Biotech’s Glass Half Full for 2012

Happy New Year! Its another January and we’re taking stock of last year and pondering the one before us.

Reflecting on the Life Science landscape, there are a number of good reasons to be optimistic about where things are today:

1. Exits: Real innovation won in the M&A marketplace for venture-backed biotechs.  A number of great deals with attractive multiples were closed in 2011 for companies with innovative assets in hot areas of medicine and science: e..g, B-raf at Plexxikon, PI3Kd at Calistoga, LPA at Amira, dual PI3K/mTor at Intellikine, oncolytic viruses at BioVex, and most recently Astofase Alfa at Enobia.  I expect that in 2012 this theme will accelerate with a number of exciting innovative biotechs getting acquired.
2. Funding: Venture capital flows into life science companies in 2011 went up more than 8% vs 2010, according the Burrill Scorecard; their data also claims that nearly $10B in venture capital went into Life Science companies around the globe in 2011.  Certainly a positive datapoint for what was seemingly a volatile year in the capital markets and one full of doom-and-gloom in the life sciences. I don’t think we’ll see cash rain down on biotech in 2012 like it has in the social media space, but funding will be available.
3. Startups: Brand new companies are still getting created at a steady pace.  The latest numbers from VentureSource suggest that nearly 100 new biotech startups were seed or first round financed in the US in 2011.  That’s more than 2009 and 2010.  Median investment size may be down, but as I’ve mentioned before the pace of venture creation is moving ahead and new innovative players are being created. The quality of the science and the deal flow we’re seeing today is as good as its ever been.  2012 will likely continue or beat this steady pace of NewCo formation.
4. Partnering: Pharma is getting increasingly comfortable being partners with VCs through creative financing and deal structures.  Motivating traditionally conservative Pharma to make creative deals happen can be particularly challenging, but 2011 brought some good momentum.  Arteaus Therapeutics is working closely with Lilly on a structured deal around a migraine asset.  Celgene struck a fascinating deal with Quanticel.  Shire is working closely with us on an rare genetic disease initiative. Pfizer’s established the CTIs to access academic biotherapeutics, and startups may soon follow from it.  These and many others signal to me that we’re entering a period of experimentation with the early stage model.  Many of these will fail, some won’t – but certainly expect more of them in 2012.
5. VC Fundraising: Lastly, as a sure sign of optimism, over 165 venture funds that invest in healthcare are out fundraising with LPs right now according to PreQin, with $22B as their combined funding target.  Roughly 50% of those are pureplay healthcare funds. Its worth noting that several of these aren’t true venture funds, but instead are Royalty Funds, but $22B is still a big number. Assuming even a fraction of that gets raised, there will be plenty of new capital to deploy into life sciences in 2012 and beyond.

Not an exhaustive list at all, but a few things to feel positive about heading into 2012.

That said, there are a few things I continue to fret about:

• Early stage biotech IPOs aren’t coming back.  Despite a few notable post-IPO performances, the biotech buyside in the public markets has little if any interest in early stage innovation today, or for that matter over the past decade. This bias against innovation, and in favor of closer-to-revenues but me-too incrementalism, isn’t likely to change in the near future. Even though the outperformance of Pharmasset (NASDAQ:VRUS) is a good case study in how early stage bets can pay, the buyside community is unlikely to step up with valuations that are attractive. Fortunately, the public market’s loss is Big Pharma’s gain: the latter will continue to pluck off the winning assets before they can be convinced to go public. That said, for those that don’t get acquired, pricing their IPOs will remain tricky.
• The offerings on the biotech menu are much larger than Pharma’s stomach can handle.  Although Pharma has a big appetite for new products to fill their pipelines, its not infinite. Only a small percentage of biotechs ever get acquired before having marketed assets. This is in large part because although the biotech R&D pipeline has 1000’s of assets, the number of high quality innovative programs isn’t that large. According to Tim Opler at Torreya Partners, who has been tracking this via their Available Pharma Products list, less than 1 out of 20 companies with Phase 2a assets get acquired. Same goes for Phase 1. And even fewer preclinical stage plays. These aren’t big numbers. Frothy auctions aren’t common, unfortunately.
• The number of syndicate partners for innovative early stage deals is small.  The reality is venture capital requires a critical mass of players at each stage for healthy capital flows, good governance, and efficient pricing of rounds.  With fewer early stage life science players, this is an issue; thankfully, however, corporate venture capital has stepped up to work closely with us. And a few brave souls, like Access BridgeGap Ventures, Remeditex Ventures, and Broadview Ventures, have been created to fund early work along side the few early stage VCs that remain.  But with Prospect, Scale, and others not pursuing further investments in LS, syndication risk has certainly gone up for 2012.
• The hurdles around regulatory approval and reimbursement are unlikely to get any easier for most diseases.  Obesity and diabetes are already de-prioritized at many firms because of the FDA uncertainty.  And I agree with John LaMattina that the ALTITUDE failure of aliskerin is likely to be cited as a reason for even larger pre-approval studies.  This isn’t good, and in so far as these hurdles make it harder for early stage biotechs to find bigger pharma partners, they will undoubtedly discourage some of the early stage investment in 2012.