PPD Biotech pan­el: Five lead­ers in the Boston hub eval­u­ate the top trends — and where we’re all head­ed in the next 5 years

Julie Adams, M.D., med­ical of­fi­cer, PPD® Biotech East re­gion, wel­comes Boston-area biotech lead­ers to the PPD Biotech-host­ed pan­el dis­cus­sion.

With Jef­frey Schwartz, Bain Cap­i­tal Life Sci­ences · An­drew Hirsch, Agios Phar­ma­ceu­ti­cals · Cigall Kadoch, Foghorn Ther­a­peu­tics and Dana-Far­ber/Har­vard Can­cer Cen­ter · Ste­fan Vi­torovic, Vi­da Ven­tures · Chris Garabe­di­an, Xon­toge­ny

PPD Biotech host­ed an in­dus­try gath­er­ing re­cent­ly at Cafe ArtScience in the heart of the Cam­bridge bio­hub. I mod­er­at­ed a pan­el con­ver­sa­tion among some of the up- and-com­ing lead­ers there, fo­cus­ing on key trends guid­ing the ex­plo­sive growth we’ve been see­ing in biotech across the globe—but par­tic­u­lar­ly in Cam­bridge/Boston.

I want­ed to hear their ideas about how the in­dus­try reached this place—and why—and where we’ll be head­ed over the next three to five years. Is this pumped-up growth we’re see­ing a bub­ble? Or are fun­da­men­tal­ly dif­fer­ent forces dri­ving all the IPOs and mas­sive ven­ture rounds we’ve seen of late?

Join­ing me were Jeff Schwartz, man­ag­ing di­rec­tor for life sci­ences at Bain Cap­i­tal Life Sci­ences; An­drew Hirsch, CFO at Agios Phar­ma­ceu­ti­cals, just ahead of their sec­ond drug OK; Cigall Kadoch, sci­en­tif­ic founder at Foghorn Ther­a­peu­tics and a sci­en­tist at the Dana- Far­ber/Har­vard Can­cer Cen­ter and The Broad In­sti­tute; Ste­fan Vi­torovic, co-founder of new­ly cre­at­ed Vi­da Ven­tures; and Chris Garabe­di­an, who is now form­ing new com­pa­nies at Xon­toge­ny.

Our hosts for the evening’s dis­cus­sion were David Sim­mons, chair­man and CEO of PPD, the glob­al con­tract re­search or­ga­ni­za­tion; Daniel Burch, M.D., glob­al med­ical of­fi­cer; and Julie Adams, M.D., as­so­ciate re­gion­al med­ical of­fi­cer with PPD Biotech, the spe­cial­ty ser­vice for biotech and small to mid­size phar­ma com­pa­nies.

Our con­ver­sa­tion cov­ers the fast pace of com­pa­ny growth, sky-high val­u­a­tions, the fac­tors that can hob­ble the in­dus­try, the sud­den emer­gence of Chi­na on the world biotech scene and the huge ex­pec­ta­tions that come with a bet­ter un­der­stand­ing of the sci­ence of drug de­vel­op­ment. I found it all fas­ci­nat­ing, and I think you will too.

Fast, fast, fast: Can biotech keep up this pace?

John Car­roll

What I’d like, first of all, is to gauge every­body’s per­spec­tive about where you’re com­ing from. Is this a bub­ble? Is this some­thing that’s sus­tain­able? What are the lim­its in terms of what the mar­ket can do if it con­tin­ues to grow at this kind of a pace?

Jeff Schwartz

“I’m go­ing to pass the buck on the “Is it a bub­ble?” ques­tion to the left. (Laugh­ter)

One of our big vi­sions in cre­at­ing our fund a cou­ple years ago was that there’s so much in­no­va­tion out­side of clas­sic Big Phar­ma. It can ad­vance far­ther than it ever could be­fore, in part through the vir­tu­al na­ture of or­ga­ni­za­tions, in part be­cause of the na­ture of whether we call it a cure or a more for­ma­tive un­der­stand­ing of what’s go­ing on un­der­neath dis­eases so you can re­al­ly see sig­nals ear­li­er.

More hap­pens in com­pa­nies ear­li­er. That re­quires more cap­i­tal, and so there’s a need for the cap­i­tal we’re see­ing across the spec­trum. I think there’s an op­por­tu­ni­ty here where [larg­er-] scale in­vest­ments ear­ly on help great sci­ence and great tech­nol­o­gy ad­vance faster than it ever used to. So, part of this is—and we could talk about the sup­ply-and-de­mand na­ture of it—part of this is a re­al de­mand for the in­no­v­a­tive and great things hap­pen­ing in our in­dus­try.

Part of this is, as we talked about, is sup­ply. It’s very hard to ever call a cy­cle—a top and a bot­tom. We were jok­ing the oth­er day that if both of us could do that, nei­ther of us would be on this pan­el, be­cause we’d be day trad­ing some­where.

There are good times and there are tougher times in the fi­nanc­ing side of our mar­ket, but we get ex­cit­ed about the long-term prospects of what’s go­ing on in the in­dus­try, and the rea­son there’s de­mand, and the cap­i­tal fol­low­ing the op­por­tu­ni­ty that ex­ists be­cause of that de­mand.

An­drew Hirsch

I think to your ques­tion: Are we in a bub­ble? I would say maybe. I do think we have an op­por­tu­ni­ty to screw it up. If you think about what’s hap­pen­ing and the amount of cap­i­tal out there, you re­ly on the mar­kets to be dis­cern­ing. You want the mar­kets to be able to se­lect which are the good op­por­tu­ni­ties or the bad.

When you get in­to a bub­ble is when they’re not dis­cern­ing and they in­vest in every­thing. There are some dy­nam­ics that may make you think that’s the case. I ex­pe­ri­enced it in my pre­vi­ous com­pa­ny where—I wouldn’t say dumb mon­ey, but when you look at who’s in­vest­ing, where the in­vestors are, and how knowl­edge­able they are, you start to see peo­ple who aren’t used to in­vest­ing in biotech and who don’t re­al­ly un­der­stand the fun­da­men­tal risks.

Be­cause while we have seen an amaz­ing growth in in­no­va­tion and un­der­stand­ing of bi­ol­o­gy, the fact of the mat­ter is we don’t have the op­er­at­ing man­u­al to the hu­man body. A lot of it is still in­cred­i­bly risky. I think the sec­ond peo­ple say, “Hey, I’ve seen great pre­clin­i­cal da­ta. This is go­ing to cure can­cer, and so I’m go­ing to give it a $5 bil­lion val­u­a­tion be­fore I’ve dosed a pa­tient,” you have to ques­tion whether it’s re­al.

A ques­tion of val­ue

Cigall Kadoch

The in­vest­ments are re­al­ly com­men­su­rate with the bi­ol­o­gy. I’m a sci­en­tist at Dana-Far­ber and the Broad In­sti­tute. If you just think about the surge, for ex­am­ple, in high-through­put tech­nolo­gies, genome-wide se­quenc­ing, ex­ome se­quenc­ing, high-through­put omics; in the abil­i­ty to in­ter­ro­gate every pro­tein in the cell—this has re­al­ly emerged in a pe­ri­od com­men­su­rate with the in­crease in fund­ing for a lot of these biotech com­pa­nies.

We study in the lab mol­e­c­u­lar ma­chines that es­sen­tial­ly sit on the DNA and reg­u­late the ar­chi­tec­ture of the genome. For years, these ma­chines were just thought to play house­keep­ing roles in the cell, rather than any im­por­tant func­tion. Now, be­cause of se­quenc­ing hun­dreds of thou­sands of can­cer sam­ples—of tu­mors from can­cer pa­tients—we now know that they play ma­jor roles in dri­ving dis­ease.

On­ly now do bi­ol­o­gists, do we as sci­en­tists, know that this is an im­por­tant area of po­ten­tial ther­a­peu­tic in­ter­ven­tion. The surge in fund­ing is com­men­su­rate with the surge in tech­nol­o­gy. At the same time, be­cause of that surge in tech­nol­o­gy, there are so many screen­ing re­sults, there are so many new genes that are be­ing se­quenced where we can iden­ti­fy mu­ta­tions that are dri­vers or po­ten­tial­ly causative.

Sci­en­tists are now faced with this chal­lenge of go­ing back to ac­tu­al­ly non-high through­put tech­niques—the old-fash­ioned bio­chem­istry, the hard­er, more non-high through­put ex­per­i­ments—to eval­u­ate the va­lid­i­ty of those screen­ing re­sults. This is where it be­comes very chal­leng­ing for in­vestors to dis­cern whether this is some­thing re­al­ly tru­ly worth the val­ue placed on it.

Ste­fan Vi­torovic

I think the fun­da­men­tals are as strong as ever. The ge­nom­ic rev­o­lu­tion is, ac­tu­al­ly, fi­nal­ly start­ing to bear fruit. There was a pe­ri­od of time where peo­ple thought, be­cause we had the code, that now we could ac­tu­al­ly speak the lan­guage. For the first time, we’re ac­tu­al­ly able to un­der­stand at a mol­e­c­u­lar lev­el and to ac­tu­al­ly think about drug de­vel­op­ment in a way that’s matched to that, and that’s a con­ver­gence of the tools and tech­nolo­gies and the costs of do­ing so. The most ex­cit­ing thing—and, I think, the thing that’s bol­ster­ing this in­dus­try fun­da­men­tal­ly—is the fact that we’re hav­ing out­comes nev­er fore­seen in a whole host of in­tractable dis­eases. Those clin­i­cal out­comes are yield­ing an amaz­ing ef­fect on our so­ci­ety and, I think they’re just the tip of the ice­berg. So, there’s a lot of op­ti­mism and en­thu­si­asm.

If we look at the run-up in gen­er­al of NAS­DAQ and the mar­kets at large, biotech does re­al­ly well in boom cy­cles. It does re­al­ly, re­al­ly poor­ly in bear cy­cles. As an in­vest­ment banker in 2007 and 2008, 2009—I re­mem­ber there were ze­ro IPOs for that three-year pe­ri­od. Ze­ro. Not one. There were a bunch of qual­i­ty com­pa­nies dur­ing that pe­ri­od do­ing good work.

It’s al­ways a de­ci­sion be­tween fear and greed, and what you can get and when you take it. A lot of peo­ple are op­por­tunis­tic right now, know­ing the tides are ris­ing, and you don’t know if or when that won’t be the case.

Chris Garabe­di­an

I agree. It’s the most ex­cit­ing time right now in the his­to­ry of our in­dus­try. There’s more stuff that’s work­ing, there’s more tal­ent that knows how to do drug de­vel­op­ment. I used to do cor­po­rate de­vel­op­ment at Gilead and Cel­gene, and we’d have to put to­geth­er a dis­count­ed cash flow.
If any­body won­ders why there’s not more M&A in biotech, you just can’t jus­ti­fy the val­u­a­tions. They’re not on­ly priced for per­fec­tion, but try to put to­geth­er a price on a drug and as­sume ap­proval and as­sume when that drug’s go­ing to be ap­proved and how many pa­tients are out there, and you can’t come up with the cur­rent val­u­a­tion. At the end of the day, that is the ar­biter that will dri­ve the pull­back. I don’t think it’s a bub­ble, but I think we’ve got­ten to this rel­a­tive-val­ue kind of en­vi­ron­ment that’s go­ing to be re­al­ly hard to sus­tain.

Bur­den of proof: Dream ver­sus da­ta

John Car­roll Let’s open it up a lit­tle more. Where do you head over the next three to five years? This is Kendall Square. We’re at ground ze­ro of every­thing that’s go­ing on glob­al­ly. What­ev­er plays out, much of it is go­ing to play out with­in a 20-mile ra­dius of here. If this isn’t a bub­ble, then where are you head­ed in terms of fi­nanc­ing trends and start­up trends? Do you con­tin­ue to get record lev­els of ven­ture mon­ey? Do you con­tin­ue to get record num­bers of IPOs? What hap­pens, from your own per­spec­tive, over the next few years?

Cigall Kadoch

We are eval­u­at­ing tech­nol­o­gy all the time with­in aca­d­e­m­ic in­sti­tu­tions. We do this on a rou­tine ba­sis at Dana-Far­ber, with our col­leagues and friends at all the in­sti­tu­tions. One fea­ture that has stood out among in­ves­ti­ga­tors who have cho­sen to take their ideas for­ward and start a com­pa­ny, such as our­selves, is re­al­ly the po­ten­tial for go­ing big, the po­ten­tial for a plat­form ap­proach that could in­form and un­der­pin the de­vel­op­ment of a num­ber of dif­fer­ent ther­a­peu­tics.

I think we’re start­ing to see—al­though again, in this bub­ble right now—a num­ber of com­pa­nies are still form­ing from a sin­gle mol­e­cule found in an aca­d­e­m­ic screen that’s not yet op­ti­mized via med­i­c­i­nal chem­istry, that has not been sub­ject­ed to a wide range of pre­clin­i­cal eval­u­a­tion. That’s still hap­pen­ing.

The ques­tion is whether that will con­tin­ue or whether more com­pa­nies will be found­ed on new sci­en­tif­ic prin­ci­ples that have the po­ten­tial to cat­alyze a new wave and a new class of ther­a­peu­tics. That’s the tip­ping point that I can see from the aca­d­e­m­ic sec­tor, and it cer­tain­ly was a con­sid­er­a­tion for us as we start­ed Foghorn out of some of the dis­cov­er­ies and patents that emerged from our lab­o­ra­to­ry.

Chris Garabe­di­an

The one thing we his­tor­i­cal­ly have been able to re­ly on more than any­thing else to dri­ve val­u­a­tion and jus­ti­fi­ca­tion of val­ue is clin­i­cal da­ta in pa­tients. Ide­al­ly, you want that in a well- de­signed Phase II study, but we in­creas­ing­ly see that, if you have a cu­ra­tive can­cer [treat­ment] —whether it’s Blue­bird or Sage or any­thing that has ear­ly sig­nals in a small pop­u­la­tion—that can dri­ve val­u­a­tion. What we’ve seen in the last five to sev­en years is the promise—and I’m not say­ing this is bad, I’m just call­ing it what it is—the promise of a tech­nol­o­gy be­fore it’s proven in a pa­tient. Ama­zon is still not prof­itable, right? But every­body ex­pects they’re go­ing to be, and what you’ve seen in biotech is the val­ue at­tached to brand.

All of us ben­e­fit from be­ing af­fil­i­at­ed with cer­tain brands that car­ry ca­chet and cred­i­bil­i­ty. If you cob­bled to­geth­er $50 mil­lion around tech­nol­o­gy with no name, no in­sti­tu­tion, good luck try­ing to go pub­lic or try­ing to get a bil­lion-dol­lar val­u­a­tion. So, what you’ve seen evolve is the cred­i­bil­i­ty of at­tach­ing val­ue be­fore you ac­tu­al­ly prove it plays out in the clin­ic. I hope we’re in a new era where 90% fail­ure rates won’t be the in­dus­try stan­dard, but if you ap­ply that met­ric— which has been the case for decades—then some­thing is go­ing to hap­pen, and you’re go­ing to have a mi­nor­i­ty of haves and a ma­jor­i­ty of have-nots when rub­ber hits the road. A lot of the funds are try­ing to get out be­fore they have that an­swer.

An­drew Hirsch

The oth­er sort of trend I’ve start­ed to see—I think the Broad [In­sti­tute] is start­ing to do this, and MD An­der­son is ac­tu­al­ly do­ing their own clin­i­cal tri­als and tak­ing mol­e­cules dis­cov­ered in acad­e­mia in­to Phase I, and on­ly then look­ing for a part­ner, which pre­vi­ous­ly you’d nev­er re­al­ly see them do. They’d re­ly on the in­dus­try.

John Car­roll

Well, that in­creas­es the val­ue of what you’ve got enor­mous­ly.

An­drew Hirsch

I think that’s why they’re do­ing it; look at the new­er li­cens­ing deals stem­ming from all the cap­i­tal the in­dus­try has at­tract­ed. I think the aca­d­e­m­ic in­sti­tu­tions want to grab more of that. The li­cens­ing deals are more ex­pen­sive, and they’re some­times more oner­ous on cer­tain com­pa­nies. If I think about what’s rate-lim­it­ing, get­ting ac­cess can be more ex­pen­sive. It po­ten­tial­ly can harm the fu­ture prospects of a com­pa­ny.

The biotech tal­ent search

An­drew Hirsch

Rate-lim­it­ing in Kendall Square is peo­ple and space. You see all the con­struc­tion. When I talk to our re­al es­tate bro­kers and start hear­ing rents that are $100 triple net for space in Kendall Square, is that where I want to put my cap­i­tal? Or do I want to put it be­hind the sci­en­tists?

I prob­a­bly get, on av­er­age, four calls a week from peo­ple ask­ing, “Hey, do you know some­one for this role or that role?” It’s hard to find re­al­ly good peo­ple be­cause there is such in­no­va­tion. VCs are say­ing they have more good ideas than they have peo­ple to start them. I think, to me, those are the rate-lim­it­ing things.

Cigall Kadoch

To car­ry that for­ward, I think a lot of the dis­cov­er­ies are com­ing out of this surge of new bi­o­log­ic in­for­ma­tion from se­quenc­ing. Then you’re faced with this chal­lenge, which is ac­tu­al­ly a mo­ti­va­tion for why we start­ed Foghorn: We have all these bi­o­log­ic prin­ci­ples that may rep­re­sent new ther­a­peu­tic ap­proach­es. The chal­lenge is trans­lat­ing that in­to chem­istry. If there’s a tal­ent-pool is­sue in med­i­c­i­nal chemists and chemists who are ac­tive drug-seek­ers in the aca­d­e­m­ic sec­tor, it be­comes re­al­ly chal­leng­ing.

Ac­tu­al­ly, I’m of­ten asked, “You made these dis­cov­er­ies. Why didn’t you then run 10 screens in your lab­o­ra­to­ry?” Well, in ad­di­tion to the fund­ing re­quired to do that prop­er­ly, even if we were to get hits, it’s very chal­leng­ing for us in the aca­d­e­m­ic sec­tor to push those for­ward with­out a re­al­ly, re­al­ly tight med­i­c­i­nal chemist part­ner. The tal­ent pool on the chem­istry side, and cer­tain­ly af­ter that the de­vel­op­ment/drug dis­cov­ery side, is very lim­it­ing on the aca­d­e­m­ic side.

Ste­fan Vi­torovic

You asked the ques­tion of where things are like­ly to be in three, five-plus years from now. The good news is, ob­vi­ous­ly, health care is some­thing we val­ue so in­trin­si­cal­ly and so much. Biotech is re­al­ly at the cusp of find­ing new prod­ucts that are push­ing the en­ve­lope of what’s pos­si­ble. The ex­cit­ing thing is, we as a so­ci­ety—at least here in the Unit­ed States and cer­tain­ly this mi­cro­cosm—have re­ward­ed that in­no­va­tion. Some of the broad­er ques­tions fo­cus on whether we con­tin­ue to re­ward those types of in­no­v­a­tive med­i­cines and how we cre­ate the in­cen­tives for peo­ple to con­tin­ue to de­vel­op and in­vest in their ca­reers.

The peo­ple we at­tract from acad­e­mia and in­to acad­e­mia ob­vi­ous­ly have a pletho­ra of oth­er op­por­tu­ni­ties. What’s key to the sus­tain­abil­i­ty of this in­dus­try and con­tin­u­ing this amaz­ing ride we’re hav­ing right now in tak­ing in­no­va­tion and mak­ing prod­ucts, and then get­ting to pa­tients com­mer­cial­ly, is con­tin­u­ing to in­vest in the larg­er in­fra­struc­ture ques­tions that come from be­yond the in­dus­try. The in­dus­try has its own role, but the gov­ern­ment is play­ing a role in pric­ing, in in­cen­tive struc­tures and in think­ing about ways [to en­sure] the in­dus­try won’t be cast in a less-than-fa­vor­able light. Those are some of the larg­er is­sues.

Big mon­ey equals big ex­pec­ta­tions

John Car­roll

If you look at the big com­pa­nies and what they’ve been do­ing, and at the re­turn on in­vest­ment they’ve had over the last 10 years, it’s steadi­ly been shrink­ing and shrink­ing. Some would sug­gest it’s in­evitably go­ing to go neg­a­tive at some point. You could say that would help biotech, be­cause it’s go­ing to re­quire more in­no­va­tion and Big Phar­mas don’t seem to be able to do it on scale. That’s a good thing. But on the oth­er hand, these are the big en­gines. These guys pro­vide half the re­search dol­lars that go in­to de­vel­op­ing drugs. What are the long-term ef­fects of that?

Jeff Schwartz

The fund­ing be­comes so big in a cou­ple of these ar­eas. If for some rea­son they get un­lucky, the fail­ure rates are still go­ing to be high. Is that some­thing that we, as an in­dus­try, step back and say, well, that modal­i­ty, that ap­proach did not work? Or do we say, some­times it’s the third and the fourth at­tempt that dri­ves it? In many ways, Big Phar­ma, for bet­ter or worse, cre­ate these big op­por­tu­ni­ties around things.

They cre­ate big in­sti­tu­tions, and they keep pur­su­ing and pur­su­ing and pur­su­ing. Maybe that’s part of their chal­lenge, be­cause it’s very hard to sit in a big or­ga­ni­za­tion and say, when do I stop with A and go to B? But with the cap­i­tal that has come in—and es­pe­cial­ly if we were to hit a weak­er point in cap­i­tal in­flec­tion—I wor­ry we might cre­ate a sit­u­a­tion where great ideas fall by the way­side. We could come to aban­don an idea be­cause a cou­ple hun­dred mil­lion dol­lars went in­to ac­cel­er­at­ing a first ver­sion and a sec­ond ver­sion and for some rea­son they didn’t work, but if three shots on goal or four shots on goal had hap­pened, maybe we would have suc­ceed­ed.

John Car­roll

Par­tic­u­lar­ly in the Unit­ed States it seems we get ex­cit­ed about things and pile in very quick­ly. I’m cu­ri­ous about whether val­u­a­tions are on a steady up­ward slope or whether they’re go­ing go through waves.

An­drew Hirsch

I think they will, to the ex­tent that val­u­a­tions are priced for per­fec­tion. You start off with the age of un­re­al­is­tic ex­pec­ta­tions, you go in­to the trough of de­spair and then you come out in­to some­thing of an en­light­en­ment. That’s any new tech­nol­o­gy, whether it’s biotech, whether it’s IT, it goes through that, where you think it’s got all this promise and all these com­pa­nies go pub­lic with their val­u­a­tions are based on the promise. It’s a lot eas­i­er to sell the dream than it is when you ac­tu­al­ly have da­ta and it’s not per­fect and in­vestors can pick at it.

If you go pub­lic pre­clin­i­cal­ly, you may suc­ceed, and that’s great. It’s a great place to be in the pub­lic mar­kets be­cause it’s re­al­ly easy to raise mon­ey when you have suc­cess. But I’ll tell you from ex­pe­ri­ence, if you stum­ble, it’s not a great place to be at all.

You would rather be pri­vate in that sit­u­a­tion. It’s much eas­i­er to re­cap­i­tal­ize a com­pa­ny when you’re pri­vate. You just have to be care­ful and rec­og­nize it may not work the first time. It prob­a­bly won’t. You need to plan. Be­cause if you do stum­ble, it’s a re­al­ly cru­el place to be.

I think you are go­ing to see that di­choto­my in the next few years as some of these pre­clin­i­cal com­pa­nies take the cap­i­tal they’ve raised, in­vest it, move their pro­grams with­in the clin­ic, and see re­sults in hu­mans.

John Car­roll

I had a con­ver­sa­tion with Tom Lynch (R&D chief) at Bris­tol-My­ers Squibb a few months ago, and he talked about the fever pitch in re­search in­sti­tu­tions: Wow, that’s great re­search. Is that a com­pa­ny? Do we have a com­pa­ny now? And that, I bet, is a ques­tion you get a lot.

Cigall Kadoch

With­in this bub­ble and for the points that have been dis­cussed, it’s go­ing to be in­ter­est­ing to see what hap­pens, es­pe­cial­ly in the pub­lic mar­kets. We’ve seen a lot of these ear­ly-stage pre­clin­i­cal com­pa­nies go­ing pub­lic on the pub­lic mar­kets, trad­ing and wait­ing and wait­ing and wait­ing to see whether this promise is go­ing to be made true.

Once we see the first waves of those com­ing through, it’ll be in­ter­est­ing to see how that changes or reroutes the strate­gies among some of these ear­li­er com­pa­nies. It’s cer­tain­ly scary. It may work across an en­tire plat­form but al­so may have a lot of ups and downs. How is this go­ing to fare in the pub­lic mar­kets, es­pe­cial­ly when a lot of in­vestors are not go­ing to un­der­stand?

Chi­na: A surge of in­vest­ment

John Car­roll

About five years ago, I start­ed say­ing Chi­na is com­ing. And then I said the same thing the next year: Chi­na is com­ing. Next year, Chi­na is com­ing. Well, Chi­na is here, and in a big, big way. Every­thing is chang­ing in Chi­na right now. Is this some­thing that’s got legs? Is it a new world we’re go­ing to be liv­ing with for a while? Be­cause a lot of the re­search and de­vel­op­ment in Chi­na isn’t par­tic­u­lar­ly well un­der­stood.

Jeff Schwartz

The in­dus­try has al­ways been a glob­al in­dus­try, we’ve just de­fined our glob­al as the U.S. and Eu­rope, be­cause that’s where peo­ple paid for drugs. But in­no­va­tion is go­ing to hap­pen more broad­ly, and cap­i­tal, for sure, is more broad. The na­ture of the fund­ing and the im­pli­ca­tions of that are re­al. I’m sure that will cy­cle up and down, and the con­trols over get­ting cap­i­tal in and out of Chi­na and the whole dy­nam­ics of that will have pos­i­tive and neg­a­tive days, but it would be fool­ish to think there’s not go­ing to be a lot go­ing on in Chi­na, from an in­no­va­tion, and cer­tain­ly for the fore­see­able fu­ture, from a cap­i­tal per­spec­tive.

What’s in­ter­est­ing is the speed at which that trans­for­ma­tion is hap­pen­ing. Leave aside the abil­i­ty to take com­pa­nies pub­lic in Hong Kong and Chi­na and the fact that some strong U.S. com­pa­nies are choos­ing to list over there and the dy­nam­ic that that cre­ates. What’s in­ter­est­ing to me is how quick­ly it went from fund­ing with­in Chi­na to show­ing up in a lot of the trans­ac­tions we see.

For us, the ques­tion is … as we were talk­ing about ear­li­er, com­pa­nies are built by peo­ple. Most folks up here would agree, cap­i­tal is not just mon­ey. It’s peo­ple be­hind that and ex­pe­ri­ence be­hind that and the na­ture of un­der­stand­ing that it nev­er goes in a straight line. You want a part­ner that’s more than just cap­i­tal.

Chris Garabe­di­an

One en­cour­ag­ing thing I’ve seen with Chi­nese in­vest­ment is that they’re very dis­cern­ing and they want to know we’re part­ner­ing with peo­ple. You see syn­di­cates with U.S. funds that have great rep­u­ta­tions, so they’re not just throw­ing mon­ey at biotech. They’re us­ing a lot of their con­tacts. You have great drug de­vel­op­ment ex­pe­ri­ence and part­ner­ing with those folks, and a lot of them are the ben­e­fi­cia­ries. But at the end of the day, why do so many com­pa­nies still form in Boston, Cam­bridge, San Fran­cis­co?

It re­al­ly still hinges on drug de­vel­op­ment abil­i­ty and a track record of suc­cess, and that’s still hard to find. There are a lot of tech­nolo­gies out there, a lot of good sci­ence, a lot of mon­ey, but at the end of the day, it’s dis­cern­ing that drug de­vel­op­ment abil­i­ty. If we were a pro­fes­sion­al sports in­dus­try, who’s the free agent who is go­ing to get the biggest con­tract? Those who can con­sis­tent­ly turn that Phase II study in clin­i­cal pa­tients. That’s where we’ll re­al­ly see who does the best due dili­gence, who has the track record of good per­for­mance in the long run.

The last point I’ll make around this con­cept is, if you look over the last 20 years, the in­dus­try has swung back and forth be­tween prod­uct-fo­cused val­u­a­tions and plat­form val­u­a­tions. For most of the last 20 years, you were bet­ter off bet­ting on prod­uct. Not the last five years. If you be­lieve these trends con­tin­ue, there will be a swing back. Every sin­gle pre­clin­i­cal com­pound has a neg­a­tive NPV to­day. Soon, some­one is go­ing to say, we can’t trust all these plat­forms. What is your lead prod­uct? When are you go­ing to have a read­out? When are you go­ing to get ap­proved, and how much mon­ey is that go­ing to make?

An­drew Hirsch

We ac­tu­al­ly just went through a process where we re­li­censed Chi­nese rights to Tib­so­vo to CStone, and we went through and looked at who are the right com­pa­nies to part­ner with. And un­til re­cent­ly, most of the big com­pa­nies in Chi­na were large­ly sell­ing gener­ics. But what’s dif­fer­ent—and you men­tioned peo­ple—is you have a lot of Chi­nese na­tion­als who were trained in U.S. biotech com­pa­nies mov­ing back and form­ing com­pa­nies of their own. When we had our due dili­gence meet­ings, a num­ber of our ex­ec­u­tives had worked with these peo­ple. You have that men­tal­i­ty in Chi­na, and we were very clear that that’s what we were look­ing for in a part­ner.

You want a lo­cal com­pa­ny, not a large multi­na­tion­al, be­cause it’s pret­ty clear they have a bet­ter track record with the CF­DA. But they al­so knew they were more like us in how they think about drug de­vel­op­ment, be­cause they were all trained in the biotech com­pa­nies we all were. That’s a big dif­fer­ence from three or four years ago.

Q&A

Ques­tion

Giv­en that there’s go­ing to be a loss of fund­ing, the cy­cle is just go­ing to go down, what can a small­er com­pa­ny do right now to get them­selves ready for that? Ob­vi­ous­ly, every­one says get as much mon­ey as you can.

John Car­roll

Get as much mon­ey as you can.

Ques­tion

But then every­body’s wor­ried about a down round, so how do you pre­pare? What’s the best thing to do?

An­drew Hirsch

A down round is not the worst thing that can hap­pen. The worst thing that can hap­pen is you’re on a plane back and forth to Delaware, which I spent most of 2016 do­ing, so I think you have to think about the big pic­ture. What’s most im­por­tant is get­ting the cap­i­tal and do­ing what you have to do to move your pro­grams for­ward, and to me, the best way to mit­i­gate the risk of a down round is to ap­pro­pri­ate­ly man­age your val­u­a­tion. It’s nice to be able to say, “Hey, I raised this much mon­ey at this val­u­a­tion and I min­i­mized my di­lu­tion.”

But if you get your­self to a po­si­tion where your val­u­a­tion is well ahead of where the fun­da­men­tals of your busi­ness are, un­less you are per­fect and ex­e­cute per­fect­ly, you’re go­ing to have a down round. You’ll face a chal­lenge and you’ll al­most back your­self in­to a cor­ner. I think man­ag­ing the val­u­a­tion ramp as a pri­vate com­pa­ny ap­pro­pri­ate­ly—and not get­ting too ex­cit­ed about what your last round pre-mon­ey val­u­a­tion is—is the best way to avoid that, be­cause if you do get ahead of your­self, you’re priced for per­fec­tion, and we know that 90% of things fail. While VCs like to have a nice round to min­i­mize their di­lu­tion as an op­er­a­tor, that’s not al­ways the best thing.

Chris Garabe­di­an

I see this every week. If you’ve done a se­ries A and you’re at a val­u­a­tion that’s at $70 mil­lion to $120 mil­lion, if you don’t have the syn­di­cate to­geth­er that can car­ry that type of val­u­a­tion, you have to re­al­ly think hard whether you’re rais­ing mon­ey that’s over your ap­pro­pri­ate val­u­a­tion.

But with a good Phase II plan and good tim­ing of that Phase II da­ta read­out? No­body dis­putes what a good Phase II dataset is worth, and every­body will say the floor is prob­a­bly half a bil­lion. So, if you have a good plan to turn that card over in 2020, and know this is how much we need to do it, and if we’re all right, we’re go­ing to be worth half a bil­lion or $1 bil­lion, that’s a good in­vest­ment. So, I think, at the end of the day, that’s what you need to solve for.

Jeff Schwartz

I’d just add on one more com­po­nent. We were talk­ing about Big Phar­ma and the chal­lenges they have in al­lo­cat­ing cap­i­tal and mak­ing de­ci­sions. But ear­li­er-stage com­pa­nies have that as well. There will be pe­ri­ods where there will be less cap­i­tal and com­po­nents around it.

I think, along with the oth­er com­ments, it’s know­ing when you are rais­ing cap­i­tal and look­ing at the cap­i­tal that you have on hand. What is it go­ing for and what are the con­tin­gen­cies that you have around that? We get frus­trat­ed when some­one says, I’m go­ing to raise ex­act­ly X. And you’re like, where does that take you? They say, that takes me ex­act­ly to when I get X da­ta.

And it’s like, what hap­pens if tri­als en­roll a lit­tle slow­er, or what hap­pens when that FDA meet­ing gets pushed to the right? You don’t want to have an ex­cess of buffer, but you have to be think­ing around that, and you have to have con­tin­gen­cies that say, if X goes wrong, what are the things I can tog­gle if the cap­i­tal’s not there?

And part of that’s look­ing around your syn­di­cate and talk­ing to your ex­ist­ing in­vestors about their com­fort lev­el, and the na­ture in which you do it. We all have to be good stew­ards of cap­i­tal and cap­i­tal al­lo­ca­tion, and we sit here and do that as our dai­ly jobs. Every man­ag­er of a busi­ness is do­ing that, and you have to be hon­est about what you get from your cap­i­tal. What’s the right way to do it and how do you run the right stud­ies? Not just what you have on hand. It’s al­so how you face the tough chal­lenges: I’m go­ing to do A and I’m go­ing to do A well, and I’d like to do B and C, but I don’t nec­es­sar­i­ly have the cap­i­tal to do that. Let’s make sure I have A, and be­fore I ven­ture on to B and C, let me make sure I have the cap­i­tal around the ta­ble for that, or the un­der­stand­ing amongst my in­vestor base that we’re go­ing to go af­ter this and need more cap­i­tal to move for­ward.

David Sim­mons, chair­man and CEO of PPD (sec­ond from right), joins John Car­roll (cen­ter) and, from left, San­ti­a­go Ar­royo, CMO of Mo­men­ta Phar­ma­ceu­ti­cals, Dan Burch, M.D., glob­al med­ical of­fi­cer, PPD Biotech, and Ste­fan Vi­torovic, co-founder and man­ag­ing di­rec­tor of Vi­da Ven­tures.

Im­ages from PPD® Biotech pan­el, pre­sent­ed by End­points Stu­dio, on “Fi­nance For­ward: Biotech’s Op­por­tu­ni­ty-Rich Fi­nanc­ing Land­scape” at ArtScience Cafe in Cam­bridge, Mass­a­chu­setts, on Tues­day, Ju­ly 17, 2018. Cred­it: Chris­tine Hochkep­pel, End­points News

This pan­el dis­cus­sion has been edit­ed for length and clar­i­ty.