Venture capital investment in early-stage biotechnology and pharmaceutical startups is seeing exuberance that could be classed as “froth,” but it does not appear to be in bubble territory yet.
Jonathan Norris, a managing director for venture relationships at Silicon Valley Bank and co-author of the bank’s twice-yearly report on healthcare investment, had that to say when asked in a phone interview if the b-word applies to the huge amount of investment flowing into the industry.
The report found that halfway through the year, biopharma Series A investments already hit $2.6 billion, compared with $2.3 billion for all of 2017. Oncology claimed the largest share, with $2.362 billion from 2016 to the first half of 2018. Median Series A funding grew from $8 million in the first quarter to $32.5 million in the second quarter, among 77 biopharma rounds so far, compared with quarterly medians last year ranging from $5.9 million to $19.1 million.
In the last week, two companies have already raised Series A rounds in the neighborhood of 2018’s second-quarter median. On Wednesday, Johns Hopkins University neurology startup Neuraly announced it had received $36 million from mostly Korean investors. And on Tuesday, San Francisco-based Verge Genomics said it had received $32 million in a round led by DFJ Ventures, a technology-focused VC fund better known for investing in tech companies, albeit with participation from several biotech-focused venture capitalists.
While biopharma Series A raises grow, exits – particularly initial public offerings – are up this year as well. Thirty companies went public in the first half of the year, compared with 31 for all of 2017. Taken together, the total value of exits – including pre-money IPOs, as well as upfront and milestone payments connected to M&A – has already reached $20 billion this year, exceeding last year’s $18.7 billion. However, M&A has slowed, with only five deals to date, compared with last year’s 14.
Writing in a Boston Globe op-ed in March, Jason Pontin, senior partner at Boston investment firm Flagship Pioneering, questioned whether Boston’s large biotechnology sector was in a bubble, pointing to parallels with the 1990s-2000s dot-com boom, like companies going public without revenues and a jittery stock market. However, he also pointed to significant differences, such as biotechs’ inherent need to go public before launching products due to the time and investment needed to develop them, as well as their products’ more significant potential effects on people’s lives and the science behind them, compared with the dot-coms.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
A surer and more worrisome sign of a bubble, Norris said, would be if a large number of biotech companies were receiving investment from tech-focused VCs without any expertise on the biotechnology front. However, he said, that has not begun to happen yet.
Verge’s funding round also points to growing interest in the use of artificial intelligence and machine learning in drug discovery and development. Norris said that approach has been pushed more by the tech industry than biopharma, but he has started to see some healthcare investors make bets in the sector as well. Still, there aren’t enough results to judge how valuable AI/ML will be, he said. At the same time, Salt Lake City-based AI/ML drug discovery firm Recursion announced last week that the Food and Drug Administration had accepted its Investigational New Drug application for REC-994, a drug discovered through ML for which the company plans to initiate a Phase I study in the third or fourth quarter of this year for the genetic disease cerebral cavernous malformation.
While biotechnology and pharmaceutical startups saw a huge surge in investment, diagnostics and tools saw less, with 27 Series A rounds totaling $224 million this year, compared with 73 rounds worth $548 million last year. One potential reason is that last year saw several diagnostics firms – such as Grail and Guardant Health – draw funding rounds worth hundreds of millions of dollars each, Norris said. That, in turn, may have led to relative quiet this year, as diagnostics firms develop their products, with the possibility that funding could pick up again later, he said. Grail, which is developing a next-generation sequencing test for early cancer detection, netted $900 million in a Series B round in March 2017, followed by a $300 million Series C round raised from Chinese investors in May of this year. Guardant raised $360 million in a funding round last May.
Photo: Pakhnyushchyy, Getty Images
