PE-zation of Pharma

Historically, there have been two consensus paths to start a biotech (defined here as early stage co to discover & develop drugs)

  • Trad biotech venture incubation/spinout (think: Flagship, Arch incubations)

  • Generalist VCs providing seed-funding for technical/scientist founder CEOs

Recently, there’s been an emerging and fascinating trend (perhaps in response to macro/biotech industry maturation): Private-equity style New Co launches. I’d say these are distinct from traditional biotech incubations for several reasons.

  • Rather than launching around a specific biological thesis (X technology or school of thinking for disease driver), they are created around a pipeline of clinic-ready assets in a therapeutic area

  • Frequently launched in partnership with a Pharma (who provide assets they otherwise shelve) who split large equity ownership with a fund that commits dictated $$ for clinical development out the gate

  • While not the explicit goal but all of them have been further clinically developed before flipping back to Pharma

Private equity has always been part of biotech industry, but the aggregation and launch of a pipeline is rarer with recent successful outcomes (Cerevel/$7B, Blackstone deals). It’s caught my eye as an interesting potential strategy to set up a Pharma startup (which I will define as an early stage drug co set up for revenue and R&D pipeline within 10 years).

Why:

Biotech and Pharma are distinct industries.

Biotech generally focuses on discovery and development of drugs. Pharma does discovery, development, and sales of drugs.

Biotech must raise money and survive on a focused narrative (developing X platform, modality, etc). Tight focus is necessary for startups but this may also force the biotech to prioritize or ignore opportunities based on whether they fit a pre-defined narrative. Pharma selects and develops a pipeline of assets that are individually selected for potential value (no overall narrative necessary to string together). Although perhaps sales may influence R&D focus/priorities.

The PE playbook-esque NewCos borrows elements from both, biotechs and Pharma. They are akin to biotechs in stage and survival focus and resource limitations. But assemble a portfolio of assets intended for parallel clinical development. Despite facing resource constraint headwinds like standard biotechs, judicious selection of assets to develop could jumpstart the startup -> Pharma chasm more easily than research-stage biotechs which carry additional time & cap table baggage that is unavoidable. This may be a more strategic to jumpstart a Pharma in modern day.

  • Start at the starting line- not behind it. Limitations of becoming a Pharma are limited by Macro costs of R&D. One could argue that biotechs do poorer than Pharma and tech because they start at an earlier stage. Starting with clinic ready assets to prove a biological thesis is a pragmatic way to start (can do earlier stage research/discovery once existential risk is lower and leverage is higher)

  • Critical mass of assets starting out the gate insulates and de-risks the company significantly.

  • You actually scale and build a co equipped for all activities of a Pharma (R&D, clinical, sales). Pharma is really good at selling drugs. Building out internal capacity to commercialize and sell is no small feat and one that biotechs rarely get the opportunity to do given they are forced to sell way before.

You might be thinking:

You can’t moneyball success with handful of assets to scale a co. Key is progressing portfolio in parallel. How you identify/aggregate the assets is the secret sauce (tech-bio’s do with omics data, roivant does with propietary deal flow). Perhaps you can’t systematize this but that’s ok. It’s starting the company at a different stage and build from there based on what you envision for the company (but likely concentrating an a related cluster of therapeutic areas).

This is reliant on market conditions (lots of biotechs without funding/assets on sale). Perhaps! But this type of co doesn’t have to systematize licensing portfolios. It’s an interesting route to start a biotech.

Developing a life-changing moonshot technology is the best way to buck the trend (in white space where Pharma isn’t working). I agree if the technology is good enough, it could carry the company forward alone. There are likely infinite ways to achieve it (each depending on individual cases and founders). But it seems a reductionist pov to solely focus on technology/research-stage moonshots and ‘the rest will figure itself out’ in one of the most highly regulated industries in the world. In other words, tech/silicon valley is different in that you actually can build you way out of problems- we shouldn’t presume we can solve ours in the same way.