5 trends turning biotech toward incubators
Life is hard for a biotech startup. Vacant lab space is rare in big research hub cities such as San Francisco and Boston. Rental costs can be painfully expensive. Growing a business, replete with all the operational headaches of a startup, can impede the research and data generation critical to attract more money.
In response, dozens of incubators and accelerators have cropped up, aiming to alleviate some of these pressures. They offer cheaper space, shared services and sometimes much more. There are incubators that can shoulder duties often managed by a chief operations officer. Others are blending venture funding with strategic guidance to help grow companies quickly and profitably.
Meanwhile, promising science keeps developing, meaning the demand for these services remains high. Here are five key trends likely to shape the biotech-incubator ecosystem in the future:
1.) The business of innovation
Pharma companies across the industry have increasingly turned outward to look for innovation, supplementing the work of their own labs through M&A additions.
Blockbuster transactions such as Gilead’s $11 billion acquisition of Pharmasset in 2011 represent the high-end and advanced stages of the M&A market. But many pharmas and big biotechs are active acquirers across all the development stages.
Allergan, for example, has committed to an "open science" model, keeping its own early R&D investment lean while it searches for strategic fits outside its walls. And among biotechs, Celgene has gained a reputation as an active partner, inking collaborations with dozens of smaller companies.
At the same time, pharma companies are opening their labs to early-stage research by outside companies, founding incubators that give the bigger firms visibility on promising new science. Johnson & Johnson Innovation’s JLABS is one of the more notable pharma-run incubators, currently housing 144 companies across six locations in North America.
"We really wanted to help build the ecosystem," explained Lesley Stolz, head of JLABS California. Unlike others, J&J operates the program under a "no-strings-attached" model, taking no equity stake in the companies who participate and charging a monthly rent.
"I think [the model] really does open us up to being able to see a very broad range of really interesting technologies and to help those technologies grow," Stolz said.
Other pharma companies have created their own venture arms, such as Novartis Venture Funds or GlaxoSmithKline’s SR One, to discover and grow companies working in areas of interest.
Put together, pharma companies are actively looking outside their own laboratories for new compounds and technologies, a trend which helps to deepen the drug development pool.
2.) Biotech hubs
Boston and San Francisco are rightfully known as the two most dominant biotech hubs, luring billions in venture dollars and major investments from big pharma. This sustained, intense focus on both metropolitan areas has two major consequences for biotech companies just starting out: extremely low vacancy rates and tremendously high real estate costs.
According to Jones Lang LaSalle, a real estate firm, direct vacancy rates for the Cambridge lab market have hit historic lows, falling below 1% this year. Relatedly, the cost per square foot on a triple-net basis has skyrocketed 45% over the past two years and now stands at a share under $72 per square foot. As of the third quarter, there is less than 80,000 square feet of vacant lab space in East Cambridge.
While the wider San Francisco Bay area may have more available space, demand is still intense and rents are high. Together, low vacancy rates and high costs make incubators an attractive solution for young biotech companies.
"If we have historic low vacancy rates, historic high rents, and then quickly you zero in on incubators and co-working spaces as one of the solutions," said Travis McCready, CEO of the Massachusetts Life Sciences Center. The Center is a $1 billion, 10-year initiative established by the state government to grow the state’s biotech ecosystem.
Incubators such as LabCentral or Cambridge-based Mass Innovation Labs offer scalable lab space that can be quickly built out and made operational, with considerable less financial commitment. According to McCready, incubators are a critical part of the overall ecosystem, helping to keep prices down and keep companies from locating elsewhere.
Beyond alleviating cost pressures, incubators also can preserve the ability of biotechs to tap into the deep-pocketed venture presence in the greater Boston and San Francisco areas. Together, the two areas commanded over 80% of total investments made in the third quarter, according to PricewaterhouseCoopers.
"Looking at cost is only one side of the equation. If you actually look at the other side of the equation, in terms of efficiency and time to market — or time to failure — paying that amount to be in Kendall Square, to be in Cambridge turns out to be a very worthwhile long-time investment," McCready explained.
3.) Deeper support at all levels
Incubators and shared working spaces have been around for some time. Now, companies have begun to expand the business model to incorporate firms both earlier in the development process and in need of a higher horsepower to expand quickly.
Alexandria Real Estate Equities, which manages life sciences-focused real estate holdings across the country and is behind the Alexandria Center for Life Science in New York city, recently debuted what it is calling LaunchLabs.
Aimed at developing companies prior to Series A funding, LaunchLabs is set to open early next summer. It will have room for about 20 companies, said Jenna Foger, senior principal of science and technology at Alexandria. More than 50 companies have already applied for a space in the program, Foger said, which points to the demand for lower-cost, shared lab space from early-stage biotech companies.
JLABS has opened its doors to companies such as Arcturus Therapeutics, which started out with little more than a promising idea and the experience of the founding team.
At the other end of the spectrum, companies such as Mass Innovation Labs or Accelerator Corp. tout their capacity to act as a chief operating officer, or management team for those companies that are seeking to accelerate rapidly.
Accelerator, which is backed by a syndicate of 12 high-powered corporations including blue-blooded pharmas like J&J and AbbVie, recently led a $48 million Series A for Petra Pharma and a $17 million Series A for Lodo Therapeutics. For both companies, Accelerator’s executive team serves as management for early-stage operations, allowing Petra and Lodo to focus on research.
Mass Innovation Labs, which boasts members like Editas Medicine and Gritstone Oncology as well as smaller companies, says it can serve a similar role in managing rapid growth and all the operational headaches which come with it.
"Incubators are a powerful ally for us in being able to help deliver the educational and professional development, the funds necessary in some cases, to ensure that young biotech companies are properly led," McCready said.
By consulting with biotech founders, incubators are increasingly taking a role in helping young companies plan their growth and meet development milestones. And with an expanding spectrum of support, biotechs can tap different levels of the incubator model depending on current needs.
4.) A (possible) IPO rebound
In January, not a single company braved public markets, kicking off a particularly moribund first quarter for initial public offerings. By the time March 31 rolled around, only eight companies had priced an IPO, the lowest total since 2009 and the aftermath of the 2008 financial crisis.
While IPO activity has gathered steam as the year has progressed, 2016 will likely fall short of the last year’s total and remain well below the 10-year high set in 2014.
Despite the challenging IPO environment, healthcare companies have led the way, accounting for 42% of all IPOs to date in 2016, according to Renaissance Capital.
While emerging biotech companies are typically years away from even considering listing publicly, a strong IPO market is an important barometer of the strength of the biotech sector. For investors in early-stage biotechs, IPOs are one of several successful exit options, alongside M&A and pharma licensing deals.
A weak IPO market may not necessarily lead to a slowdown in early-stage research, but it could contribute to a more risk-averse investment environment over time. Continued signs of strength from biotech IPOs should help support strong funding opportunities for companies just setting out … which leads to BioPharma Dive’s final trend to watch.
5.) Continued availability of venture funding
Venture funding activity for biotech, and for life sciences more broadly, has slowed somewhat in 2016, regressing from record highs set last year. Through the first six months of the year, venture capital firms had invested $4.7 billion across 343 life sciences deals, down from $5.2 billion over 418 deals during the same period in 2015, according to the much-watched MoneyTree report from PwC.
Biotech claimed the lion’s share of those totals, but still saw a 6% decline in overall deal value and a 14% drop in deal count year over year, per the report. That downward trend in deal count continued in the third quarter, with PwC recording a 16% drop, although dollars invested did pick up a bit.
This year's slowdown has prompted some concern of a sustained drop in the availability of capital. Yet those worries haven’t yet bled into emerging biotech, several people involved in the biotech incubator community said.
"The cool-down [in biotech] in my mind has been an idea. There is still an awful lot of funding going on in the venture side, especially here in California but in other places as well," said JLABS' Stolz.
Thong Le, CEO of Accelerator, also downplayed talk of a broad-based retrenchment in biotech:
"I think what we are seeing is a natural evolution of the cyclical nature of the way our business works. I remain optimistic. I think after the election happens and things settle down, we will come back to a more normal cadence of company financings," Le said.
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