The life science venture capital business model is in a constant state of evolution in order to meet the challenges of current market conditions. Faced with strong headwinds generated by a multitude of factors, including an economic downturn, a more stringent regulatory environment, and longer product development timelines, life science VCs are increasingly looking toward investments outside of the traditional biopharma investment mold. New investment areas such as consumer, industrial biotechnology, and healthcare IT are increasingly attractive to VCs; however, that is not to say that investing in those sectors does not come without its own risks.
For instance, non-biopharma companies can often be just as capital intensive as biopharma companies. In the case of consumer healthcare companies, they often require even more capital upfront than biopharma companies in order to support the creation of full-scale commercial teams that have to be built early on the start-up’s life. And unlike biopharma companies, consumer companies often need to generate several years of sales traction and growth before attracting an acquirer.
In addition to capital risk, exit options and timelines for non-biopharma healthcare companies are not as clear-cut as in biopharma. While the IPO window for biopharma start-ups has been pretty much closed for the last three years, biopharma M&A activity has been solid over the same timeframe (see recent report by HBM Partners). The HBM data implies that if you build a good biopharma product, there will most likely be an acquirer on the backend. The same cannot be said for consumer, industrial biotech, and healthcare IT. For example, industrial biotech exits can be challenging as there are only 4 major players (ADM, Cargill, Dow, Monsanto) out there, which often makes an IPO the preferred exit route. Needing to go IPO in a turbulent equity market is a scary proposition for most investors.
There are a number of venture funds that have developed new investment thesises around consumer, industrial biotech, and healthcare IT. In the second half of this entry, I will focus on three life science venture funds – Aisling Capital, TPG Biotech, Versant Ventures – and their investments in non-biopharma companies.
One of the largest life science funds ($650M fund raised in 2009), Aisling Capital made its name by investing in clinical stage therapeutics companies. With its most recent fund (Fund III), Aisling shifted its focus a bit and has completed two consumer (Scerene Healthcare and Zeltiq) investments. Both Scerene and Zeltiq are developing aesthetic medicine products, an attractive investment area due to lower regulatory burdens and minimal reimbursement risk (patients usually pay cash).
Over its 6 year life, Zeltiq has raised about $100 million from a strong pool of VCs including ATV, Frazier, Venrock, as well as Aisling. The company is developing a medical device that noninvasively and selectively reduces fat without damaging the skin or surrounding tissue. In early July, Zeltiq filed a registration statement to raise up to $115 million in an IPO.
To go from founding to IPO in 6 years is an impressive feat, considering the biopharma industry average is closer to 7.5 years. Should the IPO proceed as planned, the company and investors should receive a tidy return on their investment.
In 2002, TPG Biotech was spun-out of TPG, one of the world’s oldest and largest private equity funds. TPG Biotech has always had a broad interest in the types of life science companies they pursued, but more recently the fund has made a number of industrial biotechnology investments. Industrial biotech is a natural extension for life science venture funds because the underlying science for those companies – genomics, molecular biology, cell biology – is similar to that of biopharma companies. The risk with making such investments is that they are incredibly capital intensive. Whereas biopharma start-ups can outsource much of their work to CROs, industrial biotechs have to create large industrial facilities, which requires quite a bit of capital.
There are two TPG Biotech investments that I would like to highlight – Amyris and Elevance Renewable Sciences. Both of these companies convert common natural products (biomass) into high-value chemicals. Those chemicals are presold to interested parties and then Amyris and Elevance make a profit on the margin (presold price - cost inputs = margin). Unlike biopharma where the cost of inputs are basically nothing, industrial biotech companies purchase organic raw materials that can have major price swings due to changes in global commodity prices. Therefore, the goal for many industrial biotech companies is to use stable, non-commodity inputs, and develop a cheap manufacturing process so that profits are large and predictable – something that is not so easy to do on a large scale.
While capital intense and subject to raw material price swings, the ability to presell future inventory at attractive prices (among other reasons) makes industrial biotech an interesting non-biopharma investment play.
Versant Ventures is generally regarded as one of the top biopharmaceutical and medical device venture funds; however, few realize that the fund has recently made a number of interesting healthcare IT investments. The cost of developing new software platforms has plummeted over the last 10 years, which has dramatically lowered the capital requirements for those companies. Instead of spending 2-5 years of time and money on development, software companies are now launching almost immediately and VC dollars are being pumped into those companies to support commercial rollouts.
I really like two of Versant’s investments – CodeRyte and RedBrick Health. A lot of healthcare IT companies say they create efficiencies for healthcare providers, but the reality is that few actually do so. CodeRyte is a natural language processing (NLP) platform that reads the text of a physician’s patient report and automatically assigns the appropriate billing codes. This product increases coding compliance and saves money on administrative costs without requiring the doctor to receive special training or hindering his or her ability to see the same number of patients. RedBrick is an personalized incentive platform that encourages employees to take a greater role in controlling their own healthcare. By purchasing the RedBrick platform, employers can incentivize employees to make responsible healthcare decisions which will ultimately improve employee heath and save the company money.
Not all life science VCs will veer from the tried-and-true biopharma model. As the HBM Partners data shows, there is a robust pool of biopharma acquirers that are willing to pay attractive multiples for great VC-backed companies. That being said, there are challenges (FDA, lack of capital, etc.) to that model and branching out from biopharma might be a reasonable risk mitigation strategy for some VC firms. It is too soon to tell if that is a worthwhile strategy, but for now at least, it is exciting to see the breadth of investments being made by life science VCs.