Joe Coletti
Hello and welcome to another edition of Pathfinders in Biopharma the podcast series from RBC Capital Markets. I'm your host Joe Coletti. In today's episode, we dive into the dynamic and ever changing world of biotech investing with a special VC roundtable hosted in partnership with Endpoints News.
You'll hear RBCs Noel Brown, Head of US Biotechnology Investment Banking, speak with three VC guest panelists. Chen Yu, Founder & Managing Partner at TCGX, Matthew Young, Managing Director at Longitude Capital, and Arsani William, CIO & Managing Partner at Logos Capital.
They'll discuss the exploration of how investors across the biotech ecosystem are navigating market complexity, to put dollars to work creatively, to manage risks, maximize rewards and stimulate growth.
As they assess the landscape, it becomes clear the sector holds promise from both a fundamental and equity valuation perspective. Now let's dive into the conversation.
Arasani William
We enter 2023 with the view that the biotech sector, its worst days were behind it. And that this two year correction that has been historic, right by in terms of total magnitude and duration was likely behind us. And what's been fascinating to see is over the course of this year, despite the fact that the market overall has been quite resilient. With the S&P and NASDAQ actually posting positive returns. We've seen a substantial gap between the XBI or the sector proxy for the index, and the S&P just continuing to widen. And it's something we didn't expect because if you look back in 2021 and 22, there was a lot of speculative access in the sector.
The good news I would say is that, you know, our ecosystem has this history of experiencing very rapid and substantial reversals, and that can happen in both positive and negative directions. And I'd say for the last couple of years it's certainly been in a negative direction. But the reality today is that when you take a look, and we do analyses on these that we more or less kind of sent our to our investor base, in terms of just a sector proxy of how expensive or cheap valuations really are in this smid-cap biotech complex. You're looking at equity to cash ratios that are below other prior turbulent troughs, and that includes 2008 2009 during the financial crisis and even during the 2001 and 2002 tech bubble bursting. And when we look at what happens in sub second periods, once you sort of hit these troughs, you typically see, one, a violent reversal in terms of a valuation upgrade across the entire complex. We're still waiting for that to happen, especially kind of given, we exist in an environment where risk aversion is clearly the predominant psychology and mentality that exists today. But notwithstanding, if you take a look at sector fundamentals in regards to you know, companies are conserving cash, they're cutting spend on early pipeline programs that two years ago, those decisions would have been much more difficult. They're looking at new and exciting opportunities in order to break new areas of you know, what we've seen from asthma, for example, a lot of different novel cancer targets and other areas, new modalities that they can advance forward into the clinic. And what you're finding is that pharmaceutical companies are beginning to step up, not just as a corporate buyer but also as a big investor through different collaborations, different supply agreements, and also through different venture capital arms where they're coming in to bolster the sector. So I think that like it's been it's been a tough couple of years from an investor perspective. Certainly, I would say from a company perspective, if you're early stage or running preclinical programs but that being said, the sector from a fundamental standpoint, from an equity valuation standpoint, actually screens quite frankly, pretty asymmetric to the upside to us and we're excited to see what 2024 looks like starting in a few months.
Noel Brown
Interesting. Matt, any thoughts and all your thoughts about the macro environment generally. Is it aligned with your expectations as well?
Matt Young
Yeah, I'd say largely, we're not too surprised with the market we're in now and I would agree with what Arsani’s mentioned here. Really though, one of the distinct differences of which are there are two is just the size of this impact of the liquidity bubble and 2020 2021. And the fact that we had almost 400 IPOs in that window out of 2000, over the 30, sort of preceding years. And so just when you think about the quantum of companies that went public, some of which in our minds were really are not ready. A lot of that was that that exuberance that Arsani alluded to on pipelines or platform companies that could really deliver on promised quickly and I think, you know, we've seen that that can take some time to bear out and to get to data that really definitively proves the success of that platform. So stepping back and looking at a $50 billion funding wall for the sector. And the second big factor, which is what the impact on time value of money is from higher interest rates, which I think we haven't seen before and I think the big question remains, how sustainable or is that a structural change that's likely to last for a longer period of time, and I think what we're trying to do is gird our portfolio companies and factor into the companies we're looking at. The fact that that may be around and I think we've expected it could last until 2025 in terms of how management teams are, I think, appropriately adapting to that environment, making tougher decisions. It's just a lot to digest to work that out of the system. So I think coupling that with things like the IRA some of the pressures from the FTC, there are some headwinds there. And I think we expect them to continue. That said, M&A activity has been you know, kind of about average. It's always a bit episodic, but that that support from the standpoint of exits is there. I think pharma will continue to be creative about how they support this ecosystem. And ultimately, I think, from our point of view, for the right stories, we are seeing good signs of life and support. So I think we continue to believe we can navigate this environment but we're, I guess, less sanguine that it's going to fundamentally shift right away. That despite some of the lower valuations just because of this really large bolus of activity that happened a couple of years ago.
Noel Brown
Chen, when you think but your year this past year, how these like evolving macro conditions influenced your strategies that you've executed on?
Chen Yu
One of the quirks of our particular fund approach is that we have a flexible mandate. Our fund actually has no limitation on private probably, we can be 100% public or 100% private. And part of the rationale for that is, you know, somebody like I kind of had this thought a couple of years ago like.. trying to predict the market cycles impossible, like no one knows when it's gonna turn. And so instead of spending my time thinking and worrying about whether the next year is gonna be good or bad, I just essentially go where the best risk reward is. And so you know, right now when a markets like this, it's gonna be very hard for private opportunities to compete with public ones. The liquidity discount that you have to be paid for effectively in a private deal right now is just a mess. If you think about like, to the point that I think was made earlier, I mean, from 2017 to 21, we were generating somewhere around 150 companies a year. So you have this backlog. You think about it's like there's been like 18 IPOs in the last two years. So where are the other 500 plus companies gonna get money from? Right? So, in effect, weaker companies are going to pull down valuations for all companies. And that backlog in the private market is replicated in the public market, right? Where you had historically like, 200 public companies that don't get 700. Right? So I think the good part for investors is actually it's like, it's great for active management. These are the errors were active management action beats index, right? Because a third of the index just has to go to business. But I think it's going to portend I mean, like if I go back in time, like 20 years now, the lessons learned from the early 2000s was early stage is just going to be really, really tough. And the math just doesn't work at 7% interest percentage rates. So, you know, I think for many investors, we're gonna see like this kind of, kind of interesting boom opportunity for late stage investors because we kind of get to pick off the early stage winners, but we don't have to pay a risk premium it. But then fast forward two years, and the reality is the pipeline gets tight, right, because there hasn't been as much early stage company formation. So the system kind of equilibrates. So we’re honestly thinking of things now like a more like a three year timeframe. We're not actually expecting 2024, frankly, to be much better. If you actually look at developed economies over time, the time it takes to go from 5% inflation back down to 2% has taken on average, like 10 years. This actually could, I would say, this may not be a not a moment, it might be an era.
Arasani William
You take a look I would say at every IPO that’s been issued since 2001 until today, and the median IPO, if it was a preclinical or phase one launch, is down 70%. 70%! What that tells us is that you know risk aversion, especially appetite for early stage, particularly in crowded markets, whether that be things like cell therapies or, you know, sixth or seventh in-class targeting, you know, known cancer target that is already well addressed, I would say by large players… that stuff is going to be very difficult to invest in and I would say certainly to finance through kind of follow on rounds. That being said, it actually creates a delineation in the market, between companies that are haves and have nots, companies that do have stellar kind of mid to late stage datasets, companies that for example, can access capital markets at low equity valuations like we discussed where investors do see the asymmetry. Like Chen was saying over two to three year time horizon. But there's going to be a lot of stuff that was I would say, kind of born out of the speculative access to the market over the last few years that doesn't get funded. But that's a healthy thing. I wouldn't say that the market in 2020 and 2021 was a healthy biotech ecosystem. I'd say it was quite diseased. As so, to be able, I would say, to cleanse you know, the speculative access that has happened and move forward in a healthier way to where companies are really paying off the idiosyncratic datasets that they convert to use in novel indications to where there isn't competition and they're at the forefront, that's the environment that we want to operate in. I would also say I agree with Chen in the sense that active management is absolutely going to thrive during this period. If you're trying to own basically kind of the inverse rates proxy, which is the XBI currently. I don't know if that's going to do all that well, because I do think that a concentrated portfolio in mid to late stage companies that absolutely have a value proposition that no one else is addressing it and I'm showing not only proof of concept in a small clinical space study, but certainly in larger datasets to where you can bear out the variability and generalize to what a phase three study will look like. Those companies will actually thrive. And what you've seen is the bifurcation, I would say in the market in regards to companies that are 200 to 500 million market cap that are trading on a public exchange, those companies have borne the brunt of the downturn. In fact, I think they're averaging two to three times the decline that their larger mid cap peers are averaging. And so I do think that you know, we're entering a period of time to where I'm a little bit more optimistic in regards to how markets especially for the biotech ecosystem will perform, because I do think that it's been a little bit too much and more of it is now psychology as opposed to fundamentals that are being priced in from a rate perspective and a macro perspective in the sector. But I do think that idiosyncratic picking on the private and the public side, particularly for mid to late stage assets is going to be the way to go.
Noel Brown
Matt, where do you think the most exciting opportunities can be found today to be therapeutic areas specific indications, modalities, geographic region? Any thoughts?
Matt Young
Importantly, we're always going to be looking for innovation that we believe can deliver products that help patients and not just what's hot today. From the market I guess we're seeing some shifting focus probably seen in other reports that there's been a broadening a bit away from oncology and particular less fervor around certain modalities that are say very expensive to manufacture, can take a long time to clarify the clinical signal, or, maybe more nuanced, or maybe have smaller market sizes. So things like precision oncology and IO, which were quite in vogue or maybe less so today. And we'll see a bit harder environment for them. There's still be investment opportunities there that make sense, but it's definitely tougher and I think there's broader interest in terms of different therapeutic areas, I think, aligns to from our perspective with demographics, as well as kind of broader market forces and we're really excited about areas like immunology, inflammation and Cardiometabolic disease, the right types of orphan assets and certainly have some of that across our portfolio and are continuing to look and make new investments there as well. Also in nerve degeneration, where we think there's some also exciting opportunity there with some of these different categories, either entering or already in the public discourse, being able to be things that can attract broader capital into the space as well. On the earlier side, where I think just touching on something we may talk about more in this discussion as well. Chen’s perspective there we agree with. I think you can run a lot of risk in the early side of development. And a lot of people can enter later without paying a huge premium for that. But there is still opportunity there done selectively I think to make excellent returns and investment need that needs to happen. Couple areas we're doing a lot of work around are things like epigenetic reprogramming, which has the potential unlocking a lot of novel biology and target space and things like radiopharmaceuticals where there's real promise and I think rapid and cost effective drug development is that modality mature. So we think there are some really interesting pockets of opportunity, if I was to say, therapeutic area modality wise evaluated that way. We continue to see a lot of great science and many cases that more reasonable prices out of Europe. We've seen a little bit a lot of great science but a little bit less I guess, coming to grips with the current market realities and some of the evaluations and some of the things we've seen out of Asia, so probably done a little bit less there of late. But in general, those are the areas where we're seeing the most opportunity today.
Noel Brown
Arsani, Chen, have you guys identified any areas that we should also be mindful of?
Arsani William
I'd say cancer has been a really tough state to invest in over the last couple of years and I think we've all kind of seen cancer valuations in both the private and the public market really come down substantially. But there's a lot of really exciting new targets that are coming out. I think we've looked very closely at the T cell bispecific engagers in regards to what they can do on overall survival. And I've been fascinated by some of those datasets. On a synthetic modality, I would say, to where novel targets are basically coming to fruition that are actually showing you know early datasets that are more than just intriguing alone. You know, Amgen, and Marati for example, with the pure MT-5 data in the potential to do combinations with those datasets across a wide variety of solid tumors, I would say, holds great promise for the field. In addition to things in prostate cancer that have emerged and kind of new novel targets that are coming out. All of those things that we take a look at, actually get us quite excited on the sector. In terms of other modalities and domains. You know, I'd say the reclassification of what cell therapy can do outside kind of targeting a CD-19 cancer has been an area of interest for us. Especially, I would say, some of the early data that's coming out in regards to what cell therapy can actually do for autoimmune disease. And then when we think of very large target classes, you know, both I would say in terms of active players, but also kind of new incoming players, you know, we think of markets you know, like what can replicate in the future what the TNF’s have done over the course of the last 20 years, and that really is the FCR-1 class in which you know, we both active investments are kind of looking, I would say at companies on that are that are more or less kind of coming up and reducing kind of new datasets of their own. So a lot of exciting stuff around and always, I would say have to be dynamic and really have to just follow the data in the end.
Noel Brown
At a certain point, though, is what all three of you are doing threatened by GLP-1s, right? I mean, essentially, those are going to cure every ailment that we have, and it there won’t be anything else worth investing in because we won't have disease. Right?
Chen Yu
Well, you know, the reality is where probably at a peak hype train on GLP-1’s so, let's all admit that. At the same time, what we've actually known for a long time that if you lose weight, everything else actually gets better. I think the real innovation actually if you think about it was not that it would work and have all these benefits. It's actually how would these drugs get approved because if you have been around long enough, you know that all these obesity drugs died in trying to get to approval. Because they were trying to get approval as obesity drugs. And it turned out the Trojan horse was diabetes. And then you kind of come across because once you essentially established a treatment for one of the at least the FDA in December, and some in the medical community considered a quote unquote, serious disease. And I think now with the recent data, we're GLP-1s are shown cardiovascular benefit. So we're actually quite heavily invested in this space. It's funny, this market seems to be one where maybe the reemergence of like the size of the TAM become like makes a difference again, whereas I think if you go back in time as became one of those things were what is tractable for a small biotech company? That's why rare orphan really kind of boomed target oncology, right, all those kind of boom, and that would that mindset and now if it's a TAM driven mindset, right, cardiovascular metabolic will become big. Because we all know that the most common causes of death are cardiovascular and metabolic driven. So in a weird way, I think that's where I think we're spending a little more time on some of the larger TAM opportunities. I mean, one other area I would say that's kind of interesting to think about is like specialty pharma. which no one even pays attention to anymore. And so you can you don't have to make technology bets in specialty pharma. You can just make commercial bets now, things zero technical risks, and you have all these specialty pharmacies that are trading at like insanely low valuation. So that's getting that's another little interesting niche for folks to think about.
Noel Brown 20:25
Now, that's interesting. That isn't something I hear every day, to be honest.
Chen Yu
You know why? Because if you actually look at most of our public hedge fund peers, a lot of them are in their mid-30s. And they grew up in an era where it was like all targeted oncology. Especially pharma was just you know, something that if you were you had to be kind of investing in the early 2000s. When, you know, if you go back in time, you kind of work on and go back 20 years now, hadn't venture firms survived, we were doing specialty pharma because it was lower risk. Right? And so you're grinding out binaries in the early 2000s. It's a little bit like that now in some way you kind of think about it, right? like people who grew up in the in their 30s never experienced that grind out market. It was just up into the right. So you just took speculative risk. Now you're like, okay, well, my risk profile is coming down. I think it'd be interesting to see if specialty pharma, you know, has a benefit from that.
Arsani William
Look, I agree with everything Chen said and I'd say you're gonna get a regression back to the I mean, we've been in deals for example, with Chen to where we do have to restructure and reprice companies and for example, to the ability that sort of everyone on this call can be fluid between private and public markets. You're not going to take a look at valuation territory, a new domain, basically just draw a one size fits all policy. It's going to be very specific by class, by category, by company, by stage of development, etc. There's two things that actually kind of generally speaking piqued my interest. One is that I think he's absolutely right, the GLP-1 stories, the AIB of healthcare for this year. If you take a look at the value disruption that is caused, not just for biotech companies overall, but just the fear mongering that has happened across medical device and med schools and medtech, in terms of dialysis companies and bariatric surgery companies and tools, companies that have lots of exposure to the space, it is very clear that we are pricing in a very big TAM. But that's also the opportunity is that if you don't believe that you can necessarily compete with Eli Lilly or Novo Nordisk in developing the next generation subcutaneous GLP-1 combo that is just as safe and efficacious, you need to think where the puck is going, not where it currently is. And so some of the investments that Chen had mentioned before, you can think about territories and how do we develop oral ingredients that basically can accomplish 90% of the efficacy and safety, but more or less offer of various, you know, more or less or more frequent and infrequent excuse me, or convenient dosing, in terms of administration. So that that entire arena is certainly going to evolve and will certainly actually become a major player, I would say in terms of the innovation space, and it's actually quite exciting because you think back to 2014 2015. It's almost like the hepatitis C cycle is we've unlocked something even if the science and the data and the rudimentary research was there for years, we've unlocked something that really has triggered, I would say, a pretty open market on to invest in things that will increasingly become more popular, and we'll put the biotech ecosystem and the biopharma ecosystem again at the forefront of consciousness for most investors. The spec pharma stuff is really interesting because in my mind, I would bifurcate spec pharma versus commercial stories, but in terms of commercial stories, I agree, you're able to buy really first and best in class commercial stories that are actually beating earnings in numbers and continuing to grow at a rapid pace that exceeds past launches in those areas for what you would buy… kind of a phase two or phase one company. Again, when you put that entire picture together, what does that do? That bifurcates the world into two realities. One is their mid and late stage companies that will be able to raise capital because they're only 2, 3, 4 years away from approval, potential launch, a revenue stream. And those are the risk averse assets that pharma we'll take a look at the potential BD but also the assets that investors will look at because they don't want a lot of volatility should these things enter the capital markets through an IPO. It is the early stage stuff, especially if you're in an area that is incredibly crowded without a dataset over the next two to three years that you will be able to differentiate or at least bring in investors that can see what the value proposition is versus the 20 other stores that they have seen. Those are the companies that will struggle.
Matt Young
Yep. And on this, I think you're finding a three for three alignment. I think there remains reasonable whitespace and what is a fantastically large TAM, and whether that's again, we would talk a little bit here about kind of oral medications and working on tolerability, safety with relatively similar efficacy, and combinations of mechanisms that are going to supplement that weight loss or work on things like lean muscle sparing. I think we see really exciting opportunities in those areas and would expect the sort of participation in that market to continue to broaden strategically. The issue on commercial stories, I guess I would say is today we're also seeing a little bit of extra extensive appetite from pharma for larger product opportunities, just given the patent expires and I think that trickles down into public investor sentiment as well. So for commercial stories that are probably very safe but are not gigantic products. I think they will be mispriced for a while. So again, if you're if you're patient, sometimes surprising and become much bigger products than you think is maybe the epidemiology or the market share surprises you over time. But even just apart from that I think they offer really fairly attractive valuations. Setting aside again at the difference between spec pharma or not, I think that is an opportunity set that will emerge over time to be one where people can generate attractive returns.
Noel Brown
So maybe shifting gears a little bit when we talk about the pipeline. How should we distinguish VCs from crossover investing from just public investing? And when you think about you know that spectrum of investing strategies, how should audiences think about you know, where one begins and ends? And so they kind of know who is the right investor audience to target if they're, say looking for capital or want to talk to an investor?
Chen Yu
I just more broadly, like, you know, how do companies get through this period, right? Maybe is a maybe a more constructive way to think about this. And I think here's where I do think, you know, quality really begins to matter in terms of your investor base and self-serving, of course, but the reality is, it's really true, which is, if you optimize your negotiation on pre-money, and you end up with the wrong set of investors, it actually really does screw you for the rest of your financing history, because you end up overpriced for all your best investors who are going to be committed to you through ups and downs. And so you almost like selectively get investors who are not going to be there for the good days. And so you know, for me, like the things I think about like what do I tell them is like all you have to do like survive. One, get long term investors and give on valuation to get that quality. Number two, you got to think less about the pre-money and more about your post-money. So you have to actually make sure that you don't spend you know like, money is like burning on trees. So like, you really have to make sure that you're getting to your value inflection point with essentially enough money where you get to the post money where the next guy actually gets paid. So I think that's really what folks have to do. I think about my early stage brethren, there's only a couple of firms that I think have the breadth of capital and the dry powder that can actually sustain it. So you have to be super selective now in early stage investors.
Noel Brown
I would guide companies when they have a pipeline, that look, you may have to spend a little more and move everything along, right? Or move three along, because if you focus your spending to kind of get a single asset over the line, that may be the most economical path. But there's a hiccup, if there's a delay, if there's a bump in the road, right now, you're gonna have a funding problem, right? Or heaven forbid, it doesn't work out. You can be a preclinical company all of a sudden if you don't kind of bring that pipeline a lot, right. So I think the, when we think about strategies, right, that will help just keep these companies running for the long run, it does require more spend. But I have heard from some that boards are saying focus on this one thing.
Chen Yu
But to your point, there's actually an interesting tension between companies and investors sometimes, right? Because, so, the individual company, they're buying insurance effectively by having a pipeline. But there's a cost of that insurance, which is the increased funding that they have to raise and then the post funding on the other end of it. But for an investor we don't care necessarily about the individual company having risk reduction, like, we have a diversified portfolio. We want max efficiency out of capital. So that's a little bit of the tension. And look, I think I would just say the cost of insurance in a market like this is very high. So the company just has to choose like, is it worth it for me to have three assets in development versus the one because the reality is, I mean, let's be honest. How often is the pipeline probably given much value?
Matt Young
Yeah. I would agree with that. I think if the cost of insurance is really high and the focus on the post, and ultimately what are you getting with the investment you're making in terms of getting to data that's going to be meaningful that will allow for a step up in valuation and a broadening of the types of investors that are going to be interested in it.
And I think having those hard conversations also really focusing on the strength and the quality of the team. It's a market where some people are moving around and I think being relentless about building a team that can actually execute well against a clear plan with the capital that is provided to them is really important. And that goes to the active management part of this market is all of those things factor into I think enabling a company to be successful.
The other part we probably think about there is just how expensive is it to drive towards data and, I'll maybe mentioned ADCs as an example. Early on, that's a tough one, when that when that modality wasn't super well validated, it takes a lot to figure out a complicated molecule to make it, to optimize it, then put it into people, dose escalate it, and figure out whether your therapy window what you hoped for and whether the toxicity is going to be able to be subdued relative to standard chemotherapies in a way that allows for a durable response. And that today is all the rage. A lot of very successful late stage programs with great data, a lot of business development activity around it right now. And we see tons of promise in it. That would be a harder thing in some ways with a less understood modality to do today because it might take you $40 million dollars to get to clinical signal so investing in that in a really broad sense can be complicated. So I think the inverse side of things is where this environment may cause our investor universe to sort of miss a few things. It's on things like that. But we're trying to be conscientious about what's it really cost to get to, to wrap up experiments and get to data that can really allow the company to transform in terms of valuation and breadth of interest.
Noel Brown
What kind of creative sort of deal structures do you think can be brought to bear when you've identified a company you want to invest in? There's obvious capital need how do you bridge that gap sometimes?
Arsani William
I think what we saw I would say over the last several years is that companies were likely be over funded. They took in too much capital I would say at a very high valuation that didn't enable kind of a step up into the next round to replenish the you know, hit the cap table with new investors that can really kind of take on the new risk and more or less carry the company forward. And what you're seeing for the first time, I would say maybe in the last kind of seven or so years, is the ability to trauch deals and to traunch them or on milestones to where the investors and company management are completely aligned. That if the data card flip actually does look positive and signals that the company has a future in the way it was intended when we first started a round, you put in more money at that point in time. As opposed to giving I would say the management team everything up front. Why is that the case? I would say its responsibility is that we've seen at this point in time or something like 160 companies trading in the public sector that are trading at negative enterprise values, meaning that there's no equity value left in the company. These have been relegated to cash shells because the market says that those teams will destroy value in the end. Certainly that won't be the case. And there's going to be companies that emerge out of that basket that are multi-fold winners for the investors that have stuck with the story the entire time. The lesson has been learned, is that over capitalizing a company, is it's just as big of a sin as ultimately coming in for a really high free money on that doesn't enable kind of a compounding of what that return and what the valuation looks like as the company consecutively moves through milestones. The second thing I would say that we're starting to see, and this is kind of interesting is that you know, so much that investors are moving to the right end and becoming more risk averse as opposed to trying to fund a lot of pipelines for companies and perhaps having conversations with management teams as to more or less deprioritizing this pipelines and focusing on what's central is the data of very much supports that. You look at 13 of the 14 M&A transactions that have happened this year. All of them were phase three or marketed products. Past a major pivotal data set or something that has been exemplified through derisk but it was focused on a single asset. No platform, not necessarily the idea that the success of this drug in a phase three clinical study could read through to you know, a plethora of other drugs in the pipeline, companies were bought for the single assets that could ultimately produce revenue and move the needle for pharma. But what's going to happen, which is really interesting is investors will always move towards the area of where there's asymmetric, you know, reward versus risk. And in that case, right now, you know, as you've heard from Matt and Chen, that risk reward calculus is very much into kind of, you know, good datasets, mid stage companies, companies that are well capitalized already, that aren't going to run into the problems in the next three years. So who can step up? And who is the marginal buyer of these pipelines that can potentially even more so than investors have a longer term horizon? And quite frankly, this symbiotic relationship between pharma and biotech you know, in our eyes over the next two to three years is going to get a lot closer, it's actually going to be a very happy marriage. Because from pharmas perspective, to manage their risks as to what they need in 2030, they've got to be investing in early stage assets now in order to diversify and that happens through collaborations and that happens through a wide variety of means to bring in substantial cash flow for these companies. There's one deal that I think, might have been announced either last week or the week before, where Gilead gave about $100 million up front to a company that was trading it half of that in terms of total market cap, or a collaboration or a multi-year collaboration on a segment of the market and antivirals that Gilead was interested in. Certainly, are they expecting a monetary reward or an IRR or a return that they're going to ultimately distribute back to their LPs? No. They're doing this for the innovative edge in order to be able to diversify and mitigate risks across an area that they see as a high potential for the future and be able to out license and outsource a lot of that research and clinical development. So I do think pharma is going to fill in that gap to where you're looking at what can ultimately provide the marginal dollar in terms of outsourced innovation that might be early, but I do think that most investors are kind of starting to shift into the into the mid stage.
Noel Brown
Is that a message to investors when these strategic deals happen, and you have parties like a Gilead or a Pfizer or whomever invest in a company. To me, it's sort of suggesting that the company is clearly is undervalued, right? And somebody's putting money where their mouth is.
Arsani William
Yeah, I mean, that's, that's certainly one message that can walk away. And we're starting to pharma when they do these types of collaboration agreements or even just M&A at the premiums, they are putting in a floor on the sector and saying there's a lot more value. The only issue is that the calculus for pharma is very different from the calculus of the biotechnology going at it as a standalone entity, because formula in order to acquire a single asset and more or less be able to supplement in terms of their entire commercial infrastructure, a new cancer drug or a new drug for orphan disease, or a new drug in the ophthalmology division. The costs are really that excess, especially if there's not a lot of further clinical development to be had. And it's had on the lots of the investors over the last six to seven years. So pharma’s actually extracting a lot more value, just because more or less the synergy, or what they're going to attain from revenue, versus the cost structure is going to be a lot of a higher ratio than what the biotech company will have to do in terms of building out this entire sales and commercial and marketing and medical affairs team. And to do that across you know, 300 different biotechnology companies. Well in the end, you know, that's kind of inefficiency at it as its finest. So I think that biotech will remain as kind of this golden goose for outsourced innovation for pharma to diversify the risk. And ultimately, if the biotech company can enhance and more or less take a drug to where it's no longer a science project, we've de risked it sufficiently to the point where it's from an annuity in the eyes of pharma. That's ultimately I think we're the vast majority of the acquisitions will happen, kind of as we've seen with the trend, both this year and last year, with most of them being phase three and beyond.
Joe Coletti
Thank you for listening to another episode of Pathfinders in Biopharma, brought to you by RBC Capital Markets.
This episode was originally recorded on October 25, 2023 and is taken from a live webinar hosted in partnership with Endpoints News. If you'd like to listen to the full broadcast replay, please contact us directly or, or listen to it on our website at rbccm.com/biopharma.
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