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Biopharma Investment tips from an Industry Expert

Evaluating pharmaceutical private equity with Roz Potter

by Joel Greenberg

Biopharma Investment Tips from an Industry Expert: There are many deep technology companies on the Propel(x) platform across several sectors and industries. One area that many potential investors find exciting, visionary, and potentially very profitable is the pharmaceutical industry and biopharma investment. We recently spoke with Roz Potter, a consultant in biomedical principles, who started at Hoffman LaRoche in 1981 and has taught various subjects in the field at the high school and college levels to share some biopharma investment tips with us. Not only does she have insight on how to evaluate certain aspects of the industry, but it’s an industry she has spent a long career in and one she knows has an exciting future.

For instance, cutting-edge work in Oncology presents the potential for unlimited opportunities in biopharma investment. The “hot area right now” in biopharma is oncology, Potter says. “The industry finally woke up and finally realized that [cancer] is an immune disease. Hence, she says, many researchers are focusing on “turning on” certain components of the immune system to target specific cancer cells. This has enabled doctors to treat about 90 percent of leukemias that exist, she says.

Still, she notes, these are the “early days” of cancer treatment. “It’s not possible for one drug to work well in everybody because we are all different biochemically and genetically.” But treatments will continue to improve as drugs become more targeted. “We are sharpening our skills in genetics, and that’s where the answers lie.”

Biopharma investment is undoubtedly exciting, especially for many who are excited about the high impact and want more than a passing involvement in the area they invest in. Here are a few angel investing tips to think about when considering investing in the pharmaceutical industry.

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Biopharma Investment Tips:

Tip 1: A Critical Question in Biopharma Investment: Does it Work?

When considering the potential profitability of a new drug under development, prospective investors must remember to keep one thing in mind: Will it work?

While this might seem an obvious question, a good number of investors limit their concerns to “the business side,” asking simply, “how much profit can be made off a new drug or a pipeline?” says Potter. “People tend to forget that at the end the pharmaceutical pipeline, there’s a patient who is hoping that someone comes up with something to help them,” Potter continues. “How can you ask how much you’re going to make if you haven’t asked, ‘will it work?’”

Tip 2: Biopharma Investment Requires Two Kinds of Intelligence

For many years, Potter, who had a front-row seat at Hoffman LaRoche, notes how the pharma industry has grown and what it still needs to do to reach its full potential. It must, she said, continue to strive to incorporate both “business intelligence” and “scientific intelligence” into its evaluation of the pharmaceutical horizon.

“Neither business intelligence nor scientific intelligence should operate separately or one in favor of the other,” she says. Investors must question both the drug’s “potential valuation” and whether it will “really do this…How do you invest in something, even though it has the potential for a billion dollars if you don’t know if it’s going to work or not?” Especially given the relatively small number of drugs approved by the U.S. Food and Drug Administration, she says, “that’s a hell of a risk to take.”

Tip 3: FDA Approval is Crucial—And Infrequent

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In 2016, the FDA approved just 22 new medicines, the lowest number since 2010 and sharply down from 2015’s total of 45. According to the consultancy Deloitte, returns on research and development at the top dozen pharmaceutical companies fell to 3.7 percent in 2016, down from a high of 10.1 percent in 2010. However, approvals appear on the upswing this year. So far in 2017, FDA approvals already have reached 31, according to the agency.

When she was helping Hoffman-LaRoche decide whether to collaborate with a smaller company that was researching a promising compound for cancer treatment, for example, Potter was able to research scientific literature on the drug and advise the company’s “business people.” “Roche not only wanted to know if the compound would work, but they also wanted to know why this [smaller] company was asking such an extraordinary price for ‘collaboration,’” she says.

Potter “fell in love with the mechanism” of the drug in attacking a specific mutation. Moreover, she noted that since the same mutation existed in several forms of cancer, the compound theoretically should be effective for each of those types of the disease. This, she determined, justified the smaller company’s high asking price. “Roche agreed with my evaluation, entered the collaboration, and after more than 20 years, the drug is still highly effective and a great money earner,” she says.

Tip 4: Pharma: Steeped in Tradition, In Need of Updates

Despite making some progress in evaluating both the financial and scientific sides of the equation, she says, “the pharmaceutical industry…is still a very old and conservative business. Their approach to evaluating drug candidates hasn’t changed in more than 100 years. The science and business sides general don’t work closely together, and they should.

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“You want to know if it’s worth the effort and have a financial perspective. [But] from the science perspective, will it work, how will it work, and will it work in more ways than they told you. What is the side-effect profile, who else is working on it, and are they a threat?”

Tip 5: Catching Start-Ups at the Right Time

Historically, start-up companies have been at the forefront of novel drug approaches to treating disease, she says. But once the drug moves past the development, many start-ups by necessity grow larger and become “absorbed” into the larger pharmaceutical landscape. “They’re [no longer] capable of looking at research in a new or different way,” Potter says. “There’s something about the culture. It’s inhibiting.”

Potter fears that the current political climate—and the threat of significant budget cuts–will inhibit progress toward innovative pharmaceutical research. “It’s terrifying,” she says. “Part of the excitement and value of the pharmaceutical industry is that people take a chance with something completely novel. Does it always work? No. But when it does, the impact can be profound. It would be terrible to lose that quality. If you’re a lucky person and you don’t have any major diseases, [the threat of funding constraints] may not occur to you. But if you’re someone who has a progressive or chronic illness, it is very serious.

“People tend to forget that, at the end of the process, there’s a patient who is hoping that someone comes up with something to help them.”

For more thoughts on evaluating deep technology companies and industries check out How to Evaluate a Science and Tech Startup, Part 3 of our 5-Part Guide to Angel Investing.


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