Healthcare Venture Investing: Part 2 — IP & Regulatory

Originally published here

For the second article in this series, I’d like to discuss the IP and regulatory landscape of biotech companies. This is often an issue that gets brought up by non-healthcare people quite a bit. ‘Oh the regulatory process is too complicated, it doesn’t make sense,’ is something I’ve heard and although they’re not totally wrong, it’s not as difficult as it may seem.

Basically for therapeutics companies, in order for a drug you develop to be given to patients, it must be approved by the FDA (The US Food and Drug Administration). This is a government organization that regulates all therapeutics and devices related to human health in the US and although countries largely have their own regulatory agency, most companies are going to be discussing the FDA regulatory pathway.

I don’t want to spend too much time on the regulatory path itself as you can get the information through various different sources, including here (overview of the drug development path), here (guidance from the FDA on drug approval), and here (great summary infographic on the approval process).

Instead, I want to highlight some of the things we look at related to the regulatory path that are important for our understanding. There’s also a caveat with all of this and that is medical device approval. That is a topic for a completely separate article but if you’d like more information on that, please see here. Now let’s get into it…

Manufacturing:

The quality of the drug product is so important that regulatory agencies spend a lot of time analyzing this before approving a drug. As a consumer, you expect that each batch of medicine you take meets a specific quality standard so you know that it’s safe and effective. Therefore, all drugs need to go through GMP (good manufacturing regulations) which are enforced by the regulatory agency to provide systems that assure proper design, monitoring and control of the manufacturing processes and facilities. For further information from the FDA on GMP guidelines, see here.

Have they sorted the manufacturing process out yet? Can you produce it under GMP conditions?

Do they have batch to batch consistency? How much can be produced now and how difficult it is to scale?

Have you contacted and had conversations with suppliers already? Who’s leading the manufacturing internally and how experienced are they?

This is one area I have not spent nearly enough time on. However, so far in my limited experience as a VC, this is an aspect that can cause significant delays to a company in hitting its milestones. My understanding is that this is really known by the more experienced people in the industry because once you have to deal with this problem with a portfolio company, you never tend to forget it.

Especially in the early phases of a company, you want to make sure the manufacturing process is nailed down. Good VCs spend a lot of time understanding your manufacturing strategy and making sure that it’s reasonable. I’ve even seen certain VCs make their portfolio companies have agreements with multiple suppliers just in case something happens. Our job is to protect against downside risk and this is one area that you don’t want to get burned on.

Given the trend of the biotech industry in moving to different therapeutic modalities like cell therapies, gene therapies, immunotherapies, antibodies, and RNA therapeutics, understanding the manufacturing processes for all these different treatments is extremely important. There are certain modalities like small molecules that have been done for several decades so investors have good confidence in what it looks like to design and manufacture these compounds. However, with these new modalities, there’s still significant manufacturing risk and these modalities are relatively new. Having confidence, at least in the early stages, that you can progress with manufacturing is a key milestone that investors will pay attention to.

Clinical trial design:

Have you started formulating your clinical trial plan?

Have you met with the FDA regarding the primary and secondary endpoints?

What does your patient selection criteria look like? Inclusion/exclusion criteria? How easy is it to recruit patients? How many sites do you need?

Who’s in charge of running the clinical trials? How experienced are they?

Drugs live and die based on clinical trial results and the trial design aspect is something that can be overlooked but can be the crucial reason why a trial is successful or not. Likewise, clinical trial recruitment always takes longer than anticipated so you want to make sure the company has back-up plans in place to ensure they’re meeting their milestones.

Have you started formulating your clinical trial plan? How many patients do you need to run a trial? Have you spoken to the FDA already and what has their feedback been? How expensive will it be to run the trial? How long will patient recruitment take per site? How long does the trial need to be done for? For phase I trials, is there any way to add specific biomarkers that can show early proof of efficacy? Are the primary and secondary endpoints not only statistically significant but also clinically relevant enough to improve patient outcomes? What do the later trials look like? Can you get a pivotal trial with a smaller patient population or do you need large patient populations to get a significant read-out?

How easy is it to recruit patients for the trials? Have you been in touch with the KOLs yet? What has their feedback been on your approach?

Do you have an experienced person running clinical trials? What clinical trials has he/she been responsible for in the past? Have they been involved in taking any drugs to market?

IP:

What is the IP situation? Method of use vs. composition of matter?

Is there IP on the platform/molecules?

Are they developing innovations that are patentable?

Is the IP owned by anyone else (universities, other scientific founders, etc.), or does the company have full control?

I’m not sure how much time VCs in other industries spend on this particular subject but I imagine it depends on the industry and type of company. If someone has customers, revenue and the first-mover advantage with a high barrier to entry, I imagine the IP is not as important. However, if they’re just at the beginning of launching a new platform, then it may be a totally different story.

I don’t know a lot about the abyss that is IP law in biotech but I do know this is a crucial part of the diligence process that can either make or break a deal. IP diligence involves working with a respectable law firm that can give you information around whether or not the product/technology has had their patent issued and if there are any potential FTO (freedom to operate) issues. The key questions here surround if you’ve filed and been granted your patents already? Are you working closely with an IP law firm and do you have a clear IP strategy going forward? Do you have freedom to operate in the areas in which you’re developing your drug/treatment? Have you conducted an FTO-lite type search?

It’s also important to understand the agreements in place around the IP as most platforms and assets are developed at universities. This means that the university technically owns the patent and the company has to work with tech transfer offices in order to in-license the IP into the company. This can lead to potential problems if the IP situation is not clearly defined and is definitely a point of diligence that cannot be stressed enough.

Conclusion:

The regulatory landscape is something that all healthcare investors have to be aware of because you can only create a great company if you’re keenly aware of the process. We’re not expecting a single person to have all the answers with regards to the regulatory path but this is why a lot of great early-stage companies hire fantastic regulatory consultants early on to help guide them in the right direction. Building the right people around you who have had experience working through these issues before is paramount to growing a successful biotech company. No matter what industry you’re in, companies ultimately live and die based on the people around the table so you want to make sure the companies you’re looking at feel the same way.

Last but not least in this series, evaluating venture businesses from a healthcare perspective. Till next time.

This post is Part 2 of a three-part series.
Stay tuned for the next article which talks about Evaluating Venture Businesses from a Healthcare Perspective.

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