The methods of financing biotech R&D are evolving as large pharma companies and governments look to small biotech start-ups to provide the next generation of medicines.

Finding Funding: The Diversification of the Biotech Financing Landscape

March 27, 2018

As the number of biotech start-ups has rapidly grown and the drug discovery focus has shifted away from the internal pipelines of large pharma companies, the financing landscape has also adapted in line with market needs. While early-stage venture capital funds were once large in number and a primary source of funding for the industry, challenging market conditions has necessitated increasing resourcefulness and a diversification of financing sources. “[F]rom 2000 to 2009, life sciences venture capital was a bad place to be; none of those funds really made much money,” commented Peter Parker, managing partner at BioInnovation Capital. “Many changed course and moved towards growth equity, and some carved out their life sciences unit and focused on tech. As a result, there are far fewer early-stage life sciences capital firms, with some being Third Rock Ventures and Flagship Pioneering, which create their own ventures, so follow a different model. This leaves about five in the Boston area and four on the West Coast, and then a large vacuum.”

Large pharma companies began to fill this void, establishing their own venture capital funds and fostering relationships with biotechs as an extension of their R&D pipelines. “While these partnerships initially generally favored large pharma, as the biotech industry grew and became more confident, and the value of the research made them more competitive, they were able to demand better terms from the pharma companies, leading to the creation of more balanced partnerships,” noted Janice Bourque, managing director at Hercules Capital, a business development company specializing in providing venture debt. “When the stock market fell and the public market with it, many companies were challenged to stay afloat and many venture capital firms fell by the wayside. Since the re-emergence of the public markets, the trajectory has been interesting.”

In addition to a range of grants from organizations such as the NIH, there is a large group of angel investors within the Boston and San Francisco communities.

With biotechs seeing increasing support and mutually-beneficial collaboration opportunities from large pharma companies, Massachusetts’ companies are particularly well positioned. Highlighting the importance of the significant presence of 18 of the top 20 pharma companies within the state, Travis McCready, president and CEO at the Massachusetts Life Sciences Center, remarked: “An interesting dynamic is taking place: on a per capita basis, we lead the United States in the amount of venture capital being invested into early stage companies… However, unlike in years past, those venture capital dollars are going in larger tranches to a smaller number of companies. The ecosystem has managed to maintain equilibrium because the large pharma and medical device companies have their own investment funds, which amounts to about a billion dollars going into early stage companies. This deployment of investment funds in young companies is not done in any other ecosystem.”

Another notable source of financial support are the federal and state governments in the form of incentives and investment into infrastructure. The support of the state government has been a great contributor to the rapid growth of Massachusetts’ life sciences sector over the last few years, for example, most clearly reflected in the allocation of a US$1 billion fund, distributed by the Massachusetts Life Sciences Center across three major capital categories as a catalyst for the industry’s growth. Half a billion dollars was allocated to capital infrastructure, spanning aspects from research facilities to high-end equipment. Within this category, arguably the most widely acknowledged success has been the LabCentral facility in Cambridge, into which US$10 million was invested. This facility, which provides lab space and resources to its resident companies, contributed to the creation of 402 new jobs and over US$300 million raised in additional financing in 2016 alone, plus the filing of 113 new patents and 27 new licensing agreements.

Of the remaining US$1 billion investment, US$250 million was made available for tax incentives, a huge support in the growth of small and mid-sized companies, and an attractive proposition for companies outside of Massachusetts open to relocating. The final US$250 million was allocated towards an investment fund for pre-seed and seed stage companies, also contributing to internship programs for approximately 500 to 525 high school and college students every year. The Massachusetts Life Sciences Center is now in the process of securing a further half-a-billion dollar investment to be allocated over the next five years.

This strategic allocation of funds, particularly directed towards long-term sustainable growth, puts Massachusetts at a big advantage compared to other life sciences hubs. Other hubs rely more heavily on initiatives and grants directed at particular projects. “One challenge across California is that the industry has had to support its own growth without many incentives provided by the state or federal governments,” referenced Joe Panetta, president and CEO at Biocom. “The situation is very different from other hubs such as Massachusetts. State investment in California is generally only through research universities such as UC Berkeley, UC San Francisco, UCLA, UC Irvine, UC Riverside and UC San Diego. 13 years ago, we passed a citizens’ initiative, which created our US$3 billion Stem Cell Agency to provide grant funding to academic researchers and small companies within that field.”

New Jersey is also particularly committed to creating a favorable framework at a policy level, including a number of financial incentives in support of innovation. For example, the state’s recently-formed Biotechnology Task Force is charged with the development of recommended action steps that will inform policy making, with the goal of building a first-class innovation economy. By fostering a supportive ecosystem in which start-ups are able to thrive, the potential for bringing novel drugs to market amplifies.

By softening the financial burden, small biotechs are better able to progress focused pipelines, bringing new treatments to market and addressing unmet needs more quickly and efficiently. There is therefore some responsibility at the policy-making level to facilitate innovation where possible, which can also be seen in the formation of biotech incubators. Meanwhile, traditional funding channels continue to drive the industry financially, with venture firms citing cutting-edge innovation as the primary consideration when identifying investment opportunities.


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