Remember
from Chapter 1? An investor allocates cash across a portfolio of diverse investments, relying on the fact that the reward from one “big winner” will be enough to make up for the failure of the vast majority. The promise of attractive returns for a big win must be compelling enough for an investor to stomach the risks associated with all of the failures. Importantly, that sentiment isn’t specific to biotech - it’s what drives our capitalist economy.Since we know that government funding represents a drop in the proverbial ocean compared to private investment, it stands to reason that without investors, very few new drugs would be created.
How does an investor decide to fund a drug in the first place?
Try putting yourself in an investor’s shoes for a moment. Imagine you are considering 4 options for investment. Which drug feels like the best investment to you?
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An injectable treatment for Alzheimer’s disease that slows the progression of dementia.
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An oral pill that helps obese patients minimize the stress that extra weight puts on the cardiovascular system.
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A gene therapy that helps babies’ eyes reverse a protein buildup that would otherwise cause them to go blind.
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An IV chemotherapy drug that shrinks tumors and extends the lives of colon cancer patients.
All of those drugs sound pretty important — even groundbreaking, if successful. So how in the world do investors choose which of them to fund?
Peter Kolchinsky explains in this video:
(If you’re interested in diving more deeply into this topic, read through our full slideset here! [OPTIONAL])
As explained in the video, investors work backwards to calculate net present value (NPV) when deciding whether a drug is worth funding today. In the process, they consider questions like:
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What would this product be worth if it works?
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What is the probability that this product will succeed?
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How much time and money will it take for the company to demonstrate that this drug is working?
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Will physicians, payers, patients, other investors, and laypeople understand that this drug is valuable, i.e., worth prescribing or paying for?