Punching above our weight: backing world-class Aussie biotechs

A sector in decline… or a golden opportunity?

"The healthcare sector really has been in a bear market for a long time, longer than anyone would've expected,” says De Silva. “We really saw that turn begin probably April 2021, and that’s just continued to get worse and worse.”

Compounding the decline have been macro headwinds: “Gyrations with the FDA and the staff moving around, the grant funding effectively getting decimated in the US, and then talk about drug pricing reform… that's created an incredible amount of uncertainty and volatility.”

But for De Silva, volatility equals opportunity. “When the market gets bad, a lot of people's focus turns very short-term. If you are a long-term investor with the ability to do long-term investments, you can really capitalise. And so that's where we're quite excited.”

KP Rx: Investing at the inflexion point

KP Rx operates in a unique part of the healthcare spectrum, targeting companies beyond the ‘science project’ stage. 

“We focus on what I like to call companies at the inflexion point of value creation,” says De Silva. 

“We don't invest in just an idea or a preclinical drug with some animal models.”

Instead, KP Rx targets “biotech companies that are after first-in-human data” or “medical device companies close to regulatory approval.” In Australia, he notes, these companies are still attractively priced: 

"What we find is that the valuations for companies at our stage are not that different from valuations for a pre-seed company in the US, but the value at the exits is often the same". 

Unlike traditional VCs that spread capital widely, KP Rx builds a concentrated portfolio: “We're looking to do a max of 10 investments… and any one company is material to the fund.” That structure enables KP Rx to take meaningful positions and support companies through to exit.

What sets KP Rx further apart is its rigorous, medically informed due diligence. 

“You have to be able to know what the right questions to ask are, and equally as importantly, be able to understand the answer when they're given,” De Silva explains. 

The Fund also assembles expert panels for each investment. 

“Often we might speak to somewhere between 20 to 50 different people at the initial diligence stage,” and distil that down to “six to 10 people that we think are the experts in the field.”

A revolutionary bet: Inventia Life Science

One of KP Rx’s high-conviction investments is in Inventia Life Science, a private Australian medical device company. Inventia has developed a 3D bioprinter that enables high-throughput drug screening using lifelike organoids.

"They've developed a 3D printer that can 3D print micro organs - if you will, organoids - into 96-well plates that can be used for drug trials and high-throughput drug screening,” De Silva explains.

The technology also ties in with the AI revolution in drug discovery. “You can now design molecules faster than ever before, but they need to be tested. And 2D models are not representative of the human body. This allows for real 3D models to be tested at scale.”

Inventia’s commercial traction adds to KP Rx’s confidence: “They’ve sold products to 50% of the top 20 pharma already… and each printer can generate US$12,000 to US$15,000 a day in consumables". 

Crucially, the Fund invested during a major down round, taking “a material chunk of the business” at what De Silva calls “the bottom of the J curve". 

Managing risk: capitalisation and diligence

Investing in healthcare is not without risk. The biggest in today’s market? “Undercapitalisation,” says De Silva. 

“If you're doing a new investment and a company needs $20 million, you can't do it for $15 [million]. The clinical trial costs $20 [million]. It's not going to change.”

To mitigate this, KP Rx ensures that each company is fully funded to reach its next milestone: “At the moment, all of our portfolio companies, we believe, are funded to exit". 

And while biotech is often viewed as binary - “the drug works or it doesn’t” - De Silva sees this as a manageable risk. “We give a company money and support to answer a question: Does drug A work in disease X? And the answer is no, that's fine.”

Unlike many VCs who rely on diversification, KP Rx relies on conviction and diligence. 

“We don’t do many investments. We do very, very few, after months and months of due diligence that give us high conviction.”

The biggest lesson he’s learned? 

“I used to think that it was the drug or the medical device, the IP, that was the most important thing. I learned very quickly… a good management team will find a place in the market for a bad drug, and a bad management team will run a good drug into the ground.”

Access to some of Australia's best healthcare opportunities

Karst Peak Rx (KP Rx) is a healthcare investor, backed by Karst Peak Capital, specialising in healthcare and health tech investments in Australia and New Zealand (ANZ). Hashan and the team focus on investments in private and early-stage public companies, with an emphasis on biotech, medical devices, diagnostics and healthtech. Find out more.

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KP Rx Healthcare Opportunities Fund

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