What when the boundaries blur between VC & PE?

My response on the highly thought provoking blog post "Venture Capital 2.0" by Drug Baron (David Grainger) - posted on 01/Mar/2013

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Once again a really thorough proposition by Drug Baron that leaves frustratingly little scope to contradict. For the sake of a debate I would still like to raise a few questions; make a few statements & generally try not to sound like mouthing a rejoinder in support of Venture Capital 1.0 - which it definitely is not! J

It is absolutely true that the VC model should periodically re-invent itself & evolve like the innovations of other kind it chases routinely – this, I believe is not just true of VCs focused on life sciences but for all others too. Also, after a quick read, I realized that one could misread the term “asset centric investing” if they do not go through what exactly Index ventures pursues through its IDDs – David, you may consider hyperlinking your statement “Asset-centric investing is only the first step on a road to improved returns for life science investors” to http://www.indexventures.com/blog/index/post/354.

Now, since the primary intent of the asset-centric-investing model appears to be de-risking venture funding to the LPs (and thus raise funds with less difficulty), the inferred premise(s) of this model appear to be as follows;

• That the early discovery prior to lead-validation should-not-be/ need-not-be venture funded

• That owing to the large investment & the inherent risk of failure, innovation (in particular drug discovery) is something better left to academic/ federal institutions & large pharmaceutical organizations that can afford the risk (did someone say, ‘risk is neither created nor destroyed, only transferred and hedged differently!’ :-))

• And finally that any VC backed biotech with a “pipe-line” hasn’t probably thoroughly screened the clinical & commercial viability of candidates including, probably in a few cases other than, the lead-program candidate for which it managed to tease out some funding?

No doubt this model makes absolute sense to the fund of funds or LPs on its focus on sheer reduction of risk to IRRs but not sure if this model helps generate & nurture novel enterprises & why should it? - now I do realize that the ACI model also believes that creation of an innovative enterprise is NOT the VCs responsibility (probably since they are using ‘others money’ for this noble cause? J) & more a responsibility of the struggling entrepreneurs themselves?

Without sounding too knowledgeable about it, I would like to believe that across the past few years, VC seemed to have played a role in keeping afloat the spirit of enterprise at the most critical & vulnerable early stages and thus helped, however minimally, in letting a lot of budding innovators take root & grow their enterprises into cash-cow organizations that’d offer a lot more de-risked alternative asset investment options to the LPs.

So while I generally & unequivocally support the need for yet another paradigm shift in drug discovery methodology & innovation models, I am not sure if a VC model de-risked to this extent almost morphing into a PE would help this innovation paradigm nor help create the much needed pipeline of early innovative enterprises that later mature into investable asset-centric organizations.

Post thought:

In the current context of drastically reduced spend on basic discovery by big-pharma, I see that most most biotechs, drug discovery organizations have started to reinvent themselves into “drug development organizations” and have quite voluntarily started de-risking by building a pipeline/ portfolio of in-licensed/ spun-off ~pre-validated drug candidates . So I guess without so much as a nudge, the enterprise out there is all ready for Venture Capital 2.0 – Now again that doesn’t say much about the survival chances of real innovation that not necessarily stems from the largest of organizations/ institutions….. after all, garage innovation in life sciences appears to be a distinct possibility in in these winds of open source drug discovery.

Dialog on Drug Baron's post "The Primacy of Statistics: In defense of the pivotal Phase 3 Clinical Trial"

The Primacy of Statistics: In defense of the pivotal Phase 3 Clinical Trial

By Drug Baron (David Grainger)

http://www.tcpinnovations.com/drugbaron/?p=319&utm_source=rss&utm_medium=rss&utm_campaign=the-primacy-of-statistics-in-defense-of-the-pivotal-phase-3-clinical-trial

My comment on the above post;

A very compelling argument indeed - One factor though I think needs to be taken into account is the type of indication for which the drug is being pursued.

While for the more prevalent indications such as metabolic disorders, cardio-vascular diseases et al where the sample size is large statistical rigor is highly relevant & decisive while approving the drug, can it be simultaneously argued that for orphan & other highly specific indications, where the sample is small, a solely statistical model will eliminate a lot of potential treatment options to statistical bias? – particularly since its being increasingly noted that an individual’s genetic make-up (presence or absence of mutations on a specific gene et al in the healthy or diseased tissue) can determine how the patient responds to the drug under evaluation? (case-in-study, Vemurafenib working for BRAFV600-Mutation Positive Metastatic Melanoma patients)  

Drug Baron's reply t my above comment:

davidgrainger Mod  Murali Apparaju • an hour ago

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Thanks for your comment. This goes right to the nub of the argument.

You are exactly right that the slavish adherence to statistics will deny people (particularly in small indications) access to medicines that do actually work. In the limit, unless you are an identical twin, you are the only person with your genotype and maybe the drug would work brilliantly for you and for no-one else. With statistics as the gatekeeper, you will never get access to that drug.

BUT the key point of the piece is to point out that without statistics there is no way to know if that drug really did work for you. There is no control. At present (and maybe always) there is no alternative to a statistical test to be sure that a drug works at all.

Unless you are happy to approve drugs that MIGHT work, then we have no choice but to accept that with a statistically significant phase 3 trial as the "gatekeeper" we will reject drugs that actually work, but which we cannot prove they work.

For me, I would rather have the current system - where drugs have to be proven to work - than the one that existed prior to regulators, when snake-oil salesmen could sell anything as long as they could assemble a compelling enough argument to persuade the purchaser. That was a bad model - but allowing drugs through that havent passed a statistical test simply because they may work in some people, and there arent enough people to do the proper test, is a big step backwards.

Yet I see that happening more and more, particularly in the orphan drugs space that you plead as a "special case" - which is precisely why I wrote this article!

Has the rise of an Indian sun in drug discovery horizon turned out a no-show? OR is it a mere eclipse?

Looking up on google to put together my next post, I typed out the text “Drug discovery prospects India” and the top most hit was that of a 2012 Current Science study that went on to explain how the authors figured that the prospects are poor for original drug discovery in India. Not quite the encouraging start I was hoping for.., I scrolled further down and I find the counter poser, a report by Kauffman, no less, that predicted a bright future for drug discovery in India way back in 2008.

While the 2012 article, incidentally by Indian authors, isn’t necessarily a very brightly designed study and the Kauffman analysis isn’t exactly reeking of academic rigor, together these reports do raise the pertinent question of, if the rise of the Indian sun in drug discovery horizon turned out a no show? or is it a mere eclipse?

To part validate the above hypothesis, I went about tracking the flow of funds into life science enterprises within India in the past four years – some observations;

• Considering the 2012 article slams the quality of innovation of Indian CROs,  the discovery services companies ironically cornered >40% of all the investment made in past three years
• The investments into medical devices & diagnostics pretty much followed the global trend which has been incremental over years  
• Manufacturing organizations, both biotech & small molecule attracted some investment, I’d guess a sentiment again aided by a hope of continued & incremental global outsourcing
• Drug discovery organizations receiving venture capital rank at the very bottom of the list at 8% (as against 30% globally)

Even a cursory scan of the existing drug discovery strategies within Indian firms throws up the following aspects;

• A lot of ‘me too’ approaches/ platforms, including choice of target protein that may have already lost out the race to the plethora of US/EU innovator organizations
• Continuing the above line, a lack of novelty of approach, something that’d make an investor sit-up and take notice
• Incomplete, inadequate composition of scientific-leadership teams  i.e. key functional leaders & a sound advisory board
• A surprising lack of in-licensed drug candidates in the portfolios vis-à-vis’ efforts on building novel molecules from scratch
• A similar lack of high pedigree academic partnerships, Indian as well as overseas
• Last but not the least, a surprising lack of any focused attempt to use make use of the India-specific advantages like drug discovery based on Traditional & complementary medicine et al

As with most SWOTs, all the above weaknesses can be worked on and converted into opportunities. Looking at the diaspora of top-notch Indian chemists, molecular biologists, bio-physicists, pharmacologists across the globe making highly innovative & astute contributions to the drug discovery, development & clinical evaluation, I’d readily dismiss any talk of Indians not being up to it when it comes to path breaking innovation – only there is a definite need to re-purpose Indian drug discovery enterprise model, if I may say so & probably this is true for most other domains even.

      

Now, who’ll bell the cat? I say why not the investing universe?  of all geographies and domains out there, Indian drug discovery enterprise is where there's a crying, albeit unacknowledged, need for some astute thought leadership and strategic oversight so as to build, nurture & steer the foggy but promising entrepreneur pool - and who better than the venture capitalist to assume this constructive role, shift the paradigm & eventually partake the fruit of success?

Food for thought.

AFTER THOUGHT:

It’s about time the IRR of an Indian discovery organization is determined by the sheer value of the IP & portfolio it generates and NOT on whether the company is incorporated in Boston, Basel or Singapore.

USER TRUST, the dope that can't be ignored in the race to monetizing cyber-social engagement – A commentary in light of the recent revamps to LinkedIn user experience

Okay, here goes…

FEW STATS & STATEMENTS..

With a market cap of over US$16 billion & revenues forecast slated at US$1.4 billion and supposedly* out-pacing the original social media biggie Facebook in terms of revenue v/s user base, LinkedIn is surely fanning the flames of market expectation of an aggressive performance coming year (*the revenue per user as of last financial year is ~ US$5, coincidentally for both LinkedIn & FB)

As a part of this expectation frenzy, the analysts have been postulating various acquisition targets based on LinkedIn’s need to grow faster, hence inorganically through acquisitions, though not all necessarily as pricey as Slideshare buyout and generate more revenues & earnings that’d justify its two years into public listing - In a funny kind of way, I feel the financial markets almost want LI to compensate for the laggard performance of Facebook J

SOME RANT & RIFFS..

As a regular user, I’ve been wearily noticing the rapid dilution of what used to be the core value-add of LinkedIn platform (vis-à-vis’ other social media) – its high quality user-experience!

While a major portion of this dilution happened through the unceremonious withdrawal of various tools & applications, a lot of it is also owing to the subtle or probably not-so subtle attempt to move away from being an egalitarian professional platform to becoming an elite platform where a few celebrities & myriads of followers exist at different levels of social relevance effected through a methodically tempered and manipulated 'visibility engineering' by the overseers……. not sure about what I’m saying?... ponder this;

Unceremonious WITHDRAWAL of apps

• Just like that, one fine day most used & adored apps such as MY TRAVEL (TRIPIT); EVENTS; READING LIST BY AMAZON (along with all my reviews), BLOG LINK et al are all gone!! - Ironically, the settings still point me to the applications page where all the above application icons still exist, but defunct.

The subtle social DISENGAGEMENT:

• STATUS UPDATE - No more one can use Twitter to update the LI status, the other way is possible though. Also, the status update is now “just one more activity” on your profile & the moment you post a comment on anything else, your status update goes into hiding below. Furthermore, your comment on a LI article itself is never shown, but a grab of the article on which you commented is displayed on your profile
• ENGAGEMENT - The LinkedIn Answers is gone…. taking with it the zillions of high quality & ‘free’ opinion and advice

And what features get strengthened? 1) JOBS - with the introduction of talent solutions; Premium job-seeker et al 2) NEWS - with LinkedIn Today, Signal et al 3) TALENT SOLUTIONS – introduction of Skills and Expertise endorsements moving away from the much cumbersome recommendation 4) COMPANIES – with enhanced options for engagement with potential business associates and job aspirants et al and finally 5) PREMIUM USER ACCOUNT and the paying account privileges that come with it.

PUTTING STATS & RANTS TOGETHER..

Reading the trend of vanishing apps & features together with the names of potential acquisitions floating about, it does appear LI could end up acquiring and integrating a few companies such as;

• VIADEO & ChinaHR  - to ramp up the user-base and thus the revenues
• QUORA – to compensate for Answers & recreate the lost cause of stimulating user engagement.. and finally,
• DEMANDBASE – to optimize the momentum of COMPANY pages and create a B2B integrated transaction platform

I don’t believe acquisition of MONSTER is something LinkedIn would/ should bother about?, as LI already enjoys the benefit of a better user perception (real?) of candidate quality plus a greater brand equity, which any association with a hard-core job site like Monster would only dilute.

Essentially, when the analysts out there propose these acquisitions, it’s all about money, valuation, market capitalization & essentially monetizing all the user-base unabashedly quite like what FB is trying to do.

THE MOMENT OF TRUTH..

But of course, these are enterprises after all and they’d want to make money & people who invested in those want them to make money. But when the very basis of a business is its user base, their interest and trust in the platform and it’s ethos, I am not sure if the solely revenue-inspired changes LI is affecting make complete sense.

I want to believe when LI web-page redirect I landed on says “We'll be focusing our efforts on the development of new and more engaging ways to share and discuss professional topics across LinkedIn” – I very badly want to……. I love/ loved being on LinkedIn, I want it to sustain my interest, I do want to still confide all my professional details to the platform without having a niggling doubt that LI is only teasing-out information it could use commercially and blocking-out information it can’t monetize – only I don’t see many signs of it. I, an average but avid social media denizen am not surely alone in this feeling of the user getting left high and dry in this chase of valuation.

I hope LinkedIn is listening & FB eavesdropping..... Please don’t do the mistake of taking the user for granted 'cause on a social media user is the primal stakeholder.

Cheers!

AFTER THOUGHT..

Is LinkedIn itself a candidate for take-over? I’d think so - it’d be the right acquisition for any company out there trying to dominate the cloud scene with an integrated gadget to boot. Would one of you gentleman please raise your hand? Tim, Jeff, Larry… anyone….??

Pfizer Venture Investments (PVI) - a quick analysis of portfolio companies, categories

Trying to understand the driving factors behind the trends of life science investments in 2012, I was wondering if VC & CVCs behave differently or if one determines the trend & other follows it largely - which I realize is putting it too simplistically and perhaps the VC operates as one organism.

However, I believe that, with the genericization troubles looming large, the big pharma started to rationalize the product development strategies by taking into account parameters which hitherto were not given a serious thought.... foremost of which I'd guess is consumer behavior - This new diligence I expect will translate into the way big pharma CVCs have been building their portfolios over past 3+ years. 

Based on this premise, I tried to analyse the PVI portfolio & see if the data throws-up any tangible trend. Since I was unable to find the exact value of the funding in most cases (the funding rounds involved more than one VC, hence), I stayed with number of investments & hopefully the trend will still make some sense; 

A snap-shot of investment across innovation categories:

Some trends:

• Medical Diagnostic investments equal Drug Discovery numbers (& not in all cases it is merely companion diagnostics related investment)
• Enthusiasm for Medical devices & equipment is much lower than the overall average in 2012 (~50%) - However this I feel is still significant, as logic says a medcines company would be more interested drugs than devices
• Interesting appearance of investments into companies that'd contribute to research /business/ operational advantages for the investing big pharma - surely pro-logical, but interesting nonetheless & showcases the emerging realities in sustaining business
• Drug discovery at 30% only marginally higher than the 23% overall in 2012

Within the drug discovery investment, the innovation sub-categories point to a definite preference to go after platform technologies that'd generate leads in multiple therapeutic domains/ indications;

Overall, very interesting & I will hopefully continue this line of thought with another post or two.

Comments?

Awards: So what if there are some & some win them?

My comment today on the latest blog entry by A VC @ http://www.avc.com/a_vc/2013/02/award-shows.html

When I'm in a business and I’m courting investors & clients alike all the time, out there if there's one event that has a better brand equity than my new start-up's wet-behind-the-ears name has...., I'd surely want to jump right in & improve my chances of getting that extra nano-sec of attention, exposure and the possible business that could come along - please note my usage of would, could - no guarantees here folks, like in any investment, there's only hope which is not always merely fond...

Surely, self-nomination requires some amount of self-assuredness if not cocksureness...& if the few eyeballs I got when I figured in the nominations turn to lot more when I win - hey, am not complaining - you shouldn't even!

IRR v/s Social Impact: Do financial institutions necessarily go through this dilemma?

The news on Times of India Social Impact Awards & what Nicolas Aguzin, chairman and CEO of JP Morgan- Asia-Pacific said during his speech there about JPM's commitment to its social responsibility triggered a cackle of thoughts that're simultaneously standalone, contradictory, inter-connected and inter-dependent;

• CSR (Corporate Social REPONSIBILITY) isn’t necessarily the same as CSI (Corporate Social IMPACT)
• Given all the progress out there in the science of measuring impact, it’s possible a lot of companies have figured out OR will figure out sooner than later, how they could reposition their CSR as CSI
• In an effort to make their social impact measurable, it’s possible that corporates' inadvertently project & expect social-change in a defined, time-bound (& not practicable) fashion?   - While objectivity & accountability are a must, through my wife’s  work in the development sector (at an implementation level..), I could sense/ witness how some inappropriately designed impact measures of a funding organization can/ have killed or maimed a promising social initiative, which if supported on a longer term could've indeed resulted in replicable, scalable & sustainable social change
• Finally, if not blatantly so, at the very root most CSR initiatives tend to carefully (& smartly?) avoid any conflict of interest with the organization’s business goals – while this is understandable since the very purpose of a business is NOT social impact but profitability in the longer-term, it definitely makes more long-term business sense to ‘tangibly’ align the CSR/ CSI with an organization’s core business mission. While I wouldn’t risk associating this with the “social business model” of Prof. Muhammad Yunus, I’d think it’s nevertheless related, but limited to formulating the CSR plan – Social-Aligned Business Responsibility-SaBRe anyone?? :-) 

While attempting to apply, superimpose the above ethos onto the social sensitivity of the investing universe out there, I could only come up with a posse of questions, but no obvious answers – ponder this;

• What would amount to a social impact of a financial institution (LP)? – i.e. apart from making sure the eventual investments (through GPs) are in alignment with certain mandated geo-political guidelines – I do see some institutions following macro-level charters like the Equator principle et al & that’s no doubt a great start, but not sure if that’s comprehensive enough in all complex geological, social contexts and effective for what length of a long-term?
• In a climate where the accepted investment efficiency measures employed are the time-bound investment-to-exit cycles & IRR, is there a safety catch, any checks & measures that’d  ensure sustenance of an innovative enterprise that may have a greater social impact, if not an eye-popping ROI?

Food for thought…