Drug Development

November 2011

Gimv's perspective on drug development as a venture capital investment theme

Drug development is an increasingly challenging investment area but there are still opportunities for venture capital investors, as is illustrated by Gimv’s recent exits from Movetis and Plexxikon. These two cases illustrate our investment strategy, which is to focus on niche sectors that offer product validation within a reasonable time frame. Pharmaceutical spin-outs comply with this because they tend to have advanced R&D programmes. Niche drug categories such as orphan drugs are also attractive because their development cycles tend to be shorter and more straight-forward.

Challenging times in the pharmaceutical sector offer opportunities for the biotech sector

Pharmaceuticals used to be a safe bet: blockbuster products, great margins and an ageing population. No more. Pharmaceutical companies are currently undergoing difficult years as they digest the expiration of a number of important pharmaceutical patents. Due to the patent cliff, as it is known in the sector, most large pharmaceutical companies have lost, or will soon lose, important revenue streams as key products suddenly face competition from generic drug manufacturers. The pain is particularly severe because companies’ drug development pipelines are reasonably small at present and will not compensate for the current wave of patent expiration.

To expand their product development pipelines pharmaceutical companies have been acquiring clinical assets from biotech companies, either via licensing agreements or via outright acquisitions. Some of these deals have been pretty sizable. For example, Boehringer Ingelheim and Ablynx (a Gimv portfolio company) announced a corporate deal that has a potential value of €1.2 billion. Some acquisitions have been impressive too. Our portfolio companies Plexxikon and Movetis were acquired respectively by Daiichi ($805 million) and Shire ($428 million). It is important to note that these deals are essentially product/pipeline acquisition strategies. The value lies in the late stage/approved products.

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Challenging times for venture capital too

While the volume and size of recent deals prove that there is a market for promising biotech companies and drug development programmes, setting these up in the first place has become gradually more difficult.  This is because drug development R&D has become increasingly expensive, which is dampening investor sentiment. Ten years ago biotech companies were doing IPOs in much earlier phases of the R&D trajectory. There was a lot of appetite for promising companies and biotech was seen as an attractive area. Today investors have become a lot more critical and sophisticated in their risk assessments. 

Furthermore, the regulatory environment has become more stringent, making it harder to receive market approval for new drugs. As a result, biotech companies will typically need a product in at least phase 2 or 3 of clinical trials before they can consider an IPO, even in a better financial environment than today. All this has important implications for early-stage investors because it implies that they need to invest a lot more money and over a longer time span before they can expect any return on their investment. And it means that they’re taking on a lot more clinical risk. As a result of these changes in the market, Gimv has had to adapt its investment strategy : we need to be more selective in our investments; we need to build broader investment syndicates and we need to keep bigger reserves for follow-on investments.  Fortunately, as our two recent exits illustrate, there are still attractive investment opportunities in drug development for venture capitalists.

Gimv's investment strategy

Our current investment approach in drug development is based on the principle that we need reasonably rapid validation of the product, at reasonable costs. This means looking at niche categories; for instance, orphan drugs or pharmaceutical spin-outs. Track record of management is critically important and given the increasing size of the required investments it has become imperative to build bigger investment syndicates. VC-backed companies cannot carry drug development projects alone anymore.

Our investment in Plexxikon illustrates a number of these investment principles. From the start we were part of a broad syndicate of investors (with Gimv being the only European investor) that had the scale to fund an entire R&D trajectory, launch to exit. The management team was very experienced and we were particularly impressed with the drug development platform. Notwithstanding the fact that this was a very early-stage investment - we invested in a drug discovery platform at the time - we were convinced that the company’s approach and technology platform had a strong competitive advantage. Since their launch in 2001 Plexxikon developed a number of compounds, some more promising than others, but it was the success of one compound in particular - a new drug against melanoma - that led to the 2010 acquisition by Daiichi Sankyo, a Japanese pharmaceutical company. This particular drug showed such promise in phase 1 of the clinical trials that it was pushed straight through to phase 3 testing on large patient groups so as to get it to market as quickly as possible. That made it very interesting for Daiichi since it is building a product portfolio in oncology.

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Orphan drugs

The speed with which Plexxikon’s melanoma therapeutic has been validated is exactly what we look for in investment opportunities, and it is why we are actively looking at orphan drugs opportunities. Orphan drugs are a category of medications developed to treat rare medical conditions, typically genetic diseases that afflict very small populations. Gimv is actively looking for opportunities in this category because the returns can be good notwithstanding the small populations.

While orphan drugs cannot generate revenues comparable to ‘blockbusters’, they nevertheless can be very profitable since the prices charged for such treatments are exceptionally high. Furthermore, the development process of orphan drugs tends to be much faster than the process of developing drugs for larger populations or for complex diseases such as cancer. The clinical trials tend to be much smaller (given the small populations and the nature of the disease) and hence cheaper. Also, product validation is achievable earlier in the R&D process (again, due to the genetic basis of the diseases). Whereas in oncology a drug will frequently still fail in phase 3 of the process, after years of R&D investment, in genetic diseases it often is clear in phase 1 whether the drug has any potential. Finally, for orphan drugs it is often easier to obtain marketing approval from the regulators. All this translates into a viable investment category for venture capital companies like Gimv, and it still allows us to get in the game early on in the R&D process.

Pharma spin-outs

Another category that fits with our investment strategy is pharmaceutical spin-outs, as illustrated by the Movetis case. Pharmaceutical companies sometimes decide that a particular space doesn’t make strategic sense for them anymore, even though there might be potentially valuable assets. In these cases there has already been significant investment in R&D projects and hence some projects might be closer to validation than if one was to start from scratch. To illustrate, Gimv invested in Movetis in 2006, when it was spun out from Johnson & Johnson with several gastrointestinal projects in different phases of clinical development and we achieved an exit just four years later via the acquisition by Shire. That was an exceptionally short investment term and was due to the fact that Movetis secured European market approval for one of its key products, Resolor, in 2009. 

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Optimistic

While the drug development sector certainly has become more challenging for early stage investors such as Gimv, we remain optimistic about investment perspectives. However, we have focused our investment strategy more and are specifically looking for opportunities where it is possible to deliver validated products within a reasonable term and cost, such as orphan drugs and pharmaceutical spin-outs. This is the core principle behind our investment strategy in drug development.