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Capital Formation Trends in the Life Sciences Sector

Mar 31, 2023

In a Solution Session focused on biotech, Dawn Bell, Global Development Head at Novartis, joins our team to cover the sector’s market outlook, trends, and key considerations for milestone achievements. Leaders will learn how to accurately assess financial health among a potential downturn in biotech.


John Pennett:Hello, my name is John Pennett. I head the technology and life sciences industry practice here at EisnerAmper. We're going to have a great discussion today talking about the healthcare industry, and I've got a real industry expert to join us on our discussion. Dawn Bell, an experienced serial entrepreneur with many biotech companies and a Novartis veteran. Dawn, you want to take a moment to introduce any other fascinating facts about yourself?

Dawn Bell:Thanks, John. Yeah, so I've been around the industry for a while, so I guess that de facto makes me a bit of an expert. Spent 10 years at Novartis and prior to that in founder led biotech, including starting my own biotech and for the past five years have been reengaged with the entrepreneurship community and mentor dozens of biotechs every year through three different accelerators. I call myself a bit of a startup junkie.

And you're omnipresent in the community, so the entrepreneurs I'm sure appreciate that. Let's talk a little bit about the pharmaceutical industry as a whole. In 2019, the pharmaceutical industry was ranked as the worst industry in America behind petrochemicals and government and everything. Then all of a sudden in 2021 things have changed. The pharmaceutical industry is not even in the bottom five anymore. Talk a little bit about what changed the perception and how we've improved over the course of time here.
DB:Well, I think certainly in the intensity and the tragedy of the pandemic brought into stark relief the importance of the biopharma industry to society, not just in the US but all over the world. I think the industry did itself a big favor, if you will, in terms of reputation and our ability to collaborate with each other and with governments to bring the COVID vaccines and COVID testing to patients faster than really we ever imagined would be possible. I think those things really helped to accelerate and improve our reputation. I mean, who would've thought Pfizer would be a household name? A small company in Germany, BioNTech, would be a household name, in 2019 that I would've never imagined that or predicted that.

I do think though we can't really arrest on our laurels and I am concerned that we may revert back to being a less favorable industry as we move out of the pandemic urgency and into implementation of the Inflation Reduction Act and price negotiations with Medicare. Senator Sanders is heading the Senate Health Committee and already is calling out, shall we say, what he thinks are egregious pricing practices in the industry. Hopefully we can maintain the industry reputation gains we've gathered over COVID, but we can't really rest on our laurels about that.
JP:And certainly the collaboration between different companies, which was something at least reputationally would've never occurred, was really great to see that that actually happened between companies and they put aside a little bit of the egos and the like to get things done when needed to get done.
JP:Maybe you talk a little bit about some of the other recent accomplishments in the healthcare, biotech, pharma industry that's really influenced not only the entire country but the world in terms of the health benefits.
DB:Well, I do think there's so many, so it's hard to choose. When we think about a general audience, the Alzheimer's drugs, the one that was recently been approved and Aduhelm as well, bring some promise of help. I personally am less optimistic about those therapies because I think they offer, while they offer some benefit, the benefit is modest and the safety of those products and the way that we can implement these products limits the number of patients that we can actually impact with these therapies.

I'm very excited about the new obesity drugs, which seem to be quite efficacious and there's several of them. Certainly Novo Nordisk, Amgen, Eli Lilly, and these obesity, obviously a major problem in the United States as well as in other parts of the world. These medicines seem to perhaps be poised to make a bigger public health impact than some of the other therapies. Although one cannot discount the tremendous impact gene therapies have made on rare diseases, cell therapies have made for some types of hematologic cancers resulting in cures, which is a very rare thing that we see in the pharmaceutical industry. And it's always certainly special when we are able to achieve those cures.
JP:And if you can make a dent in sort of diabetes and pre-diabetes conditions, that'll be tremendous help as well, right?
DB:Absolutely. Like I said, from a public health perspective, I think the obesity drugs are what I'm most excited about.
JP:There's been a tremendous growth in innovation across research universities, hospitals, large companies, small companies. And as a metric to gauge that, you can see that there's been almost a 10% increase in the amount of grant applications to the NIH over the last couple years. What's fueling this growth and that need for money and just moving things forward?
DB:Well, I mean, our ability to explore biology has really been improved by the increase in the number of tools and a decrease in the cost of those tools over the past decade or so. Next generation sequencing, I mean, the cost of sequencing has really been driven down almost very similar that we see to Moore's Law with semiconductor chips. It's actually a faster trajectory in terms of its time to sequence and decrease cost of sequencing. It's a more accelerated trajectory than Moore's Law even. New tools like CRISPR enable us to explore biological spaces more rapidly and more extensively than we ever had before. I think there are just with all these tools, a lot of discoveries that are being made and that is leading to more demand for research dollars.

Unfortunately the NIH budget, President Biden actually had in his initial budget request, huge increase in NIH funding that didn't make it through. There was a slight bump in NIH funding, but I think it's still going to be very competitive for labs. And we do see labs, feedback I hear from some of our academic labs is they're looking for alternative sources of funding because it's just getting so competitive with grant making. They look to philanthropy and entrepreneurship to all licensing their inventions and working with industry to see their inventions be translated into useful products.
JP:Certainly the number of applications for grants is increasing, but the number of awards is not really increasing that much. Still very competitive process. Not all things are getting funded, but one of the other sources of funding is this large increase in these venture studio models like the Roy Vance and the BridgeBio type models. Talk a little bit about that and the benefit that they're providing to potential entrepreneurs.
DB:There are also other academic venture studios that I think of> The PIs from the tried and true entrepreneurs. I think I looked up the sort of top 50 academic innovators who have spun out multiple companies from their labs. And Bob Langer and George Church have each spun out more than 40 companies from their labs over the years, which is extraordinary. Carolyn Bertozzi, recent Nobel Laureate, has I think spun out nine companies from her lab and other great examples from academia. I love seeing that these academic innovators looking to translate their science into useful products using that company creation mechanism.

I think the innovation for the Roy Vance and the BridgeBios are really in the business model. What they've done, which I think is quite clever, is they have a central infrastructure and then they have these sort of satellite projects around. It's a way that they almost create a portfolio like a development portfolio, like a big pharma would do, but in a way where they could easily monetize those subsidiaries through M&A or licensing. It's the business structure there that's the innovation more so probably than the science itself, although they both do great science.
JP:One of the areas of innovation that we hear a lot about is personalized medicine. We also hear a lot about the cost of it and the lack of availability for certain constituencies. Is that personalized medicine going to be something that sticks? Is it going to be available to the masses? How far away is that from reality?
DB:I suppose a lot of people can mean many different things when they talk about personalized medicine. We certainly see it here and now for oncology and tumor sequencing is really a standard of care for many types of cancers. I think that type of personalized medicine is here to stay and will probably get even more intense as we better understand the genetic underpinnings of cancer and to be able to segment tumors and patients into certain subtypes. I think beyond cancer, it is difficult. First of all, you need biomarkers and that are really going to be predictive of response to drug therapy and predictive prognostic of diseases. The biology is complex to figure that out because it's not necessarily one thing for many diseases. And also from just an economics point of view, diagnostics is a challenging industry.

The development and regulatory pathways are not frankly that much easier and not any easier some would say, than developing a therapeutics. And you don't have the multiples on diagnostics that you do on therapeutics companies. The economics reimbursement can be very challenging. I don't know if we have the incentives to really do the hard work that would lead to a widespread personalized medicine. Now that being said, I do think that there's great advantages to having a biomarker driven drug discovery program or drug development program and we see more and more of that.
JP:I guess one of the tools that you could think about in doing that, it was sort of the convergence of using AI and machine learning and other IT related technologies to help in the discovery of drugs, the treatment of patients, the identification of perhaps the right combination of drugs to be used in certain patient sequences and situations and the like. They've made a lot of progress over the last couple years. Is there a lot more that can still be gathered from using IT as a real driving tool?
DB:I'm cautiously optimistic about this field. It's probably too early to tell the true potential of integrating machine learning into the drug discovery and development process. But I think that it's one that is worthy of continued investment and exploration. And I know it may seem unrelated, but the FDA's recent move to eliminate animal testing could actually be a catalyst here because we see a lot of these companies, the ones that I find the most interesting have a machine learning platform, but then they also have a wet lab. And often these companies are pursuing non-animal models or human tissue derived models that they feel have higher fidelity for translation than some of the traditional animal models that might be used historically. Organoid testing, whole human organs. I've a company I've been mentoring for many years called Ochre Bio, which is New York based company that actually ... New York and UK, that does their wet lab work on whole human livers that have been rejected for transplant.

And we see Daphne Koller's company, very extraordinarily well funded company using IPSC derived organoid models. I think these companies that have this sort of machine wet lab virtuous cycle where you are collecting their own data and that's informing their algorithms and the algorithms are getting smarter as their wet lab experiments get more and more sophisticated, they have the opportunity I think to unravel some complex biology and potentially move us faster along this trajectory such that translation into humans will be more successful. Because that's really where we fall down, right? Is I think we've been using computation and chemistry for a long time and there's more we can do there. But to me, what's the big promise of computation is in the biology spaces and unraveling that complex biology so that we can better understand what's happening and better predict efficacy and safety in humans.
JP:If you're going to fail, fail fast, and if you're going to move forward, hopefully your odds of ultimately success are going to be better, right?
DB:That's right. Yeah.
JP:Good, good. Maybe just drifting a little bit to sort of the financial and the market side of the equation for a little bit here. The pharmaceutical index has been slow and steady I guess in terms of its situation. The biotech side of things has been a little bit chaotic. 2021, landmark year for biotech IPOs, 160 companies wound up going public. Many of them went way over their initial offering price. Everybody was making lots of money. Total of I think it was 111 companies wound up going public in 2021 through traditional IPO rounds. What drove that huge increase in that biotech marketplace and that growth demand and just the overall valuations?
DB:I guess the cynical side of me might say investment bankers. Not sure of that, but I mean, I do think that there was a lot of money coming into the sector from the generalist investors who didn't really have a lot of places to go as much of the economy was shut down certainly in 2020. And again, we had such great reputation and great press if you will, on all of the magic that was happening in biotech with the COVID vaccine. I think it attracted a lot of generalist investors. There's probably also some pent up demand from a lower than average IPO rate in 2020 in the earlier part of the pandemic as market people really shut down just around all the uncertainty. But I do think that we just had non-traditional money pouring into the sector that once other things opened up and maybe it wasn't all, not everything went as fast and as successfully as the COVID vaccine, they put their money elsewhere.
JP:And a lot of the companies that did go public in the late 2020 and 2021 period were very early stage companies as opposed to what had been traditionally thought of as late stage, very high promise companies. These were very early stage companies. What does the future hold for them?
DB:Well, it depends on where they're sitting here. If they had nice catalyst events ... Where they're sitting today rather. If they had nice catalyst events in the meantime, then they may be all right if they've been able to progress beyond the preclinical stage. But if they're still in that stage, I think it's probably pretty tough for them. And those that are trading around cash or even below cash in some cases without near term catalyst events, many of them are just going to be consolidated, return cash to investors or merge with other companies, I believe.
JP:In comparison, in 2022 after well over a hundred IPOs in 2021, there was only about a dozen or so that got public in 2022. And we also saw the biotech stock index drop from about 13,500 to about 6,300 in the period from February of 2021 to where we are today, a huge drop. What happened? That market just sort of fell out the bottom, fell out of that market.
DB:Well, I think we should understand that is actually the IPO market overall, not just the biotech IPO market that was sort of decimated. Certainly we had depressed capital markets overall, I think that was definitely a factor. And I think rising inflation is a challenge for our sector and other high growth sectors. We are in this kind of risk off environment with all the macro indicators that has made people more cautious. Then I think also with the index, the companies that previously gone public, it's trading so much lower than their IPO values that the investors crossover and public investors that might traditionally invest in IPO are maybe more looking on what's already public for bargains rather than floating new IPOs.
JP:Right. Throw in a couple supply chain issues, clinical trials being delayed, and some pretty major clinical trial failures too that caused companies that looked like they were going to be potentially successful home runs for investors, all of a sudden people soured a little bit as well.
DB:Yeah, I do think that I couldn't point to any specific news, but certainly like I said, not everything goes as successfully as the COVID vaccine went. And if journalists., investors were expecting it always to be like that, well they probably got scared off in a hurry.
JP:Unfortunately, that's the biotech industry, right?
JP:With the public markets going through that cycle as you referenced there, how has that impact earlier stage investments?
DB:Yeah, so I think that the biggest thing is, and one of the things that we're seeing potentially is that while we're still seeing new company creation, there's probably less than it was somewhat. The rounds may be actually larger paradoxically. And I think that's because VCs are looking to the fact that they're not going to have access to the public markets. Most people are saying until 2024, they don't even really think it's going to open up substantially in 2023, maybe toward the end. Although I think that's really an optimist viewpoint. They want to make sure their companies are well capitalized through this downtime and until the public markets can open back up again. I think we are seeing some conservatism in terms of we want to stake successful companies. You want to make sure they have enough capital to make it through to when the public markets open back up again.
JP:Certainly I think one of the things that we've seen in our client base is that the canyon between the haves and the have nots is getting wider and deeper. And if you're not in the have side of the canyon, it could be a long cycle.
JP:And what are the entrepreneurs doing in this environment where it's tough to access the capital markets? How are the entrepreneurs reacting to that situation?
DB:Well, it's a struggle for sure. We're certainly seeing layoffs. I mean, that's been in the news. I think what's encouraging about the layoffs is that those people don't seem to be on the market for long. We're seeing supportive communities recommending people, great CEOs that are laying off people, helping people to find new roles and new companies for these people to go to. That's very encouraging because we don't see the talent market really loosening up that much. What those layoffs means that you're doing for your programs, you're really focusing on your highest value assets or your highest value programs and getting lean and stretching your runway as much as you can.

I also see resurgence in interest in pharma partnering, whereas maybe people were, didn't want to partner a lead asset because this is the most valuable asset they had, where maybe they would reconsider some aspects of partnering. And my understanding is that JPM was probably a record high year in terms of number of partnership discussions that were ongoing during that meeting. I think entrepreneurs are scrappy. They'll figure out things. The ones that are earlier stage, I know they're writing grants, they're doing whatever they can to be capital efficient and to find capital wherever it may be.
JP:And for those assets that get put to the side a little bit, as the companies prioritize their lead and best assets, what happens to those other technologies? Once you get pushed to the side a little bit, do you ever get back into the spotlight again or is it like an endless cycle to doom and gloom?
DB:That's a great question. And that's another source that companies may or may not pursue. Because it can take a lot of effort and may not be that much cash in the short term. And that's out licensing assets that they won't pursue. But typically they probably would sit on a shelf and would be, if there was an M&A deal down the road for a lead asset, they might get acquired as part of that and potentially out licensed later if they were strategic to the acquirer. But yeah, oftentimes, unfortunately we have a lot of assets that have promised sitting on a shelf collecting dust in a lot of different places.
JP:In connection with all this, would you expect to see consolidation be very prevalent in either for both large pharmaceutical companies or perhaps for some of these smaller innovative companies?
DB:I think for the smaller innovative companies, for sure, we're already seeing it. I mean, reverse mergers for cash or companies whose lead assets have failed, who have a lot of cash acquiring other people's assets that may keep programs going. We're certainly seeing the consolidation of, I call it the small cap, micro-cap type of companies. I don't think we're going to see consolidation in larger players probably because FTC issues is one issue, is one reason. And we had a conversation at Biotech Hangout a couple weeks back about what would your predictions for M&A be, and maybe one $30 billion deal we might see. But there didn't seem to be amongst the people who studied this stuff much more closely than myself, much prediction for large takeouts or a merger of equals of the larger players.
JP:There was a few transactions where some earlier stage biotech companies or pharma companies did a transaction with a SPAC. I haven't seen too many of those recently. Do you think there's still some appetite for that?
DB:They seem to have fallen out of favor and not just in biotech. I think in general, the SPACs were part of that IPO boom in '21 and yeah, I know a few actually that just, they returned money to their investors because they couldn't find a good company to merge into. It seems we're off the SPAC train, at least for the time being.
JP:Hard to do some of those, and some of the companies who were looking at doing a de-SPAC transaction we're very, very early and probably not really well prepared to become public companies. That has to make it very hard for the SPAC investors to say yes when they're looking at very early stage companies and maybe incomplete management teams and the like.
JP:Yep. I guess my last question for you is, so is the community going to go back to looking at investing in the pharmaceutical industries from sort of a long-term value perspective versus the momentum type of investment investing that we saw during the run-up of 2020 and 2021? Do we get back to that value stage or what's it going to take to get there?
DB:Yeah, that's a wonderful question. I think that there's going to be opportunity for some stock picking, I think in the nearer term. Probably until inflation is really under control, will we not see the momentum return, and I think in the meantime, it's going to be really focusing on specific companies that have assets and fundamentals that look promising, but maybe not a lift for the sector as a whole until inflation is reigned in somewhat more than it is right now.
JP:Have good quality assets, good quality teams, and build those assets and build great companies, right?
DB:That's right. It's all about the data in this business at the end of the day. Generate high quality data, you don't have a nice stream of catalyst coming forward if you're a publicly traded company, so your investors have that news and those are the recipe for success. Unfortunately, the data doesn't always cooperate.
JP:The truth shall sets you free or condemn you one way or the other.
DB:Thank you. Yeah.
JP:Terrific. Terrific. Well, thank you very much, Dawn, for your insights today. It was very helpful and I'm sure it'll be helpful to our audience as well.
DB:My pleasure.

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John Pennett is the Partner-in-Charge of the National Technology and Life Sciences Group and works closely with our IPO clients and their circle of legal and underwriting advisors to take an IPO from concept to close.

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