<article>In the US, biotechnology is increasingly emerging as a viable investment for VC firms.</article>

In the US, biotechnology is increasingly emerging as a viable investment for VC firms.
Series A valuations number in single digit for the biotech sector, as the firms maintain a tight focus on their burn rate and government regulators (i.e. the Food &amp; Drug Administration), which have become easier to deal with, compared to the recent past.
Finally, potential strategic buyers add value from the outset when acquiring the firm.
In the US, 2014 was a record year for life science IPOs, with over 128 completed. The best IPO performer for 2014 was <a href="http://www.radiuspharm.com" target="_blank">Radius Health</a>, which advertises itself as a “science-driven biopharmaceutical company focused on developing new therapeutics for patients with osteoporosis as well as other serious endocrine-mediated diseases”. After IPO, its value increased 200 per cent.
Theodore Tan, the director of a Singaporean medtech incubator, <a href="http://thebiofactory.com/" target="_blank">The Biofactory</a>, notes that &#8220;Medtech startups are more complex, and require on average twice or thrice the time and resources to achieve commercialisation and exit.”
So what are the specific elements that have triggered this shift in attitudes among US investors and increased the appeal of biotechnology and the life sciences? As the entrepreneurial ecosystems of the Asia-Pacific mature, it seems likely that something similar will happen here.
Lowered Costs &amp; Faster Market Entry
When the human genome was first sequenced via the <a href="http://www.genome.gov/" target="_blank">Human Genome Project</a>, stretching from 1990 to 2003, roughly $20 billion was expended to achieve it.  Today, an individual’s genome can be sequenced for $2,000 &#8211; a 10 million fold reduction in cost. This is due to significant advances in computing technology since the 1990’s.
Today, the US Food &amp;Drug Administration (USFDA) is also more favourable than in the past, with a preference for expediting the approval of drugs intended to treat serious medical conditions &#8211; the consequence being that biotechnology and pharmaceutical products accelerated market entry for biotech products
In 1998, <a href="http://www.novartis.com/" target="_blank">Novartis</a> ran the Phase 1 clinical trial for its cancer drug <a href="http://www.gleevec.com/" target="_blank">Gleevec</a>. Rather than effectiveness, it was meant to determine the optimal dosing for the drug. The outcome? Cancer in all 31 trial participants went into complete remission.  The USFDA only approved Gleevec in May 2001, less than three years from the start date of the 1998 clinical trial and two and a half months after Novartis submitted its new drug application.
More recently, in July 2014, the USFDA approved another cancer medicine, <a href="https://www.zydelig.com/" target="_blank">Zydelig</a>, a drug used to treat blood cancers like leukemia, developed by <a href="http://www.gilead.com/" target="_blank">GileadSciences</a>. It was available to patients less than four years after the completion of the Phase 1 trial.
Outsourcing R&amp;D &amp; Lack of Acquihire
Historical data persuaded large pharmaceutical concerns that it was better to acquire firms, rather than to develop early stage research programs themselves. Now, large pharmaceutical firms like <a href="http://www.gsk.com/" target="_blank">GlaxoSmithKline</a>, <a href="http://en.sanofi.com/" target="_blank">Sanofi</a>, <a href="http://www.pfizer.com/" target="_blank">Pfizer</a> and <a href="http://www.novartis.com/" target="_blank">Novartis</a> actively cultivate the ecosystem of venture-backed biotech startups, ensuring a robust pipeline of candidates for M&amp;A activity.
Pharmasset, which developed the first drug to cure, rather than treat symptoms of Hepatitis C, was acquired by Gilead Sciences for $11 billion. The significance? It was the largest M&amp;A for a development-stage company in the biotechnology &amp; pharmaceutical sector to date. However, it didn’t generate as much press attention as Facebook’s acquisition of WhatsApp for $22 billion.
Other examples of such acquisitions in recent years indicates a strategy aimed at accessing early development stage programs. These include <a style="color: #0000ff; text-decoration: underline;" href="http://www.bloomberg.com/news/2013-06-17/j-j-to-buy-aragon-pharmaceuticals-for-cancer-candidate.html">Johnson &amp; Johnson acquiring Aragon Pharmaceuticals in 2013</a> for $1 billion and the<a style="color: #0000ff;" href="http://www.apple.com"> 2010 purchase</a> by Gilead Sciences of Arresto BioSciences for $225 million.
Also, unlike tech startups, where some acquisitions are motivated by the desire to acquire a talented technical team, with other competent staff integrated into the business units of the acquirer, biotech startups rarely face this situation.
What motivates the acquisition of a biotech startup is their research data and potential products, rather than their scientific talent. By comparison, the competition for engineering talent in Silicon Valley often motivates the <a style="color: #0000ff; text-decoration: underline;" href="http://www.apple.com">acquihire phenomenon</a>.
Exit Strategy, Exit Time
Most biotech development cycles take a minimum of five years of research and development, or longer, in order to be developed, tested, validated and marketed for consumption. This is generally incompatible with the VC business model and their venture funds, which have a fixed life of 10 years.
While extensions by portfolio companies seeking liquidity are possible, the normal investing cycle ranges from three to five years, with the later half focused on managing and making follow-on investments in the existing portfolio. This helps to minimise exposure to the management and marketing risks for the VC firm from portfolio companies.
The <a href="http://www.nih.gov/" target="_blank">US National Institutes of Health (NIH)</a>, which remains the key funding source of academic science in the US, now requires funded programs to demonstrate commercial potential for their research. This change in policy renders biotech startups a more compelling investment choice for VCs.
Similarly, purchasers are more willing to acquire a biotech startup despite proof-of-concept evidence lacking, due to the information they can access as a result. This is due to the commercial potential being in-built into such research by the NIH. However, significant risk sharing exists for the duration of clinical testing and market entry, with venture investors sharing in the risks and dividends alongside the MNC.
In 2012, <a href="http://www.mpmcapital.com/" target="_blank">MPM Capital</a>, an early-stage life science VC firm that invests in the biotech, healthcare and medical device sectors, established and incubated an immuno-oncology company called <a href="http://www.costim.com/" target="_blank">CoStim</a>.  CoStim was acquired by Novartis in 2014, less than a year after the first tranche of MPM Capital’s Series A investment into the company, with less than $20 million invested.
According to Dr Luke Evnin, the co-founder of MPM Capital, “At that point in time, CoStim’s lead program was still more than a year away from the start of human clinical trials.  Our aggregate returns from that transaction will return at least half of our fund.Early-stage biotech investing today looks an awful lot like venture did in its halcyon days: disciplined valuations and burn rates, limited competition for the best deals, major breakthroughs [in immunology and oncology] fuelling game-changing opportunities, and a consequently robust IPO market.”
Image: <a href="http://freedigitialphotos.net" target="_blank">freedigitialphotos.net</a>

Biotech startups: viable investment for VCs

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