Investing in biotechnology companies is difficult. One has to understand the science behind the drugs to start with. Then understand the patent landscape, the clinical use of the drug, clinical standard of care, regulatory pathway with the FDA, and competition from existing and upcoming new therapies. This is in addition to standard items one looks at in a company such as management, cash flow, payor reimbursement, etc.. But one item that gets little attention, but which skews the offerings of biotechnology companies to begin with, is the role investors play in the very establishment of these firms

Biotechnology companies start with either capital from 3F (friends, family, and fools), Angels, rare early-stage VC, or specialized outfits such as those from Universities. The latter three are particularly subject to the vagaries of investing. 

The first problem is the disease area focus. These come and go, which is a problem since drug development takes such a long time. One area may be the flavor du jour only to disappear a few years later. Right now, immune-oncology is the darling child and almost everything else is an orphan, particularly anti-bacterial drugs. So the money goes predominantly into companies in the immune-oncology space while others, even if needed and deserving, are neglected. This leads to misallocation of resources which ultimately leads to too many drugs chasing too few opportunities (in the chosen field) while others wither on grapevine. When the reckoning comes, a whole slew of companies lose money, and so do investors, who promise never to fund biotechnology again.

The second problem is related to the first – what appears “sexy”. Often, drugs that are prohibitively expensive to use are still developed because they are “sexy”. Antibodies, anti-sense therapies, stem cells, are all in vogue at the moment. How an antibody can be used for a disease like osteoarthritis beggars the commercial mind. We have already seen antibodies that were developed for hypercholesterolemia become commercial failures, despite great fanfare at launch (by Regeneron and Amgen). The market could simply not afford such expensive medications when cheaper alternatives are available, and the incremental benefit does not justify the cost.

The third problem is with location. As with real estate, biotechnology funding is all about location, location, location. Some hotspots such as Boston, San Francisco, etc. get the lions share of funding. So a company that is not located in these hot spots will have a hard time raising capital, no matter how good the technology and management.

The fourth problem is common to all funding but is particularly so in the biotechnology field. That is – it is who you know that counts, not what you know. To extrapolate, a company may have a great product, but if it cannot get beyond the gatekeeper at a Venture Capital company or Private Equity, its future is in doubt.

The return on a successful biotechnology company investment can be truly gratifying, but most companies will seize to exist. And that is not all because of poor drugs or management, but because the investment landscape in biotechnology is very sub-optimal. With the cost of healthcare going up, and pressure mounting to rein in drug prices, there needs to be a better way to optimize drug development. The four areas mentioned above would be good points to address