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in the report. VCs had to wait an average of about seven years for a biotech investment to yield a return, and eight years in medical devices. That’s difficult to sustain in an industry where venture funds are supposed to deliver returns in 10 years, Salehizadeh says. “If there’s one thing that gives me pause in this report is that average time to exit is trending up,” he says.
Jon Norris, a managing director with Silicon Valley Bank and the author of the report, says he saw a few surprising trends in the data, including the increased value acquirers are placing on biotech assets that haven’t yet advanced into clinical trials. Big Pharma companies have been competing for deals in that early-stage category partly as their own R&D pipelines have dried up, and many of the best biotech assets that are more validated, and further along in late-stage development, have already been snapped up.
“There are novel assets out there with big market potential, because of that you’re getting a lot of interest at the early stage,” Norris says. The investment math at that stage is also more attractive for VCs, he added, because they don’t have to foot the bills when drug development gets really expensive, in Phase II and III clinical trials.
All of these trends have altered the power dynamic between entrepreneurs and investors. As Norris notes, in technology, where there is more venture capital chasing fewer world-changing Facebook-like ideas, “the power is with the entrepreneur on the negotiation side.” The opposite is true in biotech, where a smaller group of active venture capitalists have more opportunity to pick the best companies they want to invest in, on favorable terms to them and their partners. “It’s a great time for investors with new capital, fresh capital, to invest in life sciences as a sector,” Norris says.
Salehizadeh, while saying he tries not to be a ‘rah-rah’ guy and seeks to maintain a healthy skepticism, agrees that now is a great time to be investing in life sciences. He points to two mega-trends working in favor of biotech investors—the relatively thin R&D pipelines at Big Pharma and public biotech companies, and a record sum of $350 billion in cash sitting on the balance sheets of S&P500 healthcare companies. That cash can be used for a number of things, but one obvious idea is to use it to keep buying biotech companies to fill up the R&D pipeline.
Still, betting on biotech is clearly not for everybody, and it’s pretty much impossible to put in a couple million and expect to get a $1 billion return in a couple years. But that doesn’t mean biotech can’t compete with tech as a sector for investment.
“Big companies buy little companies when their own R&D productivity slows down, and they have a lot of cash,” Salehizadeh says. “There are no Instagrams in biotech, and there probably never will be. That’s OK. But you can still make your partners happy in healthcare.”