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Biotech Companies: How Your Pipeline Influences Investors


Key Takeaways

Jonathan Selby - Founder Shield
Jonathan Selby

General Manager

Plenty of factors impact whether a venture capital (VC) firm wants to invest in specific biotech companies. From the leadership team to a company’s financials to its overall mission, VCs will consider each detail of the potential investment. One element that can sway a VCs decision quickly is the status quo of an organization’s pipeline. In this post, we take a look at how biotech companies must consider their stage of clinical trials to secure adequate VC funding. 

Is the Biotech Industry Ripe for Funding?

Biotech is an odd industry when it comes to investing. It’s the only market with devastating fails that largely outnumber the wins. And yet, it’s the only one with the primary goal of improving and saving lives. This unique combination of risk and fascination draws investors to this industry time after time.

Since 2019, investors have poured nearly $15 billion into the biotech industry, or otherwise known as life sciences. In asking if this market is ripe for funding, the answer is a resounding yes.

Plus, in the age of COVID-19, many biotech companies have jumped on developing and fast-tracking a successful drug. The market is red hot for investing. Aside from the current pandemic, several organizations try to cure some diseases continually, such as Alzheimer’s, obesity, cancer, and more.

Best cities for biotech have also seen a surge in investment, with hubs like Boston and San Francisco leading the way.

Source: Cipherbio

Keep in mind that biotech companies can burn through hundreds of thousands of dollars in a flash. It’s not uncommon for clinical trials to cost millions, after all. Even with these steep price tags and significant risk of failure, many investors keep the cash flow coming.

Why Is a Solid Pipeline Crucial?

Biotech focuses on new drug development and clinical research to treat diseases and health conditions. The “pipeline” refers to the stages biotech companies must pass through to move on to the next one. As outlined below, four main phases make up the pipeline.

Source: ILD Collaborative

Naturally, for biotech companies, the pipeline is everything. What’s more, it’s the only path to developing successful cures, treatments, and novel medicines.

Furthermore, its pipeline is also how a business presumes and projects value, precisely what investors are considering. VCs are looking for biotech companies to set specific goals and reach milestones before any investing happens. Some other developmental stages investors want to see include:

  • Continual pipeline building and improvement
  • Reaching distinct clinical trial stages (usually Phase II)
  • Featuring budding products
  • Listing various focused areas of medicine
  • Valuing drugs based on trial stages

Each of these goals involves the pipeline and plays a vital role in whether biotech companies ever benefit from VC investments.

How Do Clinical Trials Play a Role?

Although we’ve touched on the clinical trials process, let’s back up to get a full view of how vital this process honestly is.

The Food and Drug Administration (FDA), a US federal agency commissioned to ensure public health, is the gatekeeper for all novel drugs. No biotech companies (or anyone else) can release new medicines without the approval of the FDA.

FDA drug-approval process

That said, it takes an average of 9-15 years to complete the FDA drug-approval process. Despite its slow-moving procedures, the FDA tries to approve safe and effective medicine only. However, the process has been pegged as “the most stringent in the world.”

Below, the graph outlines FDA trials process in years to show the meticulous nature of each phase:

Source: Optum

  • Phase I – Biotech companies use healthy individuals to discover more about a new drug.

  • Phase II – Volunteers of the target population take part in the testing process. This vital information dictates protocols for the FDA’s next phase of trials.

  • Phase III – Real-life patients with the disease become involved in the testing process. This part is the most substantial and expensive phase.

  • Phase IV – Known as the shortest and most anticipated step — sometimes only six months long — the FDA conducts a final review of the findings before approving it.

  • Phase V – Biotech companies continue to test and monitor the post-market drug, recommending recalls if needed.

The ultimate holdup

Although some innovative startups, such as HealX, have managed to develop drugs at alarming rates — in less than 18 months — it’s incredibly rare and not at all the norm. To put it into perspective, only about 30% of the Phase II candidates ever reach a Phase III trial. A failed clinical trial is financially painful, costing $800 million to $1.4 billion.

Since the early 2010s, only about 10% of Phase I compounds have ever seen Phase II. It’s worth pointing out that no other industry operates under such a significant failure rate. On a more positive note, compounds that make it to Phase III have a historical success rate of just under 50%. Fortunately, the success rate is increasing for this phase.

Nevertheless, Phase II is undeniably the point that testing weeds new drugs because of efficacy or safety. This stage in the process is a tell-all. Even with a bleak outlook, Phase II holds massive opportunities for biotech companies when it comes to funding.


Biotech Risk Management Guide

What’s the Optimal Stage to Secure Funding?

Strangely enough, Phase II is the happy middle ground that investors often use to either green light an investment or walk away from the deal. And for a good reason, too.

The safer bet

Phase II is the optimal stage to secure funding because it’s directly before testing real-life patients come into play. After the research and development (R&D) stage, it’s easier to see what biotech companies honestly know about the drug. Plus, at this point in the game, biotech companies are far enough along to have a robust risk management program, including:

Think of it this way; the pace quickens during Phase II, making success more apparent to those VCs who do their due diligence. This stage typically only lasts two years, so investors are racing time as well as knowledge.

In short, Phase II is action-packed and likely one of the more exciting parts of the entire process. Therefore, many VCs choose to invest in biotech companies that have several drugs in Phase II. It’s a safer bet, per se.

Other options for VCs

Although some VCs opt to invest early in biotech companies to gain more company control, many are still entering the game during Phase II. Some investors also hire data scientists to help them make better decisions based on previous ventures. Naturally, the information from Phase II factors into a VCs’ final decision.

Investments happen all the time for biotech companies and at various stages in development. However, a company’s pipeline undoubtedly plays a crucial role in whether the organization secures funding or not.

Understanding the details of what coverage your company needs can be a confusing process. Founder Shield specializes in knowing the risks your industry faces to make sure you have adequate protection. Feel free to reach out to us, and we’ll walk you through the process of finding the right policy for you.

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