Nov 1, 2007: A successful biotechnology industry, in any country, requires multiple components, including investors who are willing to put money into a company years before any product will come to market. Without an appropriate support system of investors and financial institutions, a country’s biotechnology industry cannot reach its full potential.
As a biotechnology company grows and evolves, investors who understand the risks and rewards of investing in biotechnology companies at specific development stages are required.
From seed investors to venture capital (both earlier-and later-stage) to public equity investors and private equity funds, each class of investor brings an understanding of that phase of a company’s evolution and helps to maximize the potential of the company.
The risk/reward ratio for biotechnology is much higher than for most other industries, and the time to commercialization is longer than for any other industry. For companies to be successful under these conditions, they need investors that have an appropriate risk tolerance and a deep industry understanding. These investors not only provide money, but they also provide their industry expertise, experience and networks—assets that can be at least as valuable as cash to a biotechnology company.
In countries in which commercial biotechnology is just beginning to grow, investors have not had the opportunity to develop sufficient expertise and industry understanding. One could think of looking for investors in other countries where biotechnology investment is more established, but it is very difficult for investors who have built up expertise in one geography or country to make investments in a different geography.
Investing in a new country or new culture adds another layer of risk onto an already high-risk investment. Also, the geographic distance between the established investor and the company increases the difficulty for that investor to closely monitor the company, again increasing risk. If an investor does not have a local presence, the investment will likely not happen.
Government support, both in the form of cash and infrastructure, is available in numerous countries. But this support is most often very early "seed funding" to help a new company start their research operations. For very mature companies (those in late clinical development or commercialization), banks and large investment houses provide funding through public equity markets and private equity investments. However, for those companies that are between the stages of the small start-up and the large mature organization, there are currently few funding options in many emerging market countries. And this financing gap can be an insurmountable barrier for
many companies.
Over time, one can expect that investor groups will arise to fill this gap. Until then, however, companies caught in the gap will need to look closely at other options, which include:
High net worth individuals: These individuals may be looking to diversify their personal portfolios, or may have a strong interest in biotechnology. Because of the overall lower cost structure in Asia, a high net worth individual can make a much larger impact on a biotechnology company there than in a similar sized company in the US or Europe. However, such an investor may have a limited knowledge of the industry, and a similarly limited industry network, two assets that established venture capital investors bring to their portfolio companies in addition to cash.
These individuals may be looking to diversify their personal portfolios, or may have a strong interest in biotechnology. Because of the overall lower cost structure in Asia, a high net worth individual can make a much larger impact on a biotechnology company there than in a similar sized company in the US or Europe. However, such an investor may have a limited knowledge of the industry, and a similarly limited industry network, two assets that established venture capital investors bring to their portfolio companies in addition to cash.
Equity investments from larger domestic companies: These companies may be looking to diversify their business, particularly if they are in pharmaceuticals, chemicals or agriculture. For companies in these industries, an investment in a biotechnology company can be a good way to migrate their business to a more innovation-driven model. Difficulties may arise, however, from the long investment timeline required for success in biotechnology.
These companies may be looking to diversify their business, particularly if they are in pharmaceuticals, chemicals or agriculture. For companies in these industries, an investment in a biotechnology company can be a good way to migrate their business to a more innovation-driven model. Difficulties may arise, however, from the long investment timeline required for success in biotechnology.
Licensing out to domestic or international pharmaceutical partners: For companies with technology platforms or lead compounds that have progressed sufficiently, this is an option with a double financial benefit—cash inflow from upfront fees, and a reduced burn rate as the licensing partner takes on the costs of further program development. However, this is a financing option that many companies regret, learning only after additional data becomes available that they sold the "crown jewels" for much too low a price.
For companies with technology platforms or lead compounds that have progressed sufficiently, this is an option with a double financial benefit—cash inflow from upfront fees, and a reduced burn rate as the licensing partner takes on the costs of further program development. However, this is a financing option that many companies regret, learning only after additional data becomes available that they sold the "crown jewels" for much too low a price.
Even with these alternate financing options for growing companies, a mature, dynamic biotechnology industry cannot develop without a range of investors to match the range of companies, from very early start-ups through commercial-stage companies. Developing this financial infrastructure, either within a country or within a geographical region, is a difficult challenge. The intrinsic nature of biotechnology drug development—the long development timelines, the high risk/reward ratio, etc., requires a very special breed of investors and a combination of financial, scientific and commercial expertise.
Investment houses looking to enter into this space need to think creatively. For example, a joint venture with a foreign investment firm that has biotechnology experience would not only provide the required industry expertise, but could also take the biotechnology investment effort off of the books of the main company, minimizing the impact on the parent company’s financial performance.
Having the right financial infrastructure is just one of many challenges that need to be met in order to build a successful biotechnology industry. Start-up companies, entrepreneurs and governments need to be aware of all of these challenges and to begin planning early.
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