Joe Coletti
Hello, and welcome back to Pathfinders, a podcast series where we look at what's new and what's next in the fast-paced world of biotech and healthcare. I'm your host, Joe Coletti.
We recently hosted a panel discussion on unlocking biotech’s potential, exploring how public and private investment dynamics are driving activity and innovation across the biotech sector. In this conversation Noël Brown, Head of U.S. Biotechnology Investment Banking at RBC Capital Markets speaks with venture capital leaders, Srini Akkaraju of Samsara BioCapital and Craig Gordon of GordonMD Global Investments. Let’s dive into their conversation.
Noel Brown
Hi everyone. I'm Noel Brown, Managing Director and Head of US biotechnology investment banking here at RBC Capital Markets. I appreciate you all for joining today, and I'm excited to kick off this discussion. So how about we just dive in and talk a little bit about the markets generally. I’d say, despite sharp volatility in biotech public markets over the past few years, the XBI has shown some solid performance just year to date, and over a one year basis. Public investors have demonstrated an increased appetite for funding emerging companies, evidenced by recent deal activity across the sector. We continue to see mega rounds in the private market, suggesting that there is ample private capital for companies that are focused on what is in vogue, like I&I, immunology, inflammation, cardiometabolic, CNS, among others. All this said, I can't seem to shake this nagging feeling that we aren't out of the woods yet in biotech. And today's market somewhat comparable to the downturn of 2009-14, which was kicked off, obviously, by the financial collapse. Whereas this downturn was ignited by the bursting of a COVID bubble, and call it like 2022. And so I think one of the big questions that's out there is, you know, are we safely in our analog of the 2016-2017 era, or are we still in the analog of 2013-2014. And so If you can share with us just some of your thinking on that, and also touch on, say, the psychology of decision making, what is shaping investment choices today and how these are impacting markets, that would be great. And so as you reflect on the current market, how is investor sentiment influencing market outcomes, and how do you think things will look over the next three to five to five years?
Craig Gordon
You take it away first.
Srini Akkaraju
Let's, you know, step back, right? We went through a very long, as you mentioned, down cycle. You know, I'm not great at comparing it to previous cycles, but I do feel like my perspective has been, you know, have been invested 20 years that this is, you know, this is a longer, deeper cycle than we've experienced, at least for most of them. We have experienced in biotech, I think unfortunately, a long period of time where people are afraid to put money to work. I think that's been the characteristics sitting on their hands, not really knowing what the bottom is going to be not really feeling uncomfortable that if we put money or put money to work here, all I'm going to do is lose value in that capital. I don't know when I'm going to put money, where it's going to actually have a chance of making money. I do, I do think, you know, lastly, I think, to the crux of your question, I think we are coming out of it. I don't think it's a completely dysfunctional market. It's very clear. Positive public data, on the public side is rewarding. There's no doubt about that. It has to be very clear, positive data, mixed data, is not rewarded. The opposite happens. They obviously get crushed. But all that says to say that totally dysfunctional. There is some rationality to it, at least on things that are very clearly positive, and companies that have a drug that will be important therapy, and that is causing investors to finally start to feel like, okay, I need to come off sidelines. That's big pot of money that I've been sitting on. And, you know, hoping to lay an egg here with this thing or the angle hatch. Finally, it's, you know, let's actually participate in this market instead of being a voyeur
Craig Gordon
Yes, I share a lot of the same sentiments. I think, you know, in 2019 through 21 you saw a tremendous number of companies go public. They went public at the wrong valuations and way too early. And then you pile on top of that COVID, and it created an unparalleled bubble in the space that was bound to burst at some point. It is also not surprising to me that it's taken longer to get out than what people thought. I think it's really multifactorial, right? One is the macro string you mentioned about interest rates. One is there's always, there seems to be this perpetual view, while there's too many companies with a negative EV so of course, these are going to do better, and I think that's fundamentally flawed. There's also this view that, you know, Big Pharma is going to rescue with their cash flows and that hasn't really happened in a meaningfully new way. And you also saw for the last couple years, although it appears to be more stable, a very tough FDA environment that had a very risk off view about things. You blend all that together, and you get a protracted recovery, along with what I would argue in the private and public ecosystem remains in many aspects, inflated valuations versus what we would have seen historically a decade ago, or more. So it's not surprising. I still think there's both the private public ecosystem have worked to be done there. Having said that, 100% agree, clear innovation is rewarded. There's no doubt about it. And I think, you know, in 2019 through ‘21 some people might say, if you just throw a dart at the IPO and you're going to make money. And that's not historically the way biotech used to be. I think where it's a blast in the past, it is about active stock selection, and that's crucial, and it's got to go back to rolling up your sleeves fundamental work, looking for real innovation that, as Srini pointed out, is clean with management teams who are not incompetent to navigate the complexities of R&D, the complexities of FDA from both a regulatory manufacturing perspective, And then if you're if it's relevant, the complexities of commercialization, which are getting ever so more problematic and difficult, especially with the IRA law. So it's hard work and so and I think that's what it comes to. On the flip side, I would also ask things, in addition to private rounds, where there is capital for innovation, I would say two things there. One, I would say you are seeing new bubbles to be created in the private ecosystem, which I think are somewhat concerning that capital is chasing. On the flip side, I would argue that what, at least what we see both in the public and private universes, innovation outside the US, all you know, in different regions of the world. And I think it's early days for investors recognizing that, and yet it's very clear that that is the case, and I think that makes for exciting market inefficiencies while you're waiting for I would say the US to still recalibrate in some in some instances.
Srini Akkaraju
I agree all that for sure, especially, you know, in these markets, you know, we always have to go back to fundamentals. But despite that, we also end up being a sector for some of the momentum stuff, and the market itself is constantly doing this. I mean, look at the type of palooza that we had at the beginning of this year. Unprecedented number of, you know, quick hit PIPEs.
Craig Gordon
And it was pretty crazy, right? I mean, you type activity in Q1 and into Q2 and people were tripping over themselves to make sure that they were being wall crossed, because they thought this was going to be the way to generate alpha for the year. And lo and behold, you now fast forward to the end of September, and if you put $1 in every PIPE, you're underwater. Only a fraction of the PIPEs are now up, and I think that goes to show you, again, fraught with momentum, near term, it can work, but if you give it time and like anything else, it could be quite painful. The majority of the PIPEs, at least, that we were wall cost that I wanted to be for Jon, were not actually based on new, fundamental, innovative information. It was momentum in the space, therapeutic area that they were caught up in. Momentum with the broader markets. Maybe, very small patient numbers of data that were questionable at best, or exciting preclinical data, or writing off of a competitor news flow and saying, Well, we're in that space too.
Srini Akkaraju
You know, I think, you know, you mentioned few months of diligence we have. We do that, as we principally want to do on the public side, you know. I mean, it's, it's too early to say how that would work. They all will work out, because those are really making, you know, making bets on data two three years out. One of them, it was gone roughly led the fight two and a half years ago. That worked out extremely well, because data was positive. So that's a few weeks ago, and we have a few others that that'll take another year to three for that data to come out.
Noel Brown
Yeah, regrettably, in some of those instances where there was data that was meaningful, that was sort of put onto the market, either by pipe or through public press release, many of those didn't see like the performance in the aftermarket. Oftentimes, I think, because, you know, as we talked about this investor time horizon has shifted dramatically, like the venture and venture capital, and the kind of, like the risk profile that I'm used to seeing among public investors focus on this space has, like, been truncated dramatically.
Craig Gordon
Yeah. I mean, look, I think it depends what, what you're, what you're, what you're built to do, right? And so if you're built for our flip, um, then that's obviously very problematic. I mean, we're a long term fundamental investors, so I guess that makes me a dinosaur of three to five years, right? So if I'm doing whether it's IPO or PIPE or just a public investment general, we have a multi-year view, and so we're patient for that, right? But you're right that in many regards, investors were using PIPEs as a way to generate immediate, near term alpha. And I think, too, frankly, it's just it is hard to make money and buy tech historically. That's the way it's been, rightBut yeah, I mean, you think about the interest rate headwinds, the M&A headwinds, the FDA headwinds, you know, the competitive landscape where greater risk of leap frogging, two drugs launching near simultaneously, instead of two years separated, and it makes it much more challenging.
Noel Brown
So, you know, when I look at the market and I see some of the I don't call them trends, because sort of takes away from the fact that there's been genuine innovation, like, you know, in case of GLP-1’s, I mean, I do think that's going to unlock opportunities that are, frankly, most unfathomable to us today, right? I mean, it really is has potential to kind of change health span, longevity, broader human health, right? Where we're only just kind of in the early innings, I believe. But I would say, while this has been exciting of late, it's not like you know GLP-1s receptor agonists are brand new, right? I mean, we sort of known about this weight loss benefit is going as far back as like 2010s like early part of that decade. So are we seeing real new innovation? And if so, where are we seeing it?
Craig Gordon
Absolutely. And I think it's broad. In my opinion, there's been such an explosion in the universe that I think that there's a there's a struggle to find the right amount of human capital to execute, especially given the regulatory environment that we exist. But I do believe that that there is clear innovation. I think it's happening academic centers, early on. Things happening in private companies. I think it's happening in the public ecosystem, whether it's small, minimum, large cap. And I think it's happening outside the US in addition to the US.
Srini Akkaraju
Yeah, I mean just maybe not briefly to it. there is no doubt the last six, seven years has been the highest quality and quality of deal flow that I've ever experienced. We are in an unbelievable innovation cycle right now. That cycle is long. I mean, I think it's not a, you know, another years, and then we'll, we'll slow down. Quite frankly, it'll keep picking up probably 20 or 30 years. And there's little doubt in my mind that biotech will be the source of multiple really important new therapies that have an absolutely transformative effect on a lot of people's lives, and that will also come with, obviously, a lot of value creation. I mean, so you know, epigenetic modulation is one example, right? Did we really think that this was going to be a viable therapy 10 years ago? Probably not, and certainly, it's clear that it will be. There's clearly a lot more work that needs to be done to get to that, but we will have multiple drugs in will be important therapies, mitochondrial biology, another one that's on the biology side, where we're trying to understand things just, you know, I again, I think, I think we're fortunate to be in this business at this moment in time, and that moment will continue for the next, multiple decades.
Craig Gordon
So there's a lot of wood to chop for a lot of years.
Noel Brown
Because it sounds like we're entering the next phase of like the biologists, right? Like the biologists are getting their due. They're just due. Because I think there is, you know, a lot of other advancements and other parts of medicine and research that we kind of, I don't know, I didn't feel like biology was getting its fair spotlight. So we're definitely seeing that of late.
Srini Akkaraju
What I think is the opportunity in our industry to imagine that you could take the leading cause of blindness in the elderly and make that not so anymore, because of a fundamental understanding of some of the biologies that we have to pursue. And yeah, that led to some winners and some losers, but ultimately, the patients were the absolute winners. There are others. Maybe one that's worth mentioning too, that we, you know, we were fortunate to be involved in, but it goes into surrogate markers, right? So surrogate markers for chronic diseases is critical, validated surrogate markers that are approval endpoints. It’s critically important to move that forward. We know, for example, in kidney disease, there's now multiple arts and companies in renal that wouldn't have been reasonable to fund five years ago, certainly 10 years ago, and it's all because the FDA ultimately said, you know, this protein area as an endpoint is something that we're willing to give approval on, as long as you come back with 3-4 years on those patients. So that kind of continued innovation for validated surrogate markers for chronic diseases, it will continue to be incredibly important. We have a lot more work to do there for a lot of different chronic diseases, but that's one example. Honestly, you know, cholesterol levels and statins, in the first example with Framingham, right? But we need more of that. I'm sure we will get more of that, and that'll also lead to really important new therapies for practical reasons.
Craig Gordon
Just to piggyback on that example is, even for using surrogate the innovation can still be big. I mean, think about the drugs, for example, igAN, which I'm sure was partially what he was thinking about, and the breakneck pace of innovation we've seen that has real impact, right? And, you know, hopefully we're on the cost of having the first biologic approved by Otsuka, who announced yesterday that their drug worked in igAN, and this is a perfect example where you know this is what FDA and industry are supposed to be doing, and we need the FDA and industry to get back to those roots. How do we move the goal posts in a productive way to promote real innovation that doctors want to prescribe, patients want to take and, and obviously payers want to pay for it.
Noel Brown
And that shifting of mindset on, say for example, these endpoints, is that, do you see that… whose responsibility means the companies that are sponsoring trials that need to go to the FDA and have these discussions saying, ‘Listen, Mike in osteoporosis, it's ridiculous that you Know the endpoint is, you know, breakage, right? It should be bone mineral density or something,’ or is there some other lobby that should be…
Craig Gordon 31:46
Right? I mean, like, I'll pick on your example for postmenopausal osteoporosis, right? I mean, you have a bunch of therapies out there, and yes, there's still some unmet need, but, you know, it's such a big population, you gotta worry about safety, right? And so I applaud it, you know? So that is the battle that FDA has to public agency, right?
Srini Akkaraju
Yeah, completely agree, you know, and we've seen over time, and when FDA has strong leadership, there's, there's real ability to, kind of, you know, take some risk and be comfortable making decisions off of, you know, not a perfect data set. In other words, not perfect that means, not that there’s a problem with it, but there's things are missing. And that just realistic, because otherwise we gotta follow 100,000 people for 10 years to actually have all the data.
Craig Gordon
Yeah, and that comes back to also companies having the right leadership and the human talent to drive that functioning, strong dialog with FDA, right around those examples that he gave.
Noel Brown
I mean, there was such a demand during that whole 2020, 2021, company creation era where, you know, we got kind of thin. I mean, new executives are being created every day. But a lot of these management teams were, you know, three, four years as an executive, right? So this was the worst downturn they'd ever seen. Recognizing that the talent pool has been spread so thin. Should we see some consolidation of this? Not just because we want to see like complimentary technologies being developed in the same pipeline, but, you know, do want to see a concentration of management to actually drive these things over the finish line so we increase our success rate?
Srini Akkaraju
I think it's an important point. But a lot of we do on private sector is that we're gonna have management teams, CEOs and senior management teams that are senior managers, that are that's their first time in those roles, and there is absolutely some risk associated with that. We've thought a lot about help mitigate that a little bit. You know, as investors, board members, our wisdom, being part of only a tiny fraction, what could possibly be there? What's much more important for us is, you know, we've got, at least, I'm sorry, we've got this great pool of venture partners who have 34 years experience, and they really, you know, help with these companies I think is invaluable. And I think that is something that this industry needs. I mean, just another point on it. The reality is, again, going back to we are in this incredible innovation cycle. It is, the pace of it is incredible, that quality of it is incredible. And so what that means is we're already well, that the balance of how many great opportunities there are to move forward versus experienced people to move them forward, is already out of whack, and it's only going to keep spreading. So we have to find solutions to, you know, make sure that we're not making dumb mistakes, because those dumb mistakes are 10, 20, 100 million dollar mistakes and many, many months or years. So I think, I think it's important for the industry to pull in really experienced managers to now really be a part of any of these younger companies.
Craig Gordon
And I would argue that, I think it gets even more complex, right? Interest rates were zero, and everyone drank the Kool Aid and believed, you know, if you build something new, it's going to happen and faster and greater probability of success, and all these things that just didn't pan out right in that regard at a higher level. And I think there's now a realization that, you know, it is much tougher to raise, it takes longer you're going to raise less. You have to watch your budgets. You have to prioritize your pipeline. You have to think about, you know, how to how to retain and recruit top talent, but at the same time, constrain the employees. and all these things, right? That's why you need, you know, the gray haired people who used to invest way back when, when all those things weren't happening, to understand how to kind of reconfigure.
Noel Brown
So you guys touched on some things I wanted to revisit, because I know it's of importance to a lot of the executives, clients of ours, particularly the emerging biotech side. We are often, you know, the banker is sometimes in the middle with managing. How do we help a client strategize for the long run, versus engaging with you all to try and get capital? And oftentimes, the feedback we get from investors, like, there's too much going on there, they can shut down two those programs. I don't need you to help me build a portfolio. That's what I do for a living. Just come to me with one program, right? I'm going to fund the one thing. But as a CEO, right? You're like, Okay, well, it's biotech. This one thing may not work, and if it doesn't work, then I have no company. I have a responsibility right to this broader pipeline to make sure it continues to move along. So how do, how do, how should a CEO think about balancing that in today's environment?
Craig Gordon
I almost never invest in a company with one asset, or almost never, public or private. So, I mean, there are exceptions to every rule, of course, and I live them, and there's some of my portfolio today, but it's extraordinarily rare. I think the key is prioritize your pipeline. How do you sequence it? How do you think about leveraging potential partnerships to it that you know multiple different ways to bring into internalized value, while you may be focusing your term on one asset you know to generate value to then pull in additional assets yourself besides the main one,
Srini Akkaraju
And I agree with what correction prioritization is critically important. Yeah, there's a fundamental, for private companies there’s fundamental rule, right? Keep your eye on the ball. And what's the ball? The ball is to get funded again, right? The ball stops when you don’t get funded again. Because that's really what you gotta get people to write a check. Now I got two. I got to do as well for my fund, but that's, that's a different set of questions. But for a company, right? It's really that, that sort of perspective, that that that filter, it's not intuitive, but that is really, really important.
Noel Brown
You guys have said incredible things. You guys have been incredibly gracious with your time. Craig Srini, thank you both so incredibly much.
Srini Akkaraju
Thanks everyone.
Craig Gordon
Thanks everybody.
Joe Coletti
Thanks for listening to another episode of Pathfinders in Biopharma brought to you by RBC Capital Markets. This episode was recorded on October 23rd and was originally broadcast on Endpoints News. If you'd like more information or to continue the conversation, please contact your RBC representative or visit rbccm.com/biopharma. If you're enjoying Pathfinders in Biopharma, don't miss an episode. Subscribe to us on Apple Spotify, or wherever you listen to your podcasts. See you all next time.