Industry Spotlight. Biotech
Meet the first edition of the newsletter dedicated to the key verticals of our club
Hi, fellas. Since we started this newsletter, we've been focusing on educational material for beginners. If you've been with us all this time, you probably already understand enough about the basics of venture investing to move on to more advanced topics – industries. And if you don't, we recommend all the dozens of articles we've written before. They don't lose their relevance. We tried, honestly.
The Industry Spotlight column focuses on specific areas in which ICLUB invests with TA Ventures. Here we go beyond a few paragraphs and devote the entire article to a single topic. These reviews are good for angels who are ready to invest and want to get into certain technologies. This time we will take a closer look at Biotech.
An Industry for the Adults
Biotech is a mature, complex, and capital-intensive industry that dates back to the second half of the twentieth century. This area of investment is considered particularly risky, even by venture capital standards. Startups here operate in little-known and sometimes unknown fields, which has a detrimental effect on companies' lifespan.
These factors have turned the industry into a niche that still attracts huge cheques. The reasons for this persistent investor interest lie in the characteristics of biotech, whose results and products can make a real difference in people's lives and solve global challenges. And they can also be very profitable.
The field of biotech lies at the intersection of technology and science. At its core is the production or manipulation of living organisms (such as bacteria or molecular substances like mRNA) to create commercial products.
Biotechnology requires expertise in a wide range of disciplines, including molecular biology, genetics, biochemistry, biophysics, bioinformatics, pharmacology, and microbiology.
The methods and technologies that startups use to create their products are no less sophisticated. They include recombinant DNA technology, cryogenic microscopy, cell culture, genetic testing, and protein engineering. All in all, there is no shortage of things to do.
Biotechnology has applications in many areas, including food, the environment, and energy. Today, however, venture investors are focused on two sectors: medicine and agriculture. But it is mostly medicine that will serve as the main subject of this article.
Biotech Market Overview
The biotech industry is one of the most dynamic in the market. Here, global VC investments have been growing steadily since 2015. According to Bloomberg, citing SVB, startups attracted $29.5 billion in 2022. Analysts from PitchBook could only calculate the first half of last year, where they received $17.8 billion. The numbers are quite comparable and therefore worthy of trust.
The total valuation of companies reached a record $114.6 billion, and the average deal size increased by 25% year over year. Meanwhile, Grand View Research estimates the current global biotechnology market to be worth about $1.4 trillion. What can I say, both startups and investors have room to turn around.
In the previous paragraph, we mentioned medicine as one of the main, if not the only, area of investor interest. There was a reason for that. In the 1980s, the U.S. passed legislation to encourage the production of generics for drugs whose patents had expired or were about to expire. Such a move dealt a significant blow to the pharmaceutical giants’ monolithic position, who felt completely safe. The young companies have entered the room.
With the rise of generics, innovative technologies in molecular biology began to emerge, leading to the discovery of new ways to produce biological molecules. The latter began to turn into commercial drugs, shifting the industry's focus to biologics.
This is how we got to where we are today. As a result of this forty-year history, the development of biopharmaceuticals, or biologics, continues to boom. Biologics differ from conventional drugs in that they use synthetic chemicals rather than organic materials. From fighting rare diseases to breakthroughs in treating cancer and arthritis, biologics have spawned revolutionary treatments across the medical spectrum.
Key Industry Developments
The McKinsey & Company study analyzed deals from 2017 through 2021 to identify the most popular and promising technologies, according to venture capital investors. Here are the results.
Cell Therapy 2.0. More precise targeting of diseased tissues and cells to combat a wide range of conditions (e.g., large tumors).
Next-Generation Gene Therapy. Modification of DNA and RNA to treat genetic diseases.
Precision medicine. Diagnosing diseases at earlier stages and tailoring therapies to patients' specific genetic profiles.
Machine learning (ML) drug discovery. Analyzing massive amounts of data to accelerate drug discovery and development.
Developing techniques to combat diseases that have been validated but are not amenable to drugs. These include hard-to-reach proteins and treatment-resistant disorders.
New ways to deliver drugs to the body. Allowing new drugs to be delivered precisely and safely to targeted tissues and cells.
Let's take a closer look at each of these. As it turns out, there are trends within trends.
Cell Therapy 2.0
The market for approved cell therapies is expected to reach $20 billion by 2026. New technologies and techniques are treating, among other things, solid tumors, which account for more than 90% of adult cancers, as well as non-oncological conditions.
However, current cell therapies such as CAR T have a number of drawbacks. These include inflammatory cytokine release syndrome, which can cause side effects including organ failure and death.
As a result, scientists are exploring new ways to use and modify patients' cells. In turn, venture investors have increased funding for second-generation cell therapies. Three new approaches stand out among cell therapy platforms.
Innate immune cells. Although CAR T therapy has shown initial success, some startups are shifting their focus to innate immune cells (such as natural killer cells and macrophages) because of their ability to penetrate solid tumors.
Cell therapy precise control. CAR T therapy can kill even non-cancerous cells. Specially designed synthetic gene chains can prevent this.
In vivo cell therapy. Creating CAR T cells directly in the patient's body, rather than growing them in a laboratory. This approach could reduce the logistical and manufacturing complexities that have slowed the spread of CAR T.
Next-Generation Gene Therapy
As the name implies, gene therapy helps to treat genetic diseases. However, it remains a complex endeavor. For example, gene editing can cause irreversible DNA damage, mutagenic effects, or cell death.
To overcome the limitations of existing gene therapies, startups are working on the following innovations.
RNA-based gene editing. Development of new RNA editing tools such as ADA (adenosine deaminase). This helps to make transient edits and avoid harmful double-strand breaks. Another approach is to modulate protein expression with new classes of RNA, such as transferases and small activating RNAs.
Novel nucleases. Research into new Cas nucleases and enzymes (Cas12 and CasX) that promise to increase the efficiency of CRISPR gene editing.
Nuclease-free gene editing. The traditional CRISPR-Cas9 approach to gene editing limits the range of possibilities. However, new technologies can overcome this limitation. These include base editors, primed editing methods, transposases, and epigenetic modulators.
Precise Medicine
Precision medicine is about increasing the effectiveness of therapeutic drugs. Maximization is achieved by using diagnostics and analytics to account for individual variations in genes, environment, and lifestyle. This field has received a significant boost thanks to big data and AI.
However, precision medicine has one major limitation. It can only be applied to known biomarkers and mutations. In most cases, we have to deal with many unknown variables during treatment.
For the development of precision medicine, startups offer the following developments.
Early detection of disease by using advanced multiomic tools to scan millions of circulating biomarkers (including metabolites and epigenetic markers).
Discovery of new biomarkers. Sort through large volumes of multiomic data, including genomics, proteomics, metabolomics, and others. This can help identify new biomarkers to better predict patient response to drugs and treatments.
Accurate population health. Use data sets from genomic registries to analyze and make decisions about disease prevention and treatment.
Machine Learning Drug Discovery
Through computer modeling of molecular behavior, machine learning is able to accelerate new drug discovery and development. However, the scope of machine learning is limited. Challenges include insufficient quality data sets, lack of generalizability, and non-interpretable algorithms.
Startups are working on the following innovations.
Object identification. Machine learning is increasingly being used for phenotypic screening and disease understanding. Currently, ML can scan the genome and identify new genetic variants. However, companies are expanding the list of disease-associated objects that can be identified. For example, proteins, RNA splicing sites, and biomolecular condensates.
Rational drug design. The essence of this approach is the generalization of machine learning models. Once generalized, ML can apply a predictive model to multiple similar objects. Among the approaches to solve this problem: learning from experiments and generative algorithms.
Leads validation and optimization. Modern algorithms are capable of filtering through libraries of billions of different molecules to select the best ones for a given case. But where do you get these libraries? To solve the problem of the data lack needed for ML training, startups propose to generate them through interactions between proteins and the molecules associated with them. Leading candidates are selected from the resulting list.
New Ways to Fight Diseases that cannot be Treated with Drugs
To fight the disease, conventional drugs (including small molecules and monoclonal antibodies) target proteins. However, studies show that at least 85% of disease-associated proteins are untreatable. The reason is that there is no binding site.
But there are other problems. These include protein resistance to small-molecule drugs, poor medical effects where protein function cannot be altered, an insufficient amount of proven sites to target, and a limited understanding of disease biology.
How do startups propose to address all this?
New binding sites. Identifying previously unknown binding sites in proteins that can be targeted by small molecules.
Protein degradation. One of the newest ways to combat disease-causing proteins is to degrade them. Protein degradation avoids the need to search for small molecule binding sites.
Identifying new drug targets for difficult-to-treat diseases. One approach is to sample populations that are resistant to a particular disease. Advanced analytical methods are then used to detect protective antibodies and develop therapeutics based on them.
Delivering Drugs to the Body in New Ways
Drug delivery in the body has come a long way, relying more and more on disease-specific agents. Something as seemingly trivial as delivery is one of the biggest challenges for new drugs.
For example, the ability of adenoassociated viruses to deliver large loads (such as CRISPR nucleases). In addition, current vehicles can only access a limited number of tissues. For example, intravenous lipid nanoparticles primarily target the liver. In addition, some delivery methods can trigger an immune system response, leading to side effects and blocking the effectiveness of the therapy.
How are companies addressing these issues?
Improved capsids. Using rational design and machine learning to expand knowledge of existing adenoassociated viruses and discover new protective protein envelopes.
Biological vehicles. Developing safer methods of drug delivery using the body's natural signaling system, For example, extracellular bubbles of liquid or cytoplasm enclosed by a double layer of lipids called exosomes have the potential to reach almost all tissues.
Improved nanoparticles. Improved nanoparticles (e.g., optimized lipid composition) can expand the range of tissues a drug can reach.
Startup and Investor Recommendations
The aforementioned McKinsey & Company analysts came to some interesting conclusions based on their trend analysis.
First, startups should think seriously about protecting their innovations. Human cells and molecules are unlikely to be patented. As a result, companies are operating in a jungle where it's every man for himself. Startups are constantly adapting and improving on competitors' technologies, often negating the work of the pioneers. This was the case with the CasX protein, which is smaller than the original Cas9. The smaller size of the protein means it is more easily absorbed by the body and therefore less likely to trigger an immune response.
To compete successfully, first movers need to back up their product with solid evidence that sets them apart from the rest. In addition, biotech companies should advocate for a regulatory framework that allows new technologies to be evaluated even when head-to-head comparisons in clinical trials are not possible.
Second, startups should pay more attention to solving the problems of difficult-to-treat diseases. Many companies prefer to play it safe and test their products on diseases with well-understood mechanisms (e.g., sickle cell disease). But if this continues, the market will become oversaturated and stagnant. In other words, the number of new treatments for the same disease will exceed the need.
For a startup, the situation will worsen dramatically if its chosen disease also has a limited patient population. For example, investing in a startup that wants to treat Duchenne muscular dystrophy is a questionable decision. There are already about 30 drugs on the market, while only 20,000 children are diagnosed with the disease each year. In general, pay more attention to fighting conditions where there is a lack of approved drugs.
Finally, try to develop products with a moderate cost. Today, the pharmaceutical industry prefers expensive drugs to treat small groups of patients. For example, while the top ten drugs treated more than 40 million patients in 2010, the same number of drugs treated 12 million patients in 2020. But the researchers warn that if this trend continues, the model will be unsustainable. So startups are better off playing the long game and not chasing the creation of expensive drugs.
Why Biotech is so Complicated?
Confusing vocabulary and intimidating technology descriptions are not the only challenges biotech startups confront. The hurdles faced by companies here fall into three categories: science-intensive, capital-intensive, and regulatory.
I think you already understand why biotech and science are made for each other. Here, you can't just quickly write a random mobile app to make fast money. Biotech products require real scientists with rare knowledge and specialties. There are very few people who can understand genes, cells, and molecules. And all that biology has to be somehow integrated into the tech field and sold. It should be added that there are more unknowns in the biotech industry than the other way around, so painstaking research is inevitable.
Also, it is not possible to do any such research at home. Biotech requires laboratories, sophisticated equipment, and extensive R&D that will take years. If the R&D is successful, there are three more stages of mandatory testing. The first phase will cost about $6.5 million, the second $13 million, and the third $20 million.
All of these costs are a burden on investors.
Because biotech is related to human health and medicine, it lends itself to scrutiny by national and international regulators. Even if a startup has created a miracle drug, it still has to wait before it is approved for the market, if ever.
So what do we have at the end? The startup can spend years on research that is not successful, and then it has to start all over again. If the R&D is successful, the product can fail at any of the three stages of testing. Even if you manage to pass the tests, the product can be prevented from entering the market by the regulatory authorities. Why do we even invest here?
The ICLUB Experience
The biotech industry has one important advantage: relatively little competition. Investing in biotech startups has a high entry threshold, which limits the influx of new players. It is also difficult to find such startups. First, there are few of them, and second, most of them are not public because they spend most of their time in labs.
The startups themselves set special conditions for investors. Companies want to be sure that they will be given as much time as they need for R&D and product testing. Biotech investing is a long game. We can boast that our club members have already invested in three biotech companies, so there is some track record.
Gameto. Developing therapeutic solutions to treat female reproductive disorders.
Startup #2 (under NDA). Measurement and control of cortisol levels.
Startup #3 (also under NDA). Discovering and reproducing new proteins.
From the Editor
Wow, this topic took longer than I thought it would. And it's only been a little bit of digging. I'm sure we'll need a sequel. I wonder what you think?
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