Healthcare VC Investing
On this episode:
With over 20 years of experience in venture capital and degrees from MIT and Harvard, Dr. Jeff Himawan, Managing Director at EW Healthcare Partners, joins the show to discuss the role of venture capital in research-intensive pharmaceutical startups. Jeff outlines the impact that longer holding periods have on healthcare venture firms’ relationships with LPs as well as the characteristics needed to raise new financing rounds for pharma startups. Other topics include the impact of the pandemic on healthcare investing, the entrance of big tech into healthcare, and the lack of innovation by big pharma.
Interview Recap:
5 Quick Bites
Reading list: To Kill a Mockingbird
Skill or topic you’re interested in developing? Playing the piano
How do you stay up to date with the latest developments in your industry? Reading emails from analysts emails, NYT
Favorite CEO? Steve Jobs
What industry would you be interested in starting a company in? Healthcare, because it’s an industry in which everyone can win. There’s a lot of wealth generation for many people.
Where does VC fit in the pharma/biotech industry?
VC finances innovation.
In the pharma industry, big biotech and big pharma are actually really bad at innovating. They instead buy small companies, funded by VC, that develop new drugs. Big pharma and big biotech eat those companies and then commercialize and market those drugs (which they’re great at).
The ecosystem that big biotech and big pharma exist in is end state clinical development and commercialization (marketing).
What is a life cycle of a VC fund in the healthcare industry?
Traditional VC funds have a lifespan of 5 - 7 years, while VC funds in this industry are typically 10 years long.
As Dr. Jeff points out, you want to sell a cake when it’s fully baked, not raw. The challenge that portfolio managers face is balancing consistent exits/returns each year with holding out on a fund so it can mature and develop ultra-high returns at the end of its life.
The biggest successes are those at the end of the 10 years. While investments in the first few years might not deliver strong returns, those at the end do. Timing matters!
What are the stages & benchmarks of VC funding?
The stages of getting a drug passed are:
Preclinical
“Series A” funding
Phase I
“Series B” funding
Phase II
Phase III
Regulatory Filing
“Series C” funding
Approval
Launch
Here’s what happens at each stage of funding:
Series A: Most startups try to raise enough to get to a human trial, which occurs in phase 1. The probability of success here is ⅔.
Series B: Companies want to get to a gold standard, double placebo trial, demonstrating that the drug works. The probability of success is ⅓, and this is where most failures occur.
Series C: Companies want to get to a registration trial, leading to approval. The probability of success is ⅔. Registration trial
In total, there’s a 10% success rate from start to finish. This entire process usually requires $400 million & 10 years.
What are some valuation techniques that portfolio managers use?
Determining market exclusivity, which can come from patents or having the drug in the market earlier than other companies.
What are some current trends in the healthcare industry?
Amazon Care, which cuts down on the middlemen. There’s a lot of money movement between the approval of a new drug and a patient receiving it, which creates inefficiency and a lot of unneeded costs. Amazon could make a huge impact through their new healthcare platform.
Gene therapy is also a new field, but will probably be unpopular among investors because it’s very risky and unknown.
What advice do you have for college students interested in VC?
From Dr. Jeff’s experience, failure happens when different people in charge want to go in different directions. Everyone, including owners, shareholders, management team, the board of directors, and employees, should be on the same page in order to create success.
Fun fact: Pfizer was founded in 1849 by Charles Pfizer and Charles Erhart in Brooklyn, NY, where they produced an antiparasitic called santonin.
Takeaway Quote: “If the board is trying to go one way and the management is going the other way and the shareholders are going a different way, it’s not going to work. Ultimately, that’s what causes the failure” (49:00)
To learn more about Dr. Jeff and his work, visit https://www.ewhealthcare.com/.
