PPD Biotech pan­el: Five biotech lead­ers of­fer their sur­pris­ing takes on the big trends shap­ing the in­dus­try in the Bay Area and be­yond

By John Car­roll, End­points News

With Bob Mc­Dow­ell, MyoKar­dia; Paul Scansaroli, Bar­clay’s; Aron Knicker­bock­er, FivePrime Ther­a­peu­tics; Neil Ku­mar, Bridge­Bio Phar­ma; Su­jal Shah, CymaBay Ther­a­peu­tics;

Pan­el dis­cus­sion on Sep­tem­ber 20, 2018 in San Fran­cis­co;

Pho­tog­ra­phy by Jeff Ru­mans, End­points News.

John Car­roll

Con­tin­u­ing a con­ver­sa­tion I start­ed in Cam­bridge, Mass­a­chu­setts, a cou­ple months ago, I asked a few Bay Area biotech lead­ers to join me in a dis­cus­sion about big trends shap­ing the in­dus­try, as well as the fu­ture we’ll face in the hub and around the world.
My guests were Bob Mc­Dow­ell, chief sci­en­tif­ic of­fi­cer of MyoKar­dia, a stand­out biotech in the car­dio field; Paul Scansaroli, man­ag­ing di­rec­tor of Bar­clay’s US Health­care Eq­ui­ty Cap­i­tal Mar­kets, with di­rect ex­pe­ri­ence in launch­ing IPOs and fol­low-on rais­es; Aron Knicker­bock­er, CEO of FivePrime Ther­a­peu­tics; Neil Ku­mar, CEO of Bridge­Bio Phar­ma; and Su­jal Shah, CEO of CymaBay Ther­a­peu­tics.
In the tran­script that fol­lows, con­densed for length and clar­i­ty, you’ll quick­ly see their views don’t nec­es­sar­i­ly fol­low the main­stream. In many in­stances, they of­fer a sur­pris­ing take on the big trends.

Read on as we cov­er what’s dri­ving the hot IPO mar­ket and why biotechs are hit­ting pub­lic mar­kets even at pre­clin­i­cal and Phase I stages; why Se­ries A rounds are big­ger than ever, but may still fall far short of where fund­ing should be; and why the deep­en­ing ex­pe­ri­ence in­side new and ex­ist­ing funds may her­ald a new era of in­sight in­to biotech and risk.
Hir­ing is tough? Maybe you’re not pay­ing enough. And maybe, just maybe, we’re all un­der­es­ti­mat­ing the grow­ing com­mer­cial risks tak­en on by small play­ers bound for mar­kets they’re ill-equipped to han­dle — and how that may play out as their prod­ucts launch.
Our evening’s dis­cus­sion, as in Cam­bridge, was a col­lab­o­ra­tion with PPD Biotech, which is ded­i­cat­ed to pro­vid­ing CRO ser­vices to biotech and small phar­ma com­pa­nies. — John Car­roll

John Car­roll

It’s been a great year; the sec­ond quar­ter was phe­nom­e­nal in a lot of re­spects. We’re see­ing a lot of things hap­pen­ing and cer­tain­ly an ac­tive fourth-quar­ter is com­ing. Is this sus­tain­able? Is this some­thing that’ll con­tin­ue to play out, or can we on­ly con­sid­er this in three-month seg­ments?

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Paul Scansaroli

Paul Scansaroli

It’s hard, ob­vi­ous­ly, to project where we’ll be 12 months from now, but when we look at biotech broad­ly and the con­text of the new is­sue en­vi­ron­ment — and again, I fo­cus most­ly on the pub­lic side of cap­i­tal-rais­ing, al­though we spend, in many cas­es, years with com­pa­nies be­fore they’re pub­lic, try­ing to help them nav­i­gate the pri­vate cap­i­tal mar­kets and ven­ture cap­i­tal and how those seem­ing­ly ear­li­er and ear­li­er “crossover in­vestors” lead ul­ti­mate­ly to IPOs and then, suc­cess­ful fol­low-ons as the com­pa­nies grow. We are gen­er­al­ly pret­ty bull­ish on the en­vi­ron­ment for a num­ber of rea­sons that would sug­gest it’s sus­tain­able. Ob­vi­ous­ly, I’m the banker talk­ing, so I’m well aware of the in­her­ent bias I have in that point of view. But hope­ful­ly, we all are in­her­ent­ly op­ti­mistic about where the in­dus­try not on­ly is, but where it’s head­ing.
I think every­body wants to pick the top or try to fig­ure out if this is, in fact, a bub­ble. It’s hard to, ob­vi­ous­ly, see that it’s a bub­ble pop­ping like we ex­pe­ri­enced in 2008 or 2001. But, part of the rea­son we’re bull­ish on it is we’ve had a very suc­cess­ful num­ber of years in the fi­nanc­ing en­vi­ron­ment, and this year in par­tic­u­lar is on track to ex­ceed all of 2015, which was by all re­spects a kind of record, land­mark year from a new-is­sue per­spec­tive. And that was re­al­ly fu­eled by a mas­sive amount of par­tic­i­pa­tion from gen­er­al­ists, mean­ing non-health­care-ded­i­cat­ed in­vestors. The progress we’ve had so far this year has been in the ab­sence of that, pri­mar­i­ly; rel­a­tive, at least, to 2015. So, the fact that we’re able to sus­tain what’s now been al­most $20 bil­lion of is­suance in be­tween the fol­low-on and the IPO mar­ket, with pri­mar­i­ly a grow­ing health­care-ded­i­cat­ed com­mu­ni­ty who wants to and is in­her­ent­ly in­ter­est­ed in un­der­stand­ing, sup­port­ing in­no­va­tion and help­ing man­age­ment teams cre­ate the next wave of med­i­cine to cross a very di­ver­si­fied group of ther­a­peu­tic ar­eas.
So, it’s not so con­cen­trat­ed in one par­tic­u­lar field, where if some­thing goes wrong, the whole sec­tor is like­ly to ex­plode. For a num­ber of those rea­sons, we feel pret­ty bull­ish. And al­so, when you look at the larg­er-cap com­pa­nies, it’s pret­ty hard to find the kind of rev­enue and earn­ings growth pro­file in al­most any oth­er large-cap sec­tor than what we’ve seen in large-cap biotech. And this is all, again, in the ab­sence of what I think was a very high­ly an­tic­i­pat­ed year for M&A. And cer­tain­ly, M&A’s picked up, but it isn’t close to where I think peo­ple’s ex­pec­ta­tions were at the start of the year.
So, when put all that to­geth­er, it’s fa­cil­i­tat­ed a pret­ty ro­bust new-is­sue en­vi­ron­ment that we think will con­tin­ue. Cer­tain­ly, it will ebb and flow as it al­ways does. But, in most cas­es go­ing back in this type of back­drop, suc­cess­ful com­pa­nies have been able to fi­nance them­selves.

John Car­roll

We’ve got four oth­er ex­ec­u­tives here from pub­lic com­pa­nies, and I think you’ve all had var­i­ous suc­cess­es. Maybe some ups and downs along the way. Do you see this as a tem­po­rary op­por­tu­ni­ty you want to take ad­van­tage of? Or do you see this as a sus­tain­able is­sue, where you can grow your com­pa­nies and con­tin­ue to go on, de­pend­ing up­on your suc­cess or fail­ure? Bob, how about you?

Robert Mc­Dow­ell

Bob Mc­Dow­ell

Ac­tu­al­ly, the idea of a large A round was piv­otal to MyoKar­dia’s suc­cess be­cause it en­abled us to get off the ground, fo­cus on the sci­ence and es­sen­tial­ly set up the com­pa­ny.

John Car­roll

Which is Third Rock’s mod­el.

Bob Mc­Dow­ell

With­out that, we would’ve been go­ing hat in hand, re­sult by re­sult, like a lot of biotech com­pa­nies do and we’d nev­er have been able to fo­cus on get­ting in­to the clin­ic and val­i­dat­ing the the­sis of the com­pa­ny as quick­ly as we did. That’s the mod­el Third Rock has pi­o­neered. We’re now see­ing oth­er in­vestors do the same, and com­pa­nies have been giv­en suf­fi­cient fund­ing, but with ad­e­quate prepa­ra­tion to re­al­ly ad­vance to true yes/no de­ci­sions with­out man­age­ment be­ing dis­tract­ed.

John Car­roll

One of the ironies, though, is that the Third Rock funds — those rounds of $50 mil­lion, $60 mil­lion — looked so big just a few years ago. Some of these A rounds now are re­al­ly pack­ing it in. What do you see, Neil?

Neil Ku­mar

Neil Ku­mar

Are we get­ting our fair share when you think about the glob­al eco­nom­ic mar­ket? $700 tril­lion of cap­i­tal. As­set man­agers run $5 tril­lion of cap­i­tal, $1.8 tril­lion in dry pow­der and there’s $25 bil­lion of health­care pri­vate eq­ui­ty, pri­vate ven­ture in­vest­ment a year. That seems small to me. So, there’s an in­cred­i­ble run­way to fi­nance a lot more in­no­va­tion in health­care. Some­times, a more tar­get­ed A round is ap­pro­pri­ate. Some­times, di­ver­si­fi­ca­tion is ap­pro­pri­ate. De­pends on what peo­ple are think­ing about, but you’ve got a glob­al­ly yield-con­strained econ­o­my and there aren’t that many places you can put your mon­ey and watch it grow, and biotech is one of them.

Very, very few NIH pro­grams get trans­lat­ed in­to some­thing that’s com­mer­cial­ly vi­able. The num­ber of first-time fi­nanc­ings is al­most the same as what it was in 2008 right now. So, you’ve got mega A rounds and all that, but I think there’s a lot more to go in terms of…

John Car­roll

More mon­ey go­ing in­to the same num­ber of deals is some­thing that you hear over and over again in this in­dus­try.

Neil Ku­mar

Su­per­stars get fund­ed with, in­stead of $50 mil­lion yes­ter­day, $300 mil­lion now, but that’s not the on­ly way to dri­ve in­no­va­tion. These mega-rounds are de­served for some — these great CEOs and what­not — a lot of great in­no­va­tion is just go­ing starved. I see tons of good projects that don’t get fund­ed.

John Car­roll

Su­jal and Aron, let’s get you both in­volved in this thing. Are we see­ing on­ly the first glim­mers of what’s go­ing to hap­pen here? Or is this as good as it gets?

Su­jal Shah

Su­jal Shah

Maybe I’ll start, be­cause part of what Neil talked about is cer­tain­ly what I think is re­al­ly ev­i­dent. Bob men­tioned 2001 and 2007-8. Those were times when macro fac­tors cre­at­ed a very dif­fer­ent en­vi­ron­ment for biotech com­pa­nies to raise cap­i­tal. It wasn’t re­flec­tive of even the in­no­va­tion on­go­ing. I don’t think there was nec­es­sar­i­ly a gap in in­no­va­tion in those years.

There were a lot of oth­er en­vi­ron­men­tal fac­tors that im­pact­ed our own sec­tor and our own abil­i­ty to raise cap­i­tal then. The trend on in­no­va­tion is re­al­ly large­ly un­changed; what’s re­al­ly unique, clear­ly, is that the pace of in­no­va­tion is very rapid, cer­tain­ly with on­col­o­gy and gene ther­a­py, ar­eas with­in our field that were re­al­ly nascent 10, 15 years ago. But there’s al­so some­thing re­al­ly in­ter­est­ing in our new pock­ets of cap­i­tal. You re­fer to Third Rock. Vi­da Ven­tures. You’re start­ing to see in­vest­ment firms of ex-en­tre­pre­neurs and the men­tal­i­ty of fund­ing that comes with an un­der­stand­ing of op­er­at­ing. So, these mega-rounds are, I think, re­flec­tive of the un­der­stand­ing that you re­al­ly need to get at least through some key in­flec­tion points with a sig­nif­i­cant amount of cap­i­tal in the ear­ly days, and that change, I think, is cer­tain­ly ben­e­fi­cial for all of us.

We’ve been pub­lic for five years; the world we live in is a lit­tle bit dif­fer­ent, and I used to ar­gue that maybe it’s eas­i­er for us to raise cap­i­tal or sig­nif­i­cant amounts of cap­i­tal in the pub­lic mar­kets. That may still be true. But this change hap­pen­ing even with­in the pri­vate in­vest­ment op­por­tu­ni­ty is re­al­ly sig­nif­i­cant. It’s a new source of cap­i­tal. The in­no­va­tion con­tin­ues to trend very pos­i­tive­ly, and it’s ex­treme­ly ro­bust. Again, it’s more macro fac­tors that could make things more chal­leng­ing for some com­pa­nies. But in the end, even in those en­vi­ron­ments, it’s re­al­ly in­no­va­tion and ex­pe­ri­enced teams be­ing able to raise cap­i­tal. Those things, I think, are un­changed, even in some­what chal­leng­ing mar­kets.

John Car­roll

So, Aron, you’re new to the CEO job. You came up through the busi­ness side of biotech. Are things fun­da­men­tal­ly dif­fer­ent now?

Aron Knicker­bock­er

Aron Knicker­bock­er

I think we’re at a pe­ri­od of pro­longed eco­nom­ic ex­pan­sion. We’re in the eighth year of a broad bull mar­ket, and so, you’ve got cap­i­tal un­der man­age­ment, as Neil was al­lud­ing to. As­set man­agers need to al­lo­cate some of that to high­er risks that gen­er­ate high­er re­turns.

John Car­roll

And no­body gets more risk than biotech com­pa­nies.

Neil Ku­mar

That’s not true, by the way. We should talk about that.

Aron Knicker­bock­er

I’m cu­ri­ous about this, ac­tu­al­ly. This year, in the pub­lic mar­kets, the biotech in­dex has out­paced S&P and small caps have done even bet­ter, so that’s con­tin­ued to track cap­i­tal to pub­lic en­ti­ties, and at Five Prime, we’ve ben­e­fit­ed from that. But is the mu­sic go­ing to stop? I don’t think so im­me­di­ate­ly. What we’re see­ing is that pro­longed up­ward trend, and part of that is the tech en­vi­ron­ment.

When you think about tech­nol­o­gy shifts — look­ing at the tech in­dus­try for in­stance — you had a new mil­len­ni­um, dot-com move, and then you had mo­bile and the iPad and all that. Then you had cloud. Now you’ve got the in­ter­net of things. But it’s a pro­longed ex­pan­sion with re­trac­tions along the way. I think biotech is sim­i­lar in that we are see­ing we can cre­ate sus­tain­able com­pet­i­tive ad­van­tage and se­cure com­pet­i­tive po­si­tions as a re­sult. That’s go­ing to at­tract in­vest­ment, be­cause there aren’t that many sec­tors where you can in­vest, and — if the com­pa­ny’s suc­cess­ful — re­al­ize pro­longed, sus­tained com­pet­i­tive ad­van­tage. That’s what’s hap­pen­ing. We’re see­ing that as some of the ideas that used to be sci­ence fic­tion are now trans­lat­ed in­to re­al­i­ties, be it gene ther­a­py as well as pro­tein and bi­o­log­ics and small mol­e­cules. There’s an in­cred­i­ble ar­ray now of ways to treat pa­tients and their dis­eases and to tar­get those pa­tients who’ll ben­e­fit from a giv­en type of ther­a­py.

So, what we’re see­ing is tech­nol­o­gy com­ing to bear in a ma­jor way across the in­dus­try, and, as a re­sult, it’s go­ing to con­tin­ue to at­tract cap­i­tal.

John Car­roll

Neil, what’s riski­er?

Neil Ku­mar

Movies are pret­ty risky.

John Car­roll

I don’t know about that.

Neil Ku­mar

Peo­ple don’t re­al­ly think about risk in the same ways be­cause we have such a small cap­i­tal pool rel­a­tive­ly in biotech as com­pared to some of these oth­er economies. Peo­ple don’t think about pool­ing risk and col­lat­er­al­iz­ing risk. We have pools of cap­i­tal that are in the tril­lions around things like, “Will the hur­ri­cane do X-Y-Z amount of dam­age?” And then, you’ve got a sec­ondary mar­ket on top of that, and you’ve got a ter­tiary mar­ket on top of that.

We don’t have any of that in biotech. You have to some­how be able to quan­ti­fy the per­for­mance in your sec­tor in a way that can reach that $700 tril­lion — or at least a $5 tril­lion — [lev­el] of cap­i­tal in a way that’s more ro­bust. … I mean, Bob can tell you. It’s like you’re out there, there are 30, 40 funds, right? You go on the road, you talk to any bank, it’s like a hun­dred funds that they take, whether or not a biotech can tru­ly have the cap­i­tal to do some­thing, trans­form it like what they’re do­ing at MyoKar­dia.

Paul Scansaroli

And it’s con­nect­ed to what I was say­ing in the be­gin­ning. When you go back to 2015, I re­mem­ber go­ing around to var­i­ous mu­tu­al funds who have health­care PMs that I would spend the ma­jor­i­ty of my time talk­ing to, but would have end­less ex­am­ples of sec­ondary funds with­in their or­ga­ni­za­tion who his­tor­i­cal­ly had noth­ing to do with biotech run­ning in their of­fice, say­ing, “What’s this blue­bird?” They would wind up tak­ing a big chunk of that al­lo­ca­tion in the trans­ac­tions that were hap­pen­ing in 2015. I think now we’re set up for some more sus­tain­able suc­cess as it re­lates to the new is­sue en­vi­ron­ment, be­cause you haven’t seen as much of that. There’s some but not as much. I think you’re see­ing a broad­ened uni­verse of health­care-ded­i­cat­ed in­vestors. Maybe in 2015 if it was 30, 40, I think it’s maybe dou­ble that. It’s still not large, but it’s a deep­er bench of health­care funds who know and un­der­stand and ap­pre­ci­ate the risk and the in­no­va­tion that they’re par­tic­i­pat­ing in. I think, again, you can mess it up if a lot of the or­ga­ni­za­tions that have at­tract­ed that cap­i­tal over the past three years start to see con­sis­ten­cy in terms of clin­i­cal fail­ures, be­cause many of them are now start­ing to get more ro­bust datasets that are ei­ther go­ing to work or not. There’s some clear win­dow of op­por­tu­ni­ty there to suc­ceed or fail that peo­ple un­der­stand when they in­vest in biotech. I think that’s why we feel pret­ty good about at least the back­drop that we are op­er­at­ing in to­day and for the fore­see­able quar­ter or two, ab­sent the 2001 or 2008 ma­jor macro event that just kind of shuts every­thing down.

John Car­roll

What I’d like to do right now is take out our crys­tal balls. What are the biotech world and the Bay Area go­ing to look like com­pared to right now? Bob?

Bob Mc­Dow­ell

You’re go­ing to see com­pa­nies ac­tu­al­ly get­ting to and be­yond proof of con­cept. That’s the on­ly mark­er that mat­ters now. We’ve re­al­ly got to get to the pa­tients. We’re gain­ing a greater ap­pre­ci­a­tion for the trans­la­tion­al com­plex­i­ty of mov­ing from the nice pre­clin­i­cal world that we in­hab­it­ed: All the tech­nol­o­gy gives us the il­lu­sion that we can dis­sect that world to in­fi­nite res­o­lu­tion. We’ve got to get to the pa­tients and find out what’s re­al­ly go­ing on. Biotech com­pa­nies are go­ing to be chal­lenged even more to bring on sea­soned pro­fes­sion­als — like Jonathan — who de­vel­op drugs and know what to look for and can set high-bar ex­am­ples. It’s suc­ceed or fail. It’s not a bunch of maybes. Get­ting to those re­al­ly un­am­bigu­ous clin­i­cal end­points is go­ing to be crit­i­cal.

John Car­roll

If you think about it, 40 drugs or 42 new drugs a year, that nev­er struck me as a very big num­ber. I know a lot of peo­ple are in­cred­i­bly ex­cit­ed about that. To me, it’s like, why isn’t it 100? Are we head­ed to 100, Neil? Is that the fu­ture?

Neil Ku­mar

That’s what you’ve got to hope the fu­ture is, be­cause if you look back­wards in time, this is prob­a­bly one of the most pro­duc­tive turns of the biotech cy­cle in terms of new prod­uct ap­provals. We have al­most 30 new prod­uct ap­provals com­ing out of biotechs — we’re not talk­ing about large phar­ma — over the course of the next 18 months. If that’s the case, then you start to do the math. You look back­wards in the pipeline, and un­less POTS falls 10, 15 per­cent­age points, we’re go­ing to have a lot more ap­proved prod­ucts.

The fu­ture will be re­al­ly in­ter­est­ing, be­cause what hap­pened over the last 10 years is you start­ed with the be­he­moth phar­ma mod­el and you moved to dis­ec­onomies of scale. Fo­cused biotechs do R&D bet­ter. What we’re start­ing to see is ac­tu­al­ly some com­pa­nies try­ing to do com­mer­cial­iza­tion bet­ter as a fo­cused el­e­ment in the neu­ropsych field and oth­er fields like that. You’re go­ing to see a lot of new com­pa­nies that are ful­ly in­te­grat­ed biotech com­pa­nies do­ing re­al­ly in­ter­est­ing sci­ence and com­mer­cial­iz­ing the prod­ucts. To Paul’s point, you’re not see­ing a lot of M&A.

John Car­roll

Is this a re­flec­tion of the on­go­ing lack of per­for­mance of big phar­ma? Is this a per­ma­nent part of the fea­ture of this sphere where you’re go­ing to see Big Phar­ma re­cede and take a role sim­ply in late-stage de­vel­op­ment and mar­ket­ing? Or is there a broad­er fu­ture that in­cludes a more in­no­v­a­tive Big Phar­ma or­ga­ni­za­tion?

Su­jal Shah

Neil talked about some­thing, and I’ll con­nect it to the ques­tion you’re ask­ing, John. If I just think a lit­tle bit about what does this re­gion look like, I think the im­pact that small com­pa­nies de­vel­op­ing and ac­tu­al­ly com­mer­cial­iz­ing is the biggest ques­tion mark in­to what re­al­ly trans­forms the in­dus­try. The re­al­i­ty is, as of 10, 15 years ago, you could ef­fec­tive­ly just de­vel­op and let phar­ma com­mer­cial­ize. Like you said, with the kind of down­trend in M&A, you can’t count on that any­more. What’ll be re­al­ly in­ter­est­ing is to see how com­pa­nies be­come con­sol­i­dat­ed, small­er com­pa­nies that do be­come com­mer­cial. That’s a very dif­fer­ent chal­lenge for small­er com­pa­nies and the biotech sec­tor. I don’t know that any­one can re­al­ly, tru­ly count on bring­ing things just to com­mer­cial­iza­tion with the hope that a full phar­ma be­he­moth will then take it from there. That ex­pec­ta­tion is not em­bed­ded any­more in every­thing we do.

John Car­roll

The goal of Big Phar­ma as the knight in shin­ing ar­mor with the big check seems to have gone a long time ago. They’re not com­ing, and they don’t want to pay that kind of mon­ey, which seems to be part of the prob­lem for Big Phar­ma. In any case, Aron, what’s your per­spec­tive on this? Do you think a lot about mar­ket­ing right now?

Aron Knicker­bock­er

We do. We’re not there yet, but we’re aim­ing for that. Every­thing we do is to get on a reg­is­tra­tional path and to a mar­ket. To this ques­tion, phar­ma still plays an in­cred­i­bly vi­tal part of this ecosys­tem. Whether they’re sup­ply­ing suf­fi­cient in­no­va­tion for their own pipelines, it’s pret­ty clear they have to ex­ter­nal­ize some of that and ac­cess it through col­lab­o­ra­tions or ac­qui­si­tions. Still, phar­ma pro­vides tremen­dous de­vel­op­ment, man­u­fac­tur­ing, reg­u­la­to­ry, com­mer­cial, glob­al reach that we don’t have. That’s al­ways go­ing to be a sym­bi­ot­ic re­la­tion­ship that ex­ists. Biotech will in­no­vate and pro­vide prod­ucts to phar­ma or po­ten­tial­ly whole com­pa­nies to phar­ma. That’s not go­ing away. The best phar­mas will ag­gre­gate the best prod­ucts.

To your ear­li­er ques­tion about what does biotech look like in five years, we’re go­ing in a di­rec­tion of a much more be­spoke busi­ness mod­el. Whether that’s on the mol­e­c­u­lar di­ag­nos­tics side — where you know what kind of dis­ease pro­file the pa­tient has and his or her tu­mor or what­ev­er dis­ease state, for in­stance—and based on that, you se­lect a ther­a­py. Or vice-ver­sa. You cus­tom-tai­lor the ther­a­py, like a CAR-T cell, for that pa­tient us­ing his or her own cells.

We’re see­ing some phar­mas make that bet to go on the be­spoke path. Gilead buy­ing Kite or Cel­gene, Juno, for in­stance. Al­so, on the mol­e­c­u­lar di­ag­nos­tics side — Roche rolling up all of Foun­da­tion, for in­stance, and Ven­tana. That’s the way we’re head­ed glob­al­ly as an in­dus­try. We’ve got to fig­ure out the best ways to ad­dress these dis­eases. Fun­da­men­tal­ly, I’m a risk man­ag­er. I’ve got to al­lo­cate cap­i­tal across our var­i­ous projects. That means you take the very best shot you can with that cap­i­tal. To re­duce that risk, you fig­ure out who’s most like­ly to ben­e­fit from this drug and how do you tai­lor that ther­a­py to him or her. That’s the way we’re head­ed.

Paul Scansaroli

I would just add, briefly, maybe for this area specif­i­cal­ly, we’re see­ing al­so an in­te­gra­tion — maybe it’s not next year or the next five years, but be­yond that — an in­ter­sec­tion of tech and biotech [with] the num­ber of trans­ac­tions that have tried to ac­cess the mar­ket with an ar­ti­fi­cial in­tel­li­gence part of their sto­ry. Cer­tain­ly not every in­vestor is ready for that yet or ready to val­ue that yet, but there’s a tremen­dous amount of in­ter­est in where that can go. I would not be sur­prised if, down the road, you start­ed to see a lot more in terms of the in­te­gra­tion of the tech sec­tor and biotech.

Aron Knicker­bock­er

Paul’s ab­solute­ly right. These things are just be­gin­ning, like wear­able tech­nol­o­gy. Ap­ple’s got a health­care group. They’re not talk­ing about it, but they’ve got one. Half of Google Ven­ture’s in­vest­ments are in health. They have Ver­i­ly. It’s where we’re head­ed. I ab­solute­ly agree. Here in the cru­cible of tech, for us in biotech, we can take ad­van­tage of that. At Five Prime, for in­stance, our en­gi­neers could go work at tech com­pa­nies, but they come to do au­toma­tion or soft­ware en­gi­neer­ing at Five Prime be­cause they’re con­nect­ed to the emo­tion­al ap­peal of help­ing pa­tients. We’re ben­e­fit­ing from be­ing in this tech en­vi­ron­ment.

John Car­roll

This sym­bi­ot­ic re­la­tion­ship in the Bay Area be­tween tech­nol­o­gy and biotech has come up in a num­ber of con­ver­sa­tions I’ve had with peo­ple in this area; it’s some­thing you don’t hear a lot in Boston and some of the oth­er ar­eas around the world. But at the same time, there’s this huge pres­sure tech­nol­o­gy puts on in terms of swal­low­ing up tal­ent, pay­ing big wages, dri­ving up home prices.

Su­jal Shah

I’ll tell you, it’s a big prob­lem. We’ve dou­bled in size over the last year. I’ll give you an anec­dote, be­cause gen­er­al­iza­tions are prob­a­bly more bor­ing. We had a meet­ing just yes­ter­day, a se­nior team meet­ing, where we talked about a new in­di­ca­tion we’re in­ter­est­ed in go­ing in­to. Be­lieve it or not, one in­di­vid­ual we were look­ing to re­cruit who had a sig­nif­i­cant amount of ex­per­tise in this func­tion at an­oth­er very suc­cess­ful small biotech com­pa­ny in the area was ef­fec­tive­ly the de­ci­sion point on whether we could run this study in the first half of next year or the sec­ond half of next year. As a pub­lic com­pa­ny, that tim­ing is a big deal. It’s a big dif­fer­ence. For all of that to weigh on this sin­gle in­di­vid­ual — or oth­er­wise our task to go find an­oth­er one sim­i­lar — is an anec­dote of that chal­lenge. It’s re­al­ly hard to find that kind of tal­ent, but it’s crit­i­cal to suc­cess.

John Car­roll

Neil, you like to start up new com­pa­nies and get them rolling. What do you think?

Neil Ku­mar

It’s ex­pen­sive to live in the Bay Area, so you’ve got to kind of di­ver­si­fy your foot­print and make sure peo­ple from the East Bay can make it to some­thing in San Fran­cis­co. It’s al­so … I don’t know … raise the wages, then. It’s not go­ing to help the fun­da­men­tal is­sues that are oc­cur­ring in San Fran­cis­co, but with­in the biotech com­mu­ni­ty, you’re talk­ing about an in­dus­try that net sheds jobs every year. It’s not tech. I mean, tech has to go re­cruit a high school stu­dent who is an amaz­ing pro­gram­mer. We prob­a­bly don’t have to do that yet. I’m sor­ry. Every board wants to pay every­one at the 50th Rad­ford per­centile. Pay them a lit­tle more. The his­to­ry of our in­dus­try is that 90-plus per­cent of the gross pro­ceeds go to in­vestors. That doesn’t need to be the case go­ing for­ward. Why not 80 per­cent, and 20 per­cent go the em­ploy­ees? I don’t think it’s that com­pli­cat­ed. We need to pay peo­ple more.

John Car­roll

Am I nig­gling here about the salary thing?

Bob Mc­Dow­ell

Well, no. The key is when you need to make those hock­ey stick growths. We’re now en­ter­ing Phase III tri­als, and that means we just have to build an in­ter­na­tion­al­ly fo­cused clin­i­cal or­ga­ni­za­tion. That’s tough to do in the Bay Area. We’ve had to ba­si­cal­ly blow up the Rad­ford curve and say, “Look, we just need to get the best tal­ent for the roles we need. These peo­ple will make or break our lead pro­gram, which will make or break the com­pa­ny, so let’s in­vest. Let’s get the right peo­ple.” We’ve been very lucky to get some very se­nior peo­ple from Gilead and Genen­tech and oth­er lo­cal com­pa­nies who have the skills we need­ed. Just for­get the curve. This is how we have to build the team.

John Car­roll

You have a whole group of new Chi­nese com­pa­nies like Zai Lab and BeiGene and so forth. A lot of these com­pa­nies are en­gaged in gap tech­nol­o­gy right now. They’re be­com­ing, overnight, Big Phar­ma com­pa­nies for Chi­na. They’re sweep­ing up every­thing in their path that they can so that they can have a port­fo­lio of drugs they can sell in Chi­na — and ul­ti­mate­ly in­no­vate and start to do new drugs for the rest of the world. I think Chi­nese sci­en­tists are go­ing to have a big im­pact, maybe five or 10 years from now. We’re go­ing to hear from them. I’m cu­ri­ous how you view that par­tic­u­lar trend. Paul, when you talk to peo­ple, what do they say about Chi­na?

Paul Scansaroli

Peo­ple feel it’s too ear­ly to tell with­in any lev­el of cer­tain­ty, at least in my field. I’m sure oth­ers would be much more well-versed in the tal­ent pool in Chi­na from a sci­en­tif­ic per­spec­tive and how the com­mu­ni­ty thinks about that part of the world from a busi­ness and op­er­a­tional point of view. From an in­vestor point of view and the im­pact on the new is­sue mar­ket, it’s still pret­ty ear­ly days. We can all look at the mas­sive amount of cap­i­tal that BeiGene has raised. Zai Lab you ref­er­enced. But they still are more in­fre­quent than suf­fi­cient to see a clear trend. From my per­spec­tive, I would agree with you that it’s com­ing. It’s just very hard to, from where we sit to to­day, have a clear per­spec­tive on the im­pact five years from now or even less on the broad­ened new is­sue mar­ket.

John Car­roll

Aron, you just did a deal I think just as you got to be CEO or just be­fore?

Aron Knicker­bock­er

Just right be­fore. Zai Lab.

John Car­roll

Zai Lab. Tell me about that. What’s your per­spec­tive?

Aron Knicker­bock­er

The game has fun­da­men­tal­ly changed in Chi­na, even in the last two years. Chi­na used to have a much more provin­cial, pro­tec­tion­ist eco­nom­ic pol­i­cy, par­tic­u­lar­ly with re­spect to drug de­vel­op­ment and health­care. You had to run stud­ies in Chi­na with on­ly Chi­nese pa­tients, and it used to be you had to make the drug in Chi­na as well. No in­no­va­tion was go­ing to Chi­na as a re­sult.

The cen­tral gov­ern­ment has said, “No, we’re not go­ing to do that any­more.” They pri­or­i­tized life sci­ences as an area for na­tion­al in­vest­ment. They’ve re­formed their eco­nom­ic pol­i­cy al­to­geth­er and scrapped this mod­el that wasn’t work­ing. The re­sults are stun­ning. I mean, you talk about the cap­i­tal that’s amass­ing there, and it’s be­ing de­ployed now to bring in in­no­va­tion from Amer­i­can com­pa­nies, from Eu­ro­pean com­pa­nies, oth­ers. At Five Prime, we’re the ben­e­fi­cia­ries of that.

I’ll give you the ex­am­ple of what we did with Zai Lab, be­cause it per­fect­ly il­lus­trates what changed. We’re now run­ning a Phase III tri­al in gas­tric can­cer, which is very preva­lent in Chi­na. They’re now al­low­ing what’s called a mul­ti­re­gion­al clin­i­cal tri­al to be used for the ba­sis of ap­proval. That was one change. Plus, you can use im­port­ed drugs, so we make our drug here in St. Louis and send it to Chi­na to be used in Chi­nese pa­tients. That’s com­plete­ly changed the game. And for Zai Lab — with cap­i­tal-ex­pe­ri­enced drug de­vel­op­ers and a proven man­age­ment team — they’re do­ing ex­act­ly what they ought to do, which is take ad­van­tage of that op­por­tu­ni­ty, and we are as well.

So, they’ve li­censed in our drug for gas­tric can­cer for Chi­na, and to­geth­er we’re run­ning a glob­al study with them. Half the pa­tients in this piv­otal tri­al are like­ly to come from Chi­na. So it’s com­plete­ly re­worked the game. It’s pret­ty in­cred­i­ble what’s hap­pen­ing there, and I ex­pect it will con­tin­ue to be a source of cap­i­tal and col­lab­o­ra­tion go­ing for­ward. We cer­tain­ly have ben­e­fit­ed.

John Car­roll

Five years ago, a glob­al strat­e­gy would’ve been a part­ner in Eu­rope or some­thing along those lines, and that would’ve been about it. You would have heard about Japan. You wouldn’t have heard about Chi­na or much about Asia.

Aron Knicker­bock­er

So for your ques­tion, what hap­pens in five years? I think in five years some of these Chi­nese com­pa­nies will be glob­al play­ers.

Ques­tion from the au­di­ence

In the tech sphere, for ex­am­ple Uber, we’re see­ing re­al­ly, re­al­ly large com­pa­nies that have bil­lions of dol­lars in in­vest­ment that are not go­ing to IPO. They’re re­main­ing pri­vate, be­cause they have op­tions in the pri­vate mar­kets to con­tin­ue their ex­is­tence with­out go­ing to the pub­lic mar­kets. And I think the gen­tle­man on the end here al­lud­ed to the fact that, as a pub­lic com­pa­ny, there’s a hir­ing squeeze, and you have a pro­gram held up by six months be­cause you’ve got a crit­i­cal de­pen­dence on a cer­tain hire. Would those prob­lems be al­le­vi­at­ed if you re­mained with the pri­vate mar­kets rather than go­ing pub­lic? And is an IPO ac­tu­al­ly the best thing to do for a biotech in this en­vi­ron­ment as it con­tin­ues to evolve?

Neil Ku­mar

It’s an in­ter­est­ing ques­tion. We ob­vi­ous­ly burn more; we have more cap­i­tal ex­pense than your tra­di­tion­al tech com­pa­ny. But you’re hard pressed, out­side of maybe a cou­ple of re­cent ex­am­ples, to see a $10 bil­lion to $20 bil­lion biotech built out­side of the pub­lic mar­kets. Part of the rea­son for that is be­cause in biotech the cy­cle is so long. In­vestors can hang with you for some time. A hedge fund doesn’t need to liq­ui­date their po­si­tion in your com­pa­ny for a hedge fund man­ag­er to get paid.

A pri­vate eq­ui­ty firm, or a ven­ture firm, is in and out. Now, they may have a five-year hori­zon, but five years isn’t long enough. For us it’s a 10-year cy­cle. It’s over 15 years.

So, un­like in tech where [five years] could be a long enough time frame, for biotech you need to get pub­lic to sus­tain­ably raise cap­i­tal over a long pe­ri­od of time. And there are ac­tu­al­ly in­cen­tives in place for those pub­lic-mar­kets man­agers — not all of them, but some of them, the long-on­ly funds and hedge funds that have a long-term ori­en­ta­tion — for it to be suc­cess­ful.

Paul Scansaroli

I agree with a lot of what Neil was say­ing. The tech­ni­cal dy­nam­ics and the need for liq­uid­i­ty from the pri­vate in­vestor base in biotech is cer­tain­ly dif­fer­ent from what you see in tech. And the cap on what’s tra­di­tion­al­ly been per­ceived as IPO eval­u­a­tions on the mar­gin, or on av­er­age, is very dif­fer­ent.

John Car­roll

What is the av­er­age?

Paul Scansaroli

So this year, the pre-mon­ey av­er­age eq­ui­ty val­ue for biotech IPOs is $350 mil­lion, which is the high­est we’ve seen in many years. It’s gone up steadi­ly. If you look at just a cou­ple of years ago, it was be­low $200 mil­lion pre-mon­ey. And it’s in­ter­est­ing al­so in that 35 per­cent of those IPOs this year are pre­clin­i­cal or Phase I.

So the val­u­a­tions are go­ing up, and that per­cent­age was 21 per­cent last year. The ear­li­er stage and the val­u­a­tions are go­ing up, but it speaks to some of what Neil was speak­ing about in terms of want­i­ng to get pub­lic, need­ing to get pub­lic ear­li­er, for ac­cess to cap­i­tal. You know, there are oth­er in­cen­tives — vis­i­bil­i­ty, ex­po­sure, a lot of those ben­e­fits. But we al­so spend a lot of time with com­pa­nies think­ing about what’s the right time for them to be pub­lic. Not nec­es­sar­i­ly from a re­turns/in­vestors’ point of view, which usu­al­ly winds up be­ing most im­por­tant, but just from an in­fra­struc­ture, peo­ple, life-cy­cle, IPO readi­ness — all of the things that come with be­ing pub­lic ver­sus pri­vate — which I think is in­cred­i­bly crit­i­cal, plus the abil­i­ty to in­ter­face with pub­lic in­vestors and to have the staffing and time man­age­ment for se­nior ex­ec­u­tives.

We spend a lot of time with com­pa­nies, and maybe they have a lit­tle bit longer of a win­dow to re­main pri­vate now, giv­en that there’s been a more ro­bust crossover en­vi­ron­ment and a will­ing­ness to do mul­ti­ple rounds ear­li­er with a broad­er net­work of pub­lic funds. But with a goal to get pub­lic, in al­most all cas­es, much ear­li­er than you’ve seen these tech uni­corns like Uber, for ex­am­ple.

Neil Ku­mar

And you al­so prob­a­bly have less flex­i­bil­i­ty on the pri­vate side in biotech. A lot of those com­pa­nies that you’re re­fer­ring to on the tech side gen­er­ate rev­enue. They may not be prof­itable, but they gen­er­ate rev­enue. We have less flex­i­bil­i­ty be­cause we’re not gen­er­at­ing rev­enue. So some of the pri­vate rounds are more like debt rounds than they are eq­ui­ty rounds. You have a lot more of these sec­ondary mar­kets [in tech] so that you can al­most have em­ploy­ees get liq­uid along the way. We have none of that in our space. Or at least that I’ve seen. Maybe with Mod­er­na.

Ques­tion from the au­di­ence

I want­ed to come back to the com­mer­cial­iza­tion-in-biotech top­ic, which I thought was quite in­ter­est­ing. Just would love to hear a lit­tle bit of ex­pan­sion on that, be­cause I can think of a num­ber of lo­cal com­pa­nies that have strug­gled with that, and it takes sig­nif­i­cant in­vest­ment to put the in­fra­struc­ture in place. So it re­al­ly on­ly works if you have mul­ti­ple prod­ucts — ei­ther a very large prod­uct or in a spe­cial­ty — so that you can en­vi­sion spread­ing that in­vest­ment over a pe­ri­od of time. I’d just be in­ter­est­ed to hear how it’s go­ing to be done dif­fer­ent­ly in biotech or giv­en, for those of you that are fur­ther along than my shop, what you’ve been think­ing about?

Su­jal Shah

I’ll at least say that most small com­pa­nies strug­gle at it. I don’t even think it’s a few; it’s fair­ly daunt­ing for most com­pa­nies that have de­cid­ed to be­come com­mer­cial or don’t oth­er­wise have a choice. Some­thing we in biotech re­al­ly have had to think about for years, but will be­come more im­por­tant when there are more com­mer­cial small com­pa­nies, is this idea of con­sol­i­da­tion. We’re talk­ing about chal­lenge of re­sources. We need to do a much bet­ter job be­ing able to iden­ti­fy where or­ga­ni­za­tions can re­al­ly come to­geth­er, where there’s enough syn­er­gy to be suc­cess­ful from a com­mer­cial per­spec­tive.

To me, that’s one of the dri­ving fac­tors that’s go­ing to be key, whether you’re talk­ing about here in the Bay Area or in Boston, as you see more and more small com­pa­nies be­come com­mer­cial. You can’t do it with just one prod­uct. We like to tell our­selves that if we’re a niche play­er or we’re in a rare or­phan dis­ease, we can be­come com­mer­cial. That’s cer­tain­ly pos­si­ble, but to re­al­ly be able to grow as a com­mer­cial or­ga­ni­za­tion, we as small­er com­pa­nies need to do a lot more con­sol­i­da­tion with oth­ers in the in­dus­try.

Paul Scansaroli

And that opens a whole oth­er can of worms, too, as it re­lates to drug pric­ing.

John Car­roll

And we got through the whole evening with­out drug pric­ing up un­til now [laugh­ter]. It’s amaz­ing.

Paul Scansaroli

It speaks to the per­cent­age I men­tioned ear­li­er around IPOs that are Phase I or pre­clin­i­cal. That’s where all of the mon­ey is. Peo­ple want noth­ing to do with any­one that’s got ma­te­r­i­al, com­mer­cial risk, at least from what I’m see­ing in the new is­sue en­vi­ron­ment. It’s not just for lack of cer­tain­ty around drug pric­ing — where I think the fear has fad­ed a bit for now — but more specif­i­cal­ly to the points about the chal­lenges of ac­tu­al­ly get­ting it to mar­ket. Peo­ple are much more in­ter­est­ed in see­ing val­ue ap­pre­ci­ate from pre­clin­i­cal to Phase I and to proof of con­cept than they are in see­ing some­thing ac­tu­al­ly get through quar­ter-over-quar­ter of rev­enue growth.

Read Part 1 of this PPD Biotech pan­el se­ries from Cam­bridge, MA