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Is too much money being invested in oncology?

Oncology startups are raking in lion's share of early-stage capital and recent M&A's have also been heavily weighted toward oncology. Is too much capital going to overcome cancer?

Between venture capitalists flush with cash and corporate mergers and acquisitions, money is gushing into oncology.

The $1 billion-plus invested in Grail is the grand example, but every week, another big deal is announced. After spending $12 billion on Kite, Gilead recently purchased Cell Design Labs for $567 million. So far in 2018, Tmunity Therapeutics brought in $100 million in Series A funding and Celgene put down $9 billion for Juno Therapeutics– and it’s only a month into the new year.

Oncology is to funding as gravity is to everything else – but is it over the top? Is cancer investment too much, too little or just right?

“I’ve been asking this for a number of years,” said Jay Lichter, managing director at Avalon Ventures, in a phone interview. “Does the world really need another oncology company? If you look at the last ten years in biotech, the vast majority of companies have been oncology. Having said that, we will continue to invest there.”

Another venture capitalist echoed Lichter.

“We actually have a continuous internal debate about are we allocating too much capital to the space,” said Otello Stampacchia, founder of Omega Funds, which was an early investor in companies like Juno Therapeutics, Editas Medicine among others and continues to invest with a meaningful focus in that therapeutic area.

Stampacchia said he believes there are some counter arguments for still continuing to invest in oncology startups even though some VCs may be pulling out.

“The majority of M&A happens in oncology both by dollars and number of deals…  so, in essencee there is an exit for the fund not just an entrance,” he said. “Until that ends, I think the capital will continue to flow.”

Like everything else associated with cancer, the funding equation is complicated. Investors have strong motivations to go all-in for oncology. Despite decades of efforts, cancer remains the nation’s second largest killer behind heart disease. The sector is ripe for investment because it remains an unmet medical need. Quite simply, cancer kills people – and quickly.

This reality may help generate a structural advantage for cancer-focused companies. Going back to Nixon’s War on Cancer, and even before that, oncology has maintained a special status. For example, the National Cancer Institute director is appointed by the President, while other institute leaders are selected by the NIH director.

That’s mostly symbolic, but this atmosphere generates real advantages on the regulatory side. Breakthrough Therapy and other designations are dramatically cutting the time it takes to move cancer (and other) drugs to market.

“Look at the regulatory environment,” Lichter said. “In cancer, for small amounts of money, in relatively short periods of time, you can get approval. If you have a cancer that’s untreatable, you can do a phase I study with 30 patients, a phase III with 50 and get approval. The economics of running clinical trials, and getting FDA approval, really favor cancer.”

There are also more avenues for investment. New technologies have led to a more granular understanding of these diseases. As cancer has grown less monolithic and more personal, the ecosystem has simply grown bigger.

“There’s been an explosion of new information about the mechanisms,” he said. “Why it starts, why it propagates, why it spreads, why the body doesn’t stop it.”

Stampacchia voiced a similar sentiment.

“We finally have the tools to really understand and dissect the pathways – how the tumors grow and kill,” he said. “That kind of understanding of the biology always leads to a better understanding of the products you should develop.”

Consider the interlocking therapeutic and diagnostic revolutions that have overtaken the industry: low-cost genomics and immunotherapies are go-to examples. Immunotherapies hold great promise and yet remain incomplete solutions. Checkpoint inhibitors help a significant fraction of patients but fall short for the majority. CAR-T therapies are a great achievement – but so far only in blood cancers. Given the great potential for these approaches, efforts to maximize their effectiveness have multiplied. Hundreds of studies are combining checkpoint inhibitors with other agents to extend their benefits.

“There are a number of breakthroughs that have driven this shift to oncology in investment and M&A,” said Walter Moos, CEO at ShangPharma Innovation, an incubator and investment firm, in a phone interview. “It’s part of the DNA sequencing revolution. It’s part of having more computing power to analyze biomarkers. It’s the ability in the future of gene editing. It’s advances in taking the brakes off the immune system.”

There are even more investment opportunities coming along. Microbiome research is outlining the roles microbes play in cancer. Digital health plays are getting significant funding from Silicon Valley. With so much data being produced by genomic sequencers and other tools, high-powered analytics have become essential.

“Investors like Amazon and Google, these big tech players, who have a capability in analytics, are getting into the healthcare space,” said Vaughn Kauffman, principal, Health Industries Advisory for PwC in a phone interview. “They’re really supporting and funding some of these activities to create the diagnostic as well as the analytics capabilities.”

PwC sees new approaches beyond diagnostics and therapeutics, such as growing efforts to leverage digital technologies to refocus on patients, both during and after treatment.

“Many healthcare institutions don’t feel ownership beyond the actual treatment,” Kauffman said, “but the patient is all about getting the right quality of life. That’s where digital innovations come into play in connecting to that first-line coordinated care, ultimately driving better patient experience.”

From an investment perspective, the cancer pie just seems to be growing. But what about the spectrum of healthcare investment? If cancer companies win, will other segments struggle?

“If you look at the global level, there’s enough money out there that the money that’s being taken off the table for oncology, it’s not going to have an impact,” Moos said. “Tens of billions of dollars are available in China for investing – but there aren’t tens of billions of dollars of programs worth investing in.”

With the recent tax cuts, the U.S. investment pool may also get bigger. Moos believes as much as $150 billion could be repatriated, and some of that will be reinvested, particularly in M&A.

But most of these opportunities are driven by the science, which is moving rapidly and generating new opportunities, seemingly, out of nowhere.

“Something like a thousand oncology agents are in clinical development,” said Moos. “And yet, every day, there’s another company springing up with something that’s going to eat their lunch. We see this as a real opportunity for early stage players, like us.”

Arundhati Parmar contributed to the story.

Photo: Abscent84, Getty Images

 

 

 

 

 

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