The biotechnology industry hauled in $2.3 billion worth of venture capital investments during the second quarter of this year—a 32% increase over the prior quarter, according to the newest MoneyTree Report from PricewaterhouseCoopers (PwC) and the National Venture Capital Association (NVCA), with data from Thomson Reuters. The 126 deals struck during the period marked the biggest quarterly investment in biotech since the MoneyTree report first came out in 1995, and it brought the total for the first half to $3.8 billion. That puts the biotech industry well on track to soar past 2014’s total of $6 billion of VC cash raised for the year, which will inevitably spark the question that comes up whenever any industry looks so frothy: Is this a biotech bubble or are the gains sustainable?
To best address that question, it helps to start by looking at some of the trends behind the dollar signs. First of all, after years of shying away from early-stage research, VCs have clearly regained their appetite for taking bets on unproven science. During the quarter, about $1.5 billion of VC cash went into early-stage companies, and $733 million of that went to startups receiving venture money for the first time. “In the biotech space, that’s an all-time high,” says Greg Vlahos, a life science partner at PwC.
Although PwC has not released a report breaking down the numbers in detail—that will come in a couple of weeks—a quick look at the recipients of all this VC largesse shows just how broad the love is for biotech right now. No particular theme jumps out—it’s not as if investors are flocking to cancer immunotherapy, for example, just because there have been several blockbuster drugs in that category. In fact, the No. 1 recipient of VC money during the quarter was Denali Therapeutics, a San Francisco company that brought in $217 million to further its research into neurodegenerative diseases.
Investors are pouring money into early-stage biotech research at unprecedented rates, but risks remain. (Photographer: Freya Ingrid Morales/Bloomberg)
Others in the top 10 include antibiotics developer Melinta Therapeutics, which raised $67 million, and CytomX, a startup that brought in $70 million to advance its pipeline of “probody therapeutics,” antibodies that are engineered to target tumors but leave healthy tissues alone. The top-10 list also includes three companies working on gene therapy—Regenexbio, Dimension Therapeutics and Voyager Therapeutics—which is notable considering that investors bailed out of gene therapy not so long ago because of concerns about toxic side effects.
One big reason the VC market for biotech is so strong is that investors can see a clear and very attractive exit strategy. Take Aduro Biotech, for example. Just weeks after it nabbed a $200 million deal with Novartis to develop immunotherapy treatments for cancer, it staged a $119 million initial public offering in April and saw its market value quickly fly past $1 billion. Just last week, ProNAi Therapeutics raked in $138 million in an IPO and Chiasma raised $101 million. Both companies priced their shares above the expected range and both have seen significant price jumps since then.
The appetite for biotech IPOs isn’t showing any signs of dampening. During the second quarter, there were 14 venture-backed biotech IPOs raising a total of $1.2 billion, according to figures released earlier this month by the NVCA and Thomson Reuters TRI +%. Now other biotechs are jumping into the IPO line, including Israel’s Intec Pharma and EyeGate Pharmaceuticals of Waltham, MA.
The major biotech indices are performing well, too, which shows just how much investors are rewarding companies when the science pays off in the form of drug approvals and positive clinical trial data (see chart below). The Nasdaq Biotechnology Index has risen 59% in the last year, while the NYSE Arca Biotechnology Index is up 62%.
It helps that there have been some notable successes in the sector. Just yesterday, for example, shares of Exelixis flew 50% to $5.88 after it released positive results from a phase 3 trial of its drug Cometriq in patients with kidney cancer.
The potential for such positive payoffs is being reflected in the valuations VCs are assigning to startups, Vlahos says. “We had three companies this quarter that raised $600 million total, so we’re seeing more dollars go into biotech,” he says. “But the number of companies that are being funded is trending towards historical norms, which means we’re seeing bigger rounds of financing at higher valuations.”
So is this a bubble? And if so, how what risk factors might contribute to a burst? These are not such a straight-forward questions to answer, says Erik Gordon, clinical assistant professor at the University of Michigan’s Ross School of Business. One positive difference between this boom and the last major biotech bubble, which happened around 2000, is that investors understand more now about the link between genetic discoveries and marketable therapies, he says. The mapping of the human genome in the early 2000s helped drive the earlier boom—and the resulting bust—because investors assumed it would lead to medical advances much more quickly than it did.
“We thought it was going to be magic,” Gordon says. “Now we’re a little more realistic. We no longer expect that a genetic sequence will tell us everything we need to know.”
Still, Gordon worries that the current boom ignores one big risk that all biotech companies are facing. Even if much of the early-stage research that’s being funded were to pan out, he says, that doesn’t mean insurance companies are going to pay sky-high prices for the resulting drugs. The industry got a hint of that risk last year, when ExpressScripts and other payers balked at the $84,000-per-course price of Gilead’s hepatitis C blockbuster Sovaldi, particularly after similarly effective but less expensive therapies began hitting the market.
“If we have four, five, six immunotherapies, no insurance company is going to pay $100,000 for any of them,” Gordon says. “Our assumptions seem to presume the future will be like the past and we’ll be able to extract huge pricing. Given the number of companies chasing every disease state, we could have more competitors, which will lead to pricing pressure. If there are three choices, you can be sure the price is not going to be $100,000—it’s going to be $15,000.”
Gordon offers a warning to all investors tempted to follow the flock and invest in early-stage science: Biotech is driven by stories, but those stories don’t always have happy endings, as the current valuations might imply they do. “The logic of the science combined with the hope of the people adds up to huge optimism,” he says. “We will continue to see the fruits of [genomics] in terms of coming up with therapeutics that work. But every bit of progress just reveals the next difficult hurdle.”
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