A three step guide to life science investing
This will come as no surprise to the seasoned investor, but nonetheless: Investing in anything is a risk-reward balance, where you as an investor need to do a thorough Due Diligence on the asset you are looking to invest in. The same is true for life science investments.
In this quick guide we will focus on general guidelines on how to approach investing in Pharmaceutical and Biotechnology companies through three important steps:
Step 1: Start with the drugs
Is it an approvable drug and is it a meaningful drug to patients? In order to determine that, we need to look at the clinical trial risks and regulatory risk, weighed up against the market opportunity.
Example: For the sake of simplicity, let’s compare two drugs in two indications; Cancer and Alzheimer's. Both indications represent a high unmet medical need, and the reimbursement possibilities, aka commercial potential is significant in both cases. However there are a range of factors that dramatically differentiate the risk profiles of these two drugs.
To what extent do we understand cancer and Alzheimer's? One would argue that cancer is very well understood compared to Alzheimer's, where we still have many unanswered questions.
Can we use early data to predict the likelihood of clinical success? In the case of cancer, yes, we can use multiple methods to assess whether a tumor is shrinking or use a biomarker to track if cancer cells diminish. In the case of Alzheimer's, we do not have the same tools and data to show if a drug has an effect or not and therefore the investment risk is more uncertain.
One last thing to consider regarding the drug is access to accelerated clinical pathways. The FDA and EMA respectively provide accelerated clinical programs for rare diseases and cancers alike, again this is not the case for CNS indications like Alzheimer's.
All together, cancer is a less risky asset to invest in compared to Alzheimer's when assessing the clinical and regulatory risks.
Step 2: Research the market
Looking at the market opportunity, the investor should focus on the patient population, the pricing potential, and the life span of the given drug.
As for the patient population it is paramount to assess the treatable population, and ask questions such as:
Are patients diagnosed?
Is it hard to find undiagnosed patients?
Patient availability in systems (ie. electronic health records)?
What is the frequency of interaction between physician and patient?
Are patients already well treated or is there a need for change?
Are patients motivated to take the drug?
Examples of some key questions to ask around pricing would be;
What is the current standard of care pricing?
What advantages does the new drug offer over standard care?
Are there any generic drugs available?
And sum up the cost effectiveness ratio of the new drug (do you want a drug with better or similar effect at lower price, or higher price if the effectiveness benefits allows)?
Step 3: Predict the time span of your investment
The last important factor to assess is the life expectancy of the given drug;
How long do patients typically suffer from the disease in question?
How long is the drug effective?
Are there risks of adverse reactions or tolerability issues?
Will patients drop out of treatment because of that or any other issues?
To what extent will a patient see or feel the positive difference of taking the drug and how motivated are they to stay on the treatment?
The answers to these questions are essential for the savvy investor to understand before getting invested.
Depending on the maturity of the company they may have a pipeline of drugs (remember to look for diversity) and other assets to investigate such as cash and liabilities (balance sheet), royalties and milestone payments and perhaps even priority review vouchers (from the FDA). With a little luck (as with any investment, you never say no to a bit of good fortune), the company you invest in could very well achieve an exponentially higher valuation than when you first invested.
Contribution by
Jannik Grodt Schmidt, Innovation Norway