Biotech bang for buck(3)

An industry focused on such small assets has lately attracted some historically large commitments of investment capital. In the first quarter of 2007, biotechnology replaced software as the recipient industry of the largest amount of US venture financing, with $1.5 billion (€1.12 billion) going into 102 deals, according to the National Venture Capital Association.

Biotech taking the top spot is partly the result of the fact that many biotech companies are absorbing comparatively large amounts of capital. In February, Cambridge, Massachusetts-based Targanta Therapeutics, a privately held biopharmaceutical company developing antibacterial drugs, announced that it raised $70 million in a Series C venture round. The financing was led by private equity funding from US-based VCs including Brookside Capital, Skyline Ventures and Radius Ventures.

HUGE OUTLAYS
Financing rounds of this size were more often seen during the boom days of the capital-hungry IT market of the late 1990s. But today, such large investment outlays are not uncommon in the big-money world of biotech, as nearly every step of the process of getting a drug or treatment to market is cashintensive.

Jim Healy, general partner at global venture capital firm Sofinnova Ventures, says it takes a lot of money to be a success in the biotech and life sciences space on a worldwide scale. “The direct costs for a single product – including only the winning programme, not including all of the expenses that go toward the 85 percent of failures – is anywhere from $150 million to $300 million,” he says. “Include in the costs associated with the programmes that were focused on the same target and the same disease but did not work, and expenses come in well north of $600 million.”

Healy has first-hand experience of the whole spectrum of biotech and life sciences investment. Prior to joining Sofinnova, he worked at Bayer Pharmaceuticals and helped guide the discovery group at ISTA Pharmaceuticals prior to its initial public offering. He also has familiarity with research tools and platforms via his involvement at the Human Genome Center at Lawrence Berkeley Labs earlier in his career. His firm has an international perspective and manages more than $2 billion globally, with Healy's team in San Francisco and French sister organisation Sofinnova Partners in Paris both managing in excess of $1 billion. “We've got more of a global investment mandate than most firms here in the US,” says Healy.

A major contributor to the expense of drug development is the fact that the drug-approval process is very long, expensive and risky, Healy says. “The average time from inception through drug approval, from the conception of an idea through the ultimate approval of a drug, is about 12 years,” he says. “That's globally, based on all pharmaceutical and biotech companies. The risks are extremely high. The success rate from inception to approval is one out of 10,000, on average.”

Each local market has its own regulatory issues, says Healy. “In the United States, you get a streamlined regulatory process, a single negotiation around the exact label on the drugs, meaning under what conditions you can prescribe it,” he explains. “Then you tend to have a centralised pricing discussion – how it will be priced across the US. You may have centralised decision-making with regard to drug approvals, but pricing can vary on a country-to-country basis.”

The challenge for private equity investors like Sofinnova, Healy says, is to be able to find programmes and drugs that are “de-risked” and thus have a much higher success rate. “In our firm, our success rate on our investments has been well in excess of 90 percent, and our average [holding period], from our first investment through to either an acquisition of the company or an IPO is just under three years, and the average in the industry is well in excess of 88 months,” he says. “We have a very good batting average here. It's not that we're necessarily better at picking pre-clinical assets; it's just that we really look for human proof-of-concept data prior to investing.”

“The risks are extremely high. The success rate from inception to approval is one out of 10,000, on average.”

Sofinnova has primarily focused on late-stage pharmaceutical products in early-stage companies. Over 70 percent of its investments are in spinoff companies from large pharmaceutical or biotech companies.

One example of Sofinnova's approach is Actelion, a spin-out of Swiss pharma giant Hoffmann-LaRoche, for which the initial investment was led by Sofinnova. When Actelion formed in 1997, it was based in Switzerland, but had global rights to pulmonary medicine products, as well as a deep bench of proven professionals at the helm. “They needed help to set up the corporate infrastructure here [in the US], and we were very instrumental there,” says Healy.

Indeed, in January 2007, when Actelion wanted to increase its product portfolio in the US, it acquired one of Sofinnova's other investments – Belmont, California-based drug company CoTherix – for $420 million. The acquisition expanded Actelion's products portfolio, gave it another product to market, and expanded its employee base. Today, Actelion has aggregate revenues of over $750 million, and is one of the fastest-growing biotechnology companies in the market.

LIFE-AFFIRMING LIQUIDITYRecent private equity-backed biotechnology IPOs in North America,Western Europe and Israel.

BookrunnerFinancial SponsorMerrill Lynch; Morgan StanleyWarburg PincusInvestecHgCapital; Montagu PrivateEquityCarnegieNordic Capital Svenska;HBM BioVenturesRBC Capital Markets; Jefferies &Cerberus PartnersCompanyMerrill Lynch, Morgan StanleyTPG Capital; Perseus-SorosBioPharmaceutical Fund;MorgenthalerBear Stearns; Cowen & CompanyApax PartnersFortis, INGING Parcom Private Equity;Edmond de Rothschild CapitalPartnersSG Corporate & InvestmentAGF Private Equity; Edmond deBankingRothschild Capital PartnersClal FinanceApax PartnersALL EYES ON BIG PHARMA
That said, it will be a long time before Aldagen has anything on the market, if ever. Its earliest potential product, a stem-cell-based therapy to help prevent metabolic disorders and malignancies in children, won't be marketable until 2009 at the earliest – and that's only if all goes well.

But for all its research, Aldagen's Amick understands that a company must aim to hold up its end of the bargain by producing a marketable product. “You're not going to go public and you're not going to be acquired until you can show that you have something,” he says. “Obviously, the private sector is hoping that you're going to be able to show that your product is safe and efficacious in whatever disease area that you're pursuing. And then, at that point, they hope that Big Pharma comes along and takes you out or you go public, and you get a good valuation on the public markets.”

An acquisition or initial public offering (see chart), of course, is the cure for all investment ills. A big payday for investors and a new drug therapy that could alleviate a patient's suffering mean that everybody wins. With Big Pharma groups eager – sometimes even desperate – to replenish their product pipelines, it's no wonder that, for small and large venture funds alike, there's a biotech investment boom.