Life Sciences enter the mainstream
Investing in the life sciences is an extremely risky endeavor. Less than 5% of drug discovery projects ever make it to market, and they do not fail solely on the basis of setbacks in science. Unlike other industries, where businesses can launch a product within months, biotech companies often require years of intensive cash burning before a product can be commercialized. Consequently, most life science startups fail to cross the proverbial “Valley of Death.”
While failure to adequately fund a biotech company is a persistent risk, in 2020, many of these risks were assuaged by record low interest rates, aggressive economic stimulus, and a wave of positive sentiment surrounding the importance life science companies play in delivering drugs and therapeutics that contribute to our collective wellbeing. This positive sentiment was not misguided, as 2020 showed what can be achieved by those companies that reach the other side of the “Valley.” It was also a good reminder of why it is a good idea to fund multiple companies, particularly with different technologies, to tackle major unmet needs simultaneously. The redundancy is often good for patients, since we do not know a priori which approach will work best. The race for a COVID vaccine demonstrated that unleashing industry competition catalyzes progress and, in turn, more and better options for patients.
The progress and liquidity available was not limited to companies developing COVID related treatment; the light also shone on companies with pipelines targeting a wide spectrum of disease indications, from CNS disorders to oncology. We are now amidst a monumental boom in funding for life sciences. As Peter Meath, co-Head of healthcare at JP Morgan Commercial Banking, put it: “COVID-19 highlighted the solutions the life sciences industry can provide and we are seeing an acceleration of innovation and investment across this space as a result. I believe this influx of capital is overdue and a net positive for the sector.”
“With the exception of March and April 2020, life sciences companies generally came out unscathed by the immediate impact of COVID. However, demand was impacted as a large number of patients delayed elective medical procedures; this will likely have some carryover effect into 2021. The second impact was the delay of clinical trials, which we estimate will have an economic impact of US$34billion over the next four years. This is because companies have struggled to get patients through the door to enroll them into non-COVID clinical trials.”
Arda Ural, Americas Industry Markets Leader-Health Sciences and Wellness, Ernst & Young LLP
Capital floods into public and private markets
While the biotech industry used to have a fairly clear cut funding structure, the lines are no longer so plainly demarcated. There has been an explosion of alternative sources of capital and they are manifesting in many different forms. On one end, there are retail traders buying stocks commission free on Robinhood, and generalist newcomers like Mark Cuban launching a generics brand, while on the other end of the spectrum, top-tier biotech investors like Perceptive, RA Capital and 5AM have all launched Special Purpose Acquisition Companies (SPACS) with the hope of enabling companies to access public markets in a more efficient manner.
With capital readily available, life science entities have a plethora of options to retool their companies and structure them for the future.
One option is to finance with venture debt. Companies like Hercules Capital provide this form of financing because it is significantly less dilutive than a straight equity raise that a company may consider in the ordinary course. Scott Bluestein, CEO & CIO of Hercules Capital, explained: “Our team is not looking to manage or direct operations, we are not looking for board seats or control, we look to establish financing partnerships where we are relying on the existing management team to continue to make the right decisions and to continue to run the business”
This approach has paid off for Hercules over the past year on the investment and portfolio side of its business. According to their reporting, for the third consecutive year, Hercules ended up committing over a billion dollars of capital to the venture technology and life sciences industries. Despite the pandemic, Hercules had a hand in 22 IPO or M&A events in 2020; a strong validation of their model. On the Small-CAP public markets side, AzurRx has transformed itself by vastly improving its balance sheet to the point where it was able to bring in a new clinical-stage asset through an exclusive worldwide license agreement with First Wave Bio. According to James Sapirstein, the company’s president and CEO: “The agreement was driven by our ability to raise a substantial amount of capital in 2020 and into 2021. The asset is a micronized version of niclosamide that we are developing as a treatment for two indications - Checkpoint Inhibitor Colitis and COVID-19 GI infections.”
In addition, the funding allows AzurRx to comfortably continue to advance the clinical program for its lead investigative candidate, MS1819 in cystic fibrosis.
In the Mid-Cap biopharma space, rare disease focused Insmed went through an equally metamorphic year. The company’s chair and CEO, William H. Lewis, explained: “We went from a one-product company with one approval in one area, to a three-program story with global reach. What is important about these programs is that each has the potential to be the cornerstone of therapy for the respective diseases they address.”
The three programs referred to are for treprostinil palmitil inhalation powder (TPIP), which is a novel drug with the potential for disease modifying impact for pulmonary hypertension; Brensocatib, which is Insmed’s phase three development for the treatment of bronchiectasis, for the exploitation of a new pathway for the treatment of neutrophil mediated diseases; and ARIKAYCE, the first ever approved therapy for the treatment of refractory nontuberculous mycobacterial lung disease (NTM) caused by Mycobacterium avium complex (MAC).
Accelerating early-stage startups
2020 saw US$51 billion of VC investment go into the healthcare sector (biopharma, health-tech, diagnostics/tools, devices) across the US and Europe; a 47% increase in investment from 2019. By all measures this constitutes a banner year. However, as Chris Garabedian explained, it is still not an easy road for early-stage companies to navigate. Garabedian founded Xontogeny on the premise that when the large VCs close a fund, they are not starting 50 companies. Even if they have a billion-dollar fund, they are trying to put US$100 million into 10 companies. Therefore, Garabedian asserts: “While we have seen an infusion of new capital come into the space, it has not necessarily resulted in the same proportion of new companies. This means that entrepreneurs have not had many funding options if they do not ‘win the lottery’ by being picked by one of those VCs.”
In fact, the cards might even be stacked against them, because they are not going to want to take a US$100 million series A round if it means dilution for them. For that reason, many early stage companies have eschewed the company creation model and are searching for a different course. “I started Xontogeny to have a founder friendly option, which allows our team to advise, mentor and coach. We wanted to provide a home for that true entrepreneur, scientific founder, or first-time CEO. There are a plethora of cool technologies out there, and the funding of these companies should not be dominated solely by billion-dollar VC funds,” Garabedian affirmed.
One of the early success stories to come out of Xontogeny came in February 2021, as Landos Biopharma, which is focused on the discovery and development of therapeutics for patients with autoimmune diseases, filed for a US$100 million IPO. The company’s pipeline is powered by its LANCE precision medicine platform, which makes predictions of immunometabolic function, and helped accelerate the timeline for its lead asset, BT-11. “In four years, Landos has grown from an idea to a Phase 3-ready asset. We have a unique opportunity to take our BT-11 asset into commercialization, which has a better safety profile than any other drug used for UC and Crohn’s,” said Landos CEO Dr. Josep Bassaganya-Riera.
Manufacturing the renaissance
As much as the development of life altering drugs is a triumph of ingenuity and imagination, so is the ability to manufacture them. For this reason, an increasing number of players are looking to finance CDMOs; a case in point being Arch Ventures’ Robert Nelson, who founded National Resilience after COVID exposed critical vulnerabilities in medical supply chains. At the companies launch, Nelson noted: “Today's manufacturing cannot keep up with scientific innovation, medical discovery and the need to rapidly produce and distribute critically important drugs at scale.”
This is the exact problem Forge Biologics is out to solve, and it is why the company attracted US$40 million in funding in 2020 to build a state-of-the-art, 175,000 ft2 cGMP facility, dedicated to AAV viral vector production. As Timothy J. Miller, president and CEO of Forge described: “2019 and 2020 saw huge inflection points in the number of gene therapies that entered clinical trials. The increased number of programs that are nearing clinical trials is a reflection of how the field has grown over the past 10 years.”
Indeed, as viral gene therapy has become a mainstay approach for potentially treating patients with a genetic disease, the therapies are growing in popularity. However, scalability remains an enormous bottleneck. Miller continued: “Now, in many aspects, it is up to manufacturers to catch up as demand for gene therapy manufacturers far exceeds capacity.”
Another tailwind driving CDMO growth is the continued increase in capital going into research and development for both pharma and biopharma. More startups are being funded, resulting in a larger pool of potential customers for CDMOs to work with. In addition, big pharma has been increasing its external R&D budget, so the outsourcing trend stands on solid ground. Aragen Life Sciences (formerly GVK BIO) has been one of the beneficiaries of this trend, enabling the company to grow its offerings on both, small molecule solutions from concept to commercialization, and large molecule R&D. CEO Manni Kantipudi noted that the company’s cell line development business has nearly doubled over the past two years. “We are known for our work with difficult to express proteins, where customers reach out to us after failing to achieve success either internally or with other CROs. We are now forward integrating our track record in cell line development into an investment in cell culture manufacturing to best serve our biotech customers that prefer a single partner for both development and clinical manufacturing,” said Kantipudi.
In the highly volatile world of biotech, CDMO’s offer a less risky way to invest, which is why these companies are favored by private equity firms. This dynamic was evinced by Piramal Pharma Solutions (PPS) securing Carlyle Group as its growth investment partner in June 2020. Carlyle’s 20% stake in the business is worth approximately US$490 million. PPS CEO Peter DeYoung commented: “We realized that we were missing a piece of our puzzle in terms of drug product in the US. As a result, PPS expanded the company’s portfolio by acquiring a drug product facility in Pennsylvania capable of delivering potent solid oral dosage forms.”
Despite differences in the risk profile of biotech and CDMO businesses, the story remains one of record growth and funding across the board. “What we have seen in recent years is an increase in valuations, partly because of the notion that CDMOs represent a pharmaceutical investment that does not carry the direct risk of R&D pipelines. You are getting some pharma benefits: steady demand and drug-driven growth, but without as much risk of collapse if a pipeline candidate fails,” Gil Roth, president of the Pharma and Biopharma Outsourcing Association (PBOA), elucidated.
Funding our future
Although 2020 will certainly be anomalous in some respects, there is a clear lesson to take away from it. The American innovation system is far from perfect, but it works. Strong support for basic science is an important start, but it takes entrepreneurs, venture capital, and many other alternative sources of capital along the way to translate it. As Moderna CEO Stéphane Becnel said in describing his company’s successful vaccine effort: “It was an overnight success, 10 years and US$5 billion in the making.”
Image courtesy of Landos Biopharma