Great, great series of articles from the FierceBiotech team:
http://www.fiercebiotech.com/special-reports/10-truths-or-fictions-about-virtual-biotech-startups?utm_medium=nl&utm_source=internal
Showing posts with label business models. Show all posts
Showing posts with label business models. Show all posts
Thursday, October 4, 2012
Wednesday, May 9, 2012
More damning VC performance data - the model is broken
Two weeks ago I pointed to a study suggesting that there are structural problems with venture capital. A larger, more damning study is now in the news, confirming low industry returns, and diagnosing more problems with VC.
I highly, highly recommend clicking through to read Felix Salmon's reporting and analysis on the
matter. Money quotes:
In a nutshell, a study by the Kauffmann Foundation concludes that:
I highly, highly recommend clicking through to read Felix Salmon's reporting and analysis on the
matter. Money quotes:
"During the twelve-year period from 1997 to 2009, there have been only five vintage years in which median VC funds generated IRRs that returned investor capital, let alone doubled it," and
"the VC industry, as a whole, is being incredibly successful at extracting rents from dumb institutional investors."
In a nutshell, a study by the Kauffmann Foundation concludes that:
-It is debatable whether or not VC is a worthwhile investment. "78% of the funds that Kauffman invested in (i.e. those in the study) have failed." Not only does the mean VC fund destroy capital on a risk-adjusted basis, recently these funds have had negative IRRs on a gross basis!
-Quality matters: "If you can’t get into one of the best funds — and everybody knows which funds those are — then there’s really no point investing in venture capital at all."
-LPs really don't hold VCs accountable enough: "once you strip out the top-performing 29 funds, the rest — more than 500 — collectively invested $160 billion, and managed to return $85 billion to investors." Shakeout, anyone?
-incentives are misaligned: VCs are invented to raise more and larger funds, as that's where the compensation is. This also incents goosing early year returns to help with fund-raising, meaning all of that VC chatter about long term investing is bull.
-smaller, more experienced funds are more likely to have outsized positive returns.
It's time to change the life science VC industry approach. Here's a few humble suggestions from my quick reaction to the Salmon article and Kauffman study:
1. Full disclosure. Between intense VC fund secrecy and discretionary allocations of costs and returns among funds, VC investors (LPs) really can't get definitive, transparent performance accounting. It's time for quality VC firms to be proactive in publicly disclosing deal-by-deal and expense by expense fund accounting. The message from LPs needs to be "if you're not transparent, we'll assume you're hiding something."
2. VCs: Climb the risk curve. The data suggests that VC has a problem finding alpha (return). The most immediate way to goose alpha is to take on more risk by investing in earlier stages. In other words, if a VC firm says that they don't invest until B rounds, they ought to stretch into A rounds. (And likely STOP investing in later ('D') rounds. An earlier investment carries a bit more risk, but it is more or less the same type of risk seen in the later stages. (In other words, if the primary risk for an investment is target biology or lead chemistry, it still takes the same understanding/risk tolerance whether investing in round A or C. Only the size of the risk changes.) I think VCs get paid for their ability to manage risks, so if a firm's core competency is vetting lead chemistry, getting in earlier plays to their strengths, and might in fact "train" the firm to better assess and handle those risks.
3. Less therapeutics, more enabling tools and platforms. Investing in therapeutics has a more or less binary outcome - success or failure, with not much in between. One way to minimize the downside for VCs is to invest in operating companies - their ceilings aren't as high as a winning therapeutics investment, but their terminal value is, well, >$0.
4. Create smaller funds, with VC compensation tied even more to performance. Typical compensation for a VC is 2% of the amount invested every year, plus 20% of the downstream gains. If it were up to me, I'd get rid of the 2% annual fee - make the funds invest their own $$$ in annual expenses.
5. More specialized funds. The old investing true-ism is that 80% of investing returns are generated through asset (sector) allocation, not through the selection of individual securities. The suggestion then would be to hyper-specialize. A large fund that invested in "therapeutics" is less likely to deviate from traditional poor returns than a fund specializing in "oncology," though I'd postulate that a fund that hyper-specialized in "kinase inhibition in cancer" would have crushed both, and wasn't that difficult to predict 10 years ago. (Easy for me to say.)
6. Use secondary markets to generate valuations and gain liquidity, lessening short term thinking and attracting Big Pharma investment dollars. New markets like Second Market have made a splash with internet companies for their ability to provide selected liquidity and to unlock equity value for employees. I'd like to see biotech embrace these alternative markets. Earlier pseudo-liquidity would attract more investment capital in general (including from Big Pharma. It would be great to get more of their capital in the game,) provide more transparency, clarify signaling, and likely facilitate consolidation among private companies. There might be some resistance among VCs as alternative markets might disinter mediate them, but they might on net reduce the investing risk for VCs and facilitate earlier liquidity.
7. Begin a 5-year moratorium on pandering to the government to increase funding for young companies and technologies or to reform some regulatory requirement of securities law. If the Kauffman study is representative of the life science industry, then clearly the problem isn't the level of government support, but rather the commercialization efforts that VCs back. VC keeps destroying capital with bad bets, not because there aren't enough ripe, de-risked technologies, or non-equity funds to incubate promising technologies.
8. Fund businesses, not technologies, science projects, or lottery tickets. Sure, the business case for an investment may hinge on Big Pharma buying you out once the leads make it to Phase ___, but if investments aren't businesses first and foremost, you're either ultimately 1) disappointing your Big Pharma customers, and 2) trying to build a skyscraper on a foundation of mud.
Unfortunately, I don't have a lot of confidence in the VC industry adapting. It is way, way more likely that instead of changing the industry's foundation, VC will further squeeze valuations and term sheets for incoming investments in order to try to lift returns.
-Quality matters: "If you can’t get into one of the best funds — and everybody knows which funds those are — then there’s really no point investing in venture capital at all."
-LPs really don't hold VCs accountable enough: "once you strip out the top-performing 29 funds, the rest — more than 500 — collectively invested $160 billion, and managed to return $85 billion to investors." Shakeout, anyone?
-incentives are misaligned: VCs are invented to raise more and larger funds, as that's where the compensation is. This also incents goosing early year returns to help with fund-raising, meaning all of that VC chatter about long term investing is bull.
-smaller, more experienced funds are more likely to have outsized positive returns.
It's time to change the life science VC industry approach. Here's a few humble suggestions from my quick reaction to the Salmon article and Kauffman study:
1. Full disclosure. Between intense VC fund secrecy and discretionary allocations of costs and returns among funds, VC investors (LPs) really can't get definitive, transparent performance accounting. It's time for quality VC firms to be proactive in publicly disclosing deal-by-deal and expense by expense fund accounting. The message from LPs needs to be "if you're not transparent, we'll assume you're hiding something."
2. VCs: Climb the risk curve. The data suggests that VC has a problem finding alpha (return). The most immediate way to goose alpha is to take on more risk by investing in earlier stages. In other words, if a VC firm says that they don't invest until B rounds, they ought to stretch into A rounds. (And likely STOP investing in later ('D') rounds. An earlier investment carries a bit more risk, but it is more or less the same type of risk seen in the later stages. (In other words, if the primary risk for an investment is target biology or lead chemistry, it still takes the same understanding/risk tolerance whether investing in round A or C. Only the size of the risk changes.) I think VCs get paid for their ability to manage risks, so if a firm's core competency is vetting lead chemistry, getting in earlier plays to their strengths, and might in fact "train" the firm to better assess and handle those risks.
3. Less therapeutics, more enabling tools and platforms. Investing in therapeutics has a more or less binary outcome - success or failure, with not much in between. One way to minimize the downside for VCs is to invest in operating companies - their ceilings aren't as high as a winning therapeutics investment, but their terminal value is, well, >$0.
4. Create smaller funds, with VC compensation tied even more to performance. Typical compensation for a VC is 2% of the amount invested every year, plus 20% of the downstream gains. If it were up to me, I'd get rid of the 2% annual fee - make the funds invest their own $$$ in annual expenses.
5. More specialized funds. The old investing true-ism is that 80% of investing returns are generated through asset (sector) allocation, not through the selection of individual securities. The suggestion then would be to hyper-specialize. A large fund that invested in "therapeutics" is less likely to deviate from traditional poor returns than a fund specializing in "oncology," though I'd postulate that a fund that hyper-specialized in "kinase inhibition in cancer" would have crushed both, and wasn't that difficult to predict 10 years ago. (Easy for me to say.)
6. Use secondary markets to generate valuations and gain liquidity, lessening short term thinking and attracting Big Pharma investment dollars. New markets like Second Market have made a splash with internet companies for their ability to provide selected liquidity and to unlock equity value for employees. I'd like to see biotech embrace these alternative markets. Earlier pseudo-liquidity would attract more investment capital in general (including from Big Pharma. It would be great to get more of their capital in the game,) provide more transparency, clarify signaling, and likely facilitate consolidation among private companies. There might be some resistance among VCs as alternative markets might disinter mediate them, but they might on net reduce the investing risk for VCs and facilitate earlier liquidity.
7. Begin a 5-year moratorium on pandering to the government to increase funding for young companies and technologies or to reform some regulatory requirement of securities law. If the Kauffman study is representative of the life science industry, then clearly the problem isn't the level of government support, but rather the commercialization efforts that VCs back. VC keeps destroying capital with bad bets, not because there aren't enough ripe, de-risked technologies, or non-equity funds to incubate promising technologies.
8. Fund businesses, not technologies, science projects, or lottery tickets. Sure, the business case for an investment may hinge on Big Pharma buying you out once the leads make it to Phase ___, but if investments aren't businesses first and foremost, you're either ultimately 1) disappointing your Big Pharma customers, and 2) trying to build a skyscraper on a foundation of mud.
Unfortunately, I don't have a lot of confidence in the VC industry adapting. It is way, way more likely that instead of changing the industry's foundation, VC will further squeeze valuations and term sheets for incoming investments in order to try to lift returns.
Thursday, April 12, 2012
AMGN & AZN get creative
Suspicions are often aroused when two of the biopharma "big boys" partner up. Is the company originating the technology trying to hedge their bets and take some money off the table? Is the 'buying' partner inadvertently saying that their R&D efforts are inferior to their new partners'?
I would ignore the doubts in the case of last week's announced partnership between AZ and AMGN. The 2 companies will work together to develop 5 different anti-inflammation biologics, splitting costs and program responsibilities. The prospective costs and benefits are measured in billions.
Abbott's Humira (anti-inflammation biological) is a $9B product. No need to be greedy with a market that big. Both AZ and AMGN increased the chances of gaining a slice of that market, with the risk & costs roughly halved. Where some analysts are sour on the tie-up, I think it is good risk management, and I'd like to see more deals like these rather than less. (I also think this is very creative. More of that too, please!)
I like the deal a lot, but I'm not too sure that Wall Street does. Here's a quick look at how both stocks have performed in the <2 weeks since:
(Link to dynamic GOOG finance chart.)
So, AMGN is down with the market, AZ up 1.2%, so perhaps the Street thinks this is a win for AZ, and nothing new for AMGN.
I think the stakes for these two companies are higher than most recognize. For AMGN, this deal preserves their independence for a half of a decade. Without a partner, AMGN would either be betting the company on their inflammation program, or pruning the five programs just to save cash (or both.)
For AZ, they've just fattened their pipeline with high leverage R&D assets. If you believe that the cost of getting a drug to market is largely static independent of market size, AZ just gained some mid-stage leads that only cost half as much as usual to bring to market and while they only get half of the upside, halving a ginormous market 9X larger than a 'basic' blockbuster while halving the costs is a GREAT trade.
(Side note: I wonder how it would look if we similarly evaluated pharma pipelines not for risk adjusted expectations, but instead as a ratio of upside$ per R&D investment $. I'll put a little more thought into this, as my quick guess is that GENZ's rare disease approach would rank dead last in terms of upside per R&D dollar, even though we know it is a great business for them.)
I would ignore the doubts in the case of last week's announced partnership between AZ and AMGN. The 2 companies will work together to develop 5 different anti-inflammation biologics, splitting costs and program responsibilities. The prospective costs and benefits are measured in billions.
Abbott's Humira (anti-inflammation biological) is a $9B product. No need to be greedy with a market that big. Both AZ and AMGN increased the chances of gaining a slice of that market, with the risk & costs roughly halved. Where some analysts are sour on the tie-up, I think it is good risk management, and I'd like to see more deals like these rather than less. (I also think this is very creative. More of that too, please!)
I like the deal a lot, but I'm not too sure that Wall Street does. Here's a quick look at how both stocks have performed in the <2 weeks since:
(Link to dynamic GOOG finance chart.)
So, AMGN is down with the market, AZ up 1.2%, so perhaps the Street thinks this is a win for AZ, and nothing new for AMGN.
I think the stakes for these two companies are higher than most recognize. For AMGN, this deal preserves their independence for a half of a decade. Without a partner, AMGN would either be betting the company on their inflammation program, or pruning the five programs just to save cash (or both.)
For AZ, they've just fattened their pipeline with high leverage R&D assets. If you believe that the cost of getting a drug to market is largely static independent of market size, AZ just gained some mid-stage leads that only cost half as much as usual to bring to market and while they only get half of the upside, halving a ginormous market 9X larger than a 'basic' blockbuster while halving the costs is a GREAT trade.
(Side note: I wonder how it would look if we similarly evaluated pharma pipelines not for risk adjusted expectations, but instead as a ratio of upside$ per R&D investment $. I'll put a little more thought into this, as my quick guess is that GENZ's rare disease approach would rank dead last in terms of upside per R&D dollar, even though we know it is a great business for them.)
Sunday, March 4, 2012
So you need some DNA sequencing? (pt 1.)
There's an absolutely brilliant map and website devoted to taking a census of DNA sequencers around the world, and through it, you can monitor the tug of war between the placement of instruments in large DNA sequencing centers, and in individual labs (or core labs) on a onesie-twosie basis.
(The map may be a little dated - it shows only 15 sequencers @ BGI, for example - but the brilliance of the map is in how the data was generated. Do a little web surfing for the WWII spy technique that spawned the map.)
Anyway, a VERY interesting story is told when looking at the USA map (select USA under the country pull-down. Unfortunately, I can't link to this specific page.) The sequencer census really indicates who and what are on the edge of the genomic revolution.
A rough read of who's ahead by sequencer placement:
Boston: 129 (Broad Institute = 104)
St. Louis: 85 (includes 11 at Monsanto)
San Francisco Bay Area: 58
Washington, DC area: 51 (with an additional 23 in nearby Baltimore and Frederick, MD.)
NYC area: 47 (includes 18 @ CSHL on Long Island.)
RTP, NC: 37
Houston: 35 (driven by MD Anderson.)
Toronto: 33
Southern California (LA + SD): 27
New Haven, CT: 23 (birthplace of 454 and IonTorrent.)
Philadelphia: 22
Albuquerque, NM: 19 (Sandia)
Montreal: 18
Memphis: 12
Seattle: 5
most other US metropolitan areas and universities had 1-5 DNA sequencers listed.
(Note: some of the math above is fuzzy, as figures change slightly depending on how far you drill down on the map. Plus, the math is skewed by self-reporting and non-reporting. For example, there is a paucity of hardware listed in 'PharmCountry' (NJ & eastern PA) and there's virtually no privately owned sequencers in the Bay Area, but you can be sure that both Big Pharma and Genentech have some sequencing hardware on campus.
What does this all mean:
-you can see which cities are in position to lead the genomic revolution, and which are likely to be laggards. For example, according to the map, there is only 2 DNA sequencers in the city of Chicago. There's roughly 25X more genomic activity on the i-270 corridor outside DC.
-you can see funding philosophies in action (if you squint). There is a tremendous amount of hardware in Canada relative to population, representing governmental support skewed towards hard assets rather than funding annual research. (And the good work of bodies like Genome Canada.) However, with the rate of technological innovation in sequencing, hardware represents a quickly depreciating asset. Maybe the better use of the funds was to pay for outsourced sequencing. (Perhaps this was the case in California, where the inverse was present - less hardware than you might expect.)
-if I had to bet which institution will lead in the adoption of DNA sequencing in patients, MD Anderson would be my first bet. My quick survey suggests that they're the practicing center with the most NGS hardware. Yale isn't far behind.
-on the other hand, some NCI comprehensive cancer centers were extremely lame, including my hometown University of Virginia, Northwestern U, and OHSU. 1 sequencer each? Lame!
Tomorrow I'll do some analysis based on the type of hardware, and take a guess at what this means for adoption. I'm especially interested in analyzing the question of what the distribution in sequencing is likely to be between CRO/service providers and sequencing with internal assets.
(The map may be a little dated - it shows only 15 sequencers @ BGI, for example - but the brilliance of the map is in how the data was generated. Do a little web surfing for the WWII spy technique that spawned the map.)
Anyway, a VERY interesting story is told when looking at the USA map (select USA under the country pull-down. Unfortunately, I can't link to this specific page.) The sequencer census really indicates who and what are on the edge of the genomic revolution.
A rough read of who's ahead by sequencer placement:
Boston: 129 (Broad Institute = 104)
St. Louis: 85 (includes 11 at Monsanto)
San Francisco Bay Area: 58
Washington, DC area: 51 (with an additional 23 in nearby Baltimore and Frederick, MD.)
NYC area: 47 (includes 18 @ CSHL on Long Island.)
RTP, NC: 37
Houston: 35 (driven by MD Anderson.)
Toronto: 33
Southern California (LA + SD): 27
New Haven, CT: 23 (birthplace of 454 and IonTorrent.)
Philadelphia: 22
Albuquerque, NM: 19 (Sandia)
Montreal: 18
Memphis: 12
Seattle: 5
most other US metropolitan areas and universities had 1-5 DNA sequencers listed.
(Note: some of the math above is fuzzy, as figures change slightly depending on how far you drill down on the map. Plus, the math is skewed by self-reporting and non-reporting. For example, there is a paucity of hardware listed in 'PharmCountry' (NJ & eastern PA) and there's virtually no privately owned sequencers in the Bay Area, but you can be sure that both Big Pharma and Genentech have some sequencing hardware on campus.
What does this all mean:
-you can see which cities are in position to lead the genomic revolution, and which are likely to be laggards. For example, according to the map, there is only 2 DNA sequencers in the city of Chicago. There's roughly 25X more genomic activity on the i-270 corridor outside DC.
- I was surprised by the strong figures in St. Louis and RTP. Both locations have strong ag-bio efforts, so you might be able to extrapolate that the earliest exciting NGS uses will come from ag-bio, and not cancer genomics.
- Anyone else as surprised as I am that NYC was in the top 5? Certainly there is great science at places like Rockefeller, MSKCC, and such, but I wouldn't have guessed top 5. With some announced initiatives, NYC should stay near the front.
-you can see funding philosophies in action (if you squint). There is a tremendous amount of hardware in Canada relative to population, representing governmental support skewed towards hard assets rather than funding annual research. (And the good work of bodies like Genome Canada.) However, with the rate of technological innovation in sequencing, hardware represents a quickly depreciating asset. Maybe the better use of the funds was to pay for outsourced sequencing. (Perhaps this was the case in California, where the inverse was present - less hardware than you might expect.)
-if I had to bet which institution will lead in the adoption of DNA sequencing in patients, MD Anderson would be my first bet. My quick survey suggests that they're the practicing center with the most NGS hardware. Yale isn't far behind.
-on the other hand, some NCI comprehensive cancer centers were extremely lame, including my hometown University of Virginia, Northwestern U, and OHSU. 1 sequencer each? Lame!
Tomorrow I'll do some analysis based on the type of hardware, and take a guess at what this means for adoption. I'm especially interested in analyzing the question of what the distribution in sequencing is likely to be between CRO/service providers and sequencing with internal assets.
Tuesday, February 28, 2012
Real math on bio-bucks….
The LifeSciVC takes a look at the payout rates on pharma partnerships.
We all know that pharma-biotech partnerships & acquisitions usually launch with press releases touting huuuuge potential financial implications, with the eye-popping figures referred to as "bio-bucks" - headline figures that probably won't ever be completely reached. ("Bio-bucks" aren't limited to pharma-biotech partnerships. For example, LIFE bought Ion Torrent for a headline figure of $725M, which amounted to $350M at closing, with $375M contingent on performance. (Of which LIFE might have already made good - though some reports say the milestones are based on future (2012) revenues.))
The link at the top of this post is some very clever analysis of actual versus expected payout since 2005. In summary:
-38% of the announced value is captured up front.
-the remaining 62% of value is split among paid (24%) the amount still possible will ultimately , still possible (40%), and canceled (37%).
-so, $4.3B of a possible $7.0B in milestones have been resolved - either paid or negated, with 40% achieved and 60% categorized as "nevergonnahappen." (Since the deals analyzed reach cover the 2005-2009 period, you could make a strong case that the likelihood of payout on not-yet-achieved milestones is likely much, much lower than 40%.)
-If you optimistically assume that milestones TBD follow this same pattern, $1.1B of milestones will likely be realized, and $1.7 are nevergonnahappen.
Extrapolating this:
38% paid upfront
25% milestones likely to be paid.
37% "vapor," likely nevergonnahappen.
That's actually a LOT better than I expected. To think that most deals are likely to pay out 63% of their headline value is a surprise to me.
Accounting for the time value of money makes for a simple rule for pharma acquisitions ~50% of value realized on a net present value basis, 50% vapor.
(Note: connected to my post of 2 days ago regarding changing business models for early stage biotech, I suspect that the asset-lite, specialized biotech companies being developed may experience a better milestone payout rate, since their specialization would suggest more focus and understanding of milestones in a given therapeutic area. However, a by-product of the specialization is that there are likely to be less deals; more focus = a smaller target market of potential acquirers.)
What I would be curious to know is how milestones fall into the nevergonnahappen category. How much of the milestone failure is related to management of the acquiree taking their eye of the ball post-deal? How much of the milestone failure can be attributed to cultural & communication divisions between pharma and biotech? How much of the failure is related to pharma screw-ups and changing priorities? And finally, how much milestone failure can be explained by pharma being snookered by high expectations into buying crap assets. Any guesses?
We all know that pharma-biotech partnerships & acquisitions usually launch with press releases touting huuuuge potential financial implications, with the eye-popping figures referred to as "bio-bucks" - headline figures that probably won't ever be completely reached. ("Bio-bucks" aren't limited to pharma-biotech partnerships. For example, LIFE bought Ion Torrent for a headline figure of $725M, which amounted to $350M at closing, with $375M contingent on performance. (Of which LIFE might have already made good - though some reports say the milestones are based on future (2012) revenues.))
The link at the top of this post is some very clever analysis of actual versus expected payout since 2005. In summary:
-38% of the announced value is captured up front.
-the remaining 62% of value is split among paid (24%) the amount still possible will ultimately , still possible (40%), and canceled (37%).
-so, $4.3B of a possible $7.0B in milestones have been resolved - either paid or negated, with 40% achieved and 60% categorized as "nevergonnahappen." (Since the deals analyzed reach cover the 2005-2009 period, you could make a strong case that the likelihood of payout on not-yet-achieved milestones is likely much, much lower than 40%.)
-If you optimistically assume that milestones TBD follow this same pattern, $1.1B of milestones will likely be realized, and $1.7 are nevergonnahappen.
Extrapolating this:
38% paid upfront
25% milestones likely to be paid.
37% "vapor," likely nevergonnahappen.
That's actually a LOT better than I expected. To think that most deals are likely to pay out 63% of their headline value is a surprise to me.
Accounting for the time value of money makes for a simple rule for pharma acquisitions ~50% of value realized on a net present value basis, 50% vapor.
(Note: connected to my post of 2 days ago regarding changing business models for early stage biotech, I suspect that the asset-lite, specialized biotech companies being developed may experience a better milestone payout rate, since their specialization would suggest more focus and understanding of milestones in a given therapeutic area. However, a by-product of the specialization is that there are likely to be less deals; more focus = a smaller target market of potential acquirers.)
What I would be curious to know is how milestones fall into the nevergonnahappen category. How much of the milestone failure is related to management of the acquiree taking their eye of the ball post-deal? How much of the milestone failure can be attributed to cultural & communication divisions between pharma and biotech? How much of the failure is related to pharma screw-ups and changing priorities? And finally, how much milestone failure can be explained by pharma being snookered by high expectations into buying crap assets. Any guesses?
Sunday, February 26, 2012
Read this!
Will New Business Models Enhance or Endanger Drug Discovery?
A great thought piece by Stewart Lyman at Xconomy, well worth a read. Lyman analyzes the business models that have generated biotech "wins," and concludes that the current vibe is that VCs are oriented towards creating limited, focused companies (tending towards virtual) instead of the ambition a decade or more ago to built fully integrated drug discovery operations.
This reflects the fact that the end consumer (in this case the pharma companies that buy successful or promising therapeutic programs) wants to buy specific assets and nothing else. Lyman doesn't mention it, but this is as much due to the fact that the public markets are closed for any venture with less than half a billion in valuation.
(This is mostly due to 2 reasons:
-the fact that Sarbanes-Oxley imposes costs on smallish companies that make it impractical for companies of <$500M to be public. In yet another example of regulation trying to close the barn door after the horse has escaped (see also: Dodd-Frank Financial Reform), Sarbanes-Oxley has killed the US IPO market for small to mid-size companies.
-while $100M-$500M in capitalization for a young company may seem large to you and me, it is a tiny number to Wall Street, making analyst coverage unreasonable, and not profitable enough to justify underwriting efforts.
(end rant))
Since VCs can only get liquidity from pharma acquisitions of their investments, companies are not being built to last, but rather built to flip. At the same time, the size of seed VC investments has risen, so biotech start-ups need to have a quick use of $5-10M in seed capital AND a clear path to liquidity. Gone will be the days where therapeutic assets slowly incubate via SBIR funding (and other non-profit vehicles.)
(Luckily CROs now enable quicker and less expensive R&D. Young biotech companies don't need to build and staff non-core departments in order to progress a lead compound.)
The problem with this model as I see it (and not emphasized in Lyman's article) is that the smallish, asset-lite "disposable" biotech model now in vogue is absolutely terrible for anyone on the day-to-day team at the biotech company. Sign on to one of these "lite" companies and you take a GIGANTIC career risk.
Scratch that - it's not a risk if something is practically guaranteed - and unless you believe your compounds and company will smoothly grow and progress from discovery to phase III without a hiccup at any stage, you almost certainly will go through restructuring, replacement, or a reduction of one form or another.
To the VC, each $5M biotech investment is a bet with a 1:20 likelihood of payout, but with a 50X payout with a win. The VC wants to take 40 "shots on goal" with their $200M VC portfolio, with the probabilities suggesting 2 "wins" worth a total of $500M.
To the scientific and business staff, though, that means that there's only a 5% chance that their specific efforts will result in a profit. With these odds, a career in academia, at a big pharma, or at a CRO looks a LOT less risky.
So until someone comes up with a business model for VC investment that ISN"T built to flip, start-up biotech's will have a hard time attacking the talent they need to run rings around big pharma. It seems strange to suggest it, but perhaps VC needs to be mindful of the business case for talent, not just for ROI.
Personal note: my opinion is also based on my experience starting a therapeutic discovery start-up. It was a great experience, but the risk/reward math is just not favorable for biotech employees, and I won't ever work in early stage therapeutics again, if I can help it.
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