Phil Vanek is responsible for technical due diligence and evaluation of potential investments, as well as guiding operational, R&D and strategic initiatives carried out at portfolio companies. An entrepreneurial and strategic international business leader, Phil joins Gamma Biosciences from GE Healthcare’s Cell and Gene Therapy business unit where he directed strategy and portfolio growth. Phil received his Ph.D. in Biochemistry and Molecular Biology at Georgetown University Medical Center followed by an IRTA fellowship at the National Cancer Institute in Maryland, and at the Hollings Cancer Center in Charleston, SC. Phil was an instructor for Johns Hopkins University Advanced Academic Programs teaching Biotechnology Marketing in the Masters of Biotechnology/MBA program, and has held leadership positions in a number of life sciences companies including Life Technologies, Becton Dickinson, and Lonza. Phil is a Board Member of CCRM Enterprises in Toronto, Canada, and a Board Member of the ARM Foundation.
“Capital, capital everywhere! Nor any drop to drink!”
While capital is not the same as the ocean alluded to in my opening line (with apologies to poet Samuel Taylor Coleridge), it’s as critical to a company as water is to life on Earth. With the abundance of available capital over the past few years, where is it now, and will it flow again into the advanced therapies space? My blog is just one of many covering this topic as part of Signal’s eighth annual blog carnival. Please click here to read what other bloggers think about the topic.
Let’s start with the fundamentals. Available capital will float many boats; however, investors’ decisions are more nuanced based on available opportunities, but also the prevailing winds and ocean tides of the investment community. In other words, like the different seas on our planet, there are different types or classes of capital for investment. Simplistically, capital can come in the form of non-dilutive capital (gifts or grants), loans or convertible debt, and risk capital (equity). Each comes with its own set of rules for each situation. Let’s unfurl the sails and get to the fruits de mer of the topic! You can skip the next two paragraphs if you are already an investor or grizzled seafarer.
We’re all familiar with the academic’s bane: the endless pursuit of grants to populate labs, buy equipment, and write manuscripts to get more grants! From the start-up biotech company’s perspective, grants serve much the same purpose of establishing a lab and retiring technical risk, often when other investors won’t join due to the risk-reward ratio. These grants, offered by government agencies and foundations, are the lifeblood of many start-up biotechs. Most of these grants are modest in size and very competitive, making some think the juice is not worth the squeeze, but any cash early in a company’s life cycle is good cash in my book. Unfortunately, granted funding rarely results in sustainability, steering companies toward the oceans of risk capital.
Risk capital, the primary focus of this blog, is a more tempestuous sea. Typically (and again oversimplifying), risk capital is cash put into a business with the intent of spurring growth and sustainability for the receiving entity, with multiples of returned capital for the investor. Growth comes from clinical and commercial success (real or in some perceived future), and sustainability from re-investable profits (for commercial stage entities). Unlike granting bodies, venture capital investors and private equity investors offer capital with the expectation of future reward, in the form of company value growth and exit (selling to either a larger buyer or in the public markets through an initial public offering (IPO)). The amount invested and the expected rate of return, as well as the amount of operational control demanded by the investor, is largely dependent on the investor type. Additionally, some investors can offer debt financing options (e.g. loans), but that is another kettle of fish entirely.
If risk capital is still as abundant as the ocean is deep, where is it, and will it return to the advanced therapy space?
Of course it will, but when is more a question of the natural forces at work in our industry. We’ve all been told that water flows downhill, obeying the rules of gravity. Well, investment capital flows to where the reward exceeds the risk in a timeframe that allows for capital harvesting and re-deployment (a fancy term for getting their money back). When high return multiples outweigh the perceived risk of investing, money flows like the tide into biotech opportunities. When investors can make money simply by keeping money out of speculative portfolios, then money stays on the sidelines. Just as ancient mariners were superstitious of the albatross, investors are superstitious of getting stuck in markets and not getting their money out in a timely manner, due to forces beyond their control.
If we look back at 2021 and 2022, the prevailing winds were in favour of advanced therapy investments in therapeutics, manufacturing services, and tools and technologies – driven partly by the success of mRNA vaccines in the global COVID response and partly by the success in the CAR T clinical space and the promise of gene therapy medicines. Cost of capital was low, and there was a big push for raising money in public markets, together with high valuations in the private equity markets, driving a flurry of activity in the field. As far as investors were concerned, everything was fair winds and following seas.
Towards the end of 2022 and into 2023, seemingly, everything changed. The market was recovering from a COVID hangover, government spending was still unchecked in many economies, and inflation was starting to have a day-to-day effect on people’s lives (and livelihoods). Due to these (and many other) economic waves, interest rates and the cost of capital went up. In highly speculative industries such as advanced therapy development, the safer investment bets went to less binary, quicker-return investments or capital simply moored in calmer harbours, while still making money for investors. There was little appetite for IPOs, as many of the companies that had entered the public markets quickly saw valuations fall and available capital disappear. As valuations went down, some investors also found themselves holding too high a percentage of company equity, causing new concerns about being overleveraged in these high-risk portfolios. These were stormy waters for the investment community.
But all wasn’t lost in the tempest. Clinical progress continued, and investors were keenly watching and waiting for promising data. A significant number of clinical programs were paused or stopped while companies battened down their hatches to ride out the storm, and more than a few risky clinical programs were forced to walk the plank to make room for more promising, later-stage opportunities and follow-on investments. At the same time, companies had the opportunity to reef their sails, and re-evaluate their manufacturing, regulatory and commercial strategies, and make the necessary course corrections to make them more attractive to investors in the future. The impact on investors in the near term was a shift of attention to other high-tech industries including data analytics and AI, as well as other digital infrastructure technologies (many of which are facing their own headwinds as I write this) that will be important to our advanced therapy industry in the not-too-distant future.
So, has the tide turned in favour of advanced therapy investment? Perhaps not completely as we still await the next big breakthrough and investment cycle that accompanies progress, but, as an industry, we’ve continued to invest in promising technologies and the people behind them, and shored-up infrastructure and the channels to navigate regulations. All of these efforts bode well for advanced therapies and the patients they will ultimately serve. So, as an industry, I think we are steering out of these investment doldrums and can look ahead to fair seas and full sails!
Guest
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