5AM Ventures: Fueling the Next Generation of Innovators Podcast Transcript

Hi. Welcome to another edition of Pathfinders from RBC Capital Markets, where we'll be exploring what's on the horizon for companies and investors in the biopharma sector.

I'm Brian Abrahams, Managing Director and Co-Head of Biotechnology Equity Research here at RBC Capital Markets. And in this episode, I'm joined by Andy Schwab, Managing Partner at 5AM Ventures, a leading VC firm focused on creating value in early-stage, next-gen life science companies.

We're going to be discussing 5AM's diversified, hands-on investment approach, his perspectives on the VC industry today, and the outlook for 2021. Andy, welcome and thank you again for being here with us on Pathfinders. So maybe just to start, can you give us an overview of your background and journey from finance, to industry, to venture capital, and ultimately founding 5AM?

So I was a genetics undergrad major back in the early 90s, and got excited about the sector before anyone really knew what it was, and decided to move to California to get into the biotech, and was fortunate enough to end up at a great company called Affymax, that really seeded my love for biotech and entrepreneurship.

I went to medical school after that, thinking that medicine was the path to long-term success in biotech, and then realized that my heart was really in entrepreneurship and finance side of a biotech. I went to an investment bank called Montgomery Securities, where I worked on some great IPOs and M&A deals in the mid 90s, and then into venture capital.

And really, the background of 5AM, the name 5AM means early, right? So we get into companies at the earliest stages, and we created the firm to be a hands-on, early stage firm back in 2002, and that's what we've been doing for the last 18 years.

On that point, high level, can you talk a little bit more about what the big-picture mission and investment strategy is for 5AM?

We're really classic, old-fashioned venture capitalists we find entrepreneurs we want to work with, want to partner with, and find technologies that we're excited about that could be breakthroughs.

Obviously, these are very early stage projects when we get excited about them, and so it's really falling in love with the science and falling in love with the entrepreneurs as people you want to partner with and help build companies over time.

Speaking of breakthroughs, what are some of the cutting-edge technologies across your portfolio companies and in the field in general that you think are the most exciting?

I think the hardest job of a VC, is to look at where the industry is going to be in a number of years.

Gene therapy is the classic example, right? The first gene therapy trial was 1989, and only 20-plus years later have we really seen the fruits of gene therapy. We were early investors in a company called Audentes and have been in a number of gene therapy companies.

And so as you look out going forward, obviously cell therapy is incredibly interesting, and everything that's been developed in the CART space and moving that forward.

Obviously, there are read-throughs into lots of other cell therapy technologies, and also into diseases outside of oncology, so those are some key areas that we're interested in.

From a target perspective, everything you're seeing in the Insilico space, in the very technical side of identifying new targets. Those are areas where we're excited as well.

Can you talk about the importance of AI, machine learning, and digital health? How is that evolving, both in terms of development of new drugs as well as improving patient outcomes and other ways?

So, from a digital health perspective, we're big supporters of a company called Pear Therapeutics, which is a leader in the prescription digital therapeutic space. That's a company where we really got excited about the idea of using software in conjunction with pharmaceuticals to improve patient outcomes.

The company has its first product launch at this point, which is a product called reSET-O for the treatment of addiction, and it's the first Prescription Digital Therapeutic. We think that PDTs will be a new modality, like gene therapy, like cell therapy, like antibodies back in the day, and will be really ubiquitous technologies for the treatment of disease going forward.

I think on AI and ML, there's a lot of investment going into the space, and I think we've taken the position that we're interested and are paying attention, but it comes down to finding a molecule that will treat disease.

And so, while we're believers in those technologies, ultimately will they really be game changing across the board? I think it's yet to play out.

What therapeutic areas do you view as most ripe for investment, and with the most potential for innovation? And conversely, are there any disease areas that you see as particularly challenging or that you avoid?

I think it really comes back to what you're seeing in terms of the genetic definition of the targets, and the genetic underpinnings of disease. The low hanging fruit there has been in oncology, in precision medicine and now in gene therapy, gene editing, single gene mutations.

We think any disease that has a genetic basis that you can really attack and target – those are going to be the best diseases to go after.

And so, rather than saying, OK, well, oncology is obviously a major problem. Neuro is obviously a major unmet medical need, we're really looking at the genetic basis of disease, and how to move forward from there.

I think that means, unfortunately, some of the more chronic diseases, some of the more lifestyle-driven diseases, are just harder. They are so multifactorial, and choosing points for innovation and intervention is harder.

So we've really, stayed away from those big, chronic diseases, just because of the difficulty in attacking the disease.

You talked earlier about CART gene therapy. I'm curious if you could expand a little bit more about any other modalities or strategies that are really in the early stages now that you believe could radically change the treatment paradigms going forward across multiple disease areas, but perhaps are still under the radar or under-appreciated.

The one area that I'm really excited about is the microbiome. I think that is one of the new modalities that's going to be really interesting, to have living engineered microbes in your microbiome that can impact disease.

If we really can engineer microbes to live – safely, obviously – in your microbiome over time and treat disease, we think there's a huge opportunity there.

Shifting gears. To what degree do you expect the political landscape to influence innovation and the deployment of next-generation technologies?

The election and pandemic are two major intertwined factors, and it's been a really tough eight months for the country and the world. Obviously, the positive, the light at the end of the tunnel, seems to be emerging, and I think what you'll see on the backside of that is decades of tailwinds for biotech.

I think everyone that's lived through the past eight months will do whatever they can to make sure that this doesn't happen again, and so I think that leads to incredible investment hopefully, development of an industry throughout the world that continue to really attack diseases.

The US leads in this space, and I believe that if we can double down on that and really drive growth of the sector, that has incredible benefits to the country and to the world overall.

To get back to politics, there can be a bipartisan appreciation of this national treasure, and really make it a sector that's supported throughout the United States instead of more coastally at this point.

Along those lines, how has globalization played into the innovative environment? As you alluded to, traditionally, Boston, the Bay Area, San Diego, have been the hubs of biotech innovation. Are you starting to see that expand at all to different regions across the US, and to different countries?

We're seeing some of it. I think that there have been upswings and pullbacks. I'm from the Midwest, originally. I grew up in Cincinnati, and I'd love to see a bigger effort in the Midwest from a biotech perspective.

As a firm, 5AM has definitely invested outside of the coasts, and some of our best investments have been in Indianapolis, and Florida, and Toronto, and a number of other non-coastal places, and so we want to continue that. I think the pandemic has accelerated some of the movement away from the major cities, and so we'll see more of that.

But you're seeing more and more obviously in China. You're seeing more and more in Europe, and ultimately the more work that's done in the sector across the world, the better.

How much does the FDA influence your strategy of cutting-edge investment? I know there's been a lot of talk about an evolving regulatory landscape, especially in certain areas like gene therapy, neurodegeneration, or NASH. To what degree does that dictate the opportunities that are pursued by companies.

I think the FDA is incredibly important.

I've been incredibly impressed by the leadership over the past decade plus. The FDA has become much more entrepreneurial, much more thoughtful, much more science-driven.

Obviously, you've seen with the response to COVID, a huge effort from the FDA under tough circumstances, so very impressive. But it's really important, and I think that, a swing back in the negative direction would have a huge impact on investment, I remember, earlier in my career, when we were going outside the U.S. to develop therapeutics, because it was easier to get into clinical trials in other countries.

It's incredibly important and I'm not always sure that the folks in Washington understand how important it is. I'm on the board of the National Venture Capital Association, and some of the work is really just educating folks in Washington how important the FDA is to investments that get made all the way throughout the country.

How is the relationship between venture firms and universities? How has that evolved, and to what extent are academic centers the initiators of innovation?

I think this is one of the areas where you've seen more and more interest from universities in being proactive about spinning up companies, being entrepreneurial, working with the financial community to see their companies graduate.

Obviously, scientists have become more entrepreneurial, and you can name a number who are involved with dozens of companies at this point, so it's become much more fluid from that perspective. And it takes sophistication from the university perspective. It's not as easy as just wanting to take your best researchers, or best research, and start companies.

It takes experience and sophistication, it takes capital. It takes manpower. But obviously, from a venture capital perspective, we're excited about working much more closely with universities, and trying to get there early, and see the best ideas, and talk to the researchers who we believe are going to be great entrepreneurs.

In such a high-tech and fast-moving space, what do you see as the early marker of a great idea? In other words, how can you tell when a concept is a unique idea that can ultimately lead to a successfully-marketed product versus just a fascinating science project that might not materialize into something tangible?

This is the hardest part of the job. We see incredible science from some of the best scientists in the world on a daily basis, and as science lovers and technophiles at heart, we get excited about it.

And ultimately this is an investment business, and we have to find bet on the ideas that are going to get to market and help patients.

But maybe a couple of ways that we think about it and try to hit that problem. One is having a deep and broad team, which means we've got about a 20-person investment team, both in San Francisco and Boston, and the backgrounds cover everything from ex-pharma executives who have been there, done that, seen it, and seen all the pitfalls along the way in terms of which drugs ultimately get to market. We also have an intellectual property attorney on staff, because IP is so important to this business.

So it's really trying to, from a primary diligence perspective, do the work at the outset. And then I think the next step is really trying to define early on, what is the value-creating, differentiating science experiment that's going to prove that this is going to be meaningful?

It’s the reason we're in the seed and early stage business, where we can put $5 to $10 million to work, to find out what the killer app is. That's what we're focused on and, obviously, sometimes that leads to a failure, and we write off the investment and move on, but hopefully it's asking the hard questions early, so that by the time this becomes a late preclinical, early clinical stage company, we've got a lot of confidence in its ability to help patients and get all the way to the market.

Beyond technological or scientific innovation, how does a company's team play into things? How important are innovative management teams to your strategy?

I think one of the real challenges right now for the sector is that there are numbers of new companies being created at an accelerated pace, and so ultimately the types of management teams that are coming together are going to be less experienced.

They're going to have less experience working together, and so it's a major issue to look out for as we invest in early-stage stage companies. But it also creates opportunities, and I think that the tech sector is probably the parallel here, where most tech entrepreneurs are first-time entrepreneurs. I think you're going to see a lot more of that in the biotech sector, and that that'll produce some really interesting results, some good, some bad.

But it's a sector with a lot of interesting, young people, and it's a space that lots of people want to be in, and so you're going to see some really emerging and innovative management teams going forward.

It's been a record-breaking year for biotech IPOs. How do you see the public market receptivity for innovation today, and where do you see that going in the future?

Two key points here. One is you've seen IPO-- the companies that are going public are going much earlier. I think half of the companies that have gone public this year are either preclinical or early clinical, and I think that's really a nod to the fact that we are able to see in clinical trials, much earlier, whether a product is going to be successful or not, and that's because of the biomarkers.

And so I think that bodes very well for the future, and it's also why the public investors are interested and excited about investing in companies at the early stages.

I think the other, and you're an expert at this as well, is that biotech is really a space that is a growth space as well as a safe haven, so, ultimately, it's a space where there are incredible opportunities for growth, but it's also diseases that are accelerating, and as a society, we need answers to these diseases, that's really fueled the IPO boom in the last couple of years.

I think that's a great way for us to wrap things up. Thanks again, Andy, for sharing your insight and foresight with us today.

If you're wondering what else is on the horizon for the biopharma industry, we'll be keeping track right here on Pathfinders. Thank you all for joining us, and stay tuned for future episodes. And of course, if there are any areas that we discussed that you'd like to learn more about, don't hesitate to contact us directly for a more in-depth discussion, or visit our website for further insights.