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Funding Biotechs in the Economic Downturn

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In the grips of the recession, the past few years have been rocky when it comes to funding new and emerging biotech companies. However, with signs of economic recovery shining through, Nicole Goodwin from Pharma IQ, caught up with Alan Eisenberg, Executive Vice President for Emerging Companies and Business Development at Biotechnology Industry Org (BIO) at the annual BIO event to discuss the most pressing challenges facing emerging biotechs today.

Pharma IQ: What would you say the biggest challenges are for emerging companies as opposed to big bio companies?

Alan Eisenberg:
Well, raising capital. The companies that have products out on the market are able to finance their R&D through cash flow from the sales as opposed to filling up your piggy bank every few years with investor dollars and selling a part of the profits to those investors and then spending it in a very particular way to try and get, to a milestone - be it the end of a clinical trial phase or a set of pre-clinical studies, and certain results there.  So financing is always a challenge for emerging biotech companies.  It’s become more challenging over the past few years, dramatically.

Pharma IQ:
Has there been, I know any kind of innovation with regards to financing and partnership models over the past few years?

Alan Eisenberg:
I don’t know about innovation, but Pharma companies are less willing to take full risk with acquisition. Instead, they are giving what are called structured deals, and these deals usually have what are called contingent value rights.  And these aren’t in all deals but CVRs are being used quite substantially to help mitigate risk for the pharma, for the acquirer, by saying that we’ll provide additional payouts to the investors later on if certain milestones are met, market milestones. 

Pharma IQ: A recent report has shown that venture capitalists are starting to invest more in things like technology and social media and slightly less in terms of bio. How do you think that this is going to impact the industry? 

Alan Eisenberg:Well right now we’re running. We’re still well down from 2007 levels in terms of venture capital.  We’re operating more towards the 2003, 2004 levels.  Now, what was happening is that there are ramifications from two things. One is the incredible valuations that social media and some markets are getting right now, leads investors to put their money to work and if you can get a return in two years, four years, dramatic returns out of Groupon and LivingSocial and all these other things, facebook, etc, then you’re going to do that. 

I mean, investors, we like to altruistically think they’re in this for the long-term and they care about the space, but they’re in this for the money, they’re in this to turn a return.  And so the fact is that the venture cap guys continue to get squeezed by LPs, less willing LPs. Where they get their money is more constricted and the money that they afford to invest is more constricted.  So you may have dollars that are down 30% from a couple of years ago, but the number of deals is down even more so. Where we have fewer deals, the deals are generally going to more de-risked products.  There’s only a small number of venture guys that are able to really look much higher upstream.  Some VCs are ending up taking strategies whereby they wait to invest until the product has been de-risked or they buy it early, which means it’s so cheap that you can get out of it even though there’s still high risk.  But it’s all of this important developmental work in the middle that gets choked.

Pharma IQ: I see, and what do you think the landscape will look like, then, in five years time?

Alan Eisenberg:It’s hard to tell. If you think about is this way, biotech is a very long-term, very high risk investment.  In the fall of 2007 and through 2008 and through 2009, investors went from things that were long-term, high-risk to things that are short-term, low-risk.  Think of what people do - they put money out of equities and put it into cash or into bonds, things that were shorter-term, lower risk. And the risk appetite, by-and-large, hasn’t come back for a lot of biotech. There is some money being raised in the secondary markets if you’re a public company and have a product.  But for a pre-market company that is still very, very tough. So, 20% of the companies are able to still, sort of, play by old rules, but 80% of companies still have a very difficult road to go in terms of raising capital.  So, you know, we’re going to see what the ramifications of this are over the next five years.

Pharma IQ: And do you think that the virtual pharma model is here to stay?

Alan Eisenberg: I think you’re going to see companies that are not fully virtual but virtualised, meaning, you’re going to have a base of R&D people here in the US but you’re going to have, sort of networked type of companies.  You’re going to have some of your clinical trials going on overseas, you’re going to have some of your pre-clinical work going on overseas, be it China, be it India or be it Eastern Europe or what-have-you. We are increasingly moving toward a globalised, if not virtualised world. 

Okay, virtualised means the company doesn’t exist; it’s just a collection of different almost contracts, but, increasingly, you may have IP generated at Stanford that gets developed by a team that’s based both here in the US as well as in Bangalore and clinical trials get done in China and in Eastern Europe and, would aim at a global approval of a product and insured by a European company. 

I think we are increasingly looking at a world which is global for this industry and the communications technology leads you in that direction. Also the specialisation, the increasing talent overseas which is leading us in this direction. I see, not a virtualised but a globalised world. 

Pharma IQ: Interesting.  And what do you think the biggest differences are between the US and the European market? 

Alan Eisenberg: The US market is more robust. There are a number of interesting companies in Europe are in the clinic at this point, so that’s interesting. 

Pharma IQ: Thereseems to be an increased emphasis on rare diseases and orphan drugs.Do you think that’s going to be a big part of the landscape in the next five years?

Alan Eisenberg: I think that that’s going to be a part of the landscape as are other, you know, very important areas of public health. Alzheimer’s, cancer, oncology, I think those are key, key, areas.  I know there’s a lot of focus by Pharma right now on rare diseases.  I’m not a scientist, I’m not in clinical development but, as the genotyping gets more and more advances, you’re able to slice populations more thinly, then increasingly more diseases may look more like rare disease because, you know, people have specific genetic markers and there are specific medicines and specific diagnostics.

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