Are old financing models enough?

January 16, 2015 ctheodoropulos

Last year saw more than USD 400 billion returned to investors through IPO exits and a bevy of new venture funds created, but this doesn’t signal a return to business as usual. Instead biotech financing in the future must continue to look to innovative strategies and must address reimbursement questions ever earlier in the race to attract funds, according to panelists at a Biotech Showcase™ 2015 lunch plenary January 14.

Panelists at Biotech Showcase discussing whether old financing models are still valid

Panelists at Biotech Showcase discussing whether old financing models are still valid

The change in funding sources is what’s really new this year. “The inflow of crossover capital has been enormous,” said Bruce Booth, Partner at Atlas Ventures. “What used to be VC rounds are now B rounds, and investors are building private syndicates that are attracting both generalists and specialist investors. There’s also an increasing amount of unorthodox participation in biotech,” he said.

For example, last August, Juno Therapeutics raised USD 134 million in Series B financing and USD 176 million in a series A financing earlier in the year. The Alaska Permanent Fund (the state’s oil reserve fund) participated in both rounds. “The Alaska fund had never invested in biotech before,” said Luke Timmerman, biotech journalist and author, formerly of Xconomy. “We’ll see other funds do this, too,” he predicted.

That type of unorthodox investor interest will be cyclical, Booth said. He advised companies to run lean, exhibiting capital efficiency and discipline even in today’s relatively flush markets. Most of the funding, he said, still goes to later stage companies. “Early stage firms have only seen a small influx. Both have great returns, but late-stage companies generate them at shorter intervals. We don’t see a lot of competition among funds to start new companies.”

Susan Schaeffer, Editor of BioCentury, underscored the point. “The proportion of private money for preclinical companies has remained steady for several years, averaging between 18 and 22% for each year since the financial meltdown.”

“In the EU, the biotech industry still doesn’t have enough money,” said Holger Reithinger, General Partner at Forbion Capital Partners. “We haven’t seen new VC funds in the past couple years. Corporate venture funds have taken up some of the slack, and money from innovation centers and other incubators.” In Europe, he continued, showing product differentiation is difficult and there is a tendency among investors to concentrate on later stage companies that are better able to show efficacy.

Companies are retaining many of lessons learned during their lean years, but now they’re also being pressured by payers who want more information earlier. This desire for early information crosses over to investors, too. “Even at the seed stage, investors—like family foundation and corporate funds—want to know how much money the company will need, the mechanism of action, the time frame to the clinic and to commercialization, etc. Consequently, it’s hard to raise money.” Companies previously were focused on regulatory hurdles, but now must also focus on reimbursement very early on.

Vicki Anastasi, VP and Global Head of Medical Device and Diagnostics Research at ICON, said, “We’re seeing companies strategizing earlier to devise ways to collect better data from patients, payers and other stakeholders. They want to strategize beyond the regulatory data.” Therefore, Schaeffer added, “companies are doing smaller, smarter studies to answer the right questions.”

Synergy also plays a role. Today’s hot fields of CRISPR gene editing, immune-oncology, gene therapy and cell therapy are at the forefront because of advancements throughout the industry, panelists agreed. In addition to single technology companies, Schaeffer said she’s also seeing more investment in platform companies, “even though they take more time to mature and develop their technology. We’re also seeing more emphasis on proof of market. That goes beyond proof of concept, and requires companies to work on first-in-class assets. This leads to intelligent risk-taking.”

Biotech risk (which Booth defined as “losing your shirt”) is lower than generally perceived, however, when compared to other industries, he stressed. While unaccredited investors are prohibited from participating in certain financing options, “biotech has a lower loss ratio on the VC—not the retail—side than internet, telecom, semiconductors and other industries.

That said, financial discipline is vital. The companies that exited recently through the IPO markets were formed several years ago “in times when you needed to be capital efficient. They were very disciplined. It takes a few years to get to the point of IPO,” Booth reminded the audience.

“We won’t see financings at the same pace as last year, but interesting companies are getting funding,” Schaeffer concluded.



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