BioWorld Today Columnist
In Monday's issue, I wrote about the broken model of biotech venture funding, Oxford Bioscience Chair Alan Walton's thoughts on the public markets, and the impact of funding woes on start-ups. All signs are pointing to a requirement to re-think how to support early stage R&D outside of the classic $50 million/five-year model for venture-backed biotechs.
The VCs probably won't go back to the old way of funding early stage deals with oodles of cash - that model is just too expensive to maintain. We have to accept that venture investing has become an industry, just like banking. Its goal is to generate strong returns for its investors, so that they will invest in the next fund and pay even higher management fees. Biotech time frames, product risk and capital requirements simply won't work in that world.
Walton said that Oxford's general strategy as a big fund has been to create platforms within companies as quickly as possible, and get them producing lots of virtual pipeline, and try to time the company growth to look great when the biotech public market is hot again - not the easiest thing to do!
Another approach is based on the concept that most really intriguing early stage opportunities are actually projects, not companies. What's needed is a framework in which to provide applied R&D capabilities to move an invention through rigorous preclinical development and generate a "proof-of-concept" dataset to support out-licensing. If you get enough related projects together, perhaps that becomes the basis of a small company. But the key is keeping costs low, and the work focused on generating that dataset in a timely fashion.
Walton said that a version of this can be seen within his industry.
"The only people making money in recent times are those with relatively small funds, who are latching on to university-based preclinical or maybe Phase I compounds and nurturing them to Phase II or IIb trials, then selling the project to industry," he said. "It's almost a virtual company concept. You can probably get through Phase I and ready for Phase II for $10 million. If there is human efficacy evidence, you could get a $100 million return."
We need a hybrid between the academic basic research and the start-up company with its infrastructure, a place that can conduct the rigorous proof-of-concept studies in vitro and in vivo on a series of projects originating in the academic world. That hybrid, acting as a development institute, could provide the infrastructure to conduct the applied R&D for multiple projects. Projects generating product candidates could be out-licensed to existing companies, or pooled together, to create sufficient critical mass for a start-up with reasonable chances of survival.
Those hybrids could fulfill another important mission - providing jobs for the flood of graduate students and post-docs being trained on academic campuses all over the world. I have spent the past decade talking to students and young faculty members all over North America, many of whom are frantically trying to figure out their career path when the one job for which they were trained - academic research - is not available (unless you want to stay a post-doc forever). Many of those folks are avidly interested in applied work.
There are several organizations around the globe attempting to create hybrid environments. Part of the challenge is disengaging the institute from the academic world sufficiently to remove it from campus politics and academic time frames. Venture funds have tried to finance university-based projects in the past, only to find that the university threw barriers in the way of commercialization and the professors were very unreliable when it came to meeting milestones.
Another big challenge is how to fund those entities. The academic institutions can't cover the cost. The National Institutes of Health, to date, has been interested primarily in fundamental research, and ties grants to production of students who stay in academia. (That's tough to do, when there are no jobs!) Could venture funds see a value in participating in development institutes?
Walton said there is a lot of suspicion between VCs and pure academics, because of the vast differences in goals of the two groups.
"We need a hybrid institute with folks from both worlds - academic and corporate," he said. He said that it will be a huge challenge to recruit professors who are lateral thinkers - interested in exploring lots of new areas, rather than focusing deeply and narrowly, which is the more common academic approach.
Walton pointed out that some philanthropic funds are getting into the game of funding applied work in clinical areas of interest to them. The Stanley Medical Research Institute in Bethesda, Md., has been investing millions of dollars annually to support academic and early stage company research in psychiatric medicine, for example.
In future columns, I'll be exploring these ideas further and writing about groups that are actively developing new biotech business models. Let me know about your ideas at email@example.com.