Biotech startups – understanding the ecosystem for success

Biotechnology is in the midst of a great era of innovation, with an ever-expanding toolbox of drug modalities spawning development of exciting new vaccines, medicines and therapies. Today’s ecosystem for innovation in drug development looks quite different compared to ten or twenty years ago, with many more symbiotic relationships between venture capital (VC)-backed pharma and small biotech startups working to diffuse risk across the development lifecycle.

On the upside, the appetite for investment in the life science industry is big and getting bigger.  According to Silicon Valley Bank’s 2020 annual report, biopharma investment hit record highs for the fourth straight year in a row, in terms of both the number of deals and the dollars invested.  Especially encouraging for biotech startups was the significant increase in Series A funding in 2020 compared to 2019.  Into 2021 the venture capital outlook continues to look bright, with PitchBook predicting that this year “Biotech and pharma VC deal activity will likely exceed $20B for the second consecutive year.”

Big fish, little fish – finding a niche in the funding ecosystem

On a more sobering note, even as VC-backed innovation flourishes, the competition for early stage funding among biotech companies is fierce, with much of the investment dollars going into the hands of fewer but more well-connected players—the big fish, if you will.

“What we’ve really seen lagging now is seed money for new founders who don’t have a track record for having started successful companies in the past and don’t have a very strong extensive network of people in funding and in company development,” says Craig Kaneski, an associate in patents and innovations at the law firm Wilson Sonsini. Speaking in a September 2020 webinar on navigating the life science funding landscape, Kaneski elaborated: “We’ve observed that some deals are deemed more for founders that are very experienced and have strong track records, [including] a good track record with VCs.”

So the big question is – what about those little fish – the biotech startups who have great ideas, but whose founders haven’t been lucky enough, or in the game long enough, to have the same track record and connections as the big players?  How do they find their niche in the ecosystem?

Big Pharma as a resource for biotech startups

A common perception is that funding and support from a large pharmaceutical company only becomes relevant for biotech startups when their product is in the latter stages of development—that is to say, after the development project has been significantly ‘de-risked’ by the startup company.  But a recent analysis of how large pharma impacts biotechnology startup success turns this thinking on its head.

In their study published in Nature Biotechnology, analysts from two venture capital firms in the Netherlands trawled GlobalData’s Pharma database to identify all deals between large pharma and biotechnology startups over the 15-year period from 2004-2019. They then looked to see whether there was a link between startup success rate and having an established connection with a pharmaceutical company.  In this case, they defined success as being listed on public markets (IPO), acquired (majority or 100%), or having had a drug approved during the period in question.

Remarkably, they found that the startup success rate increased from 18% to 37% when a large pharma investor was on board. This connection also increased both the size of success (from a median of $138M to $332M market capitalization) and the acquisition value (from $136M to $377M).  Counter to the prevailing dogma, they found that success rates were boosted for startups that partnered not just at the clinical stage, but also earlier—during preclinical development. They concluded that large pharma partnerships are advantageous throughout the startup lifecycle—from the preclinical stage through exit by acquisition or IPO.

What are the reasons for this positive effect?  In the early stages of development, the authors suggest that access to the pharma partner’s intellectual property (IP) may play a significant role.  They speculate that the pharma partner essentially de-risks the IP before outlicensing it to the startup, which could effectively give them an edge over competitors.

They also highlight what is perhaps an even more important factor: that a large pharma partner can provide ongoing support—in terms of both resources and specific expertise that entrepreneurs may be lacking—for example, in GMP clinical development, regulatory interactions and large-scale manufacturing.

Partnering to build credibility

Another expert panelist in the life science funding landscape webinar we mentioned earlier, Cynthia (Cyndi) Green, commented on how difficult it can be for startups to succeed in the competitive biopharmaceutical space:

“On the therapeutic side of things, which is really where I’ve spent most of my time, therapeutics and vaccines, it’s tough,” says Green.  “We’re looking to invest in early stage, and when something doesn’t have clinical data yet—and a lot of times definitely doesn’t have efficacy data—it’s a hard sell and it’s a lot of risk.”

As Managing Director of Connecticut Innovations, the state’s strategic venture capital arm, Green has had a wealth of experience supporting the growth of innovative biotech companies. From what she’s seen, surviving in this competitive landscape has a lot to do with giving potential partners and investors confidence that you know what you’re doing.  She highlights the importance of having access to specialized expertise—either in-house or through partnerships—in any areas that are unfamiliar:

“If you are a new entrepreneur, try to get somebody on your team, at least as an advisor, that’s ‘been there done that’ and has credibility…[Investors] have to have faith in the [startup’s] team and their ability to find the correct advisors, to take help, and to do well with your money.”

The rise of Center of Excellence CDMOs

By definition, being an innovative biotech startup means breaking new ground. Working with a new drug modality—for example, a novel type of viral vector—may call for completely new development and manufacturing strategies.  This frequently requires entrepreneurs to venture into unfamiliar territory, especially in areas such as production scale-up, regulatory compliance and cost-of-goods estimation.

In such cases, a specialized contract development and manufacturing organization (CDMO) is another valuable resource that can give new startups an edge.  With years of experience and expertise in scale-up and manufacture of complex biological products, a CDMO can help teams avoid common pitfalls and find the quickest route to the next development milestone.

In particular, there’s a new breed of CDMO emerging, called a Center of Excellence CDMO (CoE CDMO). CoE CDMOs go beyond service provision. They provide leadership in their particular areas of focus, share best practices, and are able to offer more tailored solutions. Importantly, they aim to create long-term partnerships with their customers, which means they can often provide more comprehensive support and guidance across the development cycle.

If Green is right, having a CoE-CDMO on your side may be just the sort of knowledgeable expert you need to boost credibility with potential VC and pharma investors, and get your innovative product into the clinic sooner.

Looking for more insights on this topic? Don’t miss our next article, where we take a closer look at the elements of a successful Product Development Plan and how you can use one to build credibility with potential investors and partners.