Investor Q&A Series: Roel Bulthuis, INKEF Capital

In our first Investor Q&A article, Roel Bulthuis, Managing Partner of INKEF Capital shares his thoughts on the investment landscape in Europe.

Europe has seen an unprecedented amount of funding into Life Sciences over the last year whereas M&A activity has decreased. What do you believe has underpinned this and, in your opinion, is this trend likely to continue? Do you believe biopharma is exposed to potential over-investment and where does the associated risk lie?

Globally, last year was one of the most active years in all aspects of the healthcare sector. The ongoing pandemic has induced mass education and a positive sentiment towards the life science industry as a whole and increased the momentum new ventures had been experiencing over the past years. In parallel, there’s been a significant inflow of money into European VC funds. Also, we are starting to see more foreign funds hunting the grounds, drawn by more attractive deal terms since pre-money valuations and structural costs of European companies are much lower than they are in the US. All in all, there is growing recognition for Europe’s flourishing ecosystem with world-class research and a growing risk-appetite from investors. Whether European biotechs can sustain this pace will depend on further building the entrepreneurial mindset, handling the complexity of new investment trends/vehicles and better translating top-level research into commercial applications.

There are a few reasons why Pharma M&A might have slowed down this year. First of all, the availability of capital from VCs and capital markets allows companies to grow independently. In addition, biotech companies are raising larger rounds from VCs which allows them to operate longer without needing to secure a deal with a larger company. Interestingly, it seems that the pharma industry pivoted from signing large M&As to focus on earlier-stage collaborations and bolt-on deals in priority therapeutic areas. This trend is likely to continue for Big Pharma as the industry is looking to add to their pipeline in a focused / targeted way. Another interesting trend that we see in our discussions with Pharma and one that goes counter to what financial markets currently dictates is that Pharma is looking at acquisitions earlier again. There’s a growing sense of concern amongst key decision makers in pharma about the way that significant financings and valuations drive companies towards clinical decision points to continue to be able to access capital markets and that this is not always in the best interest of the programs.

Evaluate Vantage recently reported that:

  • Companies working on cancer treatments amassed 46% of funds raised in 2020
  • Sums raised in endocrine and metabolic space have halved over the past five years
  • The average size of an investment round for monoclonal antibody and cell / gene therapy developers has more than doubled in the past five years.

What do you see as the ‘hot’ areas for investment in the year ahead?  Where do you think the money will be best/most deployed?

INKEF invests across therapeutic areas and our therapeutics portfolio touches several of these key areas. We are also particularly interested in companies at the intersection of tech and healthcare and see Digital Therapeutics (or DTx) as a hot area for investment. DTx are tools delivering evidence-based therapeutic interventions to patients and are driven by software to prevent, manage, or treat a disease. The ageing population combined with continued adverse health behaviours fuel a rise in chronic conditions. These lead to an increased pressure on the healthcare system to shift towards personalized medicine and patient-centric value-based care. So far, we have seen many DTx companies in the behavioural health space, but DTx holds promises for many other areas such as IBD, chronic pain and respiratory illnesses. While the potential for DTx usage is significant, uncertainties present around optimal indication for digital targeting as well as how to navigate the unclear regulatory & reimbursement pathways in Europe. This, along with the undefined trajectory of the space make it challenging for early-stage investors to take a straightforward approach to assess opportunities. At INKEF, we believe that a key criterion would be a transversal product strategy with a platform that can be applied to a variety of different therapeutic applications to ensure long-term growth. Additionally, a flexible and dynamic team is required to adapt and pivot in the evolving regulatory and reimbursement landscape.

Geographically, where do you see the most promising R&D coming from? What about the most promising AI-enabled tech in life sciences? Do these regions overlap? How do you see the intersection of tech and life sciences?

We see a lot of promising R&D coming from the Benelux area. The region has a high density of life science activity, great infrastructure and a good presence of strategic players. In the past seven years, a large percentage of FDA approvals in Europe came from Benelux and these companies are particularly active in the industry’s hot spots, including immunotherapy and antibodies, cell and gene therapy, and oncology. R&D is highly promising not only due to high quality research, but also because of numerous government incentives, institutions and incubators in Benelux that constantly stimulate biotech activity; companies are supported in their creation, development, global connectivity and commercialization. These players include the EMA, VIB, InnovationQuartier, Oncode amongst many others. Finally, there is a large density of VC funds and Pharma companies in the region that can support these companies at different stages of development. While we see increasing activity in the Benelux region, it is important to note that most of the R&D activity remains in Germany, the UK and France. This is also the case for Digital Health companies.

When looking into the digital health space in Europe, Germany remains the optimal country to launch a Digital Health product due to the clear regulatory and reimbursement pathway, large market size, and framework to facilitate efficacy studies. A limitation of Germany is that it is not as digitally advanced as its comparators. While Belgium has a more straightforward DTx regulatory and reimbursement pathway, it has a smaller market size, lower digital health index, and smaller amount of capital for digital health. The UK has a market size similar to Germany but the pathway to attain reimbursement is still under construction.

How important is ESG to investment decisions in healthcare?

We have implemented several values that would typically be qualified as ESG practices into our core investment philosophy, as we truly believe in these practices and in their impact on a company’s success. It is essential to develop a diverse culture around up and coming talent, both in our portfolio companies but also within our own organization. At INKEF, what defines us as an organisation is our fundamental belief that a diverse team is critical to generate a broad set of opinions, make the best set of decisions and create better returns. We also believe in the energy, talent and resourcefulness of the less experienced generation, balanced with the more time-served leaders who can provide guidance and pass on their knowledge, thereby fertilizing the next generation of impactful leadership for biotech.

Like many other funds today, we look at ESG as part of our evaluation and encourage our portfolio companies to regularly address this topic. We hold annual discussions and reports on ESG performance and urge them to improve their sustainability, diversity in the management, and to establish feedback cultures with employees. Finally, as healthcare investors, we aim to generate profit with the central purpose to address unmet needs, deliver high quality care and improve the overall life and health of patients, which fits into that purpose.

What do you predict the long-term post-pandemic effects on investment in the sector will be? Is biopharma’s importance and attributes finally being realised by investors, governments and society more widely?

Although the pandemic improved the sentiment towards the healthcare industry, VC investors have the responsibility towards the sector to maintain product quality and market access perception in a sustainable way, which translates how we are perceived as investors.

The pandemic has caused a re-orientation towards technology and telemedicine, leading to large digital health deals such as the merger of Teladoc-Livongo or the partnership between Pear Therapeutics and Novartis. Investors and Big Pharma will need to further embrace this trend and find innovative ways to implement digital tools, treatment adherence and remote monitoring, which will require new collaborations as they do not have these capabilities in-house today.

A final lesson from the pandemic will be the need to focus on some areas that were previously overlooked, such as infectious diseases. At INKEF, we believe there will be a renewed interest in anti-infectives and see a clear unmet need in this field. Many investors and pharma have backed away from infectious diseases due to complex stewardship measures, high R&D costs, and lack of government incentives. However, we see more and more PUSH and PULL incentives being implemented in recent years and believe it is the right time to return to the space.