The biopharmaceuticals industry in the United States stands out for its significant reinvestment in research and development (R&D). In recent years, there has been a shift in drug discovery from large pharmaceutical companies to biotechs, which now account for 70% of all clinical trials conducted in the country. Unlike their large pharma counterparts, many biotechs do not have commercialized products or a steady revenue stream. As a result, it comes as no surprise that according to the Biotechnology Innovation Organization (BIO), 90% of biopharmaceutical companies are currently operating at a loss. For academic researchers or recently established start-ups, initial funding often comes from grants, with the National Institutes of Health (NIH) providing a significant annual funding amount of $37.3 billion. However, considering the high cost of drug development, estimated at $2.7 billion by a 2016 report from the Tufts Center for the Study of Drug Development (which includes costs associated with failed drugs), biotechs without private investment, partnerships with larger pharmaceutical companies or biotechs, or an initial public offering (IPO) are unlikely to sustain themselves throughout the development process.

The beginning of 2018 witnessed several noteworthy mergers and acquisitions (M&A) deals in the biopharmaceuticals industry. Celgene, for instance, acquired Juno Therapeutics for $9 billion and Impact Biomedicines for $7 billion, while Sanofi US acquired Bioverativ for $11.6 billion. However, the spotlight was on venture capital (VC) private investment, which broke numerous records. In the first 10 months of 2018 alone, biotechs received a staggering $13.5 billion in VC funding, surpassing the total investment of $11 billion in the entire year of 2017. Notable examples include Grail’s oversubscribed Series C round, which raised $300 million, and Allogene Therapeutics, a pioneering biotech in allogeneic CAR T therapies for cancer, completing a Series A round of $120 million. These instances are particularly significant as both companies received substantial funding from Chinese VC firms. With the Committee on Foreign Investment in the United States (CFIUS) exercising greater scrutiny over foreign transactions as of October 2018, potential implications could arise for biotechs and many other U.S. biopharmaceutical companies in the coming year.

Despite the increased influx of capital into biotechs nationwide, particularly in California (which received $7.6 billion in VC investment in 2018) and Massachusetts (which received $6.2 billion), hundreds of biotechs still struggle to secure funding each year. For every investment made by a VC fund or private equity firm, the odds remain long due to the low drug approval rates, which have dipped to 9.6% according to BIO. Despite the monetary risks involved in drug research and development, large pharmaceutical companies, major biotechs, and VC firms are increasingly interested in investing in early-stage biotechs to capitalize on emerging technologies before significant value inflection points. Thomas W. Chalberg, a partner at Heroic Ventures, notes a trend of investment capital flowing into the market at earlier stages of the biotech cycle. He emphasizes that early capital is essential in the biotech space and highlights the value created during the early stages. Partnerships with academic institutions often play a role in facilitating these early-stage investments.

As investments are made earlier in the process, thorough due diligence becomes crucial to mitigate transaction risks. A “build-to-buy” model is gaining popularity, where companies invest with an option to purchase later, necessitating extensive due diligence for early-stage companies, as David H. Crean, managing director for investment banking at Objective Capital Partners, emphasizes. While some early-stage biotech executives travel across the country in search of initial seed and Series A investments, a select few seasoned executives understand precisely what investors are looking for. Mirum Pharmaceuticals, a San Diego-based biotech, serves as an example, having raised $120 million in its Series A funding round a mere five weeks after its inception. Mike Grey, chairman and CEO at Mirum, emphasizes the importance of the people behind the biotech as the most critical component for investors. Mirum’s success stemmed from a collaboration between the previous leadership of Lumena and Tobira, bringing together a group of talented minds. For the investors, the value proposition lay in the potential to reach Phase III clinical data within a relatively short period.

Successful acquisitions in the biopharmaceuticals industry often involve the presence of an executive with a strong track record behind the scenes of the acquired early-stage biotech.

The focus on oncology remains strong for venture capitalists (VCs), although there is a growing trend of venturing into therapeutic areas that are less saturated. It comes as no surprise that a significant portion of Californian companies’ pipelines in 2018 were dedicated to cancer, with 433 out of 1,332 total therapies in development, accounting for one-third, according to the California Life Sciences Association (CLSA). Arch Venture Partners and OrbiMed Advisors, the first and third-largest global venture investors respectively, allocated 35% and 43% of their overall pipeline to cancer therapeutic investments from January 2015 to October 2018.

However, VCs are now seeking to diversify their investment portfolios by exploring other therapeutic areas and emerging technologies. Stem cell therapy, gene therapy, orphan drugs, neurodegenerative diseases, regenerative medicine, precision medicine, and digital health are among the areas that attract considerable interest from investors. Carolyn Ng, managing director of Vertex Ventures HC, emphasizes that despite the majority of venture capital flowing into oncology, opportunities exist across multiple therapeutic areas. She asserts that pigeonholing investments into a single area would result in missing out on valuable opportunities in other segments of the industry.

In the field of oncology, a substantial amount of funding is dedicated to immuno-oncology, while other approaches receive less attention despite offering significant prospects. Brian Frenzel, CEO of Tosk, a biotech focused on developing inexpensive, small molecule drugs to mitigate the toxic side effects of common cancer treatments, highlights the under-appreciated field of side effect reduction. While immuno-oncology receives much recognition, Frenzel emphasizes that side effects can adversely affect patients’ quality of life, be costly to treat, and limit the effectiveness of cancer therapy. Tosk’s small molecule drugs aim to reduce treatment costs and improve outcomes for cancer patients.

In addition to short-term value creation, VC firms must also consider the long-term commercial viability of their investments. This has led to certain therapeutics, particularly in immuno-oncology, taking precedence over the past decade. The Bill & Melinda Gates Foundation, through its $2 billion Strategic Investment Fund (SIF), has been able to focus on addressing unmet patient needs that may not make monetary sense to a typical VC. The foundation’s main goal is to manage and eradicate infectious diseases in the developing world. To leverage existing advancements, the SIF explores progress made in other therapeutic areas. Vidya Vasu-Devan, deputy director at the SIF, explains that since the immune system plays a critical role in both immune-oncology and infectious diseases, insights and technologies from various therapeutic areas can be applied to the foundation’s priority diseases, such as HIV and TB.

The decision to go public or remain private is a complex one for biotech companies. 2018 saw a record-breaking year for IPOs, with $8.2 billion raised on Nasdaq, surpassing the previous record set in 2014. Forty Seven, a clinical-stage immuno-oncology company, completed its IPO in July 2018, raising $116 million. Mark McCamish, president and CEO of Forty Seven, explains that going public allowed them to access funds and maximize the value of the company, benefiting both patients and investors. However, the decision to go public in 2019 may be influenced by external factors, such as the impact of the United States federal government shutdown from 2018 to 2019. The shutdown, resulting from disagreements between Congress and President Donald Trump over funding for a U.S.-Mexico border wall, is expected to have lasting effects on the number of biotech IPOs this year. Limited access to public capital may lead to another record year for VC funding, increased partnerships, and a rise in mergers and acquisitions, as exemplified by Eli Lilly’s acquisition of Loxo Oncology for $8 billion and Bristol-Myers Squibb’s acquisition of Celgene for $74 billion, marking the largest pharmaceutical company acquisition to date.