Minding (and funding) the gap
David Grainger is a Venture Partner at Index Ventures, one of the leading life sciences Venture funds worldwide. He is also a Director of half a dozen biotech companies, many of which where he was a founder, including XO1, TCP Innovations, Epsilon-3 Bio and RxCelerate. Biotech and Money caught up with him at his offices in London.
B&M: So David, let’s start by you just telling me a little bit about your VC firm, what is your history and your key focus?
DG: Index was founded in 1996. In the first year, the investments were in technology, but today, about a third of the capital under management is in healthcare. In terms of investments, we’re absolutely agnostic about factors such as geography or source of ideas. What they have to be is truly innovative, things which are disruptive. We’re looking for ideas that can really shake up the healthcare space.
B&M: What are the characteristics that define that?
DG: We operate what I call a “market backwards” approach rather than a “technology forwards” one. We are looking for the solution to a problem that we can see in the marketplace, in clinical practice. We identify the problem and then we scan the technology providers, the academics, everywhere you can imagine looking, to try and find a solution to that particular problem, rather than taking the reverse approach of looking at what’s out there in terms of technological solutions and then wondering what clever things one might be able to do with the capabilities that are out there.
B&M: What do you think determines the success of a VC?
DG: I think ruthless ability to kill things when they no longer have a sufficient chance of being successful. The biggest killer of efficiency in the large pharmaceutical drug development enterprises, and for healthcare VCs in general, is keeping going with things when somebody somewhere really knows that this is no longer the thing to pursue. We, as human beings, always like to cling on to the remaining possibilities of things working out big. We don’t like to crystallise losses. We don’t like to admit defeat. You hear people saying ‘every good idea almost died 20 times and if it hadn’t been for the perseverance of the people working on it this would never have come through’. That may or may not be true, but the danger is that this kind of determination leads to things continuing when they should have been killed. I call then “zombie projects”: they’re shambling forwards, they’re consuming capital, people’s attention and resources and efforts when actually everybody involved knows deep down that particular idea has lost most of its shine.
B&M: Okay, turning to your own challenges and concerns, what is keeping you awake at the moment? What are the biggest challenges you’re facing?
DG: I think the biggest challenge we face here is identifying individuals to lead our projects who have a sufficiently broad experience of drug development processes. People with the required “helicopter-view” of the drug development process are very thin on the ground because most people got their experience of drug development through large pharma companies and there, with teams of hundreds of people developing a drug, there’s often no one individual who is, if you like, the overall pilot. Those individuals who understand the whole process are rare and, I would argue, are the limiting factor for our ability to scale the operations and do more than we do.
B&M: Okay. If the biggest challenge is finding and identifying the individual, what is the biggest opportunity?
DG: I think the biggest opportunity lies in the healthcare revolution that’s unfolding as the public at large wakes up and takes issue with the high prices they are paying for many drugs. Up to very recently there has been a tacit willingness to pay whatever it takes to access healthcare – and this has cushioned the drugs industry until it’s become plump - to put it politely - on a surfeit of public payments. Paying high prices has allowed inefficiency to take root, probably over 3 decades now. Pharma R&D strategies have just become bigger and bigger and grander and more and more expensive and yet as costs have spiralled the number of approved drugs has been gradually trickling downwards. That’s now yielded a situation where people are sitting there and saying “hang on a minute, are we just going to keep on paying a greater and greater proportion of national productivity of GDP on drugs when the guys who are producing them are spending ever increasing sums of money on producing less and less?.”
The moment is coming over the next several years when the dam is going to break. That pressure from public opinion is going to become unsustainable and there’s going to have to be a revolution in R&D strategies. For those of us who operate small, virtual businesses, whose focus is on efficiency, on producing more per dollar rather than simply producing more, then, that revolution represents an enormous opportunity.
B&M: What do you see as the biggest opportunity for biotechs?
DG: I think to replace the R&D monoliths that are currently inside large pharma, with smaller, nimbly and most importantly more capital-efficient R&D operations.
We’re already seeing signs that these large pharma R&D operations are going to be significantly trimmed: for example, as a result of renewed interest that Pfizer have shown for acquiring AstraZeneca. If you put two large companies together then they’re going to significantly reduce the size of R&D per revenue dollar, with twice as many products yielding revenues but only one R&D engine to sustain that. Similarly, we’re seeing the interest of Pershing Square and Valeant in acquiring Allergan. There again you’ve got a situation where somebody is saying let’s buy this, let’s harvest the revenues and shutter the R&D infrastructure. Faced with those kinds of pressures you’re going to see global Pharma companies trim down their R&D operations significantly over the next several years and there will be a massive opportunity for the smaller biotechs to fill the gap. It’s the mammals versus the dinosaurs. At the moment when the meteor strikes, there’s a population explosion in the mammals and we’re seeing the first steps in that process right now.
B&M: What do you notice are the major differences between investors in the UK and Europe and the ones in the US for example?
DG: I think there is a greater conservatism among European investors. I think US investors are just inherently more willing to take risks. Some of the European characteristics can be beneficial. A degree of conservatism in deciding what to invest in is excellent, but that fear of crystallising losses is probably stronger in Europe than it is in the US. The US guys are happier to take the poison pill than we are and again that comes down to the ready supply of recycling opportunities. The danger here is in a smaller ecosystem there’s a smaller pool of capital, a smaller number of opportunities. You might be less willing to say “actually you know what guys, this thing isn’t really going to work” because you’ve not got the same certainty that something exciting is going to turn up 20 minutes later for you to jump onto (whether as an investor or an entrepreneur), something thats going to be funded, so you’re going to have an exciting new team and a shiny new asset. In the larger US ecosystem, therefore, the ability to make those tough “kill” decisions is actually easier - it’s a function of size.
B&M: We’ve talked a lot about the opportunity, particularly what’s coming around the corner, but what about the biotech industry as a whole concerns you the most at the moment and do have any advice on what should be done about it?
DG: I think the thing that concerns me the most is the public perception of the biotech and pharma industry generally. One hears enormous cynicism about the drugs industry. I think people out there generally assume that we’re all here just to rip them off, to take as much money as possible out of the system and deliver as little value as possible. But there’s no one that I know in this industry who isn’t fundamentally doing healthcare because they believe that it has an enormous potential to deliver benefit to mankind. So there’s this huge mismatch between what most individuals within the drugs industry are trying to deliver and what the public at large sense.
B&M: And that’s hugely important for the industry to address. What would you suggest they do to tackle this public perception problem?
DG: I think the industry is taking a few tentative steps. Transparency is usually an important medicine for increasing confidence. In the one hand, it sometimes feels like transparency is a burden - it doesn’t help everybody to know everything because unless you know how to interpret information you can get a more skewed picture than before. Bald data doesn’t necessarily give you the true picture of what’s happening and sometimes revealing the details results in real pain. But that pain is something which has to be taken. I think at the end of the day, until everybody can see deep inside the organisations that are responsible for developing their medicines and see all of the data that was generated, I don’t think people’s beliefs will change.
B&M: We’ve talked over the course of the interview about a number of characteristics that you’d look for in a biotech but perhaps you could just summarise. What are the key things you look for in a biotech that you would be investing in?
DG: I think the number one criterion is an asset which we can move forward over a period of 4 or 5 years with an accessible chunk of capital - say $25m, that sort of figure - in order to deliver a package that really believably can change healthcare outcomes in some particular space. The right people are a critical component too, but we already have people that we know that we can match with the right assets in order to deliver them, if that’s what is required as well. I was accused of being an ‘assetophile’ the other day because that really is what we are assessing.
B&M: You mentioned people a number of times in the interview, so how exactly do you judge the level of management in a company and how important is it to get management structure in a company correct?
DG: It’s absolutely essential because, as I just said, while we like taking technical risk, we absolutely detest taking operational risk. In other words, having an asset that would have worked, would have been the biggest selling drug of all time, except for the fact that people who were responsible for looking after it took the wrong decisions. That is what I call unacceptable failure. If you failed because you did the wrong things, please don’t come back and see me again. If you failed because the asset didn’t in the end have the properties that we originally thought it would have, but you did all the right things to demonstrate that quickly and cheaply, then you’re our kind of person.
B&M: How do you mitigate that operational risk?
DG: Here, the Index Ventures approach to that is to provide assistance to the management team that goes beyond simply providing capital and then turning up every third Tuesday to see how things are going along. We actually have the members of the investing team here with operational roles within the portfolio companies. If you were being unkind, you might call that “micro-management”, but we see it as standing shoulder to shoulder with the entrepreneurs and with the managers. That takes away the inefficiency of communication between investor and manager - it’s not one PowerPoint deck every 2 months at a board meeting; we’re there assessing the information with them in real time.
B&M: I would like to focus now on what advice you could impart to biotechs, particularly is it pertains to capital. How would you advise a biotech to best position themselves to raise capital and to attract funds?
DG: If you want to raise capital from a VC investor, worry less about the technical aspects and much more about selling me on why this thing is going to be revolutionary if it works.
B&M: To wrap up, what is the single piece of advice you would give to a biotech who is looking to raise capital?
DG: The single piece of advice I would give to a biotech is to simplify, strip out everything that’s not core and tell me what the USP really is here and make that clear. It’s the old fashioned “elevator pitch”. We can worry about whether the details are correct afterwards but right now, if you can’t tell me in 30 seconds why what you’ve got is revolutionary, you’re probably going to struggle to raise capital.
We often see an entrepreneur who will return over a 5 year period with various rehashes of the same idea when we, and presumably everyone else, has suggested that’s not a fundable asset for various reasons - no amount of rehashing it is going to change that if the fundamental 30 second elevator pitch isn’t strong enough.
If you can’t find anyone who’ll buy your elevator pitch, it’s time to say “let’s do something else” before it soaks up a lot of otherwise useful capabilities and cash. But you can only make that ruthless assessment (whether yourself or as an investor) if the critical components of the plan have been boiled down to the simplest possible form.
This article was featured in the June edition of Drugs & Dealers, Biotech and Money’s exclusive magazine.To get access to 10 other executive interviews like this one and feature articles, download for free the magazine.
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