Venture capital (VC) investment in drug development companies has shifted from small to large molecule biologics over the last decade, and while more money is being raised, fewer companies are receiving investments.
In addition, a number of diseases affecting large populations—such as diabetes, psychiatry, gastrointestinal and respiratory—have seen VC funding decline, while investment in rare diseases, metabolic indications and ophthalmology has soared.
Those are the findings of a new report on funding trends and therapeutic areas from the Biotechnology Industry Organization (BIO), Venture Funding of Therapeutic Innovation: A Comprehensive Look at a Decade of Venture Funding of Drug R&D.
In exploring venture financing by disease area and novel R&D over two five-year periods between 2004 and 2013, the report cited that just 27% of biologics R&D was backed by VC in 2004, steadily rising to 50% by 2013.
One big standout: rare disease R&D has seen a large increase in investment over the past decade, in terms of both dollars raised and the number of companies.
“The shift in R&D to rare diseases is really due to these disease having a clear genetic basis,” said Dave Thomas, BIO’s director of industry research analysis. “So pharma is narrowing down the patient population so they know exactly what type of patient is enrolled in a clinical trial.”
BIO reported 78% of U.S. VC investment in drug development was in novel drug R&D, while the remaining 22% was in what BIO labels “drug improvement,” a category that includes capturing, repurposing, reformatting or finding new delivery methods for existing drugs. However, within some specific therapeutic indications, the percentages are reversed, with as much as 70% of investments going toward improving existing drugs rather than to novel R&D.
The report also cited VC firms pulling back from areas seen as having unfavorable or unpredictable regulatory and reimbursement hurdles. “Requiring drug developers in certain chronic disease indications to run larger cardiovascular outcome trials after completing pivotal efficacy studies has contributed to a funding exodus of chronic illnesses that affect large populations,” the report stated.
Over the 10 years examined there was a 21% drop in venture investment from the first five-year period, 2004 to 2008, to the second period, 2009 to 2013. Each period was marked by half of the 2008-2009 financial crisis.
The report, which analyzed data from four VC databases to study trends and investments in specific therapeutic areas and indications, covers $38 billion in VC raised by more than 1,200 drug development companies receiving 2,000 rounds of funding over the 10 years.
Among the key therapeutic findings:
In looking at the highs and lows of VC funding, biotechs had their best year in 2007 with $5 billion, before the financial crisis of 2008. In 2010, biotech VC totaled only $2.8 billion, before climbing back to to $3.6 billion in 2013. Overall, an average of 25 biotechs have received funding each year. Both dollars invested and the number of companies funded have increased over the last decade.
“The industry has not made it all the way back to the heights of 2007, in part, because of an exodus of biotech venture investors,” the report stated. “In fact, it is estimated that there were 40% fewer biopharma venture investors in 2013 than 2007.”
Having fewer VC investors focused on earlystage drug development puts greater financial pressure on startups and small companies, according to Carlos Velez, founder and managing partner of Lacerta Bio, a pharmaceutical business development consultancy that works with small companies and investors.
“With fewer biotech venture capitalists today versus just five years ago, it is simply more difficult for new biotechs to raise money and gain the attention of the remaining biotech VCs,” said Velez. “If there are fewer investors at the front end chasing fewer therapeutic innovators, there will be fewer pharmaceutical buyers at the other end.”
He also said the reason innovative Alzheimer’s research is not catching on with VC investors is a lack of understanding the disease.
“The science is not as well understood compared to many other diseases and there is a lot of confusion about Alzheimer’s,” he said. “No VC wants to take a risk investing in a drug for a disease that is not well understood.”
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