Any of us who follow the biotech industry will know how important it is for venture capitalists and investors to seek a certain 'Delta' - the gain on an investment; failure to achieve this diminishes their continued interest in biotech. However, they know that for this type of company the Delta will not be from huge dividends as a result of product sales unless it is one of a chosen few, such as Genentech or Amgen. The return is more likely to be from any capital gain as a result of clinical development achievements, such as successful completion of Phase II, or business development achievements, such as licensing a product to big pharma or entering into a broad collaborative R&D agreement.
In fact, the expectation and the model for most biotech investors is that: 'My investment money will be used to take some exciting intellectual property along the development time line. As such it will increase in value and I will make my gain through a suitable exit.' In other words, it is the expectation that appropriate investment in the development of sound intellectual property through skilled hands will bring the required return.
This anticipation should be a reasonable bet, and in some cases it is. The problem is the issue of clinical risk. We know that on average most drugs will fail in clinical trials, in fact a healthy 80% do just this. So a biotech should have a reasonable portfolio to be a safe bet, otherwise there is a risk of complete failure and loss of investment. That is the current model, and it is one that is based purely on scientific and clinical competence. A scientifically/clinically competent and well-run biotech company is more likely to deliver the Delta - although of course, one also has to consider the additional competence in business development and licensing that would ensure that the products/technology are suitably partnered.
"...there is another way to achieve a 'Delta' - it costs less money, takes less time and has hardly any risk"
I think though that there is another way of achieving a Delta. It costs less money, takes less time and has hardly any risk. Instead of looking at assets appreciating in value through R&D one can look at assets purely in terms of value. Many assets are undervalued for a host of reasons. This can be because the company holding the assets is undervalued, or the perceptions of the market value of its products are incorrect. Each of these values can be assessed using suitable market research, forecasting and valuation methodologies. Do these well with convincing data - as we do at PharmaVentures - and you should be able to identify appropriate Deltas, not only in your own portfolio but also in the portfolios of other companies. How big are these Deltas? By using the appropriate methodologies you can identify values in the order of tens of millions and even hundreds of millions of dollars within weeks. That will bring a smile to your investors.
Fintan Walton
Chief Executive Officer
PharmaVentures Ltd