Biotech's New Money Is Out In Force At JP Morgan 2016 (And Why It Will Be There In 2026)
Kenneth Clark remembers the last time new investors moved into biotech. They came in the late 1980s.
They left in the early ’90s.
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The New is back again in the form of Founders Fund, Andreessen Horowitz, Google Ventures and others who are making big bets into the life sciences.
Clark, a partner at Wilson Sonsini Goodrich & Rosati who also sat on the board of Pharmacyclics, thinks the new investors are here to stay this time. He’s driven by an increasingly popular belief that new therapies, a maturing biotech sector and new capital will combine to bring returns those new (and traditional) investors need to stay active.
Clark, whose firm was ranked first in the Life Science Law Firm Index recently released by Lake Whillans, was at the J.P. Morgan Healthcare Conference this week and shared his thoughts on the new investors’ impact at the conference. Below are excerpts from that conversation.
How evident are new biotech investors at JP Morgan this year?
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The magnitude of this year’s conference alone is kind of astounding. It’s significantly higher than last year, which I think was historically high.
The related point is how broad the audience is. The size and diversity of investor interest here is confirming what we’re seeing: investors you’ve never heard of or never imagined would be doing biotech investing are doing biotech investing in a big way.
This is a good thing but there’s risk in it as well.
How much of it is dumb money?
It’s not dumb money. They are seeing things differently.
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What you do have are people who have been investing in the e-commerce world who are less bound by traditional norms of biotech valuations. So they don’t think doing Series A $25 million pre-money valuation is off the charts for historically biotech terms – or even higher valuations than that.
But it’s not just valuation is it? They have a fundamentally different philosophy than traditional biotech VCs, too.
What I’ve always said is that the problem with biotech VCs is we’re hunting bears with BB guns. Massive amounts of capital are necessary. You really can’t do it with a $100 million or $200 million fund. You really need a $4 billion fund.
You now have groups like Founders Fund. They don’t want you thinking about how you partner with pharma. They don’t want you thinking about getting to a Phase 2 trial and selling.
They want you to create the next Genentech. Biotech investors do not say that. They have learned not to say that because it’s not do-able.
But why is that a good thing?
I look forward to having that attitude in the board room and in the shareholder base. Because with the amount of capital in the industry we are able to achieve those things. It is self-fulfilling.
You have all of a sudden Denali Therapeutics, Juno Therapeutics and the list goes on. It’s different this time. We’re creating real drugs that have a real value that will sustain these valuations.
If the companies are worth the big valuations what are the challenges for this next generation of biotech investing?
The next shoe to drop is competition. In the past, the question was does it work? If it worked it was a home run.
But now, success rates in drug discovery are getting better. So, the question is not only whether it works but does it work better than what’s out there and what’s going to be out there?
For example, checkpoint inhibitors have changed the landscape in oncology. If you have a drug you’re very likely going to have to use that drug in combination with some kind of immunotherapy agent.
So the question becomes not, “Does it work?” but, “Does it combine with immunotherapeutics and does it combine better than anything else?”
The healthcare system is not going to pay for five combination agents. So, you’ve got to be at the top of the list.
The bar is getting higher. That is still a good thing.
We’ve talked about the dollars. But are there other things healthcare investors learn from the new investors?
These are really smart people with experience in creating great companies. They may not know the industry but they know, for example, that in order to have a great company you have to have great people.
I was in a board meeting the other day with one of these non-biotech investors who said: “When you do due diligence on the CEO candidate, get him to give you one negative reference. Then call that negative reference.”
His point was that anyone very successful almost by definition is going to have negative references. People were rolling eyes but that was a good idea, because you can listen to it and hear from it and the CEO’s job will be to overcome those objections.
I’ve been doing this 31 years and I had never heard anyone say that.
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