From left: Shelley Chu, Partner at Lightspeed; Stephen Knight, President and Managing Partner, F-Prime Capital; Adam Koppel, Managing Director, Bain Capital Life Sciences; Daniel Krizek, Portfolio Manager, Citadel.
Covid-19 has sparked a flurry of research, and the development of a life-saving vaccine has given the biotech a shot in the arm. Investment firms are closing large new funds amid growing investor interest in biotech. Biotech companies have used the funds for new funding rounds, some of which set the stage for IPOs to support more research including cell and gene therapies. But financial markets have cooled considerably over the past six months.
The Nasdaq Biotech Index is down more than 50% from its 2021 high, said Citadel portfolio manager Daniel Krizek. The wider economy is dealing with inflation, rising interest rates and the economic spillovers from Russia’s invasion of Ukraine. Unfavorable economic conditions have caused many companies to delay plans for initial public offerings or private financings. Some have described the current funding environment as a nuclear winter for biotech, Krizek said. However, all is not lost.
“One thing I want to say, even if [if] We’re in what’s called the first nuclear winter, and that could change very quickly,” Krizek said. “Second, many of these companies are not fundamentally damaged. Science is well-established in many of these areas, and continues to move forward with new advancements. “
Krizek last week World Medical Innovation Forum In Boston, he was a speaker on a group on capital formation. Lightspeed partner Shelley Chu joined him. Stephen Knight, president and managing partner of F-Prime Capital; and Adam Koppel, managing director of Bain Capital Life Sciences.
Chu said the lesson the company has learned over the past two years, especially the past six months, is to seize the money when it is available. She’s seen CEOs turn down funding because its valuation isn’t high enough, and they regret it now. For cell and gene therapies, Zhu added, it is important that the funds raised allow the company to reach one or more inflection points in value. This is especially important in the field of cell and gene therapy, where manufacturing costs are higher and potential partners will wait longer to see more validation.
A strong balance sheet isn’t just for the manufacturing needed for these complex therapies, Knight said. These therapies are complex and not fully understood, so companies should plan to hit bumps on a road that will take longer to travel than they think.
Many companies raising giant rounds of financing plan to use the funds to build manufacturing capabilities. This is especially true of cell and gene therapies, Koppel said, where the product itself is the manufacturing process that provides the company with strategic value. However, he added that it is not always feasible for companies, especially small ones, to have their own manufacturing facilities. For some companies, it may make more sense to work with a contract manufacturer or a larger partner with manufacturing capabilities. After companies have raised capital, it’s important that they spend the money on the right things to make the project successful, Koppel said. Investors are looking for data, but not all companies can provide it.
“At my company, we call them cartoon companies: companies that go out and raise money in a few pages of cartoons with some molecular biology but no real human data,” Koper said. “There is a lot of hope and hype, but it doesn’t always translate. A lot of the data that has come out in the last 6 to 10 months has not been positive. The assumptions worked and investors were disappointed.”
Good data is important to turn the investment market around. Positive data will lead to another key factor in the market turnaround: trading. The ultimate owners of most innovations in the life sciences are 15 to 20 of the world’s largest biopharmaceutical and medical device companies, Koppel said. Everyone is waiting for more of these big companies to get involved. The deals they made led to exits, freeing up funds to redeploy to more companies, he said.
Panelists generally supported how the FDA regulates cell and gene therapies. From his perspective, Knight said, the agency is doing a good job of working with companies and showing appropriate caution. With six cell therapies now approved, the FDA has paved the way for other cell and gene therapy companies, Chu said. Regulation is not a rate-limiting step for progress, she added. Access to these therapies to treat solid tumors and the development of established therapies are significant hurdles for the field.
Despite challenging market conditions, investment firms are still looking to put their money into the biotech space, especially cell and gene therapy companies. Chu said she is looking for management teams that really understand research and are doing real innovation. But she added that she would consider investing if the interactive technology could address a large commercial market or an unmet medical need.
Koppel said managing the team is his top priority. In some cases, companies will tell investors that the FDA interaction was going well, but after reading the minutes, a different story emerges. That’s not to say the management team is trying to openly lie to you, Koper said. Often, they lack experience or knowledge in regulatory interactions. A good management team informs investors about potential pitfalls and how they plan to deal with them, Koppel said.
From Krizek’s perspective, scientific progress has been growing exponentially, while the availability of management professionals capable of executing that science has not. As a result, many of today’s private companies are led by new CEOs who are learning on the go, he said.
Koppel said he thinks there are too many companies, possibly because it was too easy for companies to raise capital before the recent economic slowdown. But he said some of these companies are projects, not companies. More capital doesn’t necessarily lead to faster diffusion of innovation, he said. Conversely, capital constraints can lead to more focus on doing the right thing, while too much capital can lead the company down the wrong path. As an example, Koper pointed to Alzheimer’s disease. Much of the investment has gone into Alzheimer’s drugs, much of which may not be going in the right places, he said.
With 350 private or public cell therapy companies and more than 1,000 cell therapy clinical trials underway, Zhu said she thinks there may be too many.
“Everyone is doing something innovative — I think that’s problematic,” she said. “On the other hand, everyone has to be a first-time CEO, first-time CSO, first-time CMO at some point. Of course, I love supporting experienced management teams. But that’s not how they have to be. Do it three times and sell their former company for $2 billion. The point is that they not only know what they know, but what they don’t know, and they can share that with the board so the board can help complement those skills .”
Photo by Volkswagen General Brigham
