The downside of VC funding for biotech

Venture capitalists have poured $42 billion into drug development over the past three years. Most small biotech companies rely on venture capitalist funding to develop new drugs but is that a good way to go? not necessarily. VCs invest money in biotech because they see a potential windfall via a profitable acquisition or sale, but when the FDA weighs in with delays, VCs can be ruthless.

Small biotech firms are primarily reliant on venture capital funding which can help them fund new drugs, but when those costs start to add up, or the FDA delays approvals or indications, VCs can, and often do, request immediate cuts, which can result in more delays and a loss of jobs.

The amount of money required to gain approval of a new drug has been hotly debated, but it also costs a hell of a lot of money to launch a drug in today’s market. A study in 2020 estimated that the median cost of getting a new drug into the market was $985 million, and the average price was $1.3 billion, which was much lower than previous studies, which have placed the average cost of drug development as $2.8 billion.

Venture capitalists often don’t look that far forward. To them, a big payday is a small biotech firm being acquired by a big ten pharma company. When they tell small biotech companies to cut costs, there will often be a significant delay in getting the drug to market or massive layoffs of needed staff.

Venture capital is frequently a vital resource for fledgling drugmakers, but not all investments are made the same. A drug’s therapeutic target, stage in development, and potential to yield returns shape whether its manufacturer is worth backing — or whether money would be better spent elsewhere. Particularly attractive are medicines ahead of the curve, aimed at diseases likely to move into the spotlight over the next few years.

Young female chemist working with poisonous liquid in a laboratory.

According to Bloomberg, “venture capitalists have poured $42 billion into drug development over the past three years. That investment, equal to the National Institutes of Health’s annual spending on medical research, would seem like great news for a world waiting for help with a pandemic. Yet nearly half the money has flooded into cancer and rare diseases with expensive cures. Only about $2.2 billion, or 5% of the total, went to drugs that prevent infections, according to a tally by Silicon Valley Bank, which offers banking services to venture-backed companies and others.”

VCs also don’t like price controls.

A group of early-stage life science investors and biotech CEOs joined together with a prominent patient advocate to speak out against H.R.3, known as the Lower Drug Costs Now Act. The panel was hosted by the life sciences venture capital coalition Incubate and held at the National Press Club. The panelists warned that if lawmakers impose price controls in the pharmaceutical market, investment in biomedical research will plummet to near zero.

“If price controls are enacted, the life sciences investment equation will no longer justify investment in R&D” opened John Stanford, Incubate’s executive director. “Investment won’t just be reduced. It will drop off a cliff.”

Panelists expanded on Stanford’s sentiments, highlighting the critical role of venture capital in developing life-saving drugs and how rapidly that funding would evaporate in the presence of price controls.

“If the government can pick any arbitrarily low price it wants, and prevent a company from saying ‘no’ by threatening it with a ruinous 95% tax, then I could not justify any biomedical R&D investment to my investors,’ said Peter Kolchinsky, Ph.D., founder, and managing partner at RA Capital. “In other words, we should expect a near-total collapse of R&D funding.”

“More than 50% of FDA-approved medicines now have their start in venture-backed private biotech companies in the United States. These are the groundbreaking treatments for cancer, genetic diseases, and other scourges,” said Arjun Goyal, M.D., co-founder, and managing director at Vida Ventures. “But they’ll disappear if Congress passes these price controls. Ultimately patients will lose out, both here in the United States and globally.”

Once again, we are reminded: it’s about money, not patients. VCs can be vital in new drug development, but it’s only about the return and return. They are not here to save the world.