Contrarian Opportunities in Biotech Venture

Posted June 2nd, 2012 in Biotech investment themes, General Venture Capital, Pharma industry

Pharma have been retooling their therapeutic strategies and R&D priorities considerably over the past decade, shifting in and out of various disease areas.  As they are the eventual home for many of the biotech programs we and other early stage VCs fund, its critical for us to understand Pharma’s needs and adjust our funding strategies in light of those strategic shifts.

But perhaps not always in the way you might think: investing in areas that Pharma is fleeing or deemphasizing can yield great returns.  While there are clearly many examples that don’t fit this generalization, it certainly has held true in lots of areas.  What’s deprioritized today by some Pharma, will likely be re-prioritized by others in a few years.

One of the best examples is anti-bacterials.  In the 1990s and early 2000s, many Pharma companies pulled out or scaled back their anti-bacterial research, as has been widely covered (here, here, here).  From 2000-2005, companies like Wyeth, Aventis, Eli Lilly, GlaxoSmithKline, Bristol-Myers Squibb, Abbott Laboratories, and P&G all deprioritized anti-bacterial R&D.  Many of these companies spun out either their programs or whole divisions.  And yet, over the next five years, some of the best returns in biotech venture capital from M&A exits in the anti-bacterial space: Calixa, Cerexa, Novexel, Neutec, Paratek, Pennisula, Protez, Vicuron, and a number of others.  These deals represent multiple billions in exit value.  Several of these began their lives as startups formed around out-licensed compounds discovered by Pharma, or even entire sites/portfolios (like Novexel).  Others were de novo science around novel targets, especially for MRSA and other resistant bugs.  By having a contrarian view, and taking advantage of a strategic depriorization in Pharma, biotech entrepreneurs and their venture backers were able to create considerable value in the past decade out of the anti-bacterial theme.

I think the a similar opportunity exists today across several areas:

Neuroscience.  In past couple years, there’s been plenty of press about various Pharma cutting back their neuroscience efforts in Alzheimer’s, psychiatry, pain, etc… (here, here, here).  GSK, AstraZeneca, Novartis, Pfizer have all been reworking what’s in or out of their CNS activities.  Many believe classic neurotransmitter approaches around serotonin et al have been over-worked areas of psychiatric drug discovery, and that the clinical challenges around neurodegenerative disease modification, patient variability, and complex background therapy make CNS an unattractive R&D opportunity today.  Recent failures of several gamma-secretases in AD don’t help, and I suspect that if the Phase 3 beta amyloid antibody programs fail to show cognitive improvements in Alzheimer’s this year we’ll see a further exodus from the field.

But I’m incredibly bullish on the neurology field as a whole: I think the convergence of our emerging understanding of neurobiology, genetics (and importantly epigenetics), new models of disease, and neuroimaging/diagnostics provides an exciting foundation for new efforts.  Both symptomatic and disease modifying therapies address real unmet needs in neuroscience, and both are benefiting from the accelerating pace of scientific progress.  Patient selection and stratification approaches will reduce the noise in trials (like Genentech’s recent initiation of a landmark AD prevention trial in a Columbia subset with the NIH).  Its worth noting that most of the high profile struggling Phase 3 programs in the field were discovered at least a decade ago – around the time of the Human Genome Project – and lots has changed since then (some, like AZ/Targacept’s TC-5214, were discovered 50 years ago; Bapineuzumab’s murine parent mAb 3D6 was from late 1990s).  So I think it’s a great time for early stage translational research in neuroscience around novel approaches to these big medical problems.  We recently helped externalize Lilly’s anti-CGRP antibody for migraine prevention through our Arteaus investment – a good example of venture stepping up where Pharma was hesitating.  We’re currently evaluating a number of exciting neuro projects out of both academia and Pharma with the aim of creating and launching some high risk, high reward startups.

Heart failure.  Despite its massive cost on the healthcare system, a number of Pharma with legacy franchises in heart failure have deprioritized their efforts over the past few years, at least temporarily, including long-time heart failure leader Pfizer (here).  Lots of Pharma’s just won’t touch the area.  Earlier in the last decade, with a more limited understanding of molecular basis of heart failure, few predictive markers, and enormous Phase 3 mortality study requirements, one could sympathize with the change in emphasis.  But the world is changing: new disease models, appreciation of the different subtypes of heart failure, better surrogate endpoints to predict Phase 3 outcomes, and prognostic markers of a patient’s risk profile, etc.

Despite having a survival curve as steep as many cancers, heart failure hasn’t seen a new mechanism of action approved since the 1990s; I suspect this will change over the next decade.  New modalities like microRNAs (e.g., Miragen’s programs in CHF), gene therapy (e.g., Celladon’s SERCA AAV), stem cells (e.g., Juventis’ approach), and a plethora of other novel small and large molecule targets (e.g., Cardioxyl, Cytokinetics) offer real promise to change the heart failure landscape.  And there’s a huge number of targets being pre-clinically validated through academic work that will need to get picked up by translationally focused enterprises (after being reproduced, of course)- opening up more venture funding opportunities.

Obesity.  Many Pharma’s have fled obesity due to the challenges at the FDA (like Accomplia’s collapse, and the CRLs of the three weight loss drugs now in front of the Agency), as well as the treatment failures in the clinic throughout the 2000s (e.g., leptin, MK-0557, CCK1 agonist, PYY3-36, MC4R agonists).  No new anti-obesity therapies have been approved since Xenical in 1999.  But this is a huge medical problem, and therapeutics will be part of the solution.

But while Pharma has been generally hesitant over the past five years amidst this uncertainty, smaller biotechs have stepped up.  It’s not an accident that the three drugs in front of the agency today are from emerging mid-/small-cap companies.  Earlier in development, a number of innovative younger companies, like Zafgen, are tackling novel mechanisms to treat obesity that go beyond centrally-acting agents that suppress appetite.  Novel, peripheral targets that attack adipose, liver, and muscle abnormalities present in obese patients are critical, and blending this understanding of disease biology with targeted clinical strategies makes the early development landscape exciting.  Beyond Zafgen, we’re also excited about several early programs in the obesity/metabolic space in our portfolio today (including Nimbus’ acetyl-CoA carboxylase program, and miRagen’s miR-208 program), and certainly wouldn’t shy away from additional bets in the field.

Picking great areas like neurology, cardiology, and metabolism to invest in isn’t enough though.  In domains like these, where the biology is moving fast and R&D expenses can add up quickly, entrepreneurs and their venture backers can lose their shirts if they aren’t careful – so the keys to success are to take a thoughtful, titrated funding approach to derisking these programs, pushing for killer experiments early to terminate false positives and avoiding the omnipresent risk of over-capitalizing them.  Lastly, finding the right partners to power up these therapeutic projects as they move through development is critical because the late stage registration studies will be far bigger than a venture wallet can handle.  This is tough in fields where Pharma is pulling back.  But it can be done.  A good example of this is our partnership at miRagen with Servier, where they secured ex-US rights and will significantly help fund our global heart failure programs.  Deals like this will be critical to offsetting the burden of late stage development of these agents.

So the above areas – neuroscience, heart failure/cardiology, and obesity/metabolism – are just three of the areas I think are incredibly fertile ground for venture capital investing today (and have been over the past five years).  I think they’ve largely been underfunded in recent years by Pharma and VCs alike, while oncology, anti-virals, and orphan diseases have seen relative funding spikes.  As evidence of the latter, just look at the preponderance of EGFR inhibitors, PI3K alpha blockers, HCV programs, and orphan projects within industry pipelines (more on that in a future blog post).

There are also several modalities that I think are great contrarian bets for VCs today – RNA-based therapeutics being a prime example.  With Roche, Novartis, Pfizer, and Merck de-prioritizing their big prior RNA investments, I think they may be throwing out the proverbial baby with the bathwater.  RNA therapeutics have huge clinical potential, especially single-stranded approaches as I’ve mentioned before (here).  We’ve recently doubled-down in the field with the launch of RaNA Therapeutics.

My enthusiasm for the therapeutic areas above runs directly counter to the sentiments captured in the NVCA/MedIC’s Vital Signs report from last year: “survey respondents expect to see significant investment decreases in companies fighting serious and highly prevalent conditions including cardiovascular disease, diabetes, obesity, cancer, and neurological diseases.”  Although I’m enthusiastic, there may indeed be significant drops in funding for these areas over time, especially if venture capitalists follow Pharma’s lead.  But a drop in funding doesn’t mean a drop in returns: those companies that get funded in these areas, and deliver compelling packages in early development, will have a great opportunity to make outsized returns by selling scarce novel therapeutics to innovation-hungry partners.

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