When times are tight, creative approaches reign supreme. For the biotech industry, which has seen several years of difficult financing, smaller companies have found it especially challenging to gain the runway they need to carry drug candidates through the clinic.
While IPOs have underperformed and larger venture capital firms are looking for safer bets, companies like Diakonos Oncology, a small biotech with a phase 2-ready dendritic cell vaccine in glioblastoma, are shaking things up, according to COO and president Jay Hartenbach.
“It’s been frustrating because you want people to give you the time of day, but at the same time, they’re saying, ‘Once you get a lead, then we’re interested,’” Hartenbach said. “It’s a chicken-and-egg kind of scenario, and we’re one of many companies trying to get creative.”
After considering a series A round last year, Diakonos encountered “a lack of reception” from traditional, biotech-focused VCs. Instead, the company “pivoted to a less traditional route.” For instance, Diakonos opted for a type of financing called a simple agreement for future equity, known as a SAFE round, with family offices outside of the more common biotech investors. SAFE financing defers valuation discussions and equity issuance until a later time.
Unconventional investors like family offices and high-net-worth individuals approach the industry with a different lens than traditional VCs by embracing higher-risk, higher-reward situations, Hartenbach said. That mindset is critical for biotechs with pipelines that skew toward challenging modalities and underserved indications, he said, pointing to Diakonos’ focus on the difficult area of dendritic cell therapy for a particularly tough-to-treat brain cancer.
“Anything that’s not trying to build on a 10% or 20% improvement but a fundamentally new approach is going to have to rely on this approach,” Hartenbach said. “The non-traditional groups are going to allow more difficult, unmet indications to get R&D funding that may not have otherwise been done.”
Here, Hartenbach speaks about the importance of non-traditional investors in biotech as competition for funding remains as cut-throat as ever.
This interview has been edited for brevity and style.
PHARMAVOICE: What’s driving this shift toward more non-conventional biotech investing?
JAY HARTENBACH: Traditional pharma is doing less and less R&D, and it’s falling more on the smaller biotechs to get to the clinical proof of concept or into later clinical phases, and so it requires different types of funding with M&A or out-licensing being pushed down the road. Who’s going to fill that gap? With biotech, the industry has been having a really hard time in the last three to four years, but there’s still innovation happening. And so if the VCs are more reticent, then that’s where the opportunity comes in — for us, that’s specifically driven by what we’re doing.
We have a drug that’s a dendritic cell therapy with our lead asset in glioblastoma. When you talk to a traditional VC, they’ll say glioblastoma hasn’t worked, that there’ve been 60 or so failures in a row, and that they’ve lost a lot of money. And so even though there’s a growing interest in cell therapy, a lot of the VCs who put a fair amount of money early on in cell therapy lost money. With the VCs less interested, we’re working with a variety of family offices in the SAFE round.
It sounds as if non-traditional investors like family offices help get cutting-edge medicines through the clinical process. Can you explain why they’re willing to take that risk over some of the more traditional VCs?
Dendritic cells historically haven’t worked, so if you’re a traditional biotech VC, you’re looking at different opportunities — a lot of what makes them successful isn’t just what they say yes to, but also what they’re saying no to. And so the market contracts around things that have had a poor track record or, more importantly, poor investment results, whether that’s the indication or the modality. It becomes very hard to justify taking another bet.
But with high-net-worth individuals or family offices, they’re willing to be more objective with the data without the bias of a track record for something like glioblastoma. They’re very savvy, and with that risk comes a financial return they’re very interested in — that’s why they have the money they have. On top of that, they’re interested in and able to prioritize the humanitarian reason more than a professional investor. They see some of these investments as [being] for the greater good.
How do those strategies differ?
A non-traditional investor doesn’t necessarily have a team of experts with Ph.D.s to interrogate the science or MDs to get into the weeds on clinical results. In some ways, the due diligence is based more on how the management is portraying the deal, and so there’s a little more trust. But at the same time, they still do an extensive amount of due diligence, but not as uniformly. For high-net-worth investors or family offices, the investment horizon is substantial. They tend to be less focused on specific timelines and more focused on potential return from a specific asset or indication.
How is this shaping the biotech industry?
Let’s look at what would happen if we didn’t have participation from non-traditional investors — you’d see a more measured amount of success and innovation through a more conservative approach. The field will certainly move forward but may not make these giant leaps, especially in large unmet clinical needs. High-net-worth individuals and family offices have often been willing to get involved in early-stage or preclinical work, but seeing them starting to participate in a phase 2 registration-enabling trial isn’t as common. And that allows potential leaps forward in riskier, cutting-edge technology.
The biotech sector has had a tough time raising capital in recent years. Could this shift toward non-traditional investors pump some fuel into that?
I think so. If you look at the pendulum, companies going public in 2020 or so were doing some very large transactions or raises on three or four patients or even really promising preclinical data — that’s just not sustainable. So the contraction has actually been a good thing for the industry at large by putting better focus on the things that have to happen. When you know the money is not unlimited, you start thinking about how you can do your trial design or work with trial sites to get the most bang for your buck. That increases discipline, and for companies that are really moving the needle, it filters out the noise.
