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:
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 http://www.networkedpharma.com/funding,
and will share the panel discussion with serial entrepreneurs Andy Richards and
Julian Gilbert.
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.
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