Biotech VC trends to watch in 2010
January 19, 2010 — 9:36am ET | By Maureen Martino
2009 was a rough year for companies that rely on venture capital. Rocked by turbulent changes in the industry, venture funds were less generous with funding as they battened down the hatches and focused on core investments. While conditions improved a bit later in the year, there are still many unanswered questions going into 2010.
FierceBiotech spoke with three VC experts with front-row seats on trends in investment: Sherrill Neff (pictured, top), a founding partner of Quaker BioVentures, James Datin (pictured, middle) executive vice president and managing director, life sciences group
Economic Crisis
The biotech and pharmaceutical industries were rocked by the financial crisis in 2009. While the industry has recovered somewhat from the darkest days of the crisis, venture capitalists are more cautious now than they were before. Specifically, they want to ensure their investments are as cost effective as possible. In 2010, look for fewer $50 million investment rounds, says Safeguard's Datin, as well as a sharper focus on lead products. It's not just about giving the company enough money to survive until the next round of funding. Now when investors back a company, they're more inclined to think about the total investment required to get a product from the earliest stages to market. The stagnant IPO market also has had a wide-reaching impact on the industry. "We've had to finance our companies longer than we'd planned, and that's been really challenging for us," explains Bloch. Big Pharma, knowing that many developers had no exit strategy, were able to ink favorable deals at what some of the VCs we spoke to considered below-market value. Quaker Bioventure's Neff adds that if the IPO market is closed, "the only other channel for liquidity is acquisition. When there's a strong late-stage company with the opportunity to go public, then you can have a very different conversation with strength at your back when you're talking to buyers. But it's been a buyer's market in the last 18 months." He continues, "with the complete absence of a public market, buyers have had an upper hand in those discussions. There's no independent tool to keep them honest." On top of the angst caused by the economic crisis, investors and developers now have another outside force to contend with: Healthcare reform. Investors are already cherry-picking investments based on whether the potential product will be reimbursable under the new system. "VCs have to ask themselves what kinds of innovations will be sufficiently compelling to the payor community to result in good payment. It's fairly clear that these days incremental value does not cut it," observes Neff.
In light of this change, the industry needs to say 'so long' to me-too drugs. If it wasn't already clear these incremental improvements have fallen out of favor, the healthcare reform discussions underway in Washington should be the nail in the coffin. "VCs will be focused on how much money a drug will need to get something commercialized," says Datin, and me-too drugs have an uphill battle to compete with established drugs. Additionally, payors may not be willing to reimburse for newer, expensive treatments that don't offer a significant benefit over older therapies. Finally, Datin, Bloch and Neff all agree that, for the most part, venture capitalists will be steering clear of mass-market drugs. "We are in increasingly avoiding the mass-market drugs that require distribution through primary care physicians that require massive clinical trials. Because they are used broadly in the marketplace, the FDA is focused more on safety than efficacy," observes Neff. That means many VCs are avoiding the crowded markets for general cardio drugs, general metabolic drugs and some areas of oncology.
· So what are investors looking for? Here are some suggestions from the experts: Datin says there's a high demand for improved drug delivery technology. Boosting the effectiveness of already approved drugs is a no-brainer for investors.
· Interest in molecular diagnostics is heating up. It's one of the most attractive areas because physicians are increasingly demanding test that can tell them which treatments have the best chance of working before expensive medicines are issued. And diagnostics fit well with the healthcare reform efforts. Bloch adds that any technology that improves the efficacy of how care is delivered will be attractive to investors.
· Regenerative medicine, says Datin, is the next revolution in medicine. It goes beyond just treatment with a drug to completely fixing an illness or condition. Regenerative medicine could totally change the way people receive treatment.
· Infectious disease is another area that's garnered investor attention. Serious, hard-to-treat infections are worldwide problems, and antiviral, antibiotics and vaccines are the most effective measures for creating a healthier population. "We're very interested in broad-spectrum antivirals," notes Bloch, as well as new technologies that can get married up to create oral drugs for infectious diseases.
In addition to specific technologies, VCs are attracted by companies that have a commercial plan, even in the earliest stages of development. "Many venture capitalists have underestimated the commercial side and have gotten burned," warns Bloch. He suggests starting with the terminal value of the drug and working backwards, and carefully figuring in what kind of impact healthcare reform could have on the drug's potential performance in the market.
And finally, if it wasn't clear already, novelty and innovation will always get rewarded. Venture capitalists are being driven to invest in truly disruptive technology which, while risky, is beneficial for VCs as a whole. Says Bloch, "Firms are going back to the roots of venture, which is to take more risk. We're taking big bets on truly innovative products."