Biotech investors regularly jump on new crazes, including the microbiome and CRISPR-Cas9 gene editing. At BIO-Europe Spring 2019, Regina Hodits, Managing Partner at German VC firm Wellington Partners Life Sciences, spoke to us about the firm’s realistic approach to biotech investment.
Biotechnology is an industry with high risks and high rewards. Before a medical biotech company developing a new treatment can make a profit, it will often have to burn cash for over ten years. For this reason, these companies are highly dependent on venture capital funds and trading publicly on stock markets such as Euronext and Nasdaq.
Following the next big thing in biotech is often a powerful drive for investors. For example, the UK biotech Orchard Therapeutics, which raised over €200M ($225M) in its Nasdaq IPO back in October, specializes in gene therapies, which are surging in popularity. Another popular field, CAR T-cell therapy for cancer, is the domain of the London-based company Autolus, which raised a €130M IPO on Nasdaq a year ago.
However, going after the hottest trends isn’t a guarantee of success for an investor. As a VC at Wellington Partners, for Regina Hodits the focus is always on whether the specific company and product are worth the risk.
Hodits first had to face the sometimes brutally realistic approach of investors when she was beginning her career as a scientist in Cambridge. “I was trying to cure the common cold,” she said. “The prophylactic treatment worked quite well in the test tube, but when we discussed this with pharma partners, they were not amused. They thought that the cost of such a treatment would be too high for ever being considered for development.”
“That event told me that all my science wasn’t actually going to see daylight if I didn’t know anything about economics. I then switched careers and came into investing via consulting.”
Launched in the early 1980s, the biotechnology industry has built up a long list of investment successes and flops. This has led investors to be more critical than ever before when it comes to screening companies in the ‘hot areas’ of biotech.
“People have become much more disciplined on saying ‘how can I invest into something that, in the end, is going to turn into a product?’” Hodits said.
Her firm, Wellington Partners, is no exception to this critical mindset. “We believe that the hot areas always remain the same,” Hodits said. “What is still out there? What do people die of? They die of cancer, cardiac and metabolic diseases. The best investments are in things that, in the end, help patients, are accepted by doctors, and are affordable by the healthcare system. I think that’s what investing in healthcare is all about.”
Wellington Partners has invested in biotechs such as Themis Bioscience, an Austrian biotech developing vaccines for infections caused by the tropical Chikungunya virus, and the Danish biotech SNIPR Biome, which is developing treatments based on modifying the patient’s microbiome with the gene editing technology CRISPR-Cas9. While SNIPR’s microbiome focus is a very trendy field at present, Hodits focuses less on the microbiome angle, and more on the company’s potential.
“We’ve been following the area for quite a while and we were not quite sure what to make of all the microbiome story,” Hodits said. ”But what actually got us excited was that they have an initial proposition that is testable in the clinic.”
Bust to boom: Europe’s caution with biotech investments
Biotechs in Europe have had a difficult history with finding funding. After a biotech bubble burst in the early 2000s, public markets were largely closed as a money source for biotech companies. In 2008, VC investment took a big hit during the worldwide financial crisis. However, European stock markets and VC investors have since recovered and are taking more risks with biotech.
“Over the last ten years we’ve seen bold new ideas coming through,” Hodits said. “These are things you couldn’t have even thought about ten years earlier.”
Recently, it’s also becoming easier for a European biotech to raise big amounts on Nasdaq, which was a monumental task in the past. “It’s not that much of a big step anymore for companies to either graduate from Euronext to Nasdaq or actually even contemplate going to the stock market directly,” Hodits said. “So that door is wide open.”
Investment risk-taking around the world
The US has always had larger quantities of capital available to fund startups than Europe in general. Even after the financial crisis of 2008, investors in the US have returned to making higher risk investments than European investors would be comfortable with, which could reflect a difference in mindset between the two markets.
“I’m myself quite cautious about saying ‘let’s throw a big amount of money after a team and they’re going to work it out,’” Hodits said. “I think here in Europe you’ll probably find more people saying ‘it is a combination of the team and the product’, whereas in the US you see a lot of people that say ‘these people have made money for us before — they know the area. Why should I second-guess what they are doing?’”
Another part of the world becoming an increasingly important player in biotech investment is China. Now that the Chinese government recently made it easier for foreign companies to market new treatments in the country, Chinese investors are becoming more interested in European biotech. Although several portfolio companies of Wellington Partners have partnerships or are running clinical trials in China, Hodits remains cautious about making deals in the Chinese investment landscape.
“It is, I think, very hard if you have not really tapped into that community to know how they are going to consolidate those opportunities, to get them public. So you need a team on the ground in order to be successful.”
Biotech investment getting back to basics in 2019
Around the world, 2018 was a record-breaking year for biotech VC investment, reaching a total of €15B ($16.8B) raised by biotech companies. The size of the funding rounds has also been spectacular. One of the largest funding rounds was raised by the US Relay Therapeutics, whose Series C bagged a whopping €357M ($400M) last December.
This big spending spree appears to be tailing off in 2019. However, Hodits feels that this isn’t necessarily a bad thing. Investors are likely becoming more careful and making better quality investments. This could allow the companies with the most credible science backing them, not those just following the latest trend, to shine.
“I think 2019 is going to be a year of realism,” she said. “My feeling is it’s back to the products. It’s back to basics. So I think I’m predicting a bit of realism. But in a very positive way.”
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