Pharma Venture Capital Funding: Where is the Money Flowing?

Venture capital funding is an important source for financing drug development and pharmaceutical innovation. So which therapeutic areas receive the greatest funding, and which areas may trail? DCAT Value Chain Insights (VCI) shares results from a recent industry analysis.

A recent industry analysis of venture capital funding for the last 10 years examined more than $38 billion of venture capital into more than 1,200 US drug companies to identify investor trends, evaluate investment in specific therapeutic areas and indications, and identify disease areas that might be struggling for early-stage venture equity financing. So what did the study find? Is your company aligned with the financing flow from both a pharma and supply perspective? DCAT Value Chain Insights (VCI) examines venture capital funding into the pharma industry.

Key findings
The report, Venture Funding of the Therapeutic Innovation: A Comprehensive Look at a Decade of Venture Funding of Drug R&D, was developed by the Biotechnology Industry Organization (BIO) to better understand where venture capital funding has been invested in terms of therapeutic research and novelty of research. The analysis grouped companies into two main areas: (1) companies with novel research and development (R&D) of new chemical entities that had no prior regulatory approval and (2) companies with R&D that improves existing drugs, such as new delivery method or new formulations, or development of approved drugs for new indications.

The report showed that venture equity funding of private drug-development companies peaked in 2007 with $5 billion in total funding. This was followed by a decline through the financial crisis of 2008 and into 2010, when only $2.8 billion was raised, a drop of 44% from the industry’s peak in 2007. Financing has trended upward since that low point but not to the levels prior to the financial crisis and reached $3.6 billion in 2013. The decline was also seen in the a reduction of biotech investors, with estimates that there were 40% fewer biotech investors in 2013 compared to pre-financial crisis levels in 2007.

Other important findings
The report offered several important findings:

  • Over the last decade, 78% of US venture investment for therapeutics went toward novel drug R&D, suggesting that innovation is a priority for venture investors.
  • Comparing the five-year periods before and after the recent financial crisis (2004-2008 versus 2009-2013), total funding of drug R&D dropped 21% from $21.5 billion to $16.7 billion.
  • Disease areas affecting large population have seen a decline in novel R&D funding over the five-year periods: diabetes (-81%), psychiatry (-56%), gastrointestinal (-49%), respiratory (-41%), and cardiovascular (-33%).
  • Rare disease funding has seen a large increase over the past decade in terms of both dollars raised and number of companies funded. The highest amounts invested (more than $500 million per year) occurred in 2012 and 2013.
  • Biologics developers now receive 50% of total venture funding for therapeutics, up from only 27% in 2004, with most of the increase seen after the signing of the Affordable Care Act in 2010, which included 12 years of data exclusivity for biologics.
  • There are fewer first-time Series A financings in recent years, down from a peak in 2006. Series A funding is the first significant funding after smaller, seed investing and typically includes a syndicate of venture capital funding. In total, $10.7 billion went into Series A funding over the past 10 years (2004-2013), which is 28% of the $38 billion in all rounds. Eighty-two percent of this funding went into novel R&D funding. Companies involved in early-stage development (preclinical and Phase I) accounted for 74% of Series A financing between 2004-2013.

Other key findings
Funding by phase of development.The report also examined the level of funding based on the phase of development, and the report showed that more than half of venture financing was directed to companies with early-stage (preclinical or Phase I) drug candidates. Thirty-percent of funding went to companies with drugs in preclinical development, and 20% in Phase I. Preclinical funding in 2013 is near where it was back in 2004 (almost $1.5 billion), which was the highest level of the last decade. Thirty percent of the funding was directed to companies with Phase II programs, and only 12% of venture financing over the last decade was for companies with late-stage programs or Phase III development.  

Small molecules versus biologics. One of the interesting parts of the study was examining shifting patterns of venture capital funding as it related to small molecules versus biologics. In characterizing companies, overall, the BIO report asserts that small-molecule drug development is still the dominant modality for drug development, with two-thirds of companies involved in small-molecule development and one-third in biologics development. Venture funding, however, is evenly split between small molecules and biologics, with each receiving 50% of funding in 2013. Venture funding in biologics, however, has risen over the past decade, from 27% in 2004 to 38% in 2011 and to 50% in 2013.

Venture funding by therapeutic area. The BIO report also examined venture capital funding by therapeutic area. Three areas (oncology, neurology, and infectious disease) accounted for almost half of the total of venture financing between 2004 and 2013. Oncology is the top funded disease area by a wide margin, accounting for 24% of all investment dollars in the last 10 years (2004-2013) with over $9 billion in total dollars invested, followed by neurology (12.1%) and infectious disease (10.9%). The study examined funding pre- and post- the financial crisis as well as for allocation of funding for novel R&D and drug improvement R&D. Overall, oncology had a 13% decline comparing funding prior to the financial crisis (2004-2008) compared to the period post the financial crisis (2009-2013). For neurology, the impact on funding was more profound: a 40% decline pre and post the financial crisis and for infectious disease, a 33% decline.

Other therapeutic areas also reflect significant declines in venture financing pre and post the financial crisis: gastrointestinal (-62%), psychiatry (-49%), respiratory (-43%), endocrine (-31%), cardiovascular (-27%), hematology (-25%), and immunology (-22%), Of the 14 therapeutic categories analyzed in the study, only four therapeutics areas did not report a decline in funding in comparing financing prior to the financial crisis (2004-2008) to the period post the financial crisis (2009−2013). These were metabolic (+25%), ophthalmology (10%), so-called platform companies (referring to companies that generate numerous new chemical entities whose research has broad application, such as antibody generation, antibody scaffold design, gene therapy, stem cell therapy, regenerative medicine or patented small-molecule design) (+8%), and other areas (+ 6%). Other includes dermatology, allergy, renal, osteoarthritis, musculoskeltal disorders, genitourinary, and others. When examining novel R&D funding by therapeutic class, the numbers show even more dramatic declines in funding pre (2004-2008) and post the financial crisis (2009-2013). The most notable decreases were in endocrine (-60%), psychiatry (-56%), gastrointestinal (-49%), respiratory (-41%), and neurology (-39%).

Further insight into funding by therapeutic areas. The BIO report also analyzed funding trends further in each therapeutic category. Some key findings were:

  • Although oncology remains the largest target for venture capital funding, it was not immune to the drop in funding due to the financial crisis, seeking a drop of almost 50% in funding from the 2007 peak compared to 2010. Overall, the bulk of oncology R&D funding (66%) occurs at the preclinical and Phase I. Also, the number of companies receiving funding has increased from 57 in the period 2004-2008 to 68 in the period of 2009-2013.    
  • Neurology, although the second largest area for venture capital funding, saw a significant decline in funding pre-and post the financial crisis, dropping from $2.8 billion in 2004-2008 to only $1.7 billion in 2009-2013, a 40% decline. Novel R&D funding dropped even more, by 56%, pre and post the financial crisis. Over the full 10-year period, funding for pain medicines increased three times as much for funding for major neurodegenerative areas, and within pain medicines, only 33% of the funding went to novel R&D with the rest going to drug improvement R&D.
  • Infectious diseases represented the third largest area of venture financing over the 10-year period of 2004-2013 at $4.6 billion, accounting for 11% of venture capital raised, but in the most recent five-year window (2009-2013), it dropped 33% to $1.5 billion from more than $2 billion in the previous five-year period. Antimicrobials, which overall accounted for one-third of infectious disease venture financing, decreased 19% over the two five-year windows. Financing for hepatitis C and HIV drugs is primarily directed at novel R&D, an funding in the most recent period of 2009-2013 for hepatitis C drugs has been modest due to the domination by larger biopharmaceutical companies in this area. For antifungals, 60% of investment is for delivery or formulation of existing drugs.
  • Relative to the unmet medical need and large patient populations, funding for Alzheimer’s disease-focused companies is quite small. Reformulation of pain drugs received three times more funding and ophthalmology drugs five times more funding over the 10-year period of 2004-2013.

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