9 billion. That beats last year’s $8 billion and sets a record.

Add upfronts and equity payments and you get $11.5 billion for the year, just shy of last year’s record-setting $11.8 billion.

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To curb the rise of drug-resistant bacteria and maintain the efficacy of the therapy, Recarbrio (and other antibacterials) — the drug must be used to treat or prevent infections that are proven or strongly suspected to be caused by susceptible gram-negative bacteria, Merck $MRK said.

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John McHutchison in 2012. Getty Images

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Gilead stated that McHutchison “has decided to step down” from the job as of August 2nd. And their SEC filing notes that he’ll be getting a $1.1 million check to settle up on his contract.

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Thomas Gajewski, David Steinberg. (CRI, Pyxis)

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From PD-1 targeting to the RAS pathway to the STING complex, Thomas Gajewski has spent the past two decades of his career decoding the various ways the immune system can be unleashed to defend against cancer. So when the University of Chicago professor comes around to putting all his findings into a new platform for finding new targets, VCs and pharma groups alike pay attention.

“He’s been studying T cells for 20 years, plus he’s one of the world’s leaders if not the world leader in the space,” David Steinberg, partner at Longwood Fund, said. “Furthermore, let me add he did a lot of the foundational research and also some of the seminal clinical trials in the existing set of I/O agents. He understands the space really well, he understands the current strengths, and I think he understood really well what was missing, so he knew where to look.”

Kamala Harris speaking yesterday at the Des Moines Register Iowa Presidential Candidate Forum [via Getty]

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Earlier this week we got a look at Senator Kamala Harris’ position on drug prices. She’s proposing that HHS take an average price from single-payer systems like the UK, Germany and Canada — which leverage market access for lower prices — and use that to set the US price. Anything drug companies collect above that would be taxed at a rate of 100%.

And the rhetoric is scathing:
While families struggle to make it to the end of the month, pharmaceutical companies are turning record profits. They’re spending nearly as much on advertising as R&D. They’re manipulating their market power to hike prices on lifesaving generic drugs. They’re making twice the profit of the average industry in America and still increased drug prices by 10.5% over the past six months alone. Meanwhile, they are charging dramatically higher prices to American consumers.
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SJ Lee [File photo]

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Orum has been working on a platform tech out of Ajou University that relies on endocytosis to smuggle antibodies and their cargo inside a cell. They’ve published work in Nature that illustrates its preclinical potential in RAS mutations, and KRAS is on their list of targets. 

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Astel­las buys in­to Fre­quen­cy's re­gen­er­a­tive med strat­e­gy with a $625M al­liance on hear­ing loss

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(I)mprovements in hearing function, including audiometry and word scores, were observed in multiple FX-322 treated patients.

We don’t know exactly what that means. But whatever the details, Astellas found enough in the data to jump in with a sizable collaboration deal.

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