September 9, 2013
As In Vivo blog noted last week, asset-centric project financing in biotech is everywhere. As they said: “looking at the biopharma newsflow, you would think the entire industry was restructuring itself to find, develop and sell single products”
But they also noted that a small, but growing, minority of VC investors are not interested in asset-centric investing. They go on to quote a number of them:
“Selectively appealing. Need[s] more human capital.”
“This strategy requires additional caution.”
The article is a useful review of the advantages and disadvantages of the asset-centric approach – but its flaw is that it pitches the asset-centric model against the full-built company investing model, as they are in some kind of competition. As if an investor must either favour one or the other. As though we are witnessing the replacement of a conventional model with a new and improved model. But doing so reveals a fundamental misunderstanding: asset-centric project financing is just one more tool in the biotech investors toolbox, and its the right tool only in the right circumstances.
Unfortunately, the In Vivo blog does not provide a facility to comment directly on the blog. But even from the perspective of a Venture Partner at Index Ventures, where asset-centric investing originated in 2005, many of the principle concerns about the model appear valid:
1. Its about the returns. The jury has to remain out regarding the utility of the asset-centric investment model (at least as its been applied in the past) until there are enough exits to compare with the “old model”. The theory behind asset-centric investing is strong, the early trends encouraging, but no more than that so far. In Vivo highlights the sale of the PanGenetics asset in 2009, but there have been other successful transactions of asset-centric companies even within the Index Ventures portfolio – most recently the sale of Profibrix to the Medicines Company last month for a total of $230m.
2. It only works for certain types of assets – those that can achieve a meaningful proof-of-concept usually in Ph2, with a fixed amount of capital (say $25m or so). That precludes many areas, such as Alzheimer’s Disease, from ever being approached by asset-centric investors. No-one ever said it was a replacement for the conventional model, but just one more tool in the investors tool bag – that needs to be applied to the RIGHT assets. When applied to the right assets, the increased stringency of decision-making and relentless focus on capital at risk there is considerable potential to improve returns. But other assets, and in particular paradigm-shattering platform technologies, cannot be financed or developed this way, and attempting to do so would likely end in failure and loss.
3. Its not accessible to most VC partnerships, because it needs a different kind of investor to run it – ones with lots of drug development expertise, rather than financial management skills. It is hugely intensive on human capital, and depends on a new ecosystem of specialist ‘out-sourced drug development’ houses that did not exist a few years ago. Even still, the scalability is limited – it is hard to envision a billion-dollar fund invested exclusively according to the asset-centric model.
So if getting large amounts of capital to work matters more than returns, if you prefer disruptive platforms to exciting molecules, then asset-centric investing definitely isnt the right model for you.
But keep these three points in mind, then asset-centric investing has a chance to work, an opportunity to improve returns in life sciences investing. As with any new capability, though, there will be a rush to embrace it by people who don’t fully understand these nuances, an enthusiasm to apply it in all sorts of unsuitable ways, and no doubt some avoidable disasters. Those failures do not speak against the principle of asset-centric investing though – but underline a key phrase that applies to any investing model: caveat emptor.