Strategies in securing funding for rare disease research
Giacomo Chiesi, as head of Chiesi Global Rare Diseases and founder of Chiesi Ventures, has witnessed the many challenges facing biotechnology companies, especially those developing rare disease drugs, in securing funding for their R&D efforts. He outlines emerging business strategies and financing models to overcome these challenges and address investors’ concerns, especially in the current market.
The last several months represent a blueprint of a tough financial situation for many pharmaceutical and biotechnology companies. The public equity markets for biotechnology companies have essentially shut down completely, reversing a trend which lasted for several years of ample liquidity and increasing valuations. It is likely that in the past few decades too many companies went public, reflecting investors’ appetite for higher-risk bets at the time. This, in turn, was fuelled by a long period of low interest rates, which translated into low returns for fixed income securities. Some of this frenzy was also fed by the impressive growth that biotechnology companies, including Moderna, were able to experience in the wake of the COVID-19 pandemic.
A more defined path to profitability
In the current environment of low liquidity and signals by the central banks of potential (or actual) increases in interest rates, the ability of public biotechnology companies to raise money and of private ones to go public is severely diminished. This can be lethal for both types of companies alike, which typically burn cash rapidly. While previously there was significant investment in new biotechnologies, even those in early stages, with the expectation of increasing valuations in the long term based on a promising company pipeline or platform, now investors need to see a more defined path to profitability.
Most investors prefer opportunities where there is a clear and quick exit or liquidity events. Preferred exits are often an IPO or a sale of a new company to strategic investors – such as an established pharmaceutical company looking to acquire new technologies to expand their pipeline. Many investors are sceptical of opportunities that do not fit their criteria, pose challenges, or do not have a clear roadmap to an exit.
This scepticism can be detrimental, especially to companies developing therapies for rare and orphan diseases. Funding for research and drug development seems to favour larger indications, whose higher prevalence might make them more attractive exits for investors than smaller market opportunities. Many new rare disease therapies target very small markets, and they require drug developers to conduct expensive and sometimes lengthy clinical trials, with complex manufacturing processes. Some of the new biotech modalities, such as once-in-a-lifetime gene therapies, continue to face significant pricing and reimbursement challenges, further undermining the medium- and long-term viability of certain biotech companies, particularly in low-prevalence rare diseases. Considering all these factors, many investors label rare disease therapies as highly risky, and potential treatments often languish on a shelf, due to lack of funding.
Another common challenge that impedes funding for rare disease research is limited investor bandwidth. Investors are often overwhelmed by a large number of opportunities, which usually vastly exceeds their ability to dedicate the time needed to achieve a deep understanding of different opportunities. As a result, in many cases, companies receive limited constructive feedback, which limits their ability to progress quickly. Luckily, this is not true for all investors, as some of them are generous with their time.
Emerging business models
Given these combined funding challenges, how do biotechnology companies move forward? It is very much a “chicken and the egg” situation where funding, management, and programmes need to come to life as much as possible at the same time.
Several business models have emerged in the last 20 years to overcome common funding challenges in the biotechnology sector. In some cases, scientific founders and companies trying to progress new therapies or research seek funding via public programmes, such as the Small Business Innovation Research (SBIR) and Small Business Technology Transfer (STTR) programmes or funding available via universities or accelerator programmes. There is also a discover-build-launch model, which was pioneered with Boston-based funds such as Third Rock Ventures, Atlas Venture, Polaris Partners, and Flagship Pioneering. Under this model, firms hire industry veterans as entrepreneurs in residence or venture partners who proactively scout for programmes from academic institutions or those abandoned by large pharmaceutical companies. This model has been widely successful, and many other investors have replicated it recently in other locations. For example, in 2018 Sofinnova, a French VC fund, launched the Sofinnova Telethon Fund, which seeks early-stage research projects in the life sciences and biotechnology sectors, working in partnership with Telethon, a research centre based in Milan, Italy.
Crowdfunding, or the practice of raising money from a large number of people who contribute small amounts, is another potential business model. But it has not seen significant development as a funding mechanism for biotechnology companies because this model requires a lot of effort to put many individual investors together and it is not easy to raise the significant amount of funding needed for biotechnology companies (e.g., Series A financial rounds often range from €50-100 million).
It is a challenging landscape to navigate currently in the biotechnology industry, in terms of funding, but the good news is that new business strategies and models are emerging and successfully being put into practice to weather the storm. The following are some additional strategies that biotechnology companies, including start-ups or those developing rare disease therapies, might consider when seeking funding:
- Provide the information that investors care about. Think about how you would answer the question “What information do potential investors typically ask for?” This might include showing available discovery or preclinical data, demonstrating a therapy’s mechanism of action, proving IP rights via patents granted or patent applications, showing the management team’s track record and resumes, outlining a clear development path and key milestones along the way, and providing a financial plan and exit strategy.
- Be respectful of investors’ time. Deliver business presentations that are clear, crisp, and concise. Make investors understand that you value their time and you want to make it efficient and productive.
- Be data driven. Leverage any available data to support discussions with investors. This might include showing in vitro, in vivo, or natural history data or epidemiological data, in order to quantify the market opportunity.
- Clearly articulate the financial ask. Outline the development path to key inflection points and the financing required to reach each of those points. Follow that by explaining how the financial needs and inflection points tie into patients’ needs. Outline a clear exit for investors, if needed.
- Elucidate the unmet medical need for patients and how the therapy will address it, tangibly. With biotech innovation advancing in leaps and bounds, continued financial pressures on healthcare spending, and increasing disease awareness and patient empowerment, comparable therapies may have a hard time gaining traction after approval unless they tangibly address a real unmet medical need for patients. Explain the clinical value of a therapy for patients, how their lives will change as result, and how much and why governments should pay for the innovation.
- Be scientific and rigorous in your description of the business opportunity. Describe in detail for investors your level of understanding of the course of the disease, its manifestations and symptoms, patient prevalence and subpopulations, current standard of care, patient support needs, how the prospective endpoints used in clinical trials tie into disease progression, etc. Leverage knowledge from natural history studies and relationships with key opinion leaders that have conducted similar studies and patient advocacy groups.
- Convey gravitas. Create momentum around the company. Also aim to delicately remove boundaries between investors and try to align investors’ interests to strengthen relationships and build trust.
- Be frugal. Optimise your development plan around key inflection points. Prioritise indications according to patients’ needs and the potential of bringing a new, safe, and effective therapy to them that will deliver tangible benefits. Look for innovative ways to optimise your clinical development spending, as CRO prices have continued to increase steadily and aggressively in the past several years.
- Save capital. If you are nearing the closing of a venture round, close it! Be flexible with valuation because investors’ expectations have become much more disciplined than in the past. Also, look for non-dilutive funding opportunities, which might include selling geographical regional rights to some products under development in exchange for upfront cash and near-term and long-term payments; securing upfront financing from financial partners in exchange for future programme milestones or royalty payments; and, raising money from public sources.
New investment opportunities are picked very carefully by VCs and these and other emerging strategies are essential to distinguish biotechnology companies, including those advancing rare disease therapies that may be deemed too risky. Opportunities that do not match VC investment criteria face a tough challenge in financing. But investors have recently come to terms with reality and recognised that biotechnology companies cannot lose money forever and a breakeven point is needed for them to become self-sustaining – enough so that potentially lifesaving therapies can reach patients in need. They also now appreciate that so many new biotechnologies have advanced that it is highly unlikely that big and mid-sized pharmaceutical companies will absorb them all (together with their losses and risks). There are clear headwinds in the current market, but some good tailwinds exist as well, providing hope for many companies for the future.
About the author
Giacomo Chiesi is head of Global Rare Diseases at the Chiesi Group, where he leads the team developing and commercialising treatments for rare and ultra-rare diseases. In 2014, he founded Chiesi Ventures as a joint venture with Pappas Capital, where he currently serves as managing partner. In his career, Giacomo has directly structured and executed deals with more than $4B in value, ranging from sell-side to buy-side M&A, in- and out-licensing, and spinouts.
