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The Basics of Biotech Investing

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There’s never been a more exciting time to be investing in the pharmaceutical and biotech industry.

The COVID-19 pandemic created tremendous investor demand driving record IPOs and positioning the biotech industry as the hot new sector for investing.

According to Silicon Valley Bank, venture capital fundraising within the biotech industry soared to $47 billion in the first half of 2021 alone, exceeding all of 2020 by 30%.

This tremendous growth was not a surprise given the speed of innovation to develop the COVID vaccines.

“We generated all the life-saving drugs, vaccines, and therapeutics that literally just saved the world,” said Christiana Bardon, a portfolio manager at private equity firm MPM Capital.

Understanding Biotechnology

Novel drug development and clinical research aimed at treating diseases and medical conditions are the primary areas of focus for biotechnology companies. Unlike pharmaceutical companies, which use only chemical (and generally artificial) materials to manufacture their products, biotech companies use living organisms like bacteria or enzymes.

The lead time for the development of biotechnology is typically long, and while companies may spend years developing a product, it may never reach approval. In fact, as many as 90% of prospective new drugs fail. The Food & Drug Administration (FDA) is the regulatory body and primary gatekeeper for approving new drugs for the U.S. market. The FDA is responsible for greenlighting clinical trials, which biotech companies use to prove that their products are safe and effective.

Some Tips for Biotech Investing

  1. Gaining FDA approval for a product is the holy grail for biotech firms, so it’s highly advisable to understand the FDA application and approval process.
  2. Experts suggest that investors focus on a biotech company’s pipeline, which is the source of its presumed and projected value.
  3. Understand the biotech company’s corporate philosophy.
  4. Clinical trials are very costly, so it’s ideal to find well-funded companies.
  5. The biotech industry is very complex and risky with failures outnumbering successes, which means a high level of thorough research and diligence is imperative.

Let’s Not Ignore the Theranos Effect

While biotech investing may still be hot, there are residual effects from the Theranos scandal.

Earlier this year, Elizabeth Holmes, the controversial founder of the former flying-high biotech company she started at the young age of 19, was found guilty of defrauding investors out of hundreds of millions of dollars. Holmes captivated Silicon Valley when she promised revolutionary blood testing technology that would require one small sample of blood from a person’s finger. With Holmes at the helm, Theranos raised $700 million from investors, some of whom included media mogul Rupert Murdoch, former Secretary of Education Betsy Devos, and Walmart’s Walton family. At one time, Theranos was valued at $9 billion. The investment world was left shell shocked when Holmes was charged with fraud in 2018.

New York Times reporter Erin Griffith has conveyed that several female biotech founders complained about investors striking faulty comparisons between their companies and Theranos, and that it’s become more difficult following Theranos’s notorious downfall. Christina Farr, principal investor at OMERS Ventures and a former Fast Company reporter, says that female founders within biotech and diagnostics seem to get most of those comparisons. “We’re seeing major investor interest in women-led companies across digital health like Maven, Tia, Kindbody, Equip, and many more,” she wrote via email. Though people are still doing biiotech investing, Theranos has forced investors to do more diligence around companies that launch technology in clinical settings.

Despite the Theranos scandal, but perhaps with more skepticism and due diligence, venture capitalists continue to do biotech investing

Interested in the biotech space? Contact Smith Hanley Associates‘ Biostatistics Recruiter Nihar Parikh at nparikh@smithhanley.com.

 

 

 

 

 

 

 

 

 

 

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