While many in the venture capital industry are talking about the future promise of AI/Machine Learning, VR/AR, Big Data, IoT (Internet of Things), autonomous vehicles and drones, there is a lesser known transformative opportunity in the biotech sector that we are following – the Human Microbiome. While Genomics as a whole is experiencing explosive growth, foundational research, Next-Generation Sequencing (NGS) technology and improvements in computational biology have allowed this budding young industry to gain notice (and funding) from a number of different sources – including Venture Capitalists.
The Human Microbiome is a term used to describe the interaction between microorganisms and the human body. Microbes are everywhere around us, on us, and in us. Most of the diversity of life on Earth exists in the form of single-celled organisms, like bacteria, and the human body can harbor a wide range of these organisms numbering into the trillions. To put this in perspective, the trillions of microbes that inhabit a human body account for 2-6 lbs of the weight of an average 200 lb. male, or about 1-3% of your body weight. As current research stands, we have a growing, yet incomplete, database of known microbial DNA, and we do know that the microbes in our bodies can help us or harm us in many different ways.
In the graphic below, you will see Pitchbook’s data for the total annual funding for Genomics companies since 1995 (this includes IPOs and Private Placements). Since 2013, a growing amount of dollars have been funneled to companies operating in the Human Microbiome sub-sector and we believe this is a good time to take notice. Big Pharma recognizes the huge upside potential that this sector offers, but is currently focused on Joint Ventures/Partnerships combined with M&A for much of their exposure to this space. Not depicted below are the billions of dollars of both public and private money that went into developing much of the framework for genomics and the microbiome that we enjoy today. Through the Human Genome Project (1990-2003) and the Human Microbiome Project (2008-2013), well over $4B in federal funds have been invested.
To help explain the massive funding trends, we have compiled some of the merits and concerns we foresee in this sub-sector.
Why invest?
Big Pharma R+D – According to Atlas Venture, a TTCP manager, 50% of all biotech acquisitions occurring between 2014-2016 were of companies with early stage research programs up to and including Phase I. The average acquisition price for these early stage biotech companies has increased 2.5x since 2008 and the average acquisition price is nearly $450M.
Low Market Concentration – The Human Microbiome is a relatively new sub-sector for biotech and pharma that grants fresh entrants a variety of benefits, especially the opportunity for new companies to be the first to market with a novel therapeutic pathway.
Growing Capital Base – There will likely be more capital available for these companies in the future. The first microbiome-focused venture fund, Seventure’s Health for Life, was founded in 2013 and since then a number of different investors, incubators, and accelerators have entered the space.
Decreasing Costs – The cost of DNA sequencing is rapidly dropping and companies can increasingly outsource their R&D and testing to other providers.
Big Upside – According to Cognient Advisors, the median revenue multiples on Biotechnology companies is 8x as of Q4 2016; the 3rd highest multiple on the list behind REITs and Energy Exploration and Production. While we know it’s difficult to bring these companies through to exit, venture models are increasingly built on breakout company valuations and this is certainly one of the sectors where they can be found.
Reasons for concern:
Correlation v. Causation – Much of the knowledge base for the Human Microbiome still centers around correlation between the microbes that are present and the overall impact on the body. Determining which microbes do what and how to foster the good microbes in a human body to improve health is a difficult task considering that there are thousands of different variations of microbes in our bodies, and they vary in people depending on geography, diet, race, age, fitness, and many other factors.
Is 99.99% Close Enough? – There are three main classifications of sequencing: Short Read, Long Read and Whole Genome NGS. In summary, Short Read is cheaper and makes sense for most use cases, but Long Read can offer functional genomic information which can be very important when trying to determine what a gene actually does. Whole Genome is the most exact but is also the most expensive. It is imperative that an investor fully understand the underlying research techniques to ensure that the proper level of specificity is reserved.
FDA-Risk – Investors and researchers have a common concern about the proliferation of non-FDA approved probiotics in the consumer space. As these companies move to get their products FDA certified, if they fail, there will be an aversion to even the research-based probiotics expected to enter the marketplace over the next few years.
Unproven Technology – While there is little disputing the use of Fecal Transplants as a treatment, its general use is not FDA approved, and many Human Microbiome therapeutics are unproven treatment options.
In summary, all good scientists will remind you that each new discovery needs to be evaluated and replicated before it’s taken as a fact but we believe innovations around the Human Microbiome can become a lucrative industry with the potential to improve lives. There are many hurdles to bring these endeavors to FDA approval and eventual exit, but through improved technologies and dedicated scientific attention it can be done. Already, many Venture Capitalists are investing in the space, and we look forward to watching as these entrepreneurs build profitable, life changing companies.
For more information please see the following reading on the trends in the sector. Decreasing costs to sequence a genome; Joint Ventures/Partnerships between Big Pharma, Universities, Healthcare Providers, and Companies to help develop databases of microbiome samples; consumer excitement around Nutraceuticals and their effect on the Human Microbiome; calls for standardization of research criteria in sampling and NGS techniques; and an increased focus on Bugs as Drugs and Synthetic Therapeutics.
*Not discussed here are the various other microbe-focused startups operating in the Agriculture, Energy, Industrials, and Food & Beverage sectors. Coupled with the Healthcare sector discussed above, these are collectively referred to as the Synthetic Biology industry.