UK-based investment firm Medicxi aims to attract more investors to the life sciences with a new fund that lets them cash in on their investments earlier than conventional funds.
Last week, Medicxi closed a €200M fund called Medicxi Secondary 1 (MS1), which was co-led by the UK’s Pantheon and Switzerland’s LGT Capital Partners. The aim of the fund is to buy at a premium the portfolio of a fund previously set up by VC company Index Ventures, called Index Ventures Life VI. This portfolio consists of six unnamed clinical- and preclinical- stage companies.
By buying up this portfolio, Medicxi can reinfuse the six companies with the cash they need to develop their treatments. Furthermore, some of the proceeds from the portfolio purchase go to the original Life IV investors, who also get a chance to reinvest in the same companies by enlisting in the new fund.
This strategy, called ‘exit and reinvest’, is unusual in the biotech industry. Instead of the normal biotech investment model, where investors often wait several years for drug development programs to gain value, the investors in Index Ventures Life VI can cash in early on their investments, and also have the flexibility to reinvest.
“We believe this exit and reinvest type of transaction can be the blueprint for future investments by investors interested in obtaining exposure to biotechnology, but who are concerned by the long cycles of value creation in the asset class,” stated Medicxi’s co-founder Francesco De Rubertis in a press release.
Many industry experts are enthusiastic that it could help reduce the risks and the time needed for biotech investments to mature.
“Exit and reinvest can attract more investors in the biotechnology landscape, which is well-known as a long and risky type of investment due to the high cost and long process in drug development,” said Alessio Brunello, Senior Pharma Analyst for the data-focused consulting firm GlobalData.
“With this type of investment, investors can have profit during the first stages of the drug development process and also have the opportunity to evaluate, during the development of the drug, if it will be worth proceeding investing more money in that drug in the late stages of development or exit from that asset.”
While the specific strategy applied by Medicxi is unique in the biotech world, it blends other approaches which have been common for some time.
According to Antoine Papiernik, Managing Partner of the VC firm Sofinnova Partners, Medicxi’s approach resembles two existing investment concepts. The first is opportunity funds — which are often created to raise extra cash for late-stage companies on a firm’s portfolio — and secondary transactions, where an investor sells off their stake in a fund.
“So the Medicxi product is really a merge between those two concepts. I am sure there will be others,” said Papiernik.
The novel investment approach comes as biotech stocks are buoyed this year by investors flocking to the sector. The surge is partially based on the assumption that healthcare is better protected from the economic uncertainty caused by the Covid-19 pandemic than other sectors.
“It’s good to see Medicxi continuing to pioneer new forms of financing for late-stage drug development, as it follows the raising of its $300m Growth 1 fund in 2017 to support VC-backed companies with the later stages of drug development,” said John Rountree, a partner with pharmaceutical strategy consultancy Novasecta.
Nevertheless, while many are optimistic that Medicxi’s approach will catch on, conservatism in the sector could present an obstacle.
“I think the biggest challenge is the willingness of VC firms to pioneer the creation of new types of funds, like Medicxi has, when there is so much demand for conventional funds that might be an easier sell to their limited partners,” Rountree added.
Image from Elena Resko
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