Hedging against the drug resistant future
When the United Nations Climate Change Conference kicks off in Paris this Monday, we can expect to hear a lot about the future, about our children and our children’s children. What impedes any solution to global climate change, however, is a simple reality of human beings: the future never matters to us as much as the present. Often, this is rational: it’s why I owe you interest if I hold your money. But when confronting questions of policy and strategy, discounting the future can be disastrous. The nasty trick of the future is that — whether for us or a future generation — it will inexorably become the all-important present. I want to take this problem (discounting the future) out of the familiar context of climate change and connect it to another desperate challenge: evolving diseases and the need for health innovation.
A new study in Lancet Infectious Diseases this week gives evidence that some bacteria are growing resistant to our antibiotics of last resort. A chilling commentary in the same issue describes a future in which doctors tell patients, “Sorry, there is nothing I can do to cure your infection.” One professor who collaborated in the study explains to the BBC: “All the key players are now in place to make the post-antibiotic world a reality.” According to the CDC, resistant bacteria already kill 23,000 Americans each year, and one study estimates that growing resistance will be responsible for 300 million deaths worldwide and $100 trillion lost to the global economy by 2050.
The problem is one of innovation. Where are the incentives to develop drugs which have a very small market now but which millions of people will need desperately in coming decades? As The Observer writes, “Resistance wouldn’t be a problem if new drugs could keep up with demand, but creating antibiotics is becoming increasingly difficult … and there isn’t much incentive for pharmaceutical companies to develop new strains.” An Accenture study from May (PDF) quantified the challenge and concluded “performance indicators reveal the most significant challenge for pharmaceutical R&D is the productivity decline. The industry is developing fewer new molecular entities … Leading companies are more reliant on external molecules from smaller biotech as a source of new products.” The incentives for the largest biotech companies simply don’t price in the future.
Funding real drugs, true medical innovation, should be a real consideration. No other field offers investors the potential of these smart, lean healthcare start-ups. The goal for any young company, as an investment, is to “exit” into a successful initial public offering (IPO) or merger and acquisition by a larger company (M&A). According to the Silicon Valley Bank’s most recent report on healthcare investments, 2014 saw 83 health technology IPOs — more than 2008 to 2013 combined. This is in addition to 43 M&A exits, up from 27 in 2013. All told, these 126 exits distributed an estimated $20 billion to investors, the highest return in SVB’s ten years of reports.
2014 was a standout year by any standard. But it came as part of a larger trend. Even if healthcare exits cool off — even if a looming recession hits — these numbers, even toned down, will remain remarkable. Most impressive of all, the median time for these IPOs was less than six years after company formation. For “big exit M&A deals,” according to SVB, “the median time to exit was a speedy 4.3 years” from a company’s first financing — “the quickest we have seen.” Add your most pessimistic penalty to these numbers, and you still have dizzyingly fast returns for the world of start-ups.
We need to start making serious investments, more of them, in the drugs of the future, even if the crisis hasn’t arrived. When large companies are under pressure and making quarter-to-quarter decisions for the bottom line, foundational research — like many other investments in our collective interest — has often been the responsibility of government. But, as the Accenture report notes, it is also an opportunity for start-ups and smaller companies, risk-takers looking for their breakthrough — and hopefully helping more of us survive to a more optimistic 2050.
Zeshan Muhammedi is a co-founder at FundRx, an equity investment platform that empowers physicians and investors to fund promising early-stage healthcare companies and advance meaningful medical innovation. Join us.