Monday, September 16, 2013

Early-Stage Funding: Replacing Dwindling VC and Alliance Dollars?

We live in strange times. Venture capitalists, the traditional support for research-stage biopharmas, have been pulling back from early stage investments. Some are moving downstream, some are choosing not to raise new funds, others are exiting life science investment altogether. A few stalwarts – firms like Third Rock, Flagship and Atlas – have stayed the course, continuing to invest in unprecedented, high-science ideas. Although they’ve shown themselves able to re-up their funds, in some cases out-raising their last funds by good measure, it’s too early to say that their portfolio bets will pay off.

Pharma has been stepping into the breach, acting as LP or co-investor with venture. But it’s not enough to reverse the fall in Series A rounds.

What’s odd is that, despite the decline in VC investment, we’re seeing a steady trickle of truly novel products come to market. Immunotherapy, epigenetics, gene therapy, optimized antibodies aimed at exciting new targets – they’re all working their way through the pipeline. But venture’s declining interest (overall) in early stage start-ups has been going on for over five years now. Shouldn’t we be seeing some signals of scarcity or a fall-off in quality?

So we speculated that maybe that other fount of early stage support, big pharma alliances, is compensating for the drop in venture dollars. Maybe big pharma through its business development activities is correcting for the absence of venture with non-dilutive support for fledgling companies.

But early stage alliance funding, as measured by disclosed upfront payments, has also been trending down. The chart above measures upfront dollars from big pharma/biotech collaborations and licensings.  At its current run rate – as best this can be predicted – the alliance line will finish 2013 at around $940 million, sharply reversing its five-year downward trend.

As to the apparent paradox of a healthy, productive pipeline in the absence of the high investment levels seen in prior years, it appears that the most interesting ideas continue to be funded. As Bruce Booth of Atlas Ventures wrote in his blog two years ago “. . . less capital chasing fewer companies with more disciplined investors offers a mix that bodes well for returns from early stage investing.”

Solid returns is good news for investors, for sure. But is that what pharma, whose own internal labs are sputtering, needs from these engagements? And what about the potential for new players, like crowdfunders, to disrupt the life science investment supply chain? In the next few years, we may be looking at a markedly different environment for financing early stage ideas.

We intend to probe these and other matters at Elsevier’s 2013 PSA: The Pharmaceutical Strategy Conference in the panel “Funding Biotech: New Ways to Create Value.”  We’ll be joined by Gregory Simon, CEO of Poliwogg; Martin Shkreli, CEO of Retrophin; Noubar Afeyan, CEO of Flagship Ventures; Mark Clein, President and Founder of Precision for Medicine; and Damien McDevitt, VP and Head of Business Development for R & D Therapy Areas at GlaxoSmithKline.

We hope you’ll join us.

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