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Friday, Feb 23, 2024

Realities Reset Biotech Investment Strategies

Earlier this month, scientists said they had discovered that the so-called “junk DNA” that comprises 99 percent of the human genome is not junk after all.

It serves as circuits and switches controlling 22,000 genes.

The discovery could lead to the launch of new businesses to commercialize new cures and treatments for a wide-variety of gene-based illnesses, some say.

But Kevin Kinsella, founder of venture capital firm Avalon Ventures, doesn’t agree.

Kinsella, who announced recently that his La Jolla-based firm raised $202 million for its 10th fund, said successful commercialization of the discovery could be years — if not decades — into the future.

“In the good old days, people would be all over that,” said Kinsella, who has been actively investing for the past 29 years. “Four rival startups would have been funded by venture capital syndicates, chasing down these gene switches.”

But now he doesn’t expect much activity, given the preliminary nature of the research.

“If you dig into the actual journal articles in Nature, you’ll find this is the beginning of a very long process to figure out how these switches work,” he said. “Those are all big question marks.”

Broken ‘Promises’

He said the life science sector hasn’t performed as promised after sequencing of the human genome in the early 2000s.

“The number of medicines that have actually come from the sequencing of the human genome is mind-bogglingly small, and, in fact, I can’t name one right now,” Kinsella said.

Biotech hasn’t been successful in building companies based on research around single genes.

He said most research on new drug products are polygenic, involving more than one gene in the human genome.

Big Pharma as well as smaller biotechs focus on diseases that affect millions and millions of people,” he said. “They’re polygenic, and very difficult to figure out,” he added.

Kinsella, whose firm has invested in 95 startups over the past three decades, plus an additional 10 in which he has personally invested, said he is about to announce two investments from the new fund, one in life science and one in technology.

But Avalon has become a wary of life science investments, along with other VC firms.

He said the number of VCs involved in life science deals has declined by two-thirds during the past few years.

In addition, pharmaceutical companies, which shuttered many of their internal research labs, started partnering with VC firms, but on terms benefiting the biotech firms not VC firms.

VC firms were fortunate if they get their money back when drugs don’t pan out, Kinsella said.

“They (pharma) basically decimated their own internal research because of the lack of productivity, and for a very good reason, it wasn’t very productive,” he said. “Scientists in pharma by-in-large are not academic driven scientists; they’re B-class scientists who like to hire C-class scientists under them.”

A Downward Spiral

“Unfortunately, when you dumb down your research organization with B-class scientists, it very quickly ends up corkscrewing down a level or two to C-class scientists,” he said, which means less productive research.

“Pharma recognized that and shut their research centers,” he said.

Meanwhile, venture capital has been retreating from biotech investing because of the high costs involved and research timelines for new drugs that don’t always pass muster with the FDA.

The convergence of the two trends has created a freeze in life sciences deals, which is now only beginning to thaw.

Kinsella said he’s been contacted by a number of pharmaceutical executives who realize what has happened; they want to bring back more venture capitalist involvement.

“We’re going to have a meeting with a number of these companies through the fall, seeing what deals we can come up with,” he said, saying that it’s a “major inflection point” where the industry will start to see some changes.”

“We are agnostic between biotech and technology; we’re just looking for the best return for the least risk,” he said. “Most biotech investments today are positioned such that it’s too much money, too much risk and too much time. (Venture capital) looks for the best return, and if biotech is not going to produce the returns then the money is going to go somewhere else, as it has in droves,” Kinsella said.

Avalon is perhaps best known in VC circles for its investment in San Francisco-based online games developer Zynga Inc., which went public in December 2011, making the $5.3 million bet worth $340 million, a 700 percent return.

Nikhil Varaiya, a business professor at San Diego State University, said it’s not unusual that venture capital seeks investments that will produce the best returns in the shortest time.

It’s the goal of every venture capital firm, including Avalon.

“He’s saying that from his perspective that it’s been tough to come up with in a new drug, a new therapy or a new treatment using gene therapy, but that doesn’t mean other venture capitalists have the same view. If Kevin’s view held true in the past, we would have never seen companies like Genentech and others come along.”


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