Surviving in biotech’s new normal: 5 tips from industry VCs and CEOs

Market downturns take a toll. For many young biotechnology companies, the past few years have been a lesson in survival, as the evaporation of the sector’s pandemic-era boom brought cutbacks to the investment they so desperately need.

“Platform” companies, so called for their focus on broad drugmaking technologies rather than one or two specific medicines, felt this shakeout acutely. Once in vogue, they now seem to be somewhat out of favor among venture capitalists, who are looking to product-focused startups as safer bets.

“I think it is unequivocal that there has been a shift,” David Yang, an investor at Lux Capital, said during an event hosted Wednesday by BioPharma Dive.

To Michael Gilman, a biotech veteran who as CEO of Arrakis Therapeutics has built an R&D platform around RNA-targeting pills, the debate between product- versus platform-focused companies comes down to risk.

“When people are feeling particularly risk averse, they gravitate towards simpler, lower-risk stories,” he said. “When the market is feeling frisky and risky, then these big, ambitious platform stories tend to resonate.”

Executives and investors who spoke Wednesday on two panels at BioPharma Dive’s event discussed how platform companies are changing, and provided tips for startups navigating biotech’s new normal. Here are five:

Drug platforms can still work, but need focus

Platform companies are still launching and getting funding. A number of high-profile startups to emerge this year boast drugmaking technology they claim can create troves of better medicines.

Yet such firms may now face greater pressure to identify and pursue a lead drug program earlier, as well as to target a meaningful commercial opportunity.

“You cannot build a platform in a vacuum without thinking about the lead indication,” said Yang. “[Previously] a lot of platform companies would often take the strategy of starting with a smaller indication to de-risk their technology. Then go after a higher value one. But I don’t think there is room for the former strategy as much anymore.”

Abbie Celniker, a partner at Third Rock Ventures with decades of biotech experience, has also observed a shift in how platform companies are financed.

“You can’t take up so much capital such that your entire Series A goes toward your platform. That’s how we used to think about things,” said Celniker. “Nowadays you can’t use venture backing to build a big platform. It has to be offset with pharma support. And you have to have that clear line of sight to a product.”

Deals with pharmaceutical companies have been how Gilman has sustained Arrakis, which is allied with Roche and Amgen. “There are a million ways that platform companies get killed in down market cycles,” he said. “For us, the key has been pharma partnerships. And that’s really what kept us going through a long period of time in which it would have been very challenging for us to raise equity capital.”

Arrakis, Gilman noted, hasn’t had to raise equity capital in more than five years, a period of time that includes biotech’s pandemic rise as well as its subsequent downturn.

Series A rounds need to deliver “value inflection”

A Series A round is often how young biotechs introduce themselves to the world, a financing that’s typically accompanied by an announcement outlining their drug development ambitions. But in the current funding environment, appropriately managing that initial pool of money has become more vital.

Previously, a Series A might help conduct the very early stage research companies use to “de-risk” their technology. Now, that’s no longer sufficient, according to Celniker.

“Your Series A has to get you to a major inflection point,” Celniker said. “It’not enough just to discharge risk anymore.”

Seed rounds are larger now, according to Celniker, allowing startups to gather the initial scraps of data indicating their approach may have merit before they raise their first principal round. As a result, those rounds are trending larger.

“You’re really betting on the A to get you to a value infection point that previously we really didn’t necessarily demand of our Series A investments,” said Celniker. “So it’s not just that they’re bigger, there actually is substantial de-risking before the Series A’s are being raised.”

One consequence? Companies may be under greater pressure to deliver good results early on. 

“If you’ve raised hundreds of millions of dollars in that first round, it just dramatically raises the bar for what you need to actually accomplish to realize value for investors in that round,” said Gilman.

Capital efficient doesn’t mean capital cheap …

Downturns focus investor attention on companies’ burn rates, or how quickly they’re spending the funding they’ve raised previously. Such scrutiny may mean prioritizing certain projects over others, deciding to hold off on certain investments or, if a company gets particularly pinched, cutting staff and research.

But Nina Kjellson, a general partner at Canaan, cautioned that such capital efficiency “does not mean capital cheap,” but rather becoming “capital smart.”

“This is a place where we are finding some tensions between management and boards or companies and syndicates,” she said. “Maybe you have a pivotal study that’s going to run for two years and, in that time, your investors want you to sit tight and wait for data, be really capital efficient. Don’t grow, don’t hire.”

“But perhaps the best value creation for that program is to do a couple of supportive Phase 2 [studies] to invest in [chemistry, manufacturing and controls] efficiency, or maybe even in formulation,” she added.

Lux’s Yang, speaking on the same panel as Kjellson, made a similar point, arguing that capital inefficiency isn’t just decisions like spending $100 million on developing a platform. Instead, it can creep in in smaller ways, such as by hitting delays over things like manufacturing when a company didn’t plan ahead early enough.

“Making sure you have the clarity and paranoia to consider all scenarios, I think, has been key for companies to be actually capital efficient,” he said.

… but cost discipline can still be helpful

The past two years have been difficult for biotech startups. Many have been forced to reshuffle their operations or cut jobs to stay afloat.

For Kevin Marks, the CEO of Delphia Therapeutics, the moment recalls a vintner’s saying that “struggling vines make great wines.”

“The idea is that when it’s tough is actually when the good stuff gets done,” Marks said. Biotechs conserving cash must focus their attention and resources on the medicines that will matter most. Those kinds of choices can position a company well for the future.

“If you don’t have enough money to do everything that you dream about doing, then you’re forced to make some very careful decisions about what to invest in and what not to invest in, and those are the kinds of decisions that make or break companies,” said Gilman. “If you’re not really under a lot of pressure to make those decisions, you don’t make them.”

Conversely, companies that do manage to raise a lot of money can risk wasteful spending. Ken Song, the CEO of Candid Therapeutics, which just secured $370 million in funding, recalled raising a far smaller sum at his first company.

“We cared about every single penny and it just created a certain mindset,” he said. “Raising hundreds of millions of dollars, you want to make sure that you’re not all of a sudden behaving and acting like a large biotech.”

R&D hypotheses should regularly reassessed

Some of the best-known biotech companies didn’t find their breakthrough where they first looked. Instead, firms like Vertex and Regeneron Pharmaceuticals succeeded only after they pivoted from their original drug development plans.

The lesson, according to Marks, is that companies must always be reassessing their hypotheses as they go.

“You start with an idea for a target or program based on some data or insights about the clinical opportunity,” said Marks. “But as you go, that information changes and matures. You need to ask yourself again and again and again: Is this still the best thing to do?”

Marks previously worked at Agios Pharmaceuticals, where, he said, early experiments showed their first few projects didn’t appear likely to work in oncology, the company’s focus.

“One of the very best decisions, or sets of decisions at Agios, was not to try to find a way to move them forward, or find a way to create value or a partner to keep them going,” said Marks.

Instead, Agios pivoted one program to a new indication, where it’s now approved. The other programs the company put on the shelf, allowing it to put resources into finding something better.

“In the story of that company, among many important kind of inflections, choosing not to work on those projects at the beginning of the company was one of the very most important,” said Marks. “If we hadn’t as a company made those decisions to stop doing things, we never would have gotten onto the things that added value at the end.”

Editor’s note: BioPharma Dive hosted the panel discussions mentioned on Nov. 13, 2024. You can register to watch a replay here.

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• Source: https://www.biopharmadive.com/news/biotech-new-normal-tips-advice-survive-funding/732917/