Pharmacy for venture

Is it worth investing in Russian biotechnologies

Olga Tsyuryupa, Forbes, 21.12.2017

A venture investor in biotech has two ways to secure his investments: buy more expensive at later stages or reduce risks on his own. The latter is especially relevant for Russia.

Venture investments in Russian biotech projects at early stages are accompanied by a suicidal risk of failure. If you can find classic success stories of biotech startups on the foreign market, there are no bright domestic examples yet.

The reason is known – the level of development of foreign venture biotech reduces investment risks, and the proven process of portfolio capitalization saves a lot of effort and resources of investors, allowing him to passively accompany projects.

The Russian market, due to its immaturity, requires daily deep involvement in the development of projects and the selection of competencies within the venture fund and its partners, which can be expensive for investors. Because of this, investment opportunities in Russian biotechnologies remain unrealized.

Like other investors, we see a difference in the level of preparation of projects in Russia, the USA and the EU. In our experience, in 90% of cases, foreign teams begin to think through the stages of relations with investors, competently administer development and work out a business strategy at the very beginning of the journey. As a result, the fund receives a ready-made structured offer. Often, he is brought an independent due-diligence project ordered and paid for by the founders as confirmation of the technology's prospects and the validity of the investor's entry assessment.

Biotech in Russian

In Russia, biotech investor focuses on attractive conditions for the development of projects:  

• excellent scientific and technological base;

• cheapness of development: the cost of personnel, contract work is on average up to 4 times lower than similar costs abroad;

• high probability of successful registration: Russia is a good platform for testing hypotheses and conducting research, allowing you to understand whether it will be possible to enter highly competitive markets in the future;

• significant financial support of biotech projects from the state - untapped opportunities for synergy and diversification of the risk of private investors.

However, in most cases, the investor receives only the development of R&D, which is not worked out as a business product. As a rule, he will have to start by analyzing the research plan and, together with the project, determine the development strategy and basic financing conditions. The good news is that business competencies can be brought in, and administrative risks can be eliminated.

This work affects the timing. On average, the venture fund spends about 2.5 months searching for the pearls of the Russian biotech, for a comprehensive review of the project, interaction with the company and conducting examinations.

Strategic and financial elaboration is presented to him in less than 10% of cases. Legal support and intellectual property protection strategy is almost always determined at the time of negotiations with investors.

Since projects have their roots in the institute's laboratories, this often becomes a big stumbling block. There are risks of loss of rights due to potential claims of employers, institutions, former colleagues of the team. The investor is forced to restore and check all stages of the creation of intellectual property to make sure it is clean.

Often, due to a long search for investments, international patentability is lost. In biotech, being second is much more critical than in the same IT – the molecule is patented, and you are left out of work.

Together with insufficient business preparation of the project, the investor receives an offer of investments at an inflated cost, in which the teams almost never take into account the risks of development. In addition to this, they determine the cost of the project by the amount of funds invested – through grants, institute contracts, and other attracted money.

At the same time, not all created assets are suitable for the development of the project. Investors, filtering assets and estimating the costs of their creation (purchasing mice for experiments, equipment, creating dossiers), include the risk of stage failure and receive a cost that is on average 2-4 times lower than the declared project.

Potential profit

Nevertheless, it is not a problem for both sides to agree on the size of the transaction, since everyone understands not only high risks, but also means high profitability after passing the main boundaries. The results of the sale of such projects after the significant successes of the previous cycle are indicative: the results of the venture boom in biotech in 2013-2015 in the USA and Europe are known, when funds left portfolios with dozens of profitability multipliers.

Source: Trends in Healthcare Investments and Exits 2017 Silicon Valley Bank Report

Therefore, biotech has become a tasty morsel for investors in the world and may well become such in Of Russia. Now venture capital players are actively moving to the earliest stages of startup development, as Bolshaya Pharma has started buying projects at the stages of phases I and II of clinical trials.

Smart investments

The interest of non-core investors in biotech accelerates the development of the industry, but its specifics maintain a high entry threshold: investors must have serious expertise and reduce risks at its expense, or simply buy more expensive at later stages. If, of course, they can compete with the financial capabilities of Big Pharma, which does not skimp on interesting developments for it. 

If there is no such money, you need to reduce the risks. The concept of smart money in biotech is implemented through several directions. From the point of view of competencies and infrastructure support, this is assistance to the project in drawing up a research program, 24/7 support by the fund's project manager, contacts with leading infrastructure sites and partners and monitoring of research results "minute by minute".

The second element is grants and government contracts, which also need to be applied for correctly. For any venture investor, additional indelible financing is a strong advantage that reduces the need for new investments for the project, increasing its life span and survival rate in the early phases.

All this helps to control administrative, financial and strategic risks. According to our calculations, at the R&D stage, this way it is possible to increase the success rate of the project by 5% of the average industry. This will make 85% of the success rate of passing this stage.

At the next stage, we raise the bar by 12% thanks to the control of preclinical studies, recommendations on production sites and continuous project management by managers and experts. At the first phase of clinical trials, this level reaches 70%.

In general, the success of the portfolio at all three stages will be 45%. This is 20% higher than the industry average. Of course, such competencies require high costs on the part of the investor. But they pay off, as a profile investor is able to exit the project faster and fix his profit.

The venture biotech industry in Russia for 5-7 years has been lined up in a linear sequence of players who work with projects of different stages. This is the so-called investment elevator. So far, there is not a single profile investor of the seed stage in this elevator. However, we would advise all biotech investors and investors from other fields to pay attention to the early phases: global trends show that there are now the most "exits" there, regardless of the direction, and this is not for nothing.

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