The well-known pharmaceutical giant Pfizer and its lesser-known German biotechnology counterpart BioNTech have announced successful trial results of their COVID-19 vaccine. Shortly after, another biotech company, Moderna (Massachusetts company), published the results of their vaccine tests. Both were incredibly positive, finally giving concrete signals that this pandemic will be contained within foreseeable future.
As the market rallied, stocks of both companies shot up. BioNTech stock reached $106 per share on the 13th of November 2020 versus $19 around the same time last year. Similarly, Moderna’s stock reached $89 versus $19 one year prior. It is also worth to mention that the former was listed in October 2019 and the letter in December 2018, and since then have generated 7.6x and 5.2x returns to their investors.
It is remarkable to note that although in partnerships with Big Pharma companies, Moderna and BioNTech are not themselves pharmaceutical companies. Instead, there are Biotech companies focusing on developing live molecules rather than chemical compounds as in traditional pharma. As such, these companies may be considered tech companies within the continually disrupted healthcare industry.
Furthermore, these companies, and their solutions did not originate from Big Pharma companies or as the product of their research. Instead, these companies were founded by entrepreneurs, just like most tech startup. As such, in their early development, these companies had to rely completely on private markets and specialist VC investors for financing and support.
In the recent years, pharma companies have reduced their relative spending on internal R&D in favor of M&A. The reasons for this shift can be derived from the rate at which innovation and disruption happens. As developing a molecule or a cell/gene therapy process is a lengthy undertaking requiring substantial investment while also having significant chance of failure depending on stage, big pharma companies are now playing more to their strength – market access.
It is often the case that biotech companies do not have any immediately available manufacturing or distribution capacities and focus strictly on R&D. Consequently, they can be much more agile and efficient, ultimately increasing the chance of success and reducing the cost of failure. As such, their activities are completely complimentary to those of Big Pharma, allowing them to benefit from both, partnerships, and acquisitions of those companies.
It is worth noting that the development of innovation in Life Sciences is a costly process, sometimes requiring hundreds of millions. With Big Pharma currently going through a wave of lesser investment in R&D and higher M&A activity, the financing, and the resulting upside, is left to specialized investors willing to take the associated risk.
These investors are typically Venture Capital firms specializing in a particular segment of the life sciences business. At first, in many cases, innovation must be spun out from academia and the company must be established around a given molecule/process. This role is taken by VCs specializing on company creation. Then, the company needs to start running early stages of medical trials which require a specific set of skills to do with strict regulatory processes associated with them. For this purpose, early-stage Life Sciences VCs get involved by providing more capital to finance those rounds and assist their portfolio companies, increasing the probability of successfully completing a given phase. Lastly, the companies need to undergo the final stages of trials and registration, which can often cost hundreds of millions. For this, large, specialized investors which usually combine VC and public markets/IPO strategies engage, supplying companies with large amounts of cash, and helping them conduct large-scale trials.
Furthermore, late-stage VC funds and specialized hedge funds are typically able to finance companies all the way until the IPO, usually on NASDAQ, as in the case of BioNTech and Moderna. As a result, these investors end up almost fully covering the IPO book as well when the company is listed, leaving very few shares open to the market. In fact, between Q1 2019 and Q2 2020 over 90% of all listed Biotech’s have raised crossover rounds from those specialized late-stage VCs, and up to 50% of the IPO volume in a given quarter is taken by those insiders. The rest is shared among by other investors, who typically have strong relationships with VCs already inside.
In conclusion, three points are worth re-emphasizing. First, Life Sciences innovation is currently very heavily reliant on VC-backed Biotech companies rather than Big Pharma. Second, a variety of players are involved in developing and building these companies, adding value along the way, long before they become public. Third, although public markets return of these companies look very exciting, they are generally hard to access to investors wishing to invest more than a couple of thousand Euros. As such, and at this time, it is clear that life sciences present many great investment opportunities, but the public market is just the tip of the iceberg.