By Kaouthar Lbiati, MD, Hepion Pharmaceuticals
Investors see several risks associated with investing in startups. For instance, there are financial risks due to the potential financial losses incurred by capital intensive yet unproven technology platforms. Operational and strategic risks are usually inherent in enterprises that experience poor execution due to either inexperienced management teams, an inability to demonstrate a clear competitive advantage, or an ill-defined addressable market, or all these factors together. There is a consensus that companies with steady progress towards catalysts have a higher probability of raising capital and exiting. Among the unpredictable risks, however, are those related to capital markets, because startups are vulnerable to market condition changes that hinder their timely access to funding. Under such circumstances, an early-stage company planning to scale ought to be intentional about capital allocation and carefully navigate the marketplace to secure non-dilutive financing to bring development of its most promising drug candidate to fruition and/or partner with a multinational organization in either co-development, licensing, or M&A deals. In this article, I share six key focus areas within the cell therapy startup framework for scalability.
1. Data Is Queen: Financing Is Contingent On Catalysts And Platform Differentiation
Between 2020 and 2021, the market for early-stage off-the-shelf allogeneic cell therapies was booming because of their potential for greater patient access and cost-effectiveness compared with the first generation of cell therapies called autologous cell therapies. However, tumor targets, such as CD19 in hematological malignancies, rapidly resulted in a crowded landscape.
Since 2021, U.S.-based cell therapy and gene editing companies saw their average enterprise values (EV) sink by (–88%) and (–77%), respectively, and since last June, EV values reached low levels of (–22%) and (–13%) respectively. Unlike in 2020 and 2021, today’s financing is contingent on clinical catalysts and platform differentiation. For cell therapy startups, opportunities may lie outside of oncology; perhaps in auto-immune and neurological diseases. For instance, the focus of most of the ongoing allogeneic iPSC-based cell therapy clinical trials is on ophthalmic, neurological, and cardiovascular diseases. Together, these three indications account for (~52%) of iPSC-based clinical studies. However, allogeneic iPSC technology has yet to reach the clinical investigational phase on a broader scale and overcome technical challenges such as immune rejection of the transplant, which is mitigated, as of today, by immune suppression.
The consensus among investors and analysts is that only a steady progress toward clinical and commercial catalysts has the potential to change the observed financial market fluctuations in the areas of cell therapy and gene editing.
2. De-risking Strategies Are Agile Strategies
In a bear financial market, the focus for startups ought to be on assets with the highest probabilities of success. Preclinical and/or artificial intelligence models are becoming invaluable to inform and adapt product strategy and to stage-gate decision-making processes. Moreover, past development and business strategies may no longer be relevant in today’s reality. In 2021 and 2022, the “China strategy” gained traction and was pursued by some renown biotech but also younger start-up (s) either for market expansion and/or cost-savings’ development purposes. In June 2021, Fosun Pharmaceuticals and Kite/Gilead paved the way for cellular therapies, with the approval of Yescarta in China following a joint venture between Kite/Gilead and Fosun Pharmaceuticals. JV was a well-established business development model between the USA and China. This strategy may no longer be relevant given, for example, the ambiguity and lack of predictability of FDA approvals whenever clinical trials are conducted by biotech companies and U.S.-based start-ups in China. The opportunity/cost relative to clinical development in China became too expensive for U.S.-based companies. And the lack of cost-effective development alternatives results for early-stage startups in an increase in their cash burn.
3. Capital Allocation Strategies: Supply Chain And Chemistry, Manufacturing, And Controls (CMC)
The issue of scalability is complex, and the optimization of automation processes, analytics, CMC, and supply chain are capital-intensive. Although distribution methods differ between autologous and allogeneic cell therapies, preserving the viability and functionality of such therapies before they safely reach patients are common concerns shared by manufacturers of both autologous and allogeneic cell therapies. Tech mogul Peter Thiel’s quote resonates: “It is better to think of distribution as something essential to the design of a product. Superior distribution by itself can create monopoly even with no product differentiation.” We could perhaps extrapolate the quote to cell therapy product strategies.
Capital allocation for manufacturing should also be carefully considered by an early-stage cell therapy startup as options may vary from partnering with a CDMO to manufacturing in-house. This decision is in essence strategic, and sometimes opportunistic, and the choice between these two options often depends on your company’s access to well-trained talent and in other cases is driven by your company’s appetite for risk and partnerships.
For example, Century and Sana Biotechnology are two public clinical-stage companies developing allogeneic iPSC-based cell therapies. Century was founded in 2018 with a strategic partnership between Versant and FCDI, a subsidiary of FUJIFILM Corporation. Century has exclusive access to FCDI’s leading immune effector cell differentiation protocols and intellectual property to manufacture GMP-grade immune effector cells at commercial scale. Under the terms of the iPSC platform license agreement, FCDI will serve as the primary manufacturer of Century’s cellular products.
Most recently, Sana Biotechnology decided to move its 80,000-square-foot in-house manufacturing facility from Fremont, CA, to Bothell, MA. The new facility will be completed and fully operational by 2025. This strategic move was part of a broader initiative to save $100 million in manufacturing costs, thus extending the company’s cash runway into 2025 and enabling development of the company’s leading programs.
4. The Nuances Around Gene Editing Technology Deals And Intellectual Property
For cell therapy companies, gene editing partnerships are on top of the list of “must-have” deals. Genetic editing is critical to enhance antigen specificity, to overcome the hurdles related to cell persistence and cytotoxicity, and for host-immune evasion modification. Gene editing can be accomplished in-house if a company has built the necessary capabilities internally and attracted the appropriate talent. Alternatively, gene editing could be outsourced through research agreements or licensed to another entity in exchange for an equity stake and milestones linked to the medicinal product’s development, approval, and commercialization.
There are a variety of questions related to the intellectual property protecting gene editing technologies to consider. I will discuss CRISPR’s surrogate licensing model. The institution where CRISPR was first discovered and its principal researchers and holders of the CRISPR patent have already capitalized on the huge market for this technology by entering into a series of license agreements with commercial enterprises through a surrogate licensing model that brings royalties back to both the academic institutions and the “surrogate” companies they formed. Giving one surrogate company an exclusive right to use CRISPR to develop human therapies targeting every segment of the human genome has the potential to limit the creation of potentially beneficial therapies. One way for a company to strengthen its intellectual property when licensing a gene editing technology is to target a distinct genome segment.
5. Cash Is King: The Hard Financial Metrics
A clean balance sheet has better leverage with investors when raising capital. The hard metrics investors care about are cash burn, market capitalization, share price, and volume of traded shares.1
- Cash burn/market cap ratio: Trading with less than two years’ worth of cash and having a burn/market cap ratio of 25% and above are obstacles to raising money.
- Trading at more than $5 share price and having a consistent volume of traded shares over a period is necessary to fundraise.
- Valuation: Investors do not see significant returns from acquisitions of companies valued at less than $200 million. For instance, investors expect to generate low- to mid-single-digit annual returns from an M&A on a portfolio of $200 million to $1 billion market cap companies.
6. Exit: M&A Or Business Development & Licensing (BD&L) Deals
Since 2014, 98% of the dollars spent by biopharma acquirers went to development stage companies owned by at least one or more specialist investor. Moreover, companies with one deal are valued at more than 30% of their market capitalization, outperform their peers, and achieve on average 3% excess total returns to shareholders.1
In today’s reality, even as valuations dramatically come down, pharma may not be willing to spend in acquisitions of early-stage cell therapy companies particularly around iPSC and autologous regulatory (T reg) cell therapies and would rather prefer licensing deals. For example, Quell, the autologous regulatory T cell (Treg) startup for autoimmune diseases, was founded in 2019 by six immunologists from King’s College London, University College London, and Hannover Medical School. Before the AstraZeneca deal earlier this summer (June), London-based Quell had raised about $220 million from a group of investors led by Syncona, a company focusing on cell and gene therapy startups, which now owns 33.7% of Quell. Syncona’s valuation of its stake implies a total value for Quell of around $300 million.
Under the exclusive option and license agreement, Quell will receive $85 million up front from AstraZeneca, which comprises a predominant cash payment and an equity investment. Quell is also eligible to receive over $2 billion for further development and commercialization milestones, if successful, plus tiered royalties.
One thing to keep in mind is that all cell therapy startups are not created equal. And happy endings, as in Quell’s case, are reserved for only a few. Presently, conditions in capital markets for biotech are tougher than in 2021-2022. Investors are reluctant to take risks without transformative data, a well differentiated platform, and a solid team with a track record of at least a success story. Meanwhile, companies continue to struggle to extend their cash runways until the next inflection point and to navigate a stormy fourth quarter of 2023 as they hope for a blue sky and a happier 2024.
- Peter Kolchinsky, Semper Maior: Time to Reboot Biotech. 2023. Available at https://racap.docsend.com/view/724854hsqs6crxxy.
About The Author:
Kaouthar Lbiati, MD, MSc, is a biopharma executive who uses her extensive clinical and business background to assist mid-size biopharmaceutical organizations in achieving their strategic milestones and increasing shareholder value. In 2020, she joined an early-stage company specializing in harnessing the power of iPSC-derived NK cell therapy and biologics for the treatment of cancer: Cytovia Therapeutics. Since 2022 and 2023, Lbiati has served as a director on the Board of two public North American biotech companies: Hepion Pharma and Theralase Technology. You can connect with her on LinkedIn.