Life Science Venture
Capital in Turbulent Times
Douglas Fambrough, Ph.D.
Oxford Bioscience Partners
Swedish-American Life Sciences Summit
Stockholm, Sweden
August 21, 2008
Oxford Bioscience Partners
•
Leader and innovator in life science VC
•
Five funds totaling $1B of committed capital
•
Based in Boston, MA
•
Proven investment performance
•
Team of 5 general partners and 5 additional investment professionals
•
Investing in biopharma, medical devices, life science research tools, and
select life science opportunities outside of healthcare
•
Particular strength in innovative life science technologies such as genomics,
RNAi, bioenergy, etc.
Biotech has come of age after 2000
• Pharma is increasingly
dependent on these drugs
• A spate marketed biologic
acquisitions:
–
2007: AZ - MedImmune
–
2008: Roche - Genentech
–
2008: BMS - ImClone
• Biotech is fundamental the
pharmaceutical industry
$ billion
• Biologics are some of the
industry’s biggest sellers
2007 WW Revenue of selected biologics
approved in the last decade
Big Pharma is turning into Big BioPharma
Pfizer is committed to establishing itself as a leader in biotherapeutics…
Pfizer Annual Report 2007
…Wyeth [is] the world’s fourth largest biotechnology company by revenue
Wyeth Annual Report 2007
We were one of the first pharmaceutical companies to get involved in biotechnology
in the 1980s through our relationship with Genentech. Biopharmaceuticals now account
for 55% of our revenue
Roche Annual Report 2007
The consolidation of all our biologics capabilities from AstraZeneca, Cambridge Antibody
Technology (CAT) and MedImmune into one unit immediately creates one of the world’s
largest biologics pipelines and establishes us as a leader in biotechnology among
our pharmaceutical peers.”
AstraZeneca Annual Report 2007
% Of Revenue At Risk from Patent Expirations 2007-2011
Tremendous pressure on Pharma cash flows
Despite the centrality of biotechnology to
the pharmaceutical industry, the broader
biotech community is struggling
Global Environment
• Credit crunch and
recession crimping markets
• Pharma somewhat
sheltered, but biotechs
caught in market retreat
• VC also affected,
fundraising down 30%
• Rising health care costs
suggest future pressures
on industry
• Regulators running scared
Healthcare spending
expected to reach $4.3
Trillion by 2016!
Healthcare spending was
$2.3 trillion in 2007
Global Environment – It’s Not All Bad
• Potential revenue growth in
developing markets
• Growing need for biotech
outside of healthcare
• Biologic technologies
continue to mature
• Genomics moving out of
basic research and toward
medical practice
Healthcare spending
expected to reach $4.3
Trillion by 2016!
Healthcare spending was
$2.3 trillion in 2007
A Transition in the BioPharma Venture Capital Process
Focus on the exit environment
The “good old days”:
VC in the 1990s
After the bubble:
VC in the 2000s
• Most IPOs carried a nice
premium
• IPOs are rarer, require more
maturity, and are poorly priced
• Many non-specialist investors
(including retail) providing
higher prices and liquidity
• The rise of the buyside biotech
specialist; not an active trader,
risk sensitive
• Sell-side analysts well
compensated and effective
• Spitzer settlement (2002) has
led to a big decline in sell-side
analysis
How bad is it out there?
“We threw an IPO and nobody came”
Wall Street Journal
2002
Number of Nasdaq Biotech IPOs 2001-2008
Birth of the $7 special
A modest number of IPOs mid-decade, now back in the deep-freeze
Capital Raised Prior to IPO vs IPO Pre-Money
$mn
Premiums Have Declined Since 2001
Number of Stocks
Post-IPO Performance: Current Price vs Offering Price
Few stocks have shown sustained value creation
Is the IPO Decline Temporary and Permanent?
Decline of retail interest in the sector
Trading volumes are meager
Could change
Rise of biopharma specialist investors
Biotech Value Fund, MPM Bioequities, etc.
Permanent
Acquisition and dismantling of specialist sell-side investment banks
Alex Brown, H&Q, Robertson Stephens
Permanent
Tightened regulatory environment has increased risk
More clinical ‘implosions’
Could change
So what is a VC to do?
An Existentialist Market?
Or Shakespeare?
“No Exit”
“As You Like It”
“The Myth of Sisyphus”
“Much Ado About Nothing”
“Waiting for Godot”
“All’s Well That Ends Well”
High Value M&A Deals Becoming A Favored Route For Exit
M&A deal rate seems fairly stable through current market crisis
Capital Raised Prior to M&A vs M&A Value
Pharma Innovation Trends Suggest M&A Will Continue
“Closed Loop”
Innovation Area
Late Stage Licensing
and Mega Merger
Area
% Sales From Internally Discovered Drugs
Top 10 Pharmaceutical Companies in 2006
Source: Defined Health
“Open Loop”
Innovation Area
Big Pharma Internalizing Biotech
Pfizer is organizing their new Biotherapeutics and Bioinnovation
Center around biotech acquisitions:
BBC is run out of Rinat in SSF
CovX operates as a separate facility in SD
Coley talent running Cambridge RTC facility
“We will preserve the unique cultures of these biotherapeutic organizations
… [and] get out of their way.”
-- Corey Goodman
GSK CEDDs Structure: Sirtris acquisition feeds a growing
Cambridge-based metabolic group
“The CEDDS create the spirit of a small R&D-led team within a very large
pharmaceutical organization and allow us to be more nimble, and therefore
more productive, in our approach.”
GSK Annual Report 2007
Planning an M&A is hard to do
What’s A Venture Capitalist To Do?
• Fund Companies Attractive to Acquirers
–
–
–
–
–
Large market focus
Biologics > Small Molecules
“Big Pharma” programs, not “Wall Street” programs
Compelling mechanism of action: HSP90, DPP4, b-catenin
Proprietary Innovation
• North America and Europe remain the center of pharma innovation
• Capital Efficiency
– Exit values rarely >$500 million; less investment means more ROI
– Outsourcing to save costs: China, India
• Biologics Platform Companies
– Propriety technology with unique/scarce capability
– Compelling commercial opportunity enables by the technology
– Compelling team that will transfer the technology
• Moving Genomics from Basic Research to Medical
Science
Sirna Therapeutics Case Study
Sirna Illustrated the ‘three-legged stool’
model for successful platform investing
Launched in spring ’03
First partnership late ‘05
Acquired for $1.1 billion in late ‘06
Proprietary biologics platform – RNA Interference
RNAi opens up new targets to drug development
Commercially compelling programs – HCV, diabetes
Unpartnered programs were pre-clinical
Strong team to transfer technology
Background in antisense, ribozymes and translational medicine
The Plummeting Cost of Genetic Info
Creates new business opportunities
Mol diagnostics, risk assessment, non-healthcare applications
Requires a new generation of tools
Sequencing, gene expression, instruments for non-specialists
The cost of one base of DNA, in dollars, by year
100
As costs continue to
decline, genomic
information will become
increasingly important
to medical practice.
Eventually everyone
will have their genome
sequenced.
10
1
0.1
0.01
0.001
0.0001
1E-05
1E-06
1985
1990
1995
2000
2005
Genomic Medical Record
2010
2015
Where is Genomics Going?
The $1000 Genome (or less!)
Third-gen sequencers
Treating the Genome
Drugs that directly edit the
genomic program to cure
diseased cells
The Genomic Medical Record
The most fundamental information
Genomic Engineering and
Meta-Genomics
• Designer microbes
• Environmental applications
Challenging Areas for VCs
Whenever a small company bears the risk of late-stage
clinical success, the numbers will be against them
Taking clinical
programs through
phase III data exposes
VC investors to the full
integrated risk of drug
development
Challenging Areas for VCs
• Whenever a small company bears the risk of late-stage clinical
success, the numbers will be against them
– Risk-share deals that generate a strong IPO story often set a
company up for a devastating clinical failure
– Later stage clinical development forces a company is ever larger
and more dilutive rounds of financing
• In-licensing, re-purposing, NRDO models, etc.
– Seldom are these programs sought for acquisition,
– The clinical track record is poor relative the promise of “de-risked
programs” that this model assumes
• Pharma-specific research tools, software, etc
– Pharma wants these tools but won’t pay for them
Life Science Venture
Capital in Turbulent Times
Douglas Fambrough, Ph.D.
Oxford Bioscience Partners
Swedish-American Life Sciences Summit
Stockholm, Sweden
August 21, 2008