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Capital efficiency: managing biotechs in straitened times

At first glance, 2011 looks like it has been a bumper year for biotech financing. The industry has raised $40 billion plus from the capital markets and yet the amount of money being put to work in innovative precommercial biotechs is stagnating at around $5 billion. At the beginning of December, Scrip Intelligence hosted a roundtable discussion, chaired by editor-in-chief Mike Ward, involving Dr Kevin Johnson, partner at Index Ventures, Dr Robert Burns, CEO at 4-Antibody, Dr Johanna Holldack, CEO at Telormedix, and Dr Jason Slingsby, CEO at ProtAffin, to discuss the pressures facing the biotech industry. What follows is a short abstract of that discussion.

Q. MW: As we look at the fund raising situation, how easy or difficult it is for biotech companies to raise money?
KJ: To some extent it is helpful I think, in this context at least, that I’m a bit of a poacher turned gamekeeper. I’ve only been working full time for Index for the past year and a half, before that I would have been sitting on the other side of the table. What I find quite interesting is that there has been a dramatic reduction in the number of VCs who have been able to raise funds. I think less than 50% of the venture capitalists have been able to raise subsequent funds, so there is a reduction in the pool of available cash. It is not a 50% reduction but it’s still a reduction and you have to ask, why is that?

If you talk to the pension funds and insurance companies that invest in venture capital then it is quite clear they’ve got a choice, they can go into anything they like. They can go into retail, in automotive, it’s very mobile and they have a full choice in what they can put their funds to work in.

And if you look at the life science business as an investment business the returns haven’t been great. If you’ve got a 1.5X on your fund you’re doing well, and you are probably in the top decile doing life science investing, which is pretty rubbish. The best fund of funds are seeing 1.8 to 2X returns for their life science portfolios while their tech funds are delivering 4X to 5X, so you tell me which one they’re going to prefer?

Q. MW: I’d like to understand the pressures that investors are putting biotech executives under because they’re looking for their returns. They’ve given you some money to move businesses forward and I just wonder, given the pressure that Kevin has already explained, do you sometimes end up doing things to placate that you would rather not?
JS: I think that’s probably good discipline for both investor and CEO. For me, effective capital utilisation is the key. We’re in Austria in a cheap city, in Graz, so lab space for us is about a tenth of what it is in London,salaries are certainly lower than in a hot cluster, so for us effective use of capital in terms of infrastructure is fine it’s really more where do you do your toxicology, where do you do your GMP manufacturing? Which CROs do you use for your pharmacology? So we have looked at, and have used some Chinese CROs for some studies and we’ve saved money as they’re about a third of the price for us than in Europe. But we have yet to decide if that’s really going to continue.

For us, being a biologics company, contract manufacturing is a real cost driver. We are working with a Danish CMO, and things are going fine and while we do hear of partners in Asia who say they can do things cheaper we have to ask ourselves: do we want to take on additional communication time, distance risk? So for us I think one thing we haven’t done is try to outsource contract manufacturing to a lower cost part of the world.

You have to be really careful with every penny you spend. We have tried to really push the programmes that are most advanced as much as we could in order to establish proof of concept for the technology because then everything becomes easier. If there is less money you have to be creative and when you look around you see they have been creative in finding alternative sources of finance.

RB: I think every biotech is always looking to raise money because you believe you can use it intelligently but I think the question is where do you get it from? I’d rather not ask my investors for any more money, I’d rather get it somewhere else, so that’s what I’m working hard on doing. We did that at Affitech where we attracted new funds from Russia. It was interesting and highly speculative and I think it worked at the time. Through some long-term relationships that I built up in Brazil when I was at the Ludwig Institute I’m doing the same in Brazil now.

I’m trying to do a strategic deal at the moment in Brazil which is based on the premise that Brazil, like every developing country, wants to build an indigenous pharmaceutical industry and they know they can’t do it on the basis of chemistry because it’s too late, it’s generic. So they’ve got two options, they’re both biologics, one is vaccines and the other is antibodies. That’s what they’re all trying to do, and because I’ve got some history in Brazil that’s an obvious place for me to go first rather than China or India.

Q. MW: Johanna, you are not only a current CEO you are also active with a VC fund. Do you notice a difference, do you think differently when you’re putting your VC hat on or when you’re putting your CEO hat on?
JH: That’s a good question. Actually I don’t think so, I think in this environment, as you pointed out as a CEO you are asked to stage an exit so sometimes I stage an exit and sometimes I ask people to stage an exit so that is the major difference. I think the combination of both positions is a good exercise because it broadens your horizon.

Sometimes when I see people presenting a business plan I think that is a wonderful idea, why didn’t I think of it, and sometimes I think my goodness what on earth are you doing? And they are sometimes a little intimidated by people who come really from an operational side but I think it’s a good exercise. And when I wear my CEO hat, which I wear most of the time, then of course I ask myself the questions, what do investors want to do and how can we guarantee that there will be a successful exit? And that is really what the whole story is about at this point in time.

Q. MW: It is clear, however, that the pharma industry needs innovation and healthcare providers only want to pay for medicines that deliver cost effective positive patient outcomes but the capital markets are shying away from risky opportunities. In these circumstances who is going to pay for innovation?
JH: I think it is very clear that big pharma is not going to cover all the expenses. Venture capitalists are not going to cover all the expenses. I think the cooperation between biotech and big pharma is going to intensify and lots of funding will come from that source – not from corporate VCs but from cooperations.

KJ: It is always a balance between technical and commercial risk. It is a seesaw but technical risk is much harder to quantify than commercial risk. The challenge with going for innovative approaches is how much cash you have to throw at it before it becomes something that you feel comfortable investing a great deal more in?

Watch the roundtable video.