Venture capitalists are making hay while the sun shines on the biotech sector, according to this commentary by Frost and Sullivan research analyst Balaji K.
In the last year and a half, biotech companies have become the blue-eyed boys of the venture capitalists (VCs), displacing software companies from that much sought-after spot.
In the last quarter of 2001, it was estimated that VC funding in the biotech sector grew by 50%, and around $1 billion was invested in almost 70 companies in the United States.
VCs also made the most of the 20 initial public offers (IPOs) by life sciences companies in the USA.
The year 2002 promises to be a good year for biotech companies vying for a share of the VC pie.
VCs have by and large understood the business dynamics of biotech firms.
They are aware that, unlike the dotcoms that promised a quick buck, these companies have a longer gestation period and that returns can be reaped over a longer period of time.
VCs have clearly understood that it will take a minimum of ten years for a biotech venture to define drug targets, develop drugs, and take them through various phases of clinical trials.
It is only after this period that the venture can go public, or the venture/drug be acquired, and the VCs reap the benefits of their investments.
VCs are also appreciating the fact that management quality, a key factor influencing their investments, is increasingly being met by the biotech companies.
It is a widely appreciated fact that the present quality of management in biotech ventures has caught up with the pace of scientific advances in the field of genomics and the computational power and technology of bioinformatics.
The hot picks for VCs today are biotech companies which have pharmaceutical companies as clients, and have potential blockbuster drugs as concepts or undergoing clinical trials.
VCs are making the most of their investments in biotech ventures involving anti-infective drug research, which is one of the fastest growing categories of the global pharmaceutical industry. This is one segment promising great returns to VCs, as global pharmaceutical majors have stayed away from cutting-edge research in anti-infectives for fear of cannibalising their portfolio of blockbuster anti-infectives.
Another hot biotech area benefiting the VCs are biotech ventures developing path-breaking therapies for diseases such as HIV, cancer, and diabetes, where a successful therapy can rake in very high profit margins due to the high potential demand.
In the past, it was much easier for a biotech company to classify itself as a genomics company involved with developing tools, or compiling data for the study of genes, and walk away with a piece of the VC pie.
This scenario has now changed.
Pharmaceuticals companies are desperately seeking to bolster their sagging bottom-lines with blockbuster drugs.
The name of the game for a biotech venture seeking funds is to sell them a drug or have promising compounds in phase III clinical trials.
The scenario has changed so much that it is better for a biotech venture to focus on becoming a biopharmaceuticals company aiming to produce marketable drugs in order to get funding.
This strategy is fraught with challenges.
As per a recent study of Tufts Centre for the Study of Drug Development, it takes $810 million and 10 to 15 years to get a drug to market! These are staggering odds indeed.
Nevertheless, the advantage vis-a-vis a tools and data company is that, once a drug discovery becomes marketable, the value generated by it is incomparably higher to tools and data products, which become commodities in a very competitive market over a short period of time.
A case in point is Amgen, which is marketing its drugs, as against a company such as Celera, which is a tools and data company.
The gap between discovery and the drug launch is huge and is a critical factor determining the success of a biotech company.
Biotech companies help in narrowing this gap through the integration of basic research and the clinical trial process so that they can understand and benefit from each other, leading to the success of the company.
Though the process is time-consuming, more VC funds are opening up to this integrated approach.
In order to sustain their attractiveness, biotech companies that are developing new therapeutic products should prove that their platforms and algorithms can actually produce drugs.
To gain VCs' confidence, they would need to reveal their targets and their approaches to convincingly take drug discoveries through the various stages of clinical trials.
Biotech companies will have to prove that they can acquire or in-license products, validate drug targets, generate leads from these targets, and manage clinical trials and regulatory affairs apart from manufacturing, selling, and marketing, to harness the VCs' money.
VCs need to build a stronger understanding of biotech and the gestation periods involved, develop an insight into picking a technology with a bright future, and most importantly, sustain their investments through the long period of clinical trials.
VCs and biotech ventures are all set to explore, discover, develop, produce, and reap the benefits.
