Pop That Bubble: 5 Reasons Biotech Needs A Different Metaphor

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are aTyr Pharma, Blueprint Medicines, Moderna Pharmaceuticals, True North Therapeutics, Seres Health, and Global Blood Therapeutics. (A few prominent crossover names: Fidelity, RA Capital Management, Adage Capital Partners, Deerfield, and OrbiMed Advisors.)

Atlas Venture partner Bruce Booth—an early stage investor and a regular biotech blogger—crunched data last fall that showed crossover participation was a very good thing for biotechs aspiring to go public.

They tend to be specialists, not generalists. (A quick example: To kick off 2015, RA Capital’s Peter Kolchinsky wrote an op-ed analysis for Xconomy about hepatitis C game theory. And in case you’re curious, here’s the most recent list of RA’s holdings.) Their investments aren’t immune to risk, of course, but bubble watchers who count on generalists fleeing turbulence have to factor in the specialist crossovers, who are now a significant part of the biotech venture landscape. Which brings us to the next item…

Venture is now different. Life science venture is back, to be sure. The $8.5 billion poured into private companies in 2014 is the third highest total of the past 20 years after the prerecession years of 2007 and 2008, according to the MoneyTree survey.

But the landscape is different. The dollar totals are huge, but they’re not being spread around as much. There were 98 deals in 2014, about one third fewer than in the peak prerecession years of 2006-2008. Venture syndicates are now choosier, and they have the muscle to back their favorites with a lot of cash, which means a better chance to get to meaningful clinical data without cutting as many corners, and less need to sell rights to key products.

glen giovannetti

Giovannetti: A level of maturity.

As EY’s Giovannetti noted in January, writing about the 2014 IPO class, nearly 75 percent of the drug companies that debuted had kept their product rights instead of outlicensing them. Also, 86 percent of them went public with “products at the Phase 2 (or later) stage of development, suggesting a level of maturity that wasn’t present in the go-go days of 1999-2000.”

Again, the crossover phenomenon has helped. But the traditional venture groups are operating differently, too. Several were culled by the recession. But survivors of the shakeout, life science specialists and diversified funds alike, are ringing the fundraising bell—see our stories about Flagship Ventures, Canaan Partners, Arch Venture Partners, 5am Ventures, and Polaris Partners, to name several.

In many cases, they’re also contributing larger chunks of cash to their portfolio companies. When Juno prepared for its IPO last December after raising $310 million in private capital, Arch owned 15 percent of the company. Third Rock Ventures frequently commits the first $30 million, $40 million, or more to its startups. (Not all VCs can commit—or want to commit—such vast sums, as Avalon Ventures’ Jay Lichter told me in January.)

Like crossovers, drug companies are also filling venture niches these days. With $1.1 billion invested in 2014, they accounted for 13 percent of all life science venture, the highest amount ever tallied by the MoneyTree report. (Angel investors and disease foundations are filling small but important niches, too.)

Big pharma can often seem whipsawed by R&D trends, but its venture activity is no whim. The big guys have plenty of cash and a lot fewer scientists these days to pay. They need innovation to come from outside, and venture cash is a way to open windows. There’s a fair argument to make that these days that private biotech funding is healthy, drawn to risk, and it’s coming from a variety of sources. It’s another point to make in favor of stability over a looming bubble.

Less regulatory risk. In recent years federal regulators have given drug makers more reasons to smile—or at least not to grumble as much about oversight. Drugs are coming to market faster and in higher volume. Incentives to draw development in much-needed areas are leading to massive transactions. Two weeks before Cubist Pharmaceuticals gained approval for its antibiotic combination Zerbaxa—the first under the federal GAIN Act—Merck swooped in with a $9.5 billion buyout of the Lexington, MA-based developer.

Some of the most highly valued drugs in recent years have sped to market with the FDA’s “breakthrough” designation, which was instituted in 2012. The 16 “breakthrough” approvals include the most successful drug launch ever, sofosbuvir, and two drugs that ended up attracting sky-high acquisition offers for their owners. In March, AbbVie offered $21 billion for ibrutinib (Imbruvica) developer Pharmacyclics (NASDAQ: PCYC), and last August, Roche wrote an $8.3 billion check for Intermune, the owner of pirfenidone (Esbriet), a treatment for idiopathic pulmonary fibrosis.

The Pharmacyclics deal in particular—$21 billion for half a drug, since Johnson & Johnson owns some of the ibruntib rights—got the bubble talk going again.

But if the bipartisan 21st Century Cures Act, currently in gestation in the House of Representatives, becomes law, drugs designated as breakthroughs could come to market even faster. Other parts of the bill are also quite industry friendly, allowing for more flexible clinical trial design, more targeted patient population for antibiotics and antifungals, and longer market exclusivity. The legislation is sweeping, and all the provisions detailed here won’t necessarily be in the final version—which its sponsors said in February they’d like to see on President Obama’s desk by the end of the year—but the larger point is that the policy tilt these days is squarely toward getting more treatments approved faster.

The FDA approved 41 new and novel drugs in 2014, a near record, and regulatory changes had investors cautiously positive about the agency in a survey I wrote about here.

An even larger carrot and smaller stick from the industry’s gatekeepers won’t guarantee biotech success, but they could give many investors pause before jumping out of the sector with both feet. If you still insist on the all-or-nothing bubble metaphor because a bunch of biotech companies have outrageous stock prices, just keep in mind there are favorable winds blowing that might float the bubble merrily along for quite some time.

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One response to “Pop That Bubble: 5 Reasons Biotech Needs A Different Metaphor”

  1. oil painting says:

    Oh, so, long knowledge of the matter