Rancho Santa Fe Bio is undergoing something you don’t see a lot of these days for a startup of its size: a phase 3 clinical trial for a cardiovascular drug that could change the game for those with progressive aortic valve stenosis.
The company is looking to raise its Series A to fund the trial, an expensive endeavor that will likely take years to prove to the Food and Drug Administration it’s superior to other drugs currently on the market. Only around 25% of drugs make it past phase 3.
“I think the hardest part of this is being a small company,” said Randy Berholtz, CEO of RSF Bio, as the company is also known. “Doing a phase 3 really makes you a bigger company just with the amount of money you have to raise. It is what it is.”
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Pharma companies usually partner with startups to drive them through clinical trials, but large pharmaceutical organizations have been laying low since the funding downturn. In 2022, merger and acquisition activity in the space was the lowest it had been since 2013, according to Clarivate Analytics. Partnerships, through which pharmaceutical companies fund the development of drugs and commercialize them themselves, was the lowest it had been since 2018. Per Crunchbase data, funding in 2022 was as low as it was in 2020.
“In the downturn, we have a situation where a lot of people would be happy to partner around whatever assets or platforms they have,” said Thomas Barnes, CEO of Orna Therapeutics. “Beggars can’t be choosers.”
The lack of activity has only strengthened Big Pharma’s place in the biotech ecosystem, and is creating waves across the delicate innovation pipeline. Without being able to scrounge up venture funding or develop strong partnerships, startups are stagnant.
Startups’ relationship with Big Pharma
It is, in a sense, somewhat surprising that partnership and acquisition activity has been so low. Without large research and development arms themselves, large pharma companies rely on smaller startups to discover and develop new drugs, which they later buy to commercialize, market and patent.
“The biotech companies are bringing innovative assets, which pharmaceutical companies need,” said Mike Ward, an analyst at Clarivate. “For pharmaceutical companies, it’s important that the biotech companies are robust and are going to be around.”
As drug patents expire to make way for generics, pharma companies are constantly on the hunt for new assets to make them money. But funding pharmaceuticals is an expensive and risky business.
Pharma companies often partner with startups early to develop drugs created out of an already-tested platform, but that comes with regulatory and development risks. They might otherwise acquire those de-risked drugs late in the process at a higher cost.
Last year, Orna Therapeutics announced a partnership with Merck. Merck paid the company $150 million upfront and could pay up to an additional $3.5 billion if Orna successfully develops a handful of vaccines and therapeutics. Xanax, the EpiPen and Concerta have all been developed through a web of partnerships and Big Pharma acquisitions.
Berholtz has talked to large pharma companies before. But by entering phase 3, the company’s drug is more valuable than it has ever been, because it’s less risky and more likely to get the stamp of approval from the FDA.
“We have had some Big Pharma saying, ‘Well, why don’t you de-risk it a little more? And then we know there’s going to be a New Drug Application, then come and talk to us,’” Berholtz said. “Because Big Pharma has the commercialization, sales and marketing teams.”
Who gets Big Pharma partnerships?
RSF Bio is in what Young calls “no man’s land” in biotech — that phase in a drug’s lifecycle where the startup often has to front the cost of developing the drug and pushing it through regulatory approval at little risk to the pharma company that acquires it.
“[Pharma companies] have bifurcated, either very early or incredibly, incredibly late,” Young said. “And that’s kind of created this gulf in the middle. …This is where a lot of promising assets, with their associated risks, go to die.”
It’s not easy to scrounge up a partnership deal with Big Pharma. Many of these companies are struggling in the public markets, so they’re focused on very specific, bread-and-butter pipeline drugs that leave a lot of innovative companies out of their scope.
“When the deals get done, it’s more of a window into what the pharma is thinking,” said Barnes. “It’s less of a marker for how persuasive the biotech has been in persuading them to do something.”
Midsize to small pharma companies are also suffering on the public markets, and their lower market capitalizations make it harder to fund biotech innovation through partnerships.
“The public markets are closed and the private markets are tough,” Berholtz said. “I would think that the dynamic in that collaborative process has shifted in favor of the pharma companies.”
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Illustration: Dom Guzman
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