Private biotech market: Innovation, valuations, and capital efficiency

Thomas Mucha, Geopolitical Strategist
Nilesh Kumar, PhD, Head, Biotech Private Investments
2023-04-20T12:00:00-04:00  | S2:E6  | 30:10

The views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For professional/institutional investors only. Your capital may be at risk.

Episode notes

Co-heads of biotech private investments I-hung Shih and Nilesh Kumar join host Thomas Mucha to explore today's private biotech market, highlighting the state of deal flow, valuations, and innovation.

Key topics:

1:30 – The impact of scientific training on biotech investing

6:30 – The state of the private biotech market

9:30 – Groundbreaking innovations

12:15 – Secular trends in biotech investing

13:45 – Biotech’s valuation reset

16:15 – Regulation and drug pricing

19:15 – Wellington's broader health care perspectives

20:55 – The intersection of geopolitics and biotech innovation

23:30 – Collaborating with Wellington’s public health care team

26:15 – ESG and bioethics


THOMAS MUCHA:  Today’s topic is biotech, one of the most revolutionary and potentially most consequential scientific, business, and geopolitical developments of our time, given biotech’s complexity and its growing importance to human society. It’s also, of course, a big focus of investors and our clients here at Wellington, and around the world, so to help us sort through all the various implications I’m joined today by two of Wellington’s top experts on the subject, I-hung Shih and Nilesh Kumar, the co-heads of Wellington’s biotech private investments team. Welcome both, to WellSaid.

I-HUNG SHIH:   Thank you, Thomas.

NILESH KUMAR:  Thank you, Thomas. Good to be here.

THOMAS MUCHA:  So let’s start with your backgrounds. Neither of you began your education focused on finance, but you’ve both found your way here to Wellington, so I’d like to dig into those paths a little bit. So I-hung, you have a Ph.D. in biochemistry, and you started out in biomedical research, including at the US National Institutes of Health. So tell us a bit about what led you from the laboratory to investing.

I-HUNG SHIH:   Great question. Indeed, I spent a long time on the laboratory bench doing basic research and drug discovery. After National Institute of Health, I actually went to Gilead Sciences working on hepatitis C, and working on a better cure for this disease impacting millions and millions of people in the world. And I think at the time we had very poor options for treatments for this disease, and with this six years over there really set up where I think about in the long terms in my career what drug discovery, drug development, and commercial strategy entails in this sector. With three years on the sell side with Credit Suisse investment banking, I do think that’s really set up to see a lot of companies and be able to see beyond my immediate scientific training or research, and really understand medical needs out there, and what it takes to make a drug and eventually reward the investors. 

THOMAS MUCHA:  So it went from the science to commerce to investing.

I-HUNG SHIH:   Pretty much so.

THOMAS MUCHA:    So, Nilesh, your Ph.D. is in chemistry and chemical biology, so same question to you: what was your path to Wellington?

NILESH KUMAR:   Thank you, Thomas. Good to be chatting today, and it’s a pleasure to be here with my partner in crime, I-hung Shih. Exciting times for private investments at biotech here. Yes, as you said, I did my doctoral work with a gentleman by the name of Stuart Schreiber, who’s a professor at Harvard and at the Broad. He’s sort of an icon in chemistry and chemical biology and has been kind of an interesting academic founder of sorts, before that term was popular, because he’s been associated with founding of several companies in the Boston ecosystem, with names like Vertex, Ariad, and many more since. So there was always that idea percolating in the lab, and once I had decided that I didn’t want to be an academic, which is why I moved here from Cambridge, U.K., venture was something that I was very intrigued by. So, after a Ph.D., I decided to go straight to business school, and while in business school I worked with a number of the prominent local VCs, and got a real taste of venture investments and early investing, which got me excited. I started my venture career in the last great financial crisis, which is very interesting in the current context, as well. So, it was not the path I originally planned for myself when I started by Ph.D., but I’m certainly happy to have taken this because it combines my excitement and enthusiasm for science and research, at the same time, marries it to more actionable ideas which I’m happy to support.

THOMAS MUCHA:  Yeah, you’re a doer and a thinker.

NILESH KUMAR:  Of sorts.

THOMAS MUCHA:  So, you know, obviously you both have very strong scientific backgrounds. That gives you the ability to understand the data. It gives you the ability to understand the potential merits or risks behind new or novel therapies. But how does this scientific background make you a better investor? I-hung, let’s start with you.

I-HUNG SHIH:   Biotech investment really anchors on an active drug, and that really is a judgment call. Especially, we have to identify them early on in their preclinical stage or early clinical dataset to predict if they’re gonna be a promising drug that eventually gonna answer huge medical needs. And therefore, our training in science, as well as our accumulative knowledge base to think about what kind of risks we might run into. Every single diligence will add on to our knowledge base and --

THOMAS MUCHA:  You mean risk from the scientific side, the data side.

I-HUNG SHIH:   Risk from the data. Unfortunately, we all invest in unknown world; therefore, we have to assess how big that risk is, and also whether that risk can be resolved. And that scientific training, especially where we invest. Most of the times a private investment happens in the pre-clinical stage, or early clinical stage, really based on the dataset. Of course, management team, as well as valuation, they’re equally important, but scientific training really affects our first part.

THOMAS MUCHA:  So you gotta get the science right before you even move on to the business aspects.

I-HUNG SHIH:   Pretty much so.

THOMAS MUCHA:  Nilesh, anything to add to that?

NILESH KUMAR:  Sure. I think biotech investing is an accretive and experiential business, you know. You can’t take a class for it. It’s a multidisciplinary concoction of several disciplines, and some are very, very disparate from each other, so there isn’t a university degree for it. So, for example, we all spend five, six years doing our Ph.D. and a lot of our colleagues will go into industry and have to relearn what drug development is, because what you did in a Ph.D. is a very fractionate cross-section of what drug development truly is. I was fortunate enough to have worked with and learned from great folks in the industry having been a private investor for 15-plus years, being on boards of these companies, being involved in sort of the intimate discussions about programs, and on the scientific committees, and learning from the different aspects that are needed to be solved as you take the drugs towards man and beyond. Those things matter, so in the proportion of sort of scientific knowledge base, you accrue that over time as an investor, not really during your undergraduate and Ph.D. degrees. Whether it’s preclinical discovery, clinical development, regulatory risk, and beyond, and these are things that you learn on the job.

THOMAS MUCHA:  Great, okay. So let’s shift gears to discuss the private biotech market in more detail. Nilesh, let me start with you here, and, you know, the capital raised for biotech startups over the past few years is, in a word, staggering. Now, deal activity has slowed as the pandemic has abated, but when you look ahead in this industry, you know, what do you see in terms of deals, in terms of valuations? What are the trends that you’re paying attention to?

NILESH KUMAR:  Sure. Great question, and “staggering” is the word. I just did a rough math before this. I think if you add the sum of venture dollars raised over the last four years, they dwarf by a multiple fold over what has been raised over the last decade. So the system has raised a lot of money. It certainly shows the extent of interest and excitement in the space, and certainly is helped by the frothiness of the market. Biotech companies raised at breakneck speed, and that helped a lot of earlier stage companies raise a lot of capital, and have gone out and been public, and we are dealing with the fallout of big effects on macro, changes in interest rates, and a number of other things that have impacted, bank failures and so on and so forth. A correction was needed, and, like all corrections, it’s very hard to titrate what is the right amount of correction, and it is this dislocation that helps create opportunities. So, what do we see as we look into the future? Again, as I said, I started my career in the last financial crisis, and this feels a little bit like home, meaning I think valuations are coming down, and have come down, and they have come down to represent the underlying risk, because, frankly, what happened in the last three, four years is I think the market lost its rigor in pricing preclinical risk. It’s as if somehow the risk of drug development had fundamentally shifted. Beyond certain pockets, that is not known to be the case, not in my estimate. So, I think, what we will continue to see is, I think, good companies will get financed, but the valuations will reflect the underlying risk. I think companies that have gone up and raised money and have not delivered on their pipeline will struggle to finance. The other sort of nuance of this, from what we have seen over the last couple three years, there’s been a proliferation of first-time management teams, and they have not been through this kind of thing before.

THOMAS MUCHA:  Yeah, they’re first-time managers.

NILESH KUMAR:  And they raised a lot of capital. And there was I think “profligacy” is the word on pipeline, where, I think, there was not enough focus in capital efficiency. That’s gonna return, which bodes well for this cohort of companies, I think.

THOMAS MUCHA:  I-hung, from your perspective now, what makes biotech and life sciences, among the most dynamic areas to invest in today? 

I-HUNG SHIH:   Yeah, you’re totally right, Thomas: biotech is not a cyclic sector, and because the perennial drivers for this field is our inspiration and our desire to live healthier and longer. We are very excited in the recent years of certain approvals and phase three data sets really to address medical needs in big categories. What I’m talking about is Alzheimer. We have the first drug approved. May not be the best; we have more to come. Second, triple negative breast cancer: we have at least two drugs can really address this subset of breast cancer, which has not been efficiently managed and treated. And, of course, a lot of attention is drawn to obesity. We know this is endemic that our society, modern society, especially in the United States, that we have suffer in obesity as a category. Now, we do have some safe and efficacious drugs that can address that. And the last but not the least, we just went through a pandemic and as sectors we can answer and be able to help the human tribes, but on top of it this is investment areas that we know that when there is a problem in healthcare, there’s a disease, there’s always great innovation behind it to be able to solve it. So, I think that from the disease areas, those are the big trends that we are seeing of late, but on the innovation side, what drives this? In the past decades or so we have seen such an explosion of innovation. The accelerated pace of innovation includes gene editing, and we have the computing power that we never seen before that enables a lot of technologies, especially on the structural characterization, such as Cryo-EM, we didn’t have before. And we have other shiny tools, like machine learning, to help us to understand the complex biological processes. All these tools are the driving force that used to be we take weeks and years to do some experiments, and now we can do it in hours and days. They really facilitate and speed up our process.

THOMAS MUCHA:  So the demand side is the disease; the supply side is these new technologies. Interesting. Nilesh, from your perspective, what are the secular trends that you think are driving innovation here? I mean, is it demographics? Clearly, we’ve got these emerging technologies, this new research, we’ve got these broader societal needs. I mean, to you, what’s really driving the train here?

NILESH KUMAR:  I think it’s a confluence of all those factors. Today, what has happened over the last two decades and more is that our understanding of the underlying disease biology has increased tremendously, for various reasons. And the toolkit with which we can address that biology has increased. It’s not just a small molecule. It’s not just a protein. People are excited about this sector called protein degraders. On the other end is antibody drug conjugates, right? The growth in our understanding, and the growth in our toolkit, and marrying that in a very disease-specific way, to borrow from Thomas Kuhn, would be an episodic revolution in drug discovery and development. The demographics, the inexorable sort of force of society that is gonna create some need to solve sort of concomitant morbidity associated with these aging-slash-sort of obesity, but certainly the increase in our toolkit is gonna help us solve some of these problems.

THOMAS MUCHA:  So we’ve got demand, we’ve got new tools. All of these are allowing you to invest on the cutting edge. So, I-hung, as we’ve been discussing, this market is not immune to exogenous forces. So, let’s dig into some of the market volatility that we’ve seen recently, some of the resulting financing shocks across the sector. I mean, how is that affecting your thinking about the sector? And to put a point on it, to what extent might these near-term market dislocations impact the longer-term trajectory here?

I-HUNG SHIH:   Yeah, Thomas, as you said, biotech is a super high-beta sector, and it’s very vulnerable to high interest rates, as well as risk off environment, and that’s where we are today. We do see that the sector rolled over in 2021, actually before the broader markets fell through in 2022, and partly I think that because the long cycle since the GFC and quantitative ease, we see that our sector went through this hyper-growth phase that created such monsters that lots of companies, few ideas, and capital pile into it, and creating this frothy valuations we just discuss. So, I think actually this valuation reset is a welcomed change for our sector, for the long run, because we do need a more derisking-driven, milestone-driven valuation process, that fundamental-driven than we have seen --

THOMAS MUCHA:  So you see the winners and losers.

I-HUNG SHIH:   Exactly. So, I do think that in terms of the long-term capital requirements for these biotech companies still exist, even though the public funding might be a little bit abated, especially for the generalist point of view. However, just think about all the proceeds from the prior years that continue to fund our private sectors, as well as the biopharma side. They have lots of dry powder to drive M&A. Those long-term capital commitments for the sector still exist. So what I think this recent valuation reset, or the credit crunch that we saw from SVB, that would be very short-term, and probably more on the bifurcated investment environment, that certain companies are probably really gonna run out of the funding, however, the high-quality ones, they’re gonna continue to attract capitals.

THOMAS MUCHA:  So short-term pain leads to long-term gains for these specific winners, right?

I-HUNG SHIH:   Absolutely, and I do think it’s important to note is that market continues to reward those derisking milestones. When we see good clinical data, when we see M&As that continue to write that kind of premiums, I think that this is actually all comforting factors that our investment environment still functions properly.

THOMAS MUCHA:  So, on a related note - let’s break this into two here, how does today’s, let’s call it, regulatory environment complicate the private investment landscape? And then, separately, what about drug pricing as an issue here?

I-HUNG SHIH:   Sure. Let me answer the first part. And regulatory is namely for the US biggest drug markets, FDA’s point of view is very, very relevant to all biotech sectors, including the private ones. We do notice, over the years, FDA may swing one way or the other. However, the pendulum actually is still within a reasonable range. If it’s anything I want to point that might be more a headwind to a private company would be on oncology side, used to be FDA’s oncology divisions are more willing to consider accelerated approval with single-armed dataset. Of late, they are more leaning towards we want to see more wholesale, more complete datasets to consider approval. I do think that for private companies, or smaller biotech companies, to be able to drive long-term commitment, also capitals needs to get to the finish line, that could be something that is more a challenge. However, when we look in neurology division, we see more consideration for conditional approvals, as well as more leeway for orphan neural diseases, and that is great for our private, smaller biotech companies that we have a shorter path forward to approval.

THOMAS MUCHA:  What about drug pricing and how that plays into it?

I-HUNG SHIH: In terms of drug pricing, I think this is a topic that we talk about every election cycle.

THOMAS MUCHA:  Yes, we do.

I-HUNG SHIH:   Yeah, Thomas knows very well. And this is not just for biotech private; this is actually the whole sector, the full healthcare sector’s impacted by drug pricing. I do think that as industries we need to reach sustainability. How do we fund? How do we reimburse? This has continued to be a very important topic for the States, as well as for other markets. I do think that especially for private biotech we continue to see all this pricing discussion doesn’t preclude innovation. We still continue to fund innovation, continue to keep the drug pricing power for those best drugs, and I do think this is more important. We need to be selective. We need to find those opportunities that are transformative to drive the kind of demands and also reimbursement hurdle.

THOMAS MUCHA:  So you think the politics is always just gonna be out there, and we’ll have to deal with it on the investment side?

I-HUNG SHIH:   Absolutely, I do think that this is an issue the sector will have to solve.

THOMAS MUCHA:  Nilesh, your team has noted that private biotech companies tend to require multiple rounds of fundraising, and their cash needs don’t stop at the IPO. How does your team, and the broader Wellington healthcare platform, help companies overcome that cash need challenge?

NILESH KUMAR:  Great question, and I’ll probably add to the question how do we help companies overcome that financing challenge and add value, right? I think this is one of the reasons why I was attracted to join Wellington: because as a board member of private and public companies, we always wanted Wellington in the cap table. And one of the key reasons was it was well-known as a long-term partner for companies, and had a very fundamental view of the space, and was regarded as a validating investor in our space. The ability to collaborate with the wider healthcare team here where they can come in if the company has done well into the IPO, and continue to support the company beyond, brings a tremendous amount of value to potential portfolio companies as long-term partners. I think one of the benefits of the Wellington platform -- and to borrow sort of phrases from photography or art -- is our sort of field of vision, or depth of vision, or perspective, if you will, is much deeper, and our aperture is much wider, given where we sit in the public markets, and being able to understand the risks of an investment opportunity, both orthogonal and within the asset class is helped by that broad and long view of the space. That’s what distinguishes us from a lot of our peers.

THOMAS MUCHA:  Yeah, you’re part of a much broader, much richer, much wider research environment. Speaking of that larger frame, let’s move to my favorite topic, geopolitics, and the role of biotech in this shifting world that we’re all living in today. So, Nilesh, let’s dig into this. Now the biotech industry clearly has a unique role, let’s say, in today’s geopolitical environment. Companies in the US and Europe and China, vulnerable to national security and IP-related tensions, given the shape of great power competition, and the broader tensions that are out there in the world today, not to mention the intersection of biotech and warfare, which is a huge and growing focus of the national security policymakers that I speak with regularly. So, with that as the backdrop, how does geopolitical competition, in your view, affect the biotech market, and in particular the innovation that defines these companies, and that we’ve been emphasizing here?

NILESH KUMAR:  Good and tricky question.

THOMAS MUCHA:  Those are the best kinds.

NILESH KUMAR:  Yes, and I think I’ll start by saying that we believe innovation is global. Innovation does not know geopolitical boundaries or geographical boundaries. We have seen tremendous innovation from Europe. We have seen innovation come out of China, two of the places you mentioned, but beyond frankly. We also believe that a large part of the innovation in our sector is driven by the US.   Now geopolitics and the like are a reality today, and unfortunately innovation hurts in that process. But we remain of the view that we are open to any innovation of any shape or form. You know, as long as innovation is driving a real unmet need, we are open no matter where it comes from. I think we should be careful about sort of precluding continents and countries on innovation, because at the end of the day, if they end up solving human problems, societies at large, I think we should be not putting that into the mix of geopolitics. It’s not quite the same thing as some of the other tech sectors, I would say. When it comes to national defense and security and warfare, of course you have to be airtight, but that’s not what we’re talking about; we’re talking about innovation that solves a human need of sort of amelioration of disease, so to speak, and I think that should have a slightly different algorithm, internationally and geopolitically, I would say.

THOMAS MUCHA:  Yeah, that shouldn’t have restrictions based on the borders, right? Truth and science, all of that is beyond borders.

NILESH KUMAR:  No, and as somebody who grew up in India, I certainly say we should go even beyond that, but that’s for a different discussion.

THOMAS MUCHA:  All right, I’d like to begin to wrap up our discussion today with a focus on the team, and all the collaboration. We’ve been hinting at some of the collaboration; I want to dig into that a little bit. So, I-hung, how does your team collaborate and benefit from Wellington’s broader healthcare team? And we’ve mentioned that some of our most seasoned investors here are long-time experts in the field. So how does that impact your day-to-day?

I-HUNG SHIH:   I actually started out on both public and private side. I was able to sit in the bullpens with the smartest minds in biopharma, healthcare investment, that really helps us not just to have a stronger investment framework, but even in the diligence process, we can ask our colleagues who cover the biopharma side, on the public side, to compare and contrast because our investment targets also compete in the same areas as all other biopharma, public or private. So that vast volume of knowledge and database that exists within our team, that just incredible source. And secondly, I think this is very important, I think portfolio companies as well as the boards of those private companies and venture capitalists is that we are considered as a one-stop shop for them, multiple capital formations from the biotech, from its infancy, in the private series ABC, all the way to IPO and become the large company. We are working seamlessly within our team, but also from external point of view that really is why they come to Wellington and want to include us in their cap table.

THOMAS MUCHA:  Anything to add, Nilesh, on the collaboration side?

NILESH KUMAR:  Yes. I think with that kind of scope, wide aperture, and risk-focused sort of fundamental work that they do, leveraging that is great help to us. If you’re simply a private investor in a firm, your worldview of biopharma is somewhat pixelated, because you only have so much to look at. Here, that aperture is so wide that you can focus on the picture. You can step away from it, and look at the picture, and pick your spots. That sort of back and forth, zooming in and out is a critical component of picking up where it makes sense to invest.

THOMAS MUCHA:  I certainly benefit from that from my geopolitical perspective. You know, even just having the access to experts like you in this one area informs my own thinking about how policymakers are thinking about the national security aspect of this, or the policy implications of that. So, I feel that, too. All right, I-hung, last but not least: I do wanna get a little bit into ESG and this overlap with bioethics. There are many thorny ethical ramifications associated with some of today’s most exciting innovations here. You mentioned a few of them: cell therapy, to gene editing, to AI, all sorts of buzzwords out there. How do you think about these issues in terms of ESG at the company and industry level?

I-HUNG SHIH:   I think this is definitely an area that’s continuing to evolve, and is budding, and I would say that especially for Wellington private investment platform, we are very lucky. We really put this as one of our focus areas, and that’s where we stand out and differentiated from our colleagues. Of course, therapeutics and medicines are always in the forefront to help people, but there might be certain areas that’s more grey, like what you describe. But I do think our ESG team really helps us to help our portfolio companies and make us differentiated in the venture capital space, or private space, where they might not put in so much emphasis already. And this is where a lot of our management teams that come to us for help, right? So, they can help them think about this early on in a governance side, what’s board compositions, compensation, et cetera, especially for young private companies, to provide them with certain framework and criteria to think about that really is helpful for our portfolio companies.

THOMAS MUCHA:  So to steal Nilesh’s analogy here, it expands the aperture on the investment side. All right, well, let’s end it there. Once again, thanks for joining us. I’ve really enjoyed this conversation. It’s been fascinating, getting into the nuts and bolts of such an important and fast-moving and innovative industry. I-hung Shih and Nilesh Kumar, co-heads of Wellington’s biotech private investments team. Thanks for being here.

NILESH KUMAR:  Thank you, Thomas.

I-HUNG SHIH:   Thank you, Thomas.


Views expressed are those of the speaker(s) and are subject to change. Other teams may hold different views and make different investment decisions. For  professional/institutional investors only. Your capital may be at risk. Podcast produced April 2023.

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