Joe Coletti
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Hello, and welcome to another edition of Pathfinders, the podcast series from RBC Capital Markets that explores the fast moving world of biopharma, and healthcare. I'm your host Joe Coletti.
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In this episode, you'll hear a venture capital roundtable discussion that we recently held in partnership with endpoints news. RBC’s own Noel Brown our head of us biotechnology investment banking moderated the conversation around how venture capital firms are reacting to challenging market conditions and trends that are shaping the biotech funding ecosystem
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you'll gain valuable insight into VC capital raising strategies and learn what will separate the winners from the losers in this new funding landscape.
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This episode features three very special guest panelists — Jerel Davis, Managing Director at Versant Ventures, Otello Stampacchia, Founder & Managing Director at Omega Funds, Simeon George, CEO & Managing Partner at SR One.
Now let's get into today's episode.
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Noel Brown
Hi, everyone. I'm Noel Brown, Managing Director and Head of US biotechnology, investment banking at RBC Capital Markets. And today, I'm here with Endpoints News. And thank you for joining us for today's discussion, which would be when to call it quits VCs making tough decisions in a tough market. The focus of our discussion today will be to explore how VC firms are navigating the current landscape, and the significant trends within biotech funding ecosystem that are creating new market dynamics for both biotech companies and investors. We're sponsored today by RBC Capital Markets, and I'm thrilled and excited to be moderating today's expert panel. And maybe I can turn it first to Otello, and then have Simeon and Jerel chime in along that but, you know, with the public markets in what some might characterize as utter disarray, you know, are we experiencing right now a renaissance in private capital markets?
Otello Stampaccia
Yeah, and all as you know, I take a little bit of objection to using the world, disarray, I think, to put these in context, they still have been, not many, but a few successful public offerings. It's just that the profile of the type of companies for which public specialist investors have appetite as reverted back to what used to be the case five, six years ago, which is, you know, clinical stage companies with relatively near term milestones. So I think we've seen those go out and a full on offerings or any indications, there's still demand for those type of stories as well. I think in terms of the prominence of the private versus public markets, again, my perspective is that they're just on different clocks, timeline or lag function, if you will, right. public markets are more reflexive, versus corrections, macro factors. And again, from my personal view, the aberrations perhaps were 2018 2019 2020, more or less, versus history, private markets war come very different timelines, I mean, most of our funds, right, a 10. year plus, you know, 1-2-3, whatever your extensions, we usually deploy that capital, not often, but usually we deployed to in two or three years plus reserves. And therefore, that makes that type of capital. A lot stickier. But even on the private side, outside of, you know, whatever the 10-15-20 funds, that are relatively well established in our business, there's been a lot of influx of capital, from what I affectionately call tourists. And people love tourists when they visit but what happens is they usually go home. And in the case of Anglo-Saxon tourists, they go home with a bit of a sunburn and perhaps in shorts. So, so again, we need to put that in context and offence to any Anglo Saxons who are on this call, by the way. I just think cost of capital is obviously going up that has repercussions for the type of companies that go public for when you go public. For the type of companies that we found and what type of projects these companies should fund, right, because you are super early, five or six years away from the clinic and in a difficult to the risk indications. I think there probably takes a lot less of a priority than other things, certainly in the private in the public market, but I think also to a large extent in the private markets. So that's my view. But again, we shouldn't I mean, history is always a good teacher. And in my opinion, we are going back to what used to be slightly normal market and there's also a bit of a reaction because a number of public funds are also burned a bit. So there's a delay. But you know, for what I'm seeing lately in the follow on markets, and while you know the market better than I do, there's still huge appetite for stories that are clinical and the rest.
Noel Brown
You know, it's funny, because you talked about the tourists, and it sort of brings up that age old debate about, you know, are you do you blame the drug abuser or the drug dealer, right? Because the tourists were drawn in by the companies that you guys created. And then the markets were fed these mean, they were put out for public distribution, partly because you guys saw an opportunity to sell it. Right. So I mean, I don't think he can be blamed for putting those companies out there. But at the same time, I wonder if the tourists or, you know, the drug user, we got them addicted. Sorry.
Otello Stampaccia
And I don't make this. I mean, obviously, it does. There's a few people on this call sourcing on mobile as this. But anyway, thank you for the analogy to drug dealers. It's very flattering. I mean, we do dealing drugs, right. That's what we invest in at the end of the day. So it's not completely inept. But I do think our, you know, brethren, if you will bear some responsibility for a number of companies going public a bit too early, maybe. Now, you know, I can claim perhaps some of us were a bit of an exception. But you know, we'll the again, it comes down to the cost of capital. Investors in general, and management teams are very sensitive to cost of capital, because cost of capital is directly related to dilution. And if there is one bad word for venture capitalists, or investors in general is dilution. So, which is silly, perhaps, but it is the way we function. So I don't think yeah, the ecosystem overall. And again, I can claim some of us might be exceptions, needs to be blamed a bit for having good companies that in my opinion, were a bit immature on to the public markets, because a number of those now had no news for one or two years. And therefore, they have a really hard time attracting the attention. But what ends up being very distressed and very distracted public investors at the moment, I'll stop here. I don't want to monopolize this. It's an important topic.
Noel Brown
Simeon, do you want to offer some thoughts on the issue?
Simeon George
I think I think until us covered it. Well, thanks. No, for hosting today. Yeah, I think, you know, candidly, you know, I think what the world looks like today, if you're an entrepreneur, or startup or venture firm, with interest rates closer to five or six than what it did two years ago at zero. I mean, that's the reality. The stark reality is like, we just live in a different world now. Right? So I think it means we all have to sort of adjust the business models, how to think about accessing capital, cost of capital, remains the prohibitive, sort of, you know, backdrop against which we're all we're all facing, how to continue to fund and build companies, right. So I think when cost of capital was much lower, you know, we had all these different ways to continue to push things forward. And it made sense because you want to be able to lower your cost of capital raise from as diverse set of investors as you can. And hopefully the, you know, the companies that have the true innovation and products that are gonna have clinical benefit, will, you know, be able to take advantage of that. Right? And I think the constrained environment that we're living in now is forcing all of us to reassess sort of how what the business model is, right. So, you know, I think private there is more capital now. But there's the challenges we just talked about. Publix is much more discerning handful have gone out. I was just watching the seller in roadshow last night with Shall we and our team, you know, it's going to be that caliber of Team assets, amount of capital raised amount of capital required. Right. Those are the ones that right now make sense in this current market backdrop and probably for the foreseeable future.
Jerel Davis
I don't have much to add, Noel, I think I'd say on the question of are we going back to the future, or more correctly? Are we going back to the past? I think the answer is yes and no. Yes. There's been a dramatic pullback. Yes. Investors are standing on the sidelines. Yes, there's a refocus on later stage assets. You know, there's going to be a change into the garden VC and a transition within Pharma. On the no side, you know, there is more capital within the funds than there ever was in the previous pullback. There is an LOE issue with pharma that's driving the M&A we're seeing and it's gonna continue to drive, you know, huge amount of appetite from pharma innovations faster than it's ever been before. And then we have a really rich smid ecosystem, probably three to five times number of companies in that point five to $2 billion range, which is going to provide other opportunities. So it's yes, it's going back to the past, but there's also some differences from the past. Should the private markets go through Renaissance you know, absolutely. You know, if a renaissance is defined as you know, an era trying to surpass the ideas in the achievements of the past, the first step is trying to define for ourselves, you know, what are we really trying to surpass in terms of past achievements. And we need to do that without indexing on 2020 – ‘21. Because we index in 2020 and 2021, we're going to set the goals wrong. And the hardest part is changing mentality, you know, at the investor level, at the board level at the management level, because we're kind of still stuck in 2020-2021, many of us.
Noel Brown
So I definitely hear you on being mindful of what the metrics are that we sort of assess that we are trying to surpass. Because hopefully, it's not number of companies, because I think as we all agree, right now, there's simply just are too many in the ecosystem. And, you know, look, regrettably, some of them are going to have to go right there, we're gonna have to have some shrinkage in the population. And for you all, that may not necessarily mean selling them, but could include just shutting them down. And so kind of in that vein, I'm wondering, what are the hallmarks of the companies that aren't going to make it?
Otello Stampaccia
Would you like anybody in particular to take the hot potato? Or should we
Noel Brown
Get maybe Simeon to want to kick this one off, and we'll have Otello and Jerel chime in?
Simeon George
Are not going to make it right. No, yeah. Yeah, I mean, there's that can't remember, which is a riff on a quote, about, if you look at functional families, they all they all sort of look, maybe the same way dysfunctional families are dysfunctional in, in any number of different instances. And I think there's some truth to that, I think, you know, the quality of companies that are not going to make it, I think journalist was touching on the point at this point, like, there's accountability that goes all around the table, right. So it's entrepreneurs and management teams, that candidly start with, like, a basic premise of being financially numerous, like know how to run a business with within their means right within the amount of capital that they have, and not believing that there's going to be this pot of gold on the other side of the rainbow that they're going to be able to access from insiders or from new investors, whether it's private or public. So sort of understanding how much you have in the bank understanding how are you going to use that money to be able to continue to manifest the true potential of your startup like it starts like fundamentally with that, so it's like, scientists, entrepreneurs, whatever your background is, like, you need to know how to run a business like that, I think is the premise that we all need to sort of maybe if taken for granted. But I think it's critical. And companies that can't do that, candidly, don't deserve to be in business. I think the board members, you know, the folks around the table here, we have a responsibility ultimately to sort of assess the capabilities of those management teams to be able to execute along those lines, like are they numerate? Can they understand the challenges of their business? Do they have a way to mitigate risks? Do they have the right capabilities within the company? And I'm not talking about science at the moment, we're talking about, like pure operations of running a startup, I think just some of the onus now comes on each of us to really think about strategically, what does it mean to be a venture capitalist trying to help build and scale a business and the way that probably we haven't done before. And so there are frankly, going to be board members and investors that are going to be lazy, and they're going to basically check out of those discussions. And that doesn't lead to a productive way of working through whatever the company is going through. And then, of course, you need to have, you know, science, you know, I've heard John Oyler said to me recently, sciences like math at the end, you're either right, or you're wrong. And so ultimately, the companies that aren't successful are the ones that don't have products. That makes sense when it comes to what they're trying to achieve from a clinical and biological proof of concept, right? So when you put those things together and incompetent team that does not run a business, a board that doesn't know what their fiduciary duties are to help assess, and sort of guide the management team and technology or products that aren't working. That's a recipe for what should be companies that should or should not deserve to continue to go on into the future.
Noel Brown
So you make some great points there about, excuse me, the need to have management teams that can actually operate right beyond the science. And I know Otello and I were talking about this, and I forgot to tell you had a stat about, you know, just that reflected sort of how I don't want to use the right word. Inexperienced management teams are because again, there's been the need to create so many new companies and provide new management teams, but maybe you can speak on that point.
Otello Stampaccia
Yeah, so obviously there's 1500 plus people attending so I'm make sure that every single one of them never speaks to me again. But no, I think there is. I mean, this is all ultimately, not just what we do, like, you know, Jerel, Simeon and myself, but you know, our business is fundamentally an apprenticeship business, right? You start with a, hopefully understanding of the science and then you build understanding of development and connectivity and so on. I think there's, there's definitely a number of issues that pile on top of what and perhaps are corollaries or some of the macro issues that Simeon mentioned. And some of them include, and I'm really leery about discussing this. But that said, I never fear being unpopular. So one of them includes title inflation, right? There's been, as you mentioned, the need. And again, people like us are guilty in that to staff, so many new companies, by the way, many of them going after the same targets, which is also in the long term at the community level kind of suicidal, right. But you know, that perhaps is a topic for another day when you assess pipelines, like we all do, but you know, talent, inflation is a challenge, not just because obviously, it brings burns up, though, that is an issue. And I am aware of the absorb privilege from which I'm speaking just to be completely transparent. But apart from the comp issue, there is a competence issue, right? And when it comes to, you know, enrolling, getting the right manufacturing partners, getting the right patients into trials, mistakes, there are very dear in terms of time and therefore burns. And when all of a sudden cost of capital goes up, like you know, Siemian mentioned, then there are cascading issues. So I think, you know, I don't think that's the root of our problems. But he's definitely a pretty big branch. If I were to use some more half metaphor there. The other stuff, like I mentioned, I mean, one of the biggest discussions we usually have with companies that we are either thinking about investing in or thinking or even putting together is, okay, you got this mousetrap or technology platform, as we say, what are the product configurations that you should go after? And many, many, many times, unfortunately, the people who came up with the platform who are good at building and developing the platform are not necessarily going to be good at telling you that. So this is something that is a real challenge. I think we all face it within our portfolio companies, I think we have tried to build some kind of in house screening tool to help them up. Because the problem is, you need to look at what's currently in phase two and phase three is because again, I don't understand American sports. But to use a metaphor to skate where the puck is going. I think Jared will correct me on that when it gets wrong. But because it doesn't matter what was out there. Now, it might have worked out there in five or six years if you're in preclinical, right. So again, these are all issues that come up all the time, but they're much more acute when capital is scarce. And when now there is a silver lining to this, which the individual company and perhaps even management team member level is not reassuring, but at the community level, it eventually will be. And the silver lining is that these are actually healthy periods for the ecosystem, I know doesn't sound great when you know, you're considering a reduction in force within your company, you know that. But again, I unfortunately been doing this for 25 plus years, and the best years for investing in our businesses, which eventually leads to good drugs have been historically 2003 2004 2005 Just after the.com burst, right than 2010ish 11-12 right after Lehman, right in 2008 2009. And I'm really confident that the next two or three years are going to be [inaudible] because guess what, you know, necessity is the mother of all invention. And when there's too much capital, too many people going for senior job even though they're not super ready for it, which is going to be a disservice to themselves not just for patience, as I think is good for the ecosystem. So you know, we you know, people are caught them and um, you know, we seem in a Jarrell we unfortunately been doing this a bit in either a bit our job, right, not just a duty, but our job to try to enforce a little bit of discipline, which is never a happy message. Right? I mean, you always the ground people member will say, Well, you know, we should be careful about having too many programs too far away from the clinic, blah, blah, blah, and people look at you like you're an old fart. Right. But eventually reality reestablishes itself. So I don't know again from the unserved privilege, vantage point that I have these is healthy for the ecosystem. It is not great for individual persons or companies for sure.
Noel Brown
Right. So we're talking about almost a cyclical Darwinism, right. Like it's, it is a calling of these entities. And, Jerel, you know, and we're talking about this as well.
Otello Stampaccia
We tried not to kill anybody, just to be clear. I just think people need to find really the best fit are their aspirations versus their capability. Right? If you think about strategy, that's ultimately what strategy is, he is what I would like to do as a company where I like to build these [inaudible] and neither my capabilities. And ultimately, sorry to interrupt no what Simeon was talking about earlier, which is well, you know, if you are not numerous, but I'm not just at the financial level, but if you can run your business to make them match between aspiration and capabilities, there's a problem. So sorry to interrupt.
Noel Brown
Jerel, what's your thought?
Jerel Davis
I think it's been covered. I mean, I think it's easier to answer the questions of which companies should persist than which companies should not, you know, in my mind, which companies should persist, it's pretty simple. It's, you know, are the companies fundamentally in a valuable business, and with an eye towards competition, and I think that's what as an ecosystem we didn't do a great job of over the last time period. And they never to, as Simeon and Otello have highlighted, is the management team able to in a mercenary way, deploy capital and resources against the most value creating elements of that company. And then number three, which is the thing that's changed so rapidly, and so radically, is, you know, do the capital needs of the of the plan overlap with finance stability, and when the equity markets pull back as quickly as they have, it just puts everyone in disarray, regarding, you know, to the capital needs of the previous plan over overlap of finance stability? Absolutely not, the finance stability has really changed. So that's the challenge. That's the change. But it really comes down to those three things, we will see a number of companies continue to go away. And I think it's those fundamentals that will mark the companies that will succeed.
Noel Brown
And have all three of you thought about, like how those companies actually go away? I mean, obviously, the hope is to merge them with something else and combine these capabilities and make a better, you know, NuCo. But what if, you know, one of them is just not combinable with anything, it's just everyone's disinterested? Like it was just a bad call? What happens to the bad calls?
Jerel Davis
I mean, but we're seeing those examples every day. No, well, I mean, we're seeing dissolutions we're seeing reverse mergers, we're seeing combinations. You know, at the beginning of this, I went that, oh, there's going to be a bunch of reverse mergers. Not sure the other paths will be taken. But no, we're at the point where we're seeing these examples every day. And you know, that mid ecosystem will decline in number over the next two, three years. But it takes a while to work through all that.
Noel Brown
Yeah, no, I we definitely are seeing that activity picking up. And it seems like every company that originally had planned for, you know, a back half 2023 IPO is first exploring a potential reverse merger opportunity, which is really, you know, created a lot of it's a different dynamic right now, to say, you know, to say the least, and
Simeon George
Noel, maybe I would just add, you know, I don't think it's necessarily just for, quote, unquote, like the distressed companies to be thinking through these various creative constructs, you know, I actually think there's something to be said about companies that actually, you know, have got high quality teams, good investors capital, to be thinking about, like, how do you in this thing to tell us point, if you take the view, this is a period of time where you're going to see amazing companies that come through, how do you build enduring companies, and there's some thesis around critical mass and consolidation around talent, capabilities, products, pipelines, with the right resourcing then to be able to move forward. And so I would encourage, you know, frankly, all companies, folks that are on here to be thinking about this creative like, you just don't know what's right now, there's probably any number of different spin in spinouts combinations are possible and could lead to something that could either accelerate the trajectory of a really interesting company today, or create additional optionality or do other things that I think, you know, could make it quite interesting for that company specifically. But again, going back to this point, at the sort of the portfolio level, I do think this is such a dynamic and exciting time to be in the shoes of investor entrepreneur founder, right, that has the belief around how to build and scale an important business.
Otello Stampaccia
Maybe Noel, there's a question from the audience, which is really related to this. And Simeon, hopefully, it wasn't interrupting you forgive me. But, um, so I think there's two parts right, no matter what you ask as to how, right and I believe the title is when. Right. So you have the when and then the how. And, and perhaps, you know, I am usually accused of being excessively logical, which I can't quite understand why it's an accusation in my opinion by go tell my wife. But fundamentally, I think to me the when it needs to happen before the how right. And the when is okay, well, again, as Simeon will say, you need to see me. And so you need to make an assessment as a board member, as an investor and as a management team, or what have I got, right? What are my capabilities? Do have a phenomenal management team, yes or no? Do I have a super strong technology platform product profile? You know, yes or no, do have extremely supportive investors who have reserved to get me through the quote unquote “valley of death” whatever that is, right in terms of getting from preclinical to clinical or maybe from initial experiments on a platform to a partnership or that kind of stuff. So once you have assessed where you are on that scale of capabilities versus your aspirations, I keep coming back to this because it's a fabulous book, it's called grand strategy. I'm sure you all have read it. If you haven't, please read it. Then you can discuss the how, right and I think we all have mental images within our investment teams, okay, these are the superstar teams. These are teams that probably in the bid on help or something, or these teams are not necessarily performing, right. And in addition to their mental image, we then say, Okay, well, how many IL31, whatever, I'm not going to invest right in the indie ecosystem, I just put up just one targeted than I had in mind yesterday for some reason. But the how, when is what was seeming you guys were talking about right? You say okay, sometimes, you know, this is not going to be fine to salvage, whatever we can, which is, by the way, a perfectly legitimate way of, you know, this is called venture capital, known, you know, not assured capital, right? So there is an element of risk in everything we do. And there is a fundamental element of risk in our business. Now, the mitigating factor, and this is where I'm gonna just about to contradict myself here to be completely transparent. But as you know, Scott Fitzgerald said once you need to be able to, you're intelligent to hold two different notions in your head at the same time. So the contradicting factor is there actually, some of the best stories in our business, in terms of drugs, making impact on patients come from individuals that have persevered against all odds? Right? Parmacyclics, a bunch of stories like that. So I think, five from me, so to speak, from saying, You are a very talented person, you see something that you believe in, then you should pursue it, but at the same time, that part of the job is also to convince people like us. And unfortunately, some of our community is really affected by recency bias, right? So all the world is ending. You know, let's, let's just entrench, just because we need to change a little bit of pattern recognition. Well, I mean, I like to think that for most of us in the business, we listen, we will listen to logical, compelling arguments. So I've been, you know, perseverance is the virtue stubbornness, you know, know what, but where do you draw the line? And is really the job of the management teams to have their constructive discussion after that, yes, you close it, you merge it, you try to do a reverse merger, because now there's a lot of public companies, we're unfortunately not delivering.
Noel Brown
So what all of you have touched on is investing and creating strategy in a changing market. Like it's dynamic, right? Assuming you were saying, and Jerel and I were talking about this yesterday, you're having to put corporate finance strategies in place, like capital raising plans in place, making assumptions about what a market is going to be, right? You're making assumptions about what target to pursue based on what the zeitgeist is in biopharma focused on, right, because you go back five years, it was six, maybe six years, totally all about IO. Right, you had to be focused in some form of oncology. And if I came to you with something like an obesity company, you'd be like, Yeah, completely disinterested, you got to sharpen your pencil. And then we look at the landscape now, right? This focus on metabolic isn't incredibly exciting. We're focusing on all these things. And you know, in general, and we can offer some views on this because this whole changing of the guards is I sort of took it from our conversation was really interesting to me.
Jerel Davis
No, I think it's a great question that well and the changes in the therapeutic areas of interest with investor backing that Pharmas are getting credit for. I think I've never been sharper in a shorter period of time, with the exception of late 90s to the early 2000s. In the last five years, we've seen three major dynamics at work and in my view, you'll one is the shift in the therapeutic areas. Driving value we've seen now in obesity and cardiovascular in the incretin mimetics becoming some of the most valuable products now and then in the future we've seen in CNS and Alzheimer's disease, some debatable, but some value creating drugs come through in immunology as well. We've seen oncology, you know, less of that, I think precision oncology and immune-oncology, have had fewer stories succeed, investors have pulled back in the public markets in the private markets and oncology and shifted towards those other areas. And again, the farmers are being rewarded. And if you look at the pharma leaderboard of mark by market cap, the changes are quite remarkable, you know, Lily, and Nova were 8-9 years ago, they're now two and three. Novartis, Pfizer, and GSK have all moved way down. AstraZeneca has moved up on the back of immunology and IO. So the shifts in the leaderboard are far more dramatic, you know, who's going to make deals, who's going to buy assets is therefore also changed very, very rapidly from the Pharma point of view. You know, and then as I said earlier, I think the lop loss of expiry patent crisis is going to happen in the second half of the decade, is going to really impact how each of these Pharmas think, you know, how are they going to recover those revenues? In many cases, you know, necessity is the mother of invention. I agree with the telco. And for farmers, we're going to have to rethink some of the therapeutic areas they're in because they may not be able to recover the revenues in those same therapeutic areas. So yeah, it's a sharp change. And stories like obesity, cardiovascular renal immunology, which were much less attractive five years ago are now we're so much of the investment is going. And ecology and rare disease and other areas are kind of less than favor. Enough. There's not great opportunities, but they're less in favor than they were one or two years ago.
Joe Coletti
13:09
That concludes our Endpoints News rebroadcast. To listen the full webinar on demand which includes the audience Q&A, please visit our website at rbccm.com/biopharma. You can also watch the Webinar on Endpoints news website.
Thank you for listening to another episode of Pathfinders and Biopharma, brought to you by RBC Capital Markets.
This episode was recorded on June 02, 2023. If you'd like to learn more, or continue the conversation, please contact us directly or visit rbccm.com/biopharma.
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