Life Sciences Funding: Thriving Through The Storm

By Rob Wright

To every challenge now facing biotech these days —  every tall wave in an imperfect storm of investment and partnering adversities for small companies — Steven Burrill has an overarching response: get creative. It is quite the opposite of a pat answer; it is a call for companies to persevere in seeking individual solutions, despite the risk-averse and buyers-market conditions they now face among venture capital and Big Pharma investors.

Burrill’s boosterism runs counter to current industry headlines, including some in his own Burrill Report, bemoaning the flight of VC capital and tough-minded partnering practices of pharmaceutical companies. But he insists his point is not to deny that adversity exists, but to believe the same entrepreneurial spirit that gave life to the life sciences industry will save it — and may in fact leave it stronger. Such an evolutionary approach to biotech’s survival is inherently chaotic, imperfect, and, in Burrill’s word, “inefficient.” But in biotech as in biology, evolution is the only way forward.

Grand visions not withstanding, Burrill’s views and solutions match the times, an extended period of unfavorable economics that makes investors jumpy even as it gives them a leg up in deal-making. Everyone in the game seems acutely aware of dysfunctions in the current system of managing risks and funding innovation. But a discussion of broad reforms, aimed at improving the system for everyone’s benefit, may seem like an unaffordable luxury.

Burrill does not dispute that small companies remain at a distinct disadvantage in securing investment and partnering deals, especially to fund late-stage development. And with looming cuts to government funding, basic research seems threatened as well. His view: Harm is inevitable given an already inefficient system, and — pragmatically assuming that VCs and pharma companies will achieve no greater wisdom any time soon — the small companies must find inventive ways around the harm to the benefits beyond. Not only can companies survive the storm, he asserts; they can thrive in it by putting their faces to the wind.

WITH START-UPS AND SMALLER LIFE SCIENCE COMPANIES CAUGHT IN A TOUGHER PARTNERING AND INVESTMENT ENVIRONMENT, IS BIOTECH IN AN UNPRECEDENTED CRISIS, AND IF SO, HOW SERIOUS IS IT?
First, I don’t think we’re in the middle of an unprecedented crisis. There is plenty of money in the world today to finance the companies that should be financed, and the challenge is that it’s highly inefficient to get it. I’m not trying to be naïve. No question, there is complexity in applying for early-stage capital, in going through the capital rounds, in taking companies public, and in the already public companies. But that doesn’t mean you can’t find capital or be creative in the use of capital. It doesn’t mean that the R&D engine is dead or that we are defeated by the global economy and the extent of our public debt. There are still so many diseases that are poorly treated and extraordinary opportunity to take technology and solve many of the unsolved problems. A confluence of technology is changing the nature of some solutions; I can put my iPhone on my chest, and through my shirt, I can get my EKG. There are many possible answers to how healthcare will evolve, how we will diagnose and treat, and how we will move from a dysfunctional sickness-care system to an increasingly effective wellness-care system.

IF I’M STARTING UP OR RUNNING A SMALL COMPANY, WHAT ARE SOME OF THE REALITIES I MUST EXPECT TO DEAL WITH
IN LOOKING FOR INVESTMENT CAPITAL?
We see 100 or more deals a month, and we say no to 99 out of 100. So if you are a small-company executive, you must know this is a business for the tenacious. Of course, I hope I see and fund the right deals. But I don’t see every deal in the world or always have the absolutely perfect deal come to me at the perfect time and price. So efficiency is a big issue, but the lesson is to be tenacious as hell. Capital is clearly more expensive than it’s been, but not too expensive to make deals. You need my capital, and I need your company. Without my capital, your ideas aren’t worth a lot, and without your ideas, my capital isn’t worth a lot. So, the two of us ought to be able to come to terms acceptable to both of us, so that you can start or build a company. Yes, there are intrinsic gaps in the system; it’s a lot easier to get money if you’ve proven efficacy or have proof-of-concept (PoC).

WHAT WOULD BE SOME BETTER VEHICLES FOR FUNDING SMALL OR START-UP LIFE SCIENCES COMPANIES IN THE NEW ENVIRONMENT?
I’ve been doing this for 45 years, and we have always found new vehicles that create pools of capital to meet these gaps when they occur. I’ve looked at each of those challenges as a great opportunity, not a gigantic, unsolvable problem. Now we may go to more consortiums for precompetitive research, we may see the NIH partnering with the private sector to replace the lost support from the public sector, or there may be more tax-based incentives. There are plenty of places around the world that are trying to use their capital to recruit companies to build their economies and create jobs. The big companies are looking increasingly to the academic world to replace NIH funding with corporate funding. Maybe short term we will see more funding of applied research than basic research in the United States, while the Chinese do more basic research. There are still a lot of people who lost Aunt Martha to breast cancer and want to invest in breast cancer research. So we may find the angels, celebrities, and patient advocacy organizations spending a lot more of their money on research for the disease they care about. There are new structures and new capital sources available every day.

BUT ARE THOSE SOURCES SUFFICIENT TO FUND THE MOST PROBLEMATIC PART OF THE BUSINESS — CLINICAL DEVELOPMENT?
Let’s not just assume that we will always be going through a lengthy development process. We’re going to change the way clinical development happens and how we gain access to markets. Maybe we don’t go the FDA route first; we go to the market in Brazil or China or Timbuktu, we get our product revenue from that business, and then we come to the U.S. market after we get more clinical experience. There are lots of ways that we will build companies differently from how we did it 40 years ago, when you could go through the rounds, get PoC, and go public. That is not a model that works today. It doesn’t mean you can’t develop technology. Funding development is more challenging, it puts a reward on the creative, but the game is not over.

IN PUSHING FOR TOUGHER DEAL TERMS,  HAVE BIG PHARMA COMPANIES CREATED  AN ASYMMETRIC SITUATION THAT PUTS  SMALL COMPANIES AT A DISADVANTAGE?
Partnering is different now; the big companies can get it cheap, and you can do some risk-sharing with them. Big Pharma is bifurcating its partnering between early-stage and late-stage opportunities. It is looking for new vehicles for value creation. The big companies can no longer pump money into their internal labs and generate blockbusters, so they will continue to shop through the biotechs as a more efficient vehicle, and that’s good for us. About 10,000 companies out there have announced plans to go public or do a big partnering deal — not all 10,000 companies achieve those goals, but that doesn’t mean that all will fail. Many of the companies will change their business models, and scientists from some of them will win the Nobel prize, and some will discover the cure for cancer, and some may fall through the bottom. But over time, the biotech universe has gotten bigger, not smaller. We have more biotech or life sciences companies today than ever before. To some extent, the power in the value equation is still shifting from the big companies to the small companies.

WHAT ARE SOME NEW BUSINESS MODELS THAT SMALL COMPANIES MIGHT EMPLOY TO DEAL WITH THE TOUGHER FINANCING ENVIRONMENT?
One, companies have to compete more globally. Let’s say you spin your rights to a Brazilian investor who will take those rights and accelerate your commercialization in Brazil but provide you with nondiluted capital to do what you want to do in this country. Two, you can use a model such as an accelerator (i.e. non-VC investors offering a combination of guidance and money in exchange for a small interest in a company) to help determine whether you form the company on day one or after you get past PoC. Maybe there’s a better thing to do than form the company; maybe you sell the program to a big company at that point and monetize your investment in the research. Three, your company should have a balanced team of people with varied backgrounds bringing more micro-creativity into solving each problem. Real innovation and problem-solving tends to happen more in smaller companies, which can rely on the sweat equity of their people because they have some skin in the game. Four, use virtual resources. There may not be enough available capital these days to start with a big office and a bunch of people, so maybe you start with an idea, identify the white-hot risks that you need to eliminate, and find some capital to eliminate the risks — then it’s easier to fund your company because you have created some real value.

AMGEN AND WATSON RECENTLY STRUCK A $400M CANCER BIOSIMILARS PACT. DO SUCH DEALS MEAN THAT, IF BIOTECH CAN’T LICK BIOSIMILARS, IT’S READY TO JOIN THEM?
There is a lot of technology going off patent, and there will be biosimilars. The secret sauce is in how we make them, not necessarily what they do, and we need a clear clinical pathway for getting biosimilars to the marketplace. But I don’t think the big pharma companies or big biotechs will just hand it over to a new industry; they will be creative in hanging onto the products. Even if it leads to unusual alliances, they will find a way to provide biosimilars that meet the market needs, not just wait for some company to charge in and take the market share away. We were just bankers for Samsung on a big deal in biosimilars with Biogen Idec. It would be difficult to imagine that one of the biggest electronics companies in the world could even spell biosimilars, nonetheless be willing to spend $300 million to be in that space. But lots of people outside of the traditional world see the problems and opportunities differently from people in the industry.

CONGRESS IS CUTTING THE NIH AND OTHER FEDERAL HEALTH RESEARCH BUDGETS. IS THERE A DANGER THAT THE UNITED STATES COULD LOSE ITS LEAD IN BIOTECH RESEARCH AND INNOVATION?
It is true that spending on R&D is going up in China and going down in this country. But out of all that turmoil still comes good opportunity, as well as capital to chase that opportunity. We are still going to create great companies with great opportunities. There is no question that this country has benefited from federal spending on health-related research. The “D” that represents innovation in this country has been a function of the “R” that has been funded with public-sector support. A lot of the support flows down to the academic world and local communities, and into technology for building the companies of tomorrow — though I don’t think that people in general correlate their tax dollars with such benefits. We have to invest in our future in order to have a future, and I don’t believe the game is over because the NIH budgets may be cut. Still, in all of the healthcare-reform dialogue, very little of it is correlated to research spending. The way we can solve our healthcare problems is by investing more in research, not less.

ARE YOU HAPPY WITH THE DIRECTION THE FDA IS MOVING UNDER ITS PRESENT LEADERSHIP WITH COMMISSIONER HAMBURG?
Peggy is doing a wonderful job, though she has a dramatically underfunded agency relative to her needs. She has been dealt a tough deck, given what the FDA is expected to do — keep the food supply safe and get all of the right drugs and medical devices onto the market. And of course, there are the big issues such as how to build inside the agency the kind of science it needs to stay in touch with scientific advances on the outside, what role does the FDA play in mobile health and the new generation of diagnosis and diagnostics, and how it can help put personalized medicine into practice. With pharmaco-economics, we’re not just trying to evaluate safety and efficacy but treatment efficiency, to increase value, reduce cost, and improve outcomes. That’s going to make the regulatory role even more challenging.

WHAT IS YOUR APPRAISAL OF THE NEW INITIATIVE BY NIH DIRECTOR FRANCIS COLLINS TO “MOVE BASIC DISCOVERIES INTO THE CLINIC?”
Francis is trying to do some interesting things. He has a lot of bureaucracy around him without a lot of flexibility, and there are those who think he’s doing something that the private sector can do more effectively. But he is trying to find a way to do translational medicine, so I’m not uncomfortable with the experiment to see if he can make some progress in that area.