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