Where Einstein Meets Edison

13th Annual MIT Venture Capital Conference—Life Sciences Panel

13th Annual MIT Venture Capital Conference—Life Sciences Panel

Mar 15, 2011


November 2010, Charles Hotel, Cambridge, MA

Start-up ventures within the biotech and the life sciences face perennial challenges in the struggle to reach early stage viability. These challenges, as well as potential solutions, were highlighted recently at the 13th Annual MIT Venture Capital Conference, held at the Charles Hotel in Cambridge, Massachusetts, USA.

The conference featured a fireside chat with Revolution Chairman and CEO, Steve Case; a keynote address by Brian McAndrews, Managing Director at Madrona Venture Group; several panels in which investors, entrepreneurs, and industry experts identified and discussed some of the key issues and hot topics relating to early stage ventures across an array of sectors.  Featured sectors included healthcare, mobile internet/cloud computing, energy, emerging markets and social venture capital.   

The healthcare panel, “Early-stage Life Science Investment: Strategies in a Changing Environment”, addressed some of the challenges specific to the life sciences and was led by a group of auspicious topic experts, including acting executives, seasoned investors, and expert lawyers.  In attendance were the following:

Ellen Baron, PhD (Moderator)

Partner, Oxford Bioscience Partners

Mark Carbeau

President and CEO, Polyremedy

Alan Crane

General Partner, Polaris Venture Partners

Thomas C. Meyer

Partner, Brown Rudnick

Henry Skinner, PhD

Managing Director, Novartis Venture Funds

Geeta Vemuri, PhD

Partner, Quaker BioVentures

Moderator, Ellen Baron PhD, focused the discussion on how best to capitalise on the next generation of life science technologies.  Specifically, how are venture investors adapting their strategies to succeed, given the present economic climate? The panel was unanimous in citing increasingly stringent regulatory hurdles, legislative reforms (e.g. US healthcare reform legislation, 2010)1, renewed competition from biosimilars2, and diminished access to early stage funding, as key challenges for the industry.  

Moreover, the recent global economic downturn has had deleterious consequences for the initial public offering (IPO) market.  Witness the lacklustre performance of the 17 new biotech issues that debuted on U.S. public markets in 2010, which, in aggregate, did so at below projected market valuations and, therefore, generated negative returns as equity investments, on the order of -13%, over the course of the year. This situation has conjured a perceived lack of exits for venture investments and has created the need for significant cash infusions on the part of VC funds.  This bridge financing, designed to maintain investment viability until the public equity markets rebound, can be costly both in terms of debt and equity.

As a consequence of these conditions, the panellists noted that technology licensing deals and strategic partnerships with the pharmaceutical sector trumped both IPOs and overt cash acquisitions, in 2010.  Despite this shift and the dismal performance of recent IPOs, there are signs that things may be changing.  As many as 25 to 30 IPOs are projected for 2011, perhaps reflecting a warmer climate for public financing on the horizon.

Next, the panel spent some time deliberating the possible reasons why venture capital investments in biotech start-ups appear to be trending increasingly toward companies in the later stages of development. As a General Partner at Oxford Bioscience Partners, Baron charted the dramatic shifts that have occurred over the last 10 years.  She has observed a change in the identity of the key players involved in early stage seed and first round venture capital financing for biotech and med tech companies alike.  Increasingly, patient advocate groups and large non-profit organisations, for example, are providing early stage funding, previously the domain of seed and series A venture financing.

While the kinetics of this trend may reflect the poor underlying economic environment, this may also partly suggest a fundamental realignment within the venture community towards a more risk aversive investment ethos, as exemplified by renewed interest in genuinely disruptive technologies and novel markets.  In terms of traditional VC financing, the panel noted that start-up activity within the sector remains strong, and venture-financing writ large appears buoyant, albeit shifted to seemingly lower risk opportunities.  The panel agreed that opportunities abound, largely as a result of widespread efforts to increase access to healthcare, which is driving market expansion to encompass patient populations across a variety of underserved markets. There is renewed interest, for example, in the geriatric patient market as well as the stratification of patient populations and the sub-phenotyping of disease.  Interestingly, these trends resonate more broadly with the excitement around the subject of personalised medicine, which seeks to capitalise on the tremendous insights gleaned from the genomic revolution.

Despite genuine concern with respect to myriad new challenges and the uncertainties surrounding a changing regulatory landscape, the panel remained generally upbeat, expressing cautious optimism.  They underscored the paramount importance of demonstrating safety, efficacy, and cost effectiveness, as measured in dollars per quality-adjusted life years (QALYs), in new treatments and technologies.  Examples of this include the recent restrictions placed on GSK’s Avandia as a result of studies indicating an association with cardiac toxicity and Pfizer’s voluntary withdrawal of Mylotarg (gemtuzumab ozogamicin) from the U.S. market, a product previously intended for use in patients with acute myeloid leukemia (AML), as a result of new concerns about product safety and an overarching failure to demonstrate clinical benefit to patients.  Increasingly, new drug compounds and technologies need to demonstrate disruption and true innovation in order to obtain reimbursement from third-party payers, and to a large extent, venture investors are responding accordingly by enforcing more stringent funding criteria.  Investors are keen to emphasize disruption over differentiation and keen also to see that new therapies address genuine, unmet clinical needs rather than offer incremental advances over existing treatments.

Henry Skinner PhD, Managing Director at Novartis Venture Fund, best encapsulated this investment ethos in reiterating his renewed emphasis on portfolio diversification. Skinner noted that particularly as pertains to metabolic and cardiovascular disease, there are robust indications that the low hanging fruit have already been picked.  Generically available treatments, such as metformin for type 2 diabetes, offer proven efficacy and low risk profiles, at affordable cost, and will therefore be difficult to supplant in existing treatment algorithms.  Skinner is, therefore, eschewing “me-too” drugs as candidates for prospective investments and instead looking elsewhere for treatments grounded in new technologies or targeting novel pathways.

Where, then, might the greatest opportunities for biotech investors now lie?

In the short term, the net effect of these trends has been a reactionary shift away from traditional biotech and medical devices and, consequently, a renewed interest in consumer-oriented businesses, such as health IT infrastructure and community healthcare (e.g. home health, alternative site delivery).  Mark Carbeau, President and CEO of Polyremedy, echoed this point.  He operates a global medical technology company, focused on improving wound care through breakthrough technology, and described his experiences of early success, as the result of having elected to focus initially on home care applications. More broadly, this trend reflects, to a large extent, the decreased barriers to entry into these consumer markets as well as the lower associated risk vis-à-vis product licensing and regulatory approval.  Nevertheless, it is through this shift towards more consumer-oriented businesses, that we may see profound improvements both in clinical outcomes and with respect to the underlying efficiency of healthcare delivery.

And yet Alan Crane, General Partner at Polaris Venture Partners, emphasized it is not all gloom and doom for traditional biotech.  Sales of biologics in the US continued to rise, posting a 3% gain last year, albeit at a rate lower than previously observed.  While the reasons for this observation are complex and include anticipated one-off manufacturing lapses associated with enzyme replacement therapies at Genzyme (e.g. Myozyme, Fabrazyme (agalsidase beta), and Cerezyme (imiglucerase)), experts are largely in agreement that in 2010 US sales of biologics will match the approximately US$48 billion in total sales seen in 2009.  Moreover, hormones such as insulin analogs are likely to replace growth factors in 2010 as the second-best-selling class of biologics, that is should present growth rates persist and the slowdown in sales of both erythropoietin-stimulating factors (ESFs) and colony-stimulating factors (CSFs) continue unabated.  Moreover, unlike big pharma, biotech continues to innovate, and several promising new products are anticipated to reach the market in the forthcoming years, including novel monoclonal antibodies and new technologies such as stapled peptides (e.g. Aileron, newly backed by Roche).

So who is funding the future of biotech?  In 2010, US biotech raised US$30 billion through partnerships with large cap pharmaceuticals and big biotech—a figure only roughly 10% less than the record total seen the previous year3—largely the result of the steep patent cliffs and dwindling pipelines, now threatening large cap pharmaceuticals.  As an illustration of the scale of the problem, the impending patent cliff is anticipated to erode US$78 billion in worldwide sales from branded drugs that are facing patent expiry between 2010 and 2014 (e.g. Lipitor (atorvastatin; Pfizer), Plavix (clopidogrel; Sanofi–Aventis/Bristol-Myers Squibb) and Zyprexa (olanzapine; Eli Lilly & Company)) and nearly half of this is anticipated to occur as a result of patent expirations in 20114.

It is widely anticipated, therefore, that biotech companies will continue to benefit from a willingness on the part of large cap pharmaceuticals and biotech to pay for innovation through acquisition.  Undoubtedly, we will see renewed competition to acquire companies with advanced product pipelines, as well as attempts to corner segments of the market through exclusive technology licensing deals.  This view has since been underscored by Steven Burrill, CEO at Burrill & Company, and the wider assessment of a generally upbeat sentiment at the annual J.P.Morgan Healthcare Conference in San Francisco earlier this year.  The recent acquisition of Genzyme on the part of Sanofi-Aventis for US$20.1 billion after a long and protracted courtship also speaks to continued momentum in the sector, in this respect.

In view of the relative dearth of new funds, VC biotech investors with capital to invest are well placed to take advantage of the diminished valuations of early stage corporates, and there are certainly rich pickings, as pertains to platform technologies with the potential to revolutionize entire industries, such as advances in synthetic biology and alternative fuels, and particularly as these translate into novel products.

Watch this space…



1              Fox, J. L. Biotechs adjust to new landscape as US healthcare reform takes off. Nature Biotechnology 28, 385-386, doi:10.1038/nbt0510-385 (2010). 

2              2010 in reflection. Nature Reviews Drug Discovery 10, 7-9, doi:10.1038/nrd3354 (2011).

3              Kessel, M. The problems with today’s pharmaceutical business-an outsider’s view. Nature Biotechnology 29, 27-33, doi:10.1038/nbt.1748 (2011).

4              Harrison, C. The patent cliff steepens. Nature Reviews Drug Discovery 10, 12-13, doi:10.1038/nrd3356 (2011).