By Bill Alpert
Healthcare stocks have underperformed the market and biotech initial offerings remain scarce. But deep-pocketed investors remain willing to bet on the next cure.
Thursday morning, the veteran venture firm ARCH Venture Partners announced that its 13th fund raised over $3 billion, to back early-stage biotech firms. In the past few decades, Chicago-based ARCH helped launch industry leaders like Illumina and Alnylam Pharmaceuticals, while exiting many other start-ups in multibillion-dollar sales to pharmaceutical companies.
The ARCH news follows a $3.6 billion funding in July for the Cambridge, Mass., biotech creator Flagship Pioneering. About a year ago, the New York firm OrbiMed raised $4.3 billion in several medical venture funds.
While a few healthcare IPOs have done well in recent months, the sector has lagged behind the overall market. The iShares U.S. Healthcare ETF ETF is up 13% this year. The SPDR S&P Biotech ETF is up 10%. Meanwhile, the S&P 500 and the Nasdaq have each gained more than 20%.
But neither ARCH nor its investors care whether biotech stocks are hot or cold, says Managing Director and co-founder Bob Nelsen. The latest fund's investors include many of the wealthy family offices, pension funds and sovereign-wealth funds that invested in ARCH's previous funds.
"Everyone as they age -- even billionaires in tech -- becomes interested in healthcare, once their friends or their parents start getting sick," says Nelsen, "and they realize that the healthcare system we live in sucks."
ARCH raises money when its last fund is used up, he says, and when medical problems anger its partners.
"We're motivated by frustration," says Nelsen. "A lot of times, when we start companies, it's because we're pissed off at something." After each of his parents had cancer, Nelsen started Juno Therapeutics, the cell-therapy pioneer that became part of Bristol Myers Squibb, in a $9 billion acquisition.
Nelsen's preferred way of dealing with unsatisfactory healthcare is to keep people out of the hospital, by trying to prevent or cure a disease. ARCH has backed targeted treatments for cancer, like Braftovi and Mektovi -- drugs developed by Array BioPharma, before its $10 billion acquisition by Pfizer.
This week, the U.S. Food and Drug Administration is likely to approve the novel drug for schizophrenia, KarXT, which Bristol Myers Squibb got in the $14 billion acquisition of Karuna Therapeutics, a company backed by ARCH.
The venture firm doesn't publicize its returns. But venture tracker PitchBook reports that previous ARCH funds have delivered internal rates of return of between 25% and 40%.
"Impact tends to drives success," says Nelsen's fellow Managing Director Kristina Burow, "and success tends to drive exits."
The ARCH managers say the new fund will invest in artificial intelligence-driven drug discovery and precision treatments that use genomic information to find the patients most likely to benefit.
The fund has already backed Xaira Therapeutics, a Seattle start-up that uses generative-AI to synthesize novel antibodies and other proteins, then automatically test them on cells. Another early bet is Mirador Therapeutics, which will use genomics to find treatments for arthritis in patients not helped by current drugs like Humira.
ARCH makes high-risk, high-impact bets, says Nelsen: "Every deal that we do, we try to swing for the fences."
Write to Bill Alpert at william.alpert@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
September 26, 2024 17:16 ET (21:16 GMT)
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