Partnerships 2010: What Venture Capitalists and CEOs Look for in Early Drug Development Plans

Panelists:
Elizabeth Stoner, Managing Director, MPM Capital
Dr. Gary Shangold, CEO, Xanodyne

Venture capitalists willing to brave the turbid waters of the pharmaceuticals industry are becoming a bit rare these days. For those that do there are significant risks and sometimes-good rewards. Ms Stoner reports that the state of the industry is that capital investment in the industry is declining with current levels of $$ investment at a 5 year low. A significant number of biotechs have collapsed from lack of funding as later stage deals become more prevalent. “Capital efficiency” is the buzzword in the Venture Capitalists world. Ms Stoner believes that we haven’t yet seen what the most recent round of mergers and acquisition means. Effectively there are 20% fewer pharma companies meaning that the pools of customers for CROs are down to 80% of previous levels. Investors today are looking for a single round of financing to exit these days. In addition, the size of the initial investment is down. “Capital Efficiency” indeed.

In the face of this Biotech companies need to be ‘leaner’. Why? The real value of the company today doesn’t occur until Proof of Concept. In 2009 there were no pre-clinical deals and only one Phase I deal. The big deals are in Phase III. Companies must survive and get to the successful Phase II with the least amount of money and the shortest timeline. It seems that VCs are also risk averse. Incremental value is not good enough to warrant investment. Biotechs must focus on addressing unmet medical need. Not too different from ‘Big Pharma’.

Where do CROs fit? There is significant price sensitivity, no news there, but biotechs are still looking for the experience to achieve cash-efficient drug development and a clear path to proof-of-concept. Not just the result of a Phase II but a clear vision of where the putative product fit in the marketplace.

Dr. Shangold discusses the small company CEO perspective and perspectives of a number of CEO’s who he interviewed in preparation for this discussion. Confirming and expanding on Ms Stoner’s data he reviews the sharp decline in funding over the past few years and particularly since the recognition of the global recession in 2008. In his view creating a new, vertically integrated company is nearly impossible today. Acquisition is practically the only path, still not easy because for one reason the marketplace of buyers is extremely heterogeneous.

Increased time and cost required for R&D, is compounded by increase attrition rate for new drugs. Imperatives driven by this include are ‘lean management’ and early termination of losers, focus on proof of concept and activities that reduce risk on the way to POC. Dr Shangold walks us through specific activities that mitigate in favor of success.

In the end - “ The company’s strategic vision needs to be clear and the decisions around what drugs to develop informed by that strategy.” Is 'speed to market' or 'maximizing commercial return' most important? The answer is Yes.



Venture capitalists willing to brave the turbid waters of the pharmaceuticals industry are becoming a bit rare these days. For those that do there are significant risks and sometimes-good rewards. Ms Stoner reports that the state of the industry is that capital investment in the industry is declining with current levels of $$ investment at a 5 year low. A significant number of biotechs have collapsed from lack of funding as later stage deals become more prevalent. “Capital efficiency” is the buzzword in the Venture Capitalists world. Ms Stoner believes that we haven’t yet seen what the most recent round of mergers and acquisition means. Effectively there are 20% fewer pharma companies meaning that the pools of customers for CROs are down to 80% of previous levels. Investors today are looking for a single round of financing to exit these days. In addition, the size of the initial investment is down. “Capital Efficiency” indeed.

In the face of this Biotech companies need to be ‘leaner’. Why? The real value of the company today doesn’t occur until Proof of Concept. In 2009 there were no pre-clinical deals and only one Phase I deal. The big deals are in Phase III. Companies must survive and get to the successful Phase II with the least amount of money and the shortest timeline. It seems that VCs are also risk averse. Incremental value is not good enough to warrant investment. Biotechs must focus on addressing unmet medical need. Not too different from ‘Big Pharma’.

Where do CROs fit? There is significant price sensitivity, no news there, but biotechs are still looking for the experience to achieve cash-efficient drug development and a clear path to proof-of-concept. Not just the result of a Phase II but a clear vision of where the putative product fit in the marketplace.

Dr. Shangold discusses the small company CEO perspective and perspectives of a number of CEO’s who he interviewed in preparation for this discussion. Confirming and expanding on Ms Stoner’s data he reviews the sharp decline in funding over the past few years and particularly since the recognition of the global recession in 2008. In his view creating a new, vertically integrated company is nearly impossible today. Acquisition is practically the only path, still not easy because for one reason the marketplace of buyers is extremely heterogeneous.

Increased time and cost required for R&D, is compounded by increase attrition rate for new drugs. Imperatives driven by this include are ‘lean management’ and early termination of losers, focus on proof of concept and activities that reduce risk on the way to POC. Dr Shangold walks us through specific activities that mitigate in favor of success.

In the end - “ The company’s strategic vision needs to be clear and the decisions around what drugs to develop informed by that strategy.” Is 'speed to market' or 'maximizing commercial return' most important? The answer is Yes.