Bringing a new drug to market is a complex and lengthy process that involves multiple phases of research, development, testing, and regulatory hurdles. Venture capital plays a critical role in each phase.
Bringing a new drug to market is a complex and lengthy process that involves multiple phases of research, development, testing, and regulatory hurdles. Venture capital plays a critical role in each phase.
Let’s say a team of university researchers stumbles upon a potential molecule that could be the basis for a new medicine. Next, they patent the discovery and decide to start a small biotech firm to investigate its potential as a treatment. At this stage, specialized “seed-stage” venture capital firms can provide a small amount of funding to help hire staff and establish the initial infrastructure needed for development.
Following initial discovery, a biotech start-up typically begins “preclinical” development, which involves testing the potential drug in cell cultures or animal models. To complete this preclinical phase, start-ups generally need to secure what’s known as Series A financing.
Assuming preclinical data is promising, firms can submit an “Investigational New Drug” (IND) application to the FDA to begin clinical trials with humans. Venture capital firms provide Series B financingto support IND submission and to get clinical trials started.
Human trials consist of three phases. Phase I trials study the potential drug’s side effects and safety with a small group of patients. If safety is determined, Phase II trials evaluate the drug candidate’s effectiveness among a larger group of patients.
If Phase I or II results are successful, they can attract Series C financing, which funds Phase III trials. Phase III trials measure the safety and effectiveness of the drug being studied against the safety and effectiveness of treatments already on the market. Phase III trials can take years and require thousands of volunteers.
Based on positive Phase III results, a company can submit a New Drug Application (NDA) to the FDA for marketing approval. Venture capitalists may provide late-stage funding to support NDA submission and preparations for market launch, including manufacturing, advertising, and distribution.
Once a new drug comes to market, it can still take over a decade before the total sales revenue exceeds R&D investment, and venture investors are able to earn a return. It costs $2.6 billion on average to bring a new drug from initial discovery to FDA marketing approval. Some medicines cost much more.
Recent legislation added a new wrinkle to this timeline: a class of drugs known as small molecules are eligible for Medicare price-setting just 9 years after FDA approval. Another class of medicines, biologics, are afforded 13 years of exemption.
This disparity — which venture capitalists refer to as the “small-molecule penalty” — will disrupt the entire drug development timeline.
Due to the small-molecule penalty, many venture capitalists will shirk small-molecule investment opportunities since biologics offer a longer period for returns. It’s hard to blame them. As much as 50% of a brand-name drug’s total revenue comes 10-13 years after FDA marketing approval, meaning the potential return on investment for some small molecules will be effectively cut in half.
Thankfully, the solution is rather simple: Congress can pass legislation that gives biologics and small molecule drugs the same 13-year exemption period before becoming eligible for price controls.
The drug development ecosystem depends on venture capital financing. Let’s not give investors a reason to turn away from potentially life-saving development efforts.
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