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Three ways venture capital firms maximize their biotech investments

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Every investor wants to maximize their returns, and investing in biotech has historically been a good bet for risk-tolerant investors. 2017 saw a record amount of venture capital (VC) funding in biotech, with about $9.3 billion dollars invested.

Of note, Atlas Venture (Cambridge, MA) established a new $350 million fund, Fund XI, for investing in early-stage biotech companies. Atlas Venture noted that the establishment of Fund XI was the “fastest and most oversubscribed effort [they] had in over 15 years.” The record-setting VC funding and the establishment of Atlas Venture’s Fund XI indicate both the excitement and potential high returns of biotech investing.

Yet, the path to approval for biotech is still wrought with failures, and with each failure comes the potential for major capital losses. BIO’s 2015 report indicates that the average overall likelihood for approval by FDA from a Phase I study is only ten percent, and that for major disease categories such as oncology this rate is even lower.

The report also shows that only about thirty percent of Phase II clinical program candidates reach a Phase III trial, and the cost of a failed clinical trial is between $800 million and $1.4 billion.

Thus, having these record-setting investment levels in biotech and the high risk of failure of products achieving regulatory body approval in mind, VC firms are looking to ensure that they control early development to avoid bringing sub-optimal products to the market.

Three major trends have emerged from the involvement of VC firms in early biotech development: early investment in biotech companies, leveraging big data, and mitigating regulatory risks. These shifts to greater control in the early development of biotech should lead to better marketable therapies that have a real impact on patients’ quality of life, and, in turn, the generation of appealing investment returns.

Early investment in biotech companies

A common misconception of biotech investing is that early-stage companies are riskier to invest in than companies that have products in later stage clinical development, according to Forbes.

Yet, VC firms that invest in early-stage biotech, like Atlas Ventures, tend to see early-stage investment as an asset to their portfolios because of the control it affords them. According to Atlas Ventures’ blog, “we can titrate capital into these early stories and have the discipline to walk away when the science doesn’t play through favorably.”

Investing in early-stage companies allows VC firms to derisk the investment process by releasing money in smaller tranches. This allows VC firms to avoid investing larger pools of money in later stage biotech which may go toward more expensive risk areas such as regulatory, commercialization, and reimbursement.

Keeping investment dollars tightly controlled in this early stage allows for VC firms to have low risk while they seek to elucidate which technologies have the greatest chance of making the largest impact in healthcare and, consequently, the greatest return on investment.

Leveraging big data

A second major trend in derisking early biotech investment is leveraging big data. The pharmaceutical and medical device clinical development fields have gathered troves of information from published and unpublished preclinical development and clinical trial data. VC firms have classically made funding decisions based on subjective criterion such as perceived addressable market and how much they believe in the founders of the start-up.

Yet, effectively analyzing big data from previously performed preclinical and clinical trials to drive investment decisions has been historically out of reach for VC firms. To address this, more VC firms have been hiring data scientists in order to bridge this gap in knowledge.

Leveraging preclinical and clinical big data allows VC firms to analyze an extra layer in the due diligence process through the addition of a real-time objective data criterion. This addition of data analysis to the funding process gives VC firms greater insight into which biotech companies could bring in the highest returns based on the identification of trends and insights from the analysis of preclinical and clinical trial big data.

By using big data to inform investment decisions, VC firms are increasing the odds of spotting preclinical and clinical development pitfalls of prospective biotech early, thus increasing the chances of more substantial returns.

Mitigating regulatory risks

The third major trend in early biotech investment is the mitigation of regulatory risks. One example of an area that has high regulatory risk is the ever-expanding precision medicine space.

As many health systems and providers look to expand their precision medicine offerings, particularly in oncology, early biotech companies are developing technologies to meet the need. However, many of these new technologies are facing an unknown regulatory path, and this can be a major risk to future VC investors.

The VC field is currently showing a trend toward increasing touchpoints between biotech companies, regulatory consultants, and regulatory bodies earlier in the clinical development process. Companies such as Big Health are illustrating this by engaging Halloran Consulting Group as regulatory consultants.

By engaging Halloran early in the process, Big Health has established a regulatory map which gives them a leg-up by knowing where they’re going before they take on next steps in development. Mapping out a regulatory pathway is crucial to the success of the company and can give investors a piece of mind that their investments have a path forward.

Without mitigating regulatory risks early, biotech companies may find themselves with a complete response letter from the FDA, which may result in a loss of potential gains for VC firms. Biotech companies like Alimera, Orexigen, and Biodel have all found themselves derailed after an FDA complete response letter include. These examples indicate that derisking the regulatory path of the product early can save VC investors from losses in the later clinical development stages.

By addressing regulatory risks in the initial stages of development, VC firms are avoiding advancing a technology with a murky regulatory path. This allows VC firms to cut losses early on those technologies that would need more time and money to come to market, and allow for investment in those companies with a clearer regulatory path meaning a potential for high return on VC investment.

The traditional VC mindset still exists: high risk, high reward. Yet VC firms are trying to do all they can to tip the scales toward high reward in biotech investment by using early investment strategies, leveraging big data, and mitigating regulatory risks. These strategies help to ensure that the biotech companies that they do invest in have the greatest chance of driving medical innovation as well as promoting high return on investment.