Biotech entrepreneurs break the mould

Pharma’s appetite for early-stage products is transforming the landscape of biotechnology. The traditional model of seed funding followed by three rounds of venture capital and an initial public offering has broken.

“Now companies are being set up with a trade sale as the exit, says biotech entrepreneur Andy Richards. Unlike venture-backed counterparts, such companies do not need to build a profile with the investment community or the industry in general. “There’s an awful lot more venture activity going on in start up and early stage companies. But many deals are being done and not being announced, or the amount is not being announced,” Richards told delegates at the BioPartnering Europe conference held in London last week.

Goodbye pure products, hello platforms

In the past year there has been a switch of interest away from pure product companies and back to platform technologies that have the power to generate pipelines. “There are lots of technologies around and there is attractive value, but when setting up companies for trade sales it is the management team that is the most important ingredient and that is what investors are backing,” believes Richards.

While pharma might prefer later-stage products the competition is so intense that it is buying out earlier stage assets also. “This has changed the whole game,” said Richards.

Richards is a director of Vectura plc, Summit plc, Biowisdom, Theradeas, Pharmakodex, Cancer Research Technology (the commercialisation arm of Cancer Research UK) and Babraham Bioscience Technology, and was involved in Arakis, Geneservice, Cambridge Biotechnology Ltd, Amedis Pharmaceuticals, Sirus Pharmaceuticals and Daniolabs all of which were recently sold. He believes the industry has been slow in coming to terms with how to set up and run companies that are being groomed for sale. “If you want to do a trade sale you don’t want lots of partnering and licensing deals: an unencumbered portfolio is more attractive to an acquiring company.”

The slippery slope

This highlights the slippery slope to becoming a fashion victim in an industry driven by decade-long development cycles believes Sam Fazeli, managing director of Piper Jaffray Ltd. “You are wrong whatever you do because you are responding to today’s fashion. Three years ago you needed deals, now you don’t want to be encumbered.”

One positive effect of the focus on trade sales is that management teams no longer have to spend all their time fundraising, but can devote themselves to grooming the business.

At the same time share structures have flattened.

The UK now has a huge tail of very small companies, funded by business angels or publicly funded venture funds, which were set up with the ambition of floating on London’s Alternative Investment Market. In the past two years joining AIM has been a way of funding the next stage of corporate development, but has not represented an exit.

“It will be interesting to see if companies financed that way will find a path through the corporate funding continuum,” said Richards. He was referring in particular, to all the companies brought to AIM by the UK’s band of quoted technology commercialisation specialists such as Biofusion plc and IP Group plc.

These succeeded in getting onto AIM early in their lives, having attracted fairly small amounts of venture capital, and raised small sums on listing too. “I think we will see consolidation and M&A in the quoted commercialisation sector, said Richards. “If I were a public investor I would start getting very activist.”

Richards suggested that the credit crunch will be good for biotech. “It will result in people reassessing risk. They will go off debt and as biotech is not debt-laden, it will become more popular.”