Are some diseases associated with a higher risk of venture capital losses?
Before summer we posted a study correlating venture capital losses in drug development with the magnitude of funding of clinical trials. We have used two approaches to find losses: 1) Companies that Pitchbook registers with a “distressed deal”, 2) Companies with M&A transaction multiples of lower than 1x; focusing on European drug development companies founded after year 2000 and with more than EUR 2M raised.
Below we have studied the correlation between losses and choice of disease area.
In the left panel we have ranked the indications according to number of losses.
Some biotech investors, Sunstone included, are reluctant to invest in infectious diseases. The therapy payment models are not attractive and the established industry seems disinclined to buy infectious disease focused companies. The data below confirms that the field is subject to many losses and that some investors have learned the relevance of commercial viability the hard way!
Oncology is the second disease category with a high loss rate, but data from our previous M&A analysis suggests that oncology ranks high in M&A frequency. In the right panel we have normalized losses relative to successes (EUR >50M M&A). Infectious diseases remain risky, while the many losses in oncology seem balanced by a higher likelihood of success – at least over the past 20 years. Cardiovascular diseases also have a high Loss to Success ratio, but numbers are low (11 losses and 1 success) and we hesitate to conclude anything.
We have also analysed the average raise for the three disease areas with the highest number of losses (>20): oncology – EUR 21M per company; infectious diseases – EUR 19M per company; CNS – EUR 16M per company. Surprisingly it appears less costly to fail in CNS. Maybe CNS focused clinical trials are more definitive – whereas oncology trials are more explorative and facilitate a second try – and eventually a more costly failure?
In general, we find that the diseases that seem more exposed to losses match Sunstone’s experiences – and according to the data above, an experience we apparently share with some of our industry colleagues 🙂
Let us know what you think!
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