Do compromises in clinical trials cause Venture Capital losses?
In 2020 and 2021 Sunstone looked in depth at drug development venture-backed successes to find usable attributes and learn from the past. We have now turned the analysis up-side down and looked at the biggest losses of European venture capital invested in drug development and we will be sharing some of our observations here on LinkedIn.
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.
As before, the assumptions used to filter through the data have been cross checked against our own losses (yes surprise, we do actually have losses) to ensure that the assumptions are reasonable.
Using those assumptions, we now have a dataset of 143 companies that have caused losses for European venture capital and we can study some of the attributes relative to the M&A successes previously looked at.
Initially, we have studied the accumulated capital raised and the stage at which the loss occurred; see summary of the data below comparing losses to our previous analysis of companies that were acquired by EUR >50M M&A.
The majority of losses, relative to any later phase, occur before reaching phase 1 (65) – maybe the biology did not translate, CMC challenges could not be solved, or the company could not attract enough financing to proceed. A few companies received substantial funding (>EUR20M) and never moved to phase 1. But still, an average preclinical cost of close to EUR 10M to investigate whether a therapeutic idea is worthwhile testing in humans seems reasonable when considering average multiples and the likelihood of success.
Although the variation is high and not statistically significant, the biggest gap seems to be in phase 2 with, on average, almost EUR 15M less invested in the companies that suffer losses at phase 2. A phase 2 is always fully financed at the outset – and in our experience costs are rarely salvaged, even if a trial is stopped by an interim efficacy readout or safety issue. Accordingly, it seems that lower accumulated investment is not caused by the failure, and it becomes an obvious question, whether the loss may be caused by a lower accumulated investment.
The cost of any phase 2 trial is certainly not a given. It is always a triangulation between what needs to be demonstrated, what could be demonstrated and the budget available! Are we as investors sometimes cutting phase 2 trials too thin at the risk of creating phase 2 readouts of only little interest to the partnering industry?
Alternatively, could the losses be enriched for indications cheaper to develop, but of less M&A interest to the industry? In our next post, we will further break down losses based on choice of indication.