VC Vacuum

Has the rest of the world joined the venture capital-fueled biotechnology gold rush, now more than 40 years old here in the US?  Apparently not according to a correspondence published in Nature Biotechnology a couple weeks ago.  The authors, one of whom (Steve Sammut) is an acquaintance of mine from my tech transfer days, gathered data and conducted interviews to get a handle on venture capital (VC) investment in life sciences companies in four countries in the developing world:  China, India, Brazil and South Africa (Chakma et al. 2013).  Although I did not read the study itself (full access requires a purchase that is not in my meager blogging budget), I gathered from others who had that the they found that VC investment totaled about $1.7 billion from January 2000 to August 2013 and it was invested in 114 firms through 148 deals (FierceBiotech article and Derek Lowe post).  This is a pretty meager level of activity when compared to the US where about $4.1 billion went into 466 deals in 2012 alone (PwC press release).

The study also found that the number of Chinese (70) and Indian companies (32) attracting VC input far exceeded those in Brazil (7) and South Africa (5), and that the distribution of product objectives of the companies was similar to that in the US, about 45% of the VC-backed companies were developing therapeutic products, mostly in oncology (Chakma et al. 2013 Figures).  I used the report’s Supplementary Materials and to look more closely at the companies and found the following distribution for product objectives:

Product Objective Chinese Cos. (%, n=66) Indian Cos. (%, n=33)
Therapeutics 47 55
Diagnostics 20 9
Drug Discovery 12 21
Vaccine 12 6
Manufacturing 3 9
Drug Delivery 6 0

 

The therapeutics companies’ popularity among the VCs is likely because these products have potential domestic and foreign markets and offer the greatest upside.  I am also guessing that the relative small number of investments in vaccine companies is because the vaccine sector is dominated by existing domestic and multinational companies that are doing their own R and D, making the startups less competitive.  The report also provides a list of 25 of the VC firms studied on Page 3 of the Supplementary Materials, if one is interested in looking into their investment interests and criteria.  Overall, the report is novel and useful in gathering the data on VC activity, given the nascent nature of the VC industry in these emerging market countries and the complexity and dynamics of VC financing, even if its findings are discouraging to those of us who see the developing countries as a source of products and innovation in global health.  For a comparison to the US VC world, one may want to read a recent post by Bruce Booth of Atlas Ventures on venture financing trends in US life sciences companies (Booth post).

So what are the reasons for the paucity of VC investment?  In a recent blog posting, one of the report’s authors, Justin Chakma, provided the views of a managing director, Dr. Jonathan Wang, at Orbimed Asia Advisory, one of the firms in the study (Chakma post).  Dr. Wang noted the problem is that there are “very few companies doing high-quality innovation” and that early-stage companies are held back by a need for experienced drug developers and knowledge of GLP-level research.  He also noted that the life sciences industry needs time to mature and established companies as partners and that the involvement of multiple levels of government subsidies in the form of cheap or free facilities, local tax benefits, and grants can complicate investment deals to the point of making them unattractive.

In commenting on the study, Derek Lowe, an experienced medicinal chemist and blogger, posited that “lack of a ‘startup culture’ being a big (albeit vague) one [problem]. That covers a lot of ground, including physical infrastructure and fewer experienced investors.”  Based on my experience, I’d say that the most important ingredients in a startup culture are first, people, then money with physical infrastructure a distant third.  So my prescription for developing countries aiming to build a biotech industry and attract VC funding is that governments, established companies, and universities should do what they can to attract and support talented, experienced and motivated life scientists.  Governments may encourage expats wanting to work in the life sciences and/or start companies to return or provide tax breaks to young people willing to work at more risky companies.  Established domestic companies may start incubator facilities for their more entrepreneurial scientists to work with startups as potential investees.  The multi-national pharmas that have built new research centers in China and India are unlikely to help since their goal is to keep innovation and people for themselves.  However, if they are bureaucratic enough to stifle creativity, they could be the source of well-trained scientists looking for more entrepreneurial employment.  Universities could sponsor business plan competitions, offer more hands-on research courses, and have proactive technology transfer and mentoring programs although in my experience universities are extremely conservative and need pushing to change their ways.   Of course, free money is a help and small amounts can go a long way with startups.  Government grants awarded in a transparent and peer-reviewed process are a good idea and, if qualified reviewers are lacking, perhaps volunteer reviewers from other countries could be enlisted.  Government-backed fellowships or loans to graduates who chose to work in startups are also possible.  As for the VCs, their investments are driven by the size and number of acquisitions of small companies by large companies, so until Merck or GSK buys a small Indian or South Africa company for its innovative technology, the VCs’ cash will be spent in the developed countries.

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