P4C—Backing the Next Breakthrough: New Models for Investing in Biomedicine
Despite the growth of venture investment in the life sciences, the lion’s share of the cash is flowing to a small number of companies at later stages of development. The result is an underinvestment in wild-card ideas and early-stage drug research and development (R&D) that give way to medical breakthroughs. In response to this market failure, new sources of capital and funding models have emerged to foster innovation and help accelerate the development of effective therapies. Moderated by Court Coursey of TomorrowVentures, a panel of drug R&D and finance experts discussed the various alternative funding models that now exist to support early drug R&D and how the funding landscape will continue to evolve in the next several years.
Similar to venture capital, pharmaceutical companies have historically invested in biotech companies with drugs in later stages of development, for which commercialization risks are lower and the potential for financial returns is higher. Thus, increasingly, biotech companies have been left to their own devices to pursue the high-risk early-stage R&D and raise the necessary capital to arrive at the point of attracting pharmaceutical companies. However, “acknowledging that biotech is the lifeblood of their pipeline, pharma companies are taking more steps to make sure this ecosystem remains intact,” said David Steinberg of PureTech. These steps include seed-stage partnerships with biotech companies that provide them with facilities, expertise and financial support from very early on. These partnerships may ultimately lead to larger licensing deals, but, with this model, pharmaceutical companies can explore innovative and promising drugs from an early stage without full commitment.
The funding gap in early-stage R&D has also generated a spectrum of new finance models that blend principles of market-rate investing and philanthropy. On one end, philanthropy is driven by the potential for new medicines and is willing to take higher technical risks. Impact investing seeks both social and financial returns and therefore accepts less technical risk. At the opposite end, venture capital is led solely by financial returns and requires the most technical de-risking before an investment is made. As highlighted by Lindy Fishburne from Breakout Labs, the new blended models, including impact investing and venture philanthropy, present researchers with several different options for capital along the risk tolerance continuum.
Nonprofit organizations such as philanthropies, universities and research institutes have also started to pursue financing models that could help sustain their research interests without continuous fundraising. Providing an example, Peter Schultz of The Scripps Research Institute and the California Institute for Biomedical Research described a partnership between his two organizations that has generated drug candidates through preclinical development. To support the continued development of these drugs in the clinic, the nonprofit groups are considering a “catalyst fund,” in which they would return investors’ money with or without interest, and, if at least one of the drugs is successful, they would use the profits to reinvest in their organizations and conduct more R&D.
Other potential funding models could involve the government. Aron Betru of Milken Institute Center for Financial Markets provided examples of various roles that governments have played in fostering innovation and investments in particular sectors, including owning equity in companies. However, although there are opportunities for government to become involved, he added that they are “not necessary the right fit.” In determining which funding source and models are best, each group needs to first understand its roadblock to drug development, e.g., lack of de-risking, lack of capital.
Lastly, panelists shared their vision of the biomedicine funding landscape in the next several years. Many panelists predicted that universities will increasingly acquire internal capabilities for early-stage drug development and commercialization. Schultz stated that “the more universities can move things along internally without going to investors, both pharma and biotech investors will be able to evaluate the opportunities far better in terms of risks and the amount of time and money it will take to get to a real inflection point.” Universities will also be able to retain more of the commercial assets and create a self-sustaining model if their drugs achieve market success. In addition, Steinberg anticipated that the convergence of different sectors that are now working on health care issues, such as consumer technology, analytics and chipmakers, will generate creative new funding sources in the upcoming years.