Why VCs fell in love with pharma R&D in 2021

For many years, those inside the pharma industry have been telling the same old story about innovation: pharma is big, slow, and risk averse. Start-ups move fast and break things. That culture clash makes it hard to innovate the world of pharma at scale and with any rapidity.

And investment in pharma followed suit: pharma companies were looked at as stable assets — reliable but unlikely to balloon in value like a tech company might.

But like so many paradigms, COVID-19 bowled this one right over. The risk equation changed for things like decentralised clinical trials, with companies that lacked the capacity for these trials falling behind. And the search for a COVID-19 vaccine opened the industry’s eyes to the idea that innovation could happen quickly, and their processes needn’t be sacrosanct.

“When you stand back and look at that overall context, what seems to have happened is that pharma and investors have suddenly gone, ‘You know what, maybe you can do these quicker and faster without breaking things’,” says managing director of life sciences and healthcare for Silicon Valley Bank UK, Nooman Haque. “If you look across the entire R&D value chain, there are tools you can bring to bear to speed up particular instances.”

Data from SVB, as well as from digital health consultancy Rock Health, shows that pharma R&D was a major area of VC investment in 2021. Rock Health tracked $5.8 billion raised for digital health companies enabling pharma R&D, noting that it was the top-funded category of those Rock Health tracks.

Graphic courtesy Rock Health, from Rock Health’s report “2021 year-end digital health funding: Seismic shifts beneath the surface”.

SVB tracked $8.2 billion in funding for R&D tools in the US and Europe, up from $5.7 billion in 2020. In Massachusetts and Northern California, the US’s top regions for computational biology, investment in that subsector more than tripled.

Deep Dive spoke with Haque, Rock Health’s COO Megan Zweig, research associate Adriana Krasniansky, and investor and entrepreneur Risa Stack to get to the bottom of these funding trends and find out why venture capitalists are suddenly so interested in pharma R&D.

How clinical trials are changing

As mentioned above, COVID-19 was a major forcing function for decentralised clinical trials, which various pharma stakeholders have been trying to get off the ground for a decade.

Remote trials open up lots of opportunity for start-up innovation, from remote monitoring to data analytics and processing, to bespoke telecommunication platforms. But innovation in clinical trials hasn’t been limited to making them remote.

“A culture change or a process change starts to get people thinking ‘What else can we change?'” Haque explains. “Drug trials can’t be done more quickly, right? Except maybe they can. Maybe recruitment can be done more quickly and more smartly as well. When you think about recruitment, it’s still done pretty primitively. It doesn’t look too much different than it did 20, 30 years ago with all the attendant issues.”

Recruitment is a huge challenge for pharma, especially recruiting diverse study groups that accurately reflect larger populations, a cause that’s accelerated by growing societal awareness and intolerance of systemic discrimination.

“I think pharma is getting more interested in addressing those inequities,” explains Zweig. “They know it’s smart from a business standpoint to test efficacy in a more diverse population and a population that’s reflective of who is suffering from the ailments that they’re trying to treat.

“That’s tough right now because we can see all the trust issues that have bubbled up around healthcare and delivery and medical consent in this country. So I think some of these platforms that are emerging that help reach, build trust, create access for these populations that historically haven’t always participated in clinical trials is really interesting.”

As decentralised trials become more common, a feedback loop emerges where patients start to expect digital participation to be an option.

“Anecdotally, consumers, particularly those who might be participating in clinical trials, their relationship to what that process looks like is very different,” explains Krasniansky. “So being matched to different trials looks very different in a post-COVID world. Participating in them, searching for them. And then also thinking about how you’re accessing different therapeutic regimens, working with specialists, getting in contact with a treatment that you might need.”

Remote collaboration meets pharma

Like everyone else, pharma researchers had to learn to collaborate remotely during COVID, not only because pharma companies were also working from home and observing lockdowns but also because of the global nature of the pandemic.

“One of the really interesting things that happened during the COVID pandemic was the emergence of collaborations of labs located around the world,” says Stack. “There were these papers that had almost 100 authors on them because one group could isolate a key viral protein and another group could make small molecules to the protein. These collaborations of labs across the world showed that you can work together to generate data. It doesn’t all have to be in one place.”

Again, this change and realisation opened up opportunities for start-ups who then sucked up available investment dollars. In this case, these companies were working on the technology to enable and smooth out this collaboration.

“What’s interesting now is you’re seeing more sustainable investment and more thoughtfulness around the underlying infrastructure we need to invest in for these things to work long-term,” Zweig says. “How do I think about interoperability? How do I think about integrating with EHRs? How do I think about models that are going to address physician scarcity and talent shortages?”

AI changes the drug development game

Finally, one of the most significant investment areas in pharma R&D this year was in technologies that bring AI to bear on drug development.

“I see tech investors coming into biotech, investing in companies that are focused on novel uses of data or modelling because data is something they’ve used in their world for a long time,” says Stack.

One thing that’s changing is that pharma is awakening to the amount of data that’s already out there – for instance, from past failed trials – and devising ways to use it to improve trial efficiency.

Graphic courtesy Silicon Valley Bank, from SVB’s report “Healthcare Fundraising and Investments”.

But simulation and modelling can also shave years off the early stages of R&D, Haque says.

“The challenging problem at the start of any pharma R&D project is you know your target; you know the part of the body or the cell you want to have an effect on. You have a library of things you can test against it,” he says. “The promise of faster and more intelligent computing, as opposed to just library screening database screening of targets against molecules, is what’s changed here. It’s almost giving biochemists and drug developers – not giving them the answer, but taking some of the work out of that validation stage for sure.”

The amount of investment in this space may even be overstated because there isn’t a clear cut delineation between service companies and small pharma or biotech companies. For example, some start-ups that develop novel computing tech sell it to pharma, but others use it to get into the game themselves.

Rather than seeing those upstarts as competitors, big pharma has entered into a symbiotic relationship with them, where the small companies take on early risk, and the big pharma companies either partner with or acquire them when they’ve come up with a promising therapy.

“One way of looking at this is, as pharma internal R&D budgets have slimmed down, it’s almost like they’ve externalised the R&D,” says Haque. “It’s all being done in the biopharma industry, which is where all this VC money is going.”

The rise of small pharma, itself enabled by new technologies, has interjected a new spirit of innovation in an industry that is still somewhat risk averse at the end of the day.

“The early-stage companies are really entrepreneurial,” says Stack. “It’s often a scientist in a lab saying ‘I have this great idea for a new chemistry or a new modality to edit genes’. I think if you were a pharma executive, you might say, that’s a nice idea, but it’s too far out there, whereas there’s permission in the biotech world to go for really big ideas.”

Megan Zweig

As chief operating officer, Megan leads the Rock Health Membership, research, and operations teams. Through thought partnership, the power of community, and market-leading research, her teams support enterprise clients advancing their digital health strategies via the startup innovation ecosystem. Prior to joining Rock Health, Megan worked at The Advisory Board Company, where she led the Physician Executive Council, a best practice research membership supporting Chief Medical Officers at over 1,300 hospitals and health systems. Megan received an MBA from Berkeley Haas, where she graduated valedictorian of her executive MBA class in January 2020. She also graduated cum laude from Duke University, earning a B.A. in Public Policy Studies with a focus on health policy.

Nooman Haque

Nooman Haque is the Head of Life Sciences and Healthcare at Silicon Valley Bank for EMEA. He leads a team supporting early, growth-stage and established multinational businesses in all sectors of life sciences. Nooman is responsible for expanding the bank’s business across Europe. As part of an international team he helps clients with innovative financing solutions through the bank’s broad platform of investment & commercial banking, asset management and capital connections.

Risa Stack

Risa is a Venture Partner at RA Capital. She has played a significant role in the early operations, financing, and development of over 25 companies. Companies include: Veracyte (NASDAQ:VCYT), Foundation Medicine (NASDAQ:FMI) Trius (NASDAQ:TSRX, sold to Cubist), Pacific Biosciences (NASDAQ:PACB), Corthera (acquired by Novartis), Quantum Health (acquired), and Menlo Microsystems. Most recently Risa created and led the GE Ventures New Business Creation team which founded seven new businesses across multiple industries including healthcare, aviation, and energy. Prior to GE Ventures Risa was a partner at Kleiner Perkins Caufield & Byers where she founded and developed therapeutics, tools, and molecular diagnostics companies. She began her investing career at J.P. Morgan Partners where she sponsored venture and growth investments in healthcare companies and supported international healthcare investing. Before joining the venture capital industry, Risa worked as a derivative specialist on the Chicago Board of Trade, where she traded futures and options on government securities.

Jonah Comstock

Jonah Comstock, Editor-in-Chief

Jonah Comstock is a veteran health tech and digital health reporter. In addition to covering the industry for nearly a decade through articles and podcasts, he is also an oft-scene face at digital health events and on digital health Twitter.

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