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The column was written based on the lecture given at the "TRS Academia Consortium Symposium" held in February 2024.
"Towards Practical Application of Research in Academia"
Shinsei Capital Partners, Ltd., where I work, is a venture capital (VC) firm that was spun off from Shinsei Bank and specializes in venture investment in life sciences. For this reason, our team comprises members with expertise in drug discovery and clinical development. Today, from the perspective of investing in life sciences, I would like to explain the current state of drug discovery, the essential steps required to translate research in academia into drugs, and the perspectives needed to establish a startup.
The efficiency of research and development (R&D) in pharmaceutical companies has declined year by year. In the 1950s, a research budget of 100 billion yen could yield 60 to 70 new drugs. However, today, with the deletion of new targets and the need for increasingly complex technologies, it is uncertain whether a single new drug can be produced even with the same budget. Moreover, it is becoming difficult to make a profit unless the developed drug becomes a blockbuster. Meanwhile, the primary arena for drug development has shifted from pharmaceutical companies to universities and biotech startups, with about two-thirds of the drugs on the market originating from academia or biotech startups.
Despite the emergence of researchers from China and India, Japan remains a major scientific and technological power, ranking in the top five to ten globally. Therefore, Japan is home to excellent research across various fields, and the number of researchers per capita is also high. However, a significant weakness lies in the poor practical application of this research. One major reason for this is funding. For example, if a research group in the U.S. and Japan both discover a groundbreaking technology simultaneously and establish startups, the Japanese group might only raise 200 to 300 million yen during the seed stage, while their U.S. counterpart could raise 10 to 15 billion yen, allowing for accelerated drug development.
There are two ways to commercialize research in academia: establishing a biotech startup or conducting joint research with a pharmaceutical company. Historically, in Japan, the latter - conducting joint research with pharmaceutical companies - has been the dominant approach to drug development. However, on a global scale, most drugs are created by biotech startups. The differences between these two approaches are as follows. In collaborative research, pharmaceutical companies lead the development process, utilizing their cutting-edge infrastructure and extensive experience, and funding the drug development. On the other hand, establishing a biotech startup allows for a more hands-on approach in which you can develop your own strategy. However, due to financial constraints, research and development need to be conducted compactly and swiftly. In joint research, pharmaceutical companies proceed cautiously, development will be halting if animal studies do not produce satisfactory results. In contrast, startups can take more risks, often advancing even if they do not meet all criteria in animal studies. For diseases that require large-scale clinical trials, it may be better to pursue joint research with pharmaceutical companies due to the financial challenges faced by Japanese startups. Finally, in terms of economic benefits upon success, startups often gain greater rewards than joint research. When choosing between these options, it's crucial to consider these factors and select the most suitable path.
Starting or working in a startup is no longer an unconventional choice, nor is it highly risky. However, startups differ from large companies in their organization, culture, funding, and work methods. Unlike pharmaceutical companies, startups do not have medical representatives (MRs) to market their developed drugs, and there are various constraints on what they can do in terms of research, development, and available funding. For those establishing a biotech startup for the first time, many encounter similar obstacles and face similar challenges. In the U.S., where there are more startups, serial entrepreneurs (who start multiple companies) are common, making it easier to receive advice on potential pitfalls, and there is a shared understanding of what happens after starting a business. In Japan, many hesitate to start a business due to the fear of failure, however, it is helpful to listen to the stories of entrepreneurs and startup founders, learn where they stumbled, and study their failures. Even if one fails once, it could lead to success in the next attempt. We actively adopt people who didn't succeed in their first biotech startup because they understand the failure points.
University-based startups have more than doubled in the past ten years, with around 400 new companies being established annually - meaning more than one new startup is born every day. I believe now is an excellent time to start a startup. As mentioned earlier, the primary battleground for drug discovery has shifted from pharmaceutical companies to academia and startups. More and more pharmaceutical researchers are moving to startups and VCs, and talented individuals are supporting startups as consultants. There also seems to be a growing number of research facilities available for startups and an increase in serial entrepreneurs.
As you know, drug discovery progresses from basic research to animal studies, non-clinical trials, clinical trials, and regulatory approval. The research conducted in academia precedes these stages, and it takes a considerable amount of time to progress from basic research to non-clinical trials. For example, in the development of Opdivo by Professor Tasuku Honjo of Kyoto University and Ono Pharmaceutical Co., Ltd., the first paper on the PD-1 target by Professor Honjo was published in 1992. At that time, it was still unclear what kind of diseases could be treated by targeting PD-1. It took Professor Honjo six years to discover that PD-1 could be a target for cancer treatment, and it wasn't until 1998 that he published a paper investigating its relationship with the immune system. The patent application for Opdivo was filed in 2002, and if a biotech startup had been established, it would have been around this time. The Phase I clinical trial began in 2008, and approval was obtained in 2014. For a biotech startup, it may license its product to a pharmaceutical company around the completion of Phase II clinical trials, or if it is difficult to secure funding for further development, it may opt to license to a pharmaceutical company after Phase I clinical trials, aiming for an IPO around the time Proof of Concept (PoC) is achieved. In other words, the startup was established in 2002, and the goal would be to go public or sell around the time PoC was achieved between 2010 and 2012.
Funding for biotech startups is typically raised in several rounds aligned with the research and development phases. Usually, funds are raised when non-clinical trials begin, when entering clinical trials, and the startup is often listed on the stock market after obtaining PoC. On average, it takes about seven years for biotech startups from establishment to listing. This seven-year period is significant because VC funds like ours have a ten-year fund life, during which we must return money to our investors. Therefore, investments must be made in startups that can be listed within ten years of the investment.
When comparing investment amounts in life sciences between Japan and the U.S., Japan invests about 1% of what the U.S. does. The ultimate goal of a sbiotech startup is to deliver drugs to patients, but listing on the stock market is often an important milestone. While 70 to 80 biotech startups are listed annually on the U.S. Nasdaq market, only three to four biotech startups are listed each year in Japan.
As mentioned earlier, to commercialize research results in academia into drugs, it is necessary to either establish a biotech startup or conduct joint research with pharmaceutical companies. In either case, the final drug will be manufactured and sold by a pharmaceutical company, so the research theme must be one that appeals to them to reach the goal. When we, as startup capitalists evaluate startups, we do so from the perspective of whether they can license or sell their product to a pharmaceutical company. In addition, if the patent of the research seed is not strong, it will be difficult to raise funds or license the product to a pharmaceutical company. Therefore, it is worth spending a possible amount on robust patent applications, preferably handled by a patent office with expertise in life sciences. In most cases, universities will own the patent, but when establishing a startup, it's essential to consider whether the patent can be transferred to the startup and under what conditions. Since each university has different regulations and approaches, it is advisable to start discussions with the university as early as possible if you are considering establishing a startup. It is also important to negotiate to create a favorable situation for the startup, drawing on other cases for references.
In the case of biotech startups, the challenge lies in minimizing development risks until the product reaches the market. Statistically, the success rate of development from Phase I to approval is only 12.5%. As investors, we aim to increase this probability as much as possible. Generally speaking, for startups with limited funds, choosing rare diseases that allow for more compact clinical trials or diseases with already well-defined diagnostic criteria can increase the likelihood of success. The probability of success can vary greatly depending not only on the disease but also on the modality, the presence of biomarkers, and other factors. Therefore, if there is freedom in choosing the disease, it is important to consider these aspects and select one with a higher likelihood of successful development.
After establishing a startup, the business model can be divided into two types: pipeline-based or platform-based. That is, either developing a pharmaceutical product or using existing technology to partner with pharmaceutical companies to create programs they desire. There is no definitive answer as to which is better; however, in the case of a platform-based model, each individual project may often be insufficient to generate revenue for an IPO, and in recent years, the bar for going public has been rising.
There are a few common questions I often receive from many researchers. First, regarding the potential of drug repositioning, if the development is driven by the mission to create new drugs for patients, there is no issue in proceeding. However, from the perspective of wanting to make the startup successful, there is the problem that compounds without patents are difficult to license to pharmaceutical companies. Therefore, some creativity is required, such as changing the formulation or obtaining use patents. Secondly, the question of whether a researcher should become the CEO of a startup themselves. Personally, I believe that researchers should focus on research in academia and leave startup management to business professionals. If securing a CEO is challenging, it is possible to consult with us as a VC, and there are cases where a VC capitalist takes on the role of CEO. In addition to the CEO matters, establishing a startup requires consideration of many aspects, such as fundraising. It is difficult for researchers to resolve all these issues. For this reason, if you are considering establishing a startup, there is an increasing trends of consulting VCs about funding before establishment, as well as more instances of what is known as "company creation", where academia researchers and VCs jointly establish a startup. Moderna, for example, was established in the United States through this type of company creation.
Tetsuya Kurihara,
Partner, Shinsei Capital Partners Ltd.※
※ Affiliation at the time of the presentation, February 2024.
