The Dark Horse Called Biotech ft. Vyome

Last week, biopharmaceutical startup Vyome Therapeutics raised $22MM to advance development of its key dermatology molecules.

Far away from the massive fundraises in the consumer startup market, biotechnology has actually been one of the most attractive sectors for fundraising last year. If it seems like biotech is a “novelty” space, you’d be in for a surprise. Biotechnology has had more IPOs than technology companies in 2018. Biotech in the US had 36 IPOs, compared to ~20 in technology. 

Theranos’ Bad Blood may have only be a one-off, as Rubius Therapeutics showed with a $2Bn IPO.

But before we dive into specifics, what is biotechnology really? Put simply, it is the utilization of biological process for technological use. If you think making alcohol from fruits is biotechnology, that is absolutely correct. Biotechnology is further classified using colour schemes. One of the largest applications is “red” biotechnology or the application to pharmaceuticals, which is where biopharmaceutical companies like Vyome operate. 

Utilizing biology to dramtically improve human life is going to become increasingly important, as we push machines to their limits. 

Biotechnology has seen considerable investments over the last 30 years, and it is a notoriously capital intensive sector. Researching a drug or building a technology based on biological processes requires considerable trial and error. Making money from these products would take years of effort and investment, and returns would therefore take a long time.

That is the primary reason why a lot of these companies did not see venture funding, till the last few years. We don’t need to look any farther than the evolution of internet companies to understand why this will now change. 

The internet was first developed in 1965, but commercially viable companies took 3 decades to come about. Over the first 30 years, significant capital investment was made in developing the network and distributing it physically. Starting a company in these 3 decades on the internet was almost laughable. 

Yet today, an internet company could literally start with a push of a button. 

The cost of starting a company on the internet is drastically low, and that is the outcome of years of investing and effort. Internet protocols, operating systems, browsers and internet users set up the building blocks for internet entrepreneurs. You could now code to book a cab, buy a book, order food. Could cells become operating systems that could be manipulated with logic?

Tellingly, there are companies that are already doing so, and it signals why I believe biotechnology is a dark horse in the startup ecosystem.

It is away from the glare of consumer internet companies where Vyome Therapeutics was founded in 2010. Shiladitya Sengupta, a Harvard PhD in medical sciences founded the company and was joined later by N. Venkat, an IIM Ahmedabad alumnus. The company was set up to develop skin care solutions, and it remains true to its goal of building products for dermatology. 

With 4 products, and their flagship VB 1953 getting into phase 2b, the company is poised to finally see commercialization. 

The drug development process typically undergoes 4 phases, and the likelihood of success can be as low as 3-4%. Getting there, as I had elucidated earlier, can take a lot of capital with such limited chances of success. Phase 3 is when the drug can be marketed (or commercialized), and Vyome is just one step away from getting there.

The company has raised ~$50MM of capital till date, and if the company can get to the third phase it can commercialize. While we understand the downside associated with the long development cycles, the upside is that the company has sole access to a large market. 

With 100MM antibiotic-resistant acne patients, the potential is massive. 

Estimates peg the US market alone to be worth ~$2Bn. Given this medication will be taken in a repeated manner, the customers are locked in for repeat purchases. Patent protection fends off competition. Sizable market, high customer lifetime value and significant moat are likely outcomes for Vyome.

Years of research and development will result in commercialization with a strong product. After commercialization, biotech/biopharma companies become significantly net profitable (ranging upwards of 20%).

To understand returns on capital, to get to a $50MM of net profit, the company needs to sell $250MM worth of drugs (or ~10% of the US market). With this, the company could return the entire capital it has raised, in a single year. If it gets to commercialization, right marketing and distribution strategies will hold it in good stead. A success like this could push generally risk-averse investors to deploy capital into the space in India. 

The future looks bright for Vyome, and will likely herald great things for India’s biotech.