Is the Early Stage Opportunistic Investment Strategy Broken?

3 Nov

By Dennis Ford, Founder & CEO, LSN

In the last decade there has been an enormous shift in the drug discovery and development landscape. None of the following diatribe will be news to the life science mavens who get this…but I do want to set up for the thesis at the end of the article. Whereas R&D was previously limited mainly to a handful of pharmaceutical companies, new R&D paradigms have evolved that embrace collaborative partnerships amongst various stakeholders in the life science sectors: pharma, biotech, academic/research centers, government, and donor-backed foundations.

Lower productivity, as measured by the number of technology assets that make it to the patient coupled with increasing drug development costs, as well as higher attrition rates at all phases of the discovery and development process, have forced pharmaceutical companies to significantly pare down their internal R&D infrastructures and to increasingly focus on drug development, particularly post proof-of-concept. Thus, early-stage drug discovery is increasingly occurring outside of pharma for all but the ‘big’ diseases. This is the major change that has been driving the biotech investment environment. As the reader probably knows LSN’s arena is matching up buyers and sellers in early stage drugs, devices, diagnostics and healthcare IT.

VC funding for early-stage drug research in the biotech space has become limited because of the high risk and extended timing to exit. This has resulted in disease-focused healthcare foundations frequently left to play a leading role in driving the earliest phases of drug discovery and development—particularly for rare diseases and less prevalent indications. While disease-focused foundations collectively put billions of dollars into life science research, these groups are often dependent on donors and face yearly uncertainty over funds. In addition, their non-profit status limits their ability to take an equity stake in any technology, where a financial gain could then be used to reinvest into the foundations mission. It’s therefore difficult for most disease-focused foundations to implement an investment model that will lead to a tangible impact. Overall this dynamic has impeded the delivery of cures that could address the unmet need that exists for many diseases.

My own observation from living in the space has been that a lot of players that could make early stage investments are reluctant to make early-stage investments. The few that are willing to do so, will generally invest only if something potentially breakthrough or disruptive appears on the radar screen. However, what typically happens is that they will place a large bet on advancing a single opportunity or platform only to move down a dead-end path, at which point they just say ‘never mind’. I would argue that that this places a lot of capital at unnecessary risk. There is a better strategy for making early stage investments. I have come to the conclusion that, yes, the opportunity is there in early stage; but I would want to place my bet on funding multiple early stage technologies rather than just one. For example, it would be a mistake to bet heavily on one small molecule program and leave out the promises of gene therapy, therapeutic proteins, cell therapy etc. especially where there is an unmet medical need and no cure or treatment which is the case with many rare diseases. I think the near future will hold an opportunity for those diseases with no cure in sight by discovering and combining diverse technology assets to help move the needle.

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