Venture Capital is the Lifeblood of Biotech

Since the inception of the biotechnology industry in 1980, startup companies have looked to venture capitalists to help them move innovations through human trials and into medical practice. This endeavor requires a lot of assistance: the drug development process can take more than 12 years and $1.2 billion. This is the cost for the approximately 10 percent of drug candidates that are successfully commercialized. Nearly 90 percent will fail in development.

Working with emerging companies, venture capitalists often provide five to eight years of equity to startups whose stock is essentially valueless. The goal for both the investor and the company is to advance the potential product through Phase I and Phase II clinical trials and use positive results to complete an initial public offering (IPO) or to engage in a merger and acquisition transaction to regain their investment and advance therapies to the patients who need them.

Figure 1

The firms that have successfully negotiated this pathway have been well rewarded for their work. However, they are a part of a very select group (see Figure 1). According to the graph, of the more than 1,800 U.S. biotechnology companies founded since 1980, fewer than 200 are generating revenues on the product sales today. Of those, only six companies have earned more than they spent in development. Those companies are CHI members Amgen, Biogen Idec, Genentech, Genzyme, Gilead Sciences and MedImmune.

With the stock market crash of 2008, institutional investors rebalanced their risk in part by reducing their venture capital investments. Even venture capital firms specializing in biotechnology are using their reserves to fund their prior investments rather than seeking out new startups. The current economic climate is threatening the formation, funding and forward progress of small biomedical companies—and the therapies, cures and technologies of the future.

As the economy recovers, venture capitalists and other investors will return to biotechnology in proportion to their assessment of the overall lifecycle risks and the lifecycle duration of potential products. They also will calculate the potential value of their investment at their exit. That means that California’s biomedical industry entrepreneurs need to use this time to verify the validity of their ideas, shore up their business plans and lay the groundwork for bringing their dreams to fruition—and trust that investors continue to see the value of biomedical breakthroughs.

Click here to read more in the 2010 California Biomedical Industry Report.