BioPharm Executive: 6 Ways to Save Biotech
6 Ways to Save Biotech
Here we are a bit past mid-year, and figures from the first half of 2012 point to a rapidly worsening environment for early-stage biotech companies.
According to various sources, venture capital has dried up like a contact lens on a carpet. Bloomberg says there were just 59 deals totaling $550 million in the second quarter, down 43% from a year earlier, backing up similar figures from Dow Jones' VentureSource. The trend certainly hasn't improved as the year has progressed. For the first half, life sciences VC funding dropped 46% to $1.07 billion, according to VentureSource, with the total number of deals down 28% to 104.
Widen your view to the total capital raised by private and public biotech companies, and things don't look much better. According to data published in Bioworld, total fundraising was down 40% in the first half of the year, to $7.9 billion. The dearth of early-stage venture financing is going hand-in-hand with an apparent slowdown in partnership dollars. Private companies, with little hope of an IPO in the current environment, aren't exactly negotiating with partners from a position of strength. That leads to deal terms that offer up lower milestone payments and fewer overall dollars. Early stage public companies aren't faring much better.
These are tough times indeed. But typically when you squeeze down on one or two spots on the balloon that is the life sciences financial system, it'll swell up in other places.
Is that happening now? Intriguingly, Elsevier's Strategic Transactions Database suggests that biotech public secondary offerings are up sharply from a year ago, totaling $3.14 billion in the first half--more than was raised in all of 2011 and 2010, respectively. While I don't have the details that might allow me to fully reconcile this with the starkly divergent stats above, it goes along with a general trend in the industry and, for that matter, the rest of society: The rich are getting richer. Established companies are able to raise capital while smaller and riskier companies are left in the cold. And that makes sense when you compare underperforming IPOs to the blue chip companies in the AMEX Biotechnology Index or even the broader Nasdaq Biotech Index, both of which are blowing away the S&P 500 this year and giving investors a reason to be sanguine.
The overall picture emerging is that no one is much concerned with early-stage biotechs--not VCs, not investors, and not pharma companies. For a while it seemed like Big Pharma was stepping in to take up some of the slack from the equity market with buyouts and partnerships with rich upfront terms. But if that's no longer the case, what does it mean? Can the industry do without new companies?
According to Big Pharma itself, no. In Ernst & Young's recent annual report on the biotech industry, GlaxoSmithKline R&D chair Moncef Slaoui notes that even a huge organization like his "will generate only 0.1% of the good ideas." He says the life sciences ecosystem is threatened, and that GSK is taking serious steps to right it.
What can save biotech from this capital shortage? Here are a few ideas:
1. More pharma-backed venture money. In recent months I've also noted the various pharma-VC partnerships and strategies undertaken by GlaxoSmithKline, Johnson & Johnson, Sanofi, Merck, and others. Some of this is aimed at academic research, some aimed at traditional equity investment, with pharma stepping in to fill the void left by traditional VCs.
2. More venture lending. This often gets overlooked, but not all venture financing comes in the form of equity. Anecdotal reports suggest that biotech companies might be raising as much as $800 million a year in venture debt from lenders like Silicon Valley Bank, Oxford Finance, and Hercules Technology Growth Capital. Unfortunately, there isn't a lot of detailed information on the segment of the biotech financial market.
3. Build IPO Confidence? Slaoui, along with John Maraganore and Stelios Papadopoulos, have suggested that pharma companies might pool resources to buy into biotech IPOs as a way of validating technology and instilling more confidence among other investors. Sounds nice, but if companies think there are compelling investments out there, why aren't they already opening their wallets?
4. A focus on platforms rather than single drugs. Slaoui says that among its 50 biotech alliances, "almost all...are not focused on a single project but rather on an entire segment of the company’s portfolio." If that's true, it's unusual. Pharma partnerships have been increasingly aimed at single drugs as way to control risk, keep focused, and make return on investment clearer. But if biotech is serving the early R&D role for pharma, it makes sense to take more risks and delve more broadly.
5. Open-source collaboration, an approach I discussed last month. Slaoui calls it "precompetitive collaboration." GSK is one of the companies to take some baby steps in the direction, so this isn't all empty rhetoric...although there's still relatively little to point to in the way of this kind of open data sharing.
6. New capital sources. The Bill and Melinda Gate Foundation recently announced that it is planning to make equity investments in up to a dozen biotech start-ups. Rather than asking for a financial return, however, they will be asking for free access to technology in the developing world, while leaving the innovator to profit in major markets--not a bad deal. The non-profit foundation made its first-ever equity investment earlier this year in Liquidia Technologies, which is working on immune system decoys.
Of course, the number one way to return the biotech ecosystem to full health is to build a healthy economy in which there is more appetite for risk. But let's hope the current adversity will lead to some creativity that will better serve the industry in good times as well as bad.
-Karl Thiel
Read the BioPharm Executive online newsletter July 25, 2012.
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