Investors Become Goldilocks in a Bear Market

Episode Summary

Current market trends have put investors in a “flight-to-safety” mentality, especially when it comes to biotech companies. What does this mean for getting biotech innovations to the marketplace? This episode explores the daunting challenge of raising capital in a bear market.

Episode Notes

Current market trends have put investors in a “flight-to-safety” mentality, especially when it comes to biotech companies. What does this mean for getting biotech innovations to the marketplace? This episode explores the daunting challenge of raising capital in a bear market.



Episode Transcription

Speaker 1 (00:05):

Do you get the feeling that we're in the process of stabilizing or making some kind of a bottom, or do you think that we've got another significant amount of downside, 10, 20% more to come?

Speaker 2 (00:18):

Investors continue to worry about inflation and the odds of an upcoming recession.

Dr. Michelle McMurry-Heath (00:25):

Current economic challenges are affecting all of us. Families are facing higher prices for everyday items. We're seeing shortages at the grocery store and plummeting 401(k)s. This uncertainty has extended to the investment marketplace as well, as investors take on a flight to safety mentality. They are reducing their risk tolerance and becoming more selective in their investments. But what does this mean for getting biotech innovations to the marketplace? Today, we'll take a deep dive into the daunting challenge of raising capital in a down market and hear from three guests with decades of experience in biotech. I'm your host, Dr. Michelle McMurray Heath, and you are listening to I am BIO. Joining us today are three guests.

Bill Newell (01:37):

I'm Bill Newell, I'm the chief executive officer of Sutro Biopharma.

Sougato Das (01:42):

My name is Sougato Das, I'm the vice president of product and technology at PRISM.science. I used to in fact work for BIO from 2013 to 2017 and in that capacity, I developed the BIO partnering system which facilitates tens of thousands of meetings at the BIO International Convention and other BIO events.

Lisa Drakeman (02:06):

Hi, I'm Lisa Drakeman, I'm a biotech entrepreneur with more than 20 years of experience. I've been from company founding all the way through product approval.

Dr. Michelle McMurry-Heath (02:18):

At a time of unprecedented innovation in the biotech industry, our guests speak about how current market conditions present challenges for companies that need continued infusions of cash to develop products, products that might take decades to reach the marketplace and produce a return. Here's Bill and Sougato.

Bill Newell (02:39):

The market is undoubtedly quite different than it was a year ago. And the capital markets have really constricted such that there is meaningfully less capital available and by that I mean investors are less willing to put their money into a company that is still multiple years away from having product revenue that can sustain that company. And they're looking for other investment vehicles rather than these long time to mature investment opportunities that Sutro Biopharma and many other biotechnology companies represent.

Sougato Das (03:18):

Well, I think companies are definitely looking at their reserves a lot more carefully, a lot more stringently, if you will. Many companies bought more lab space and equipment during the good times, as it were, and even increased staff, but now they have to figure out how to make really efficient use of that. They really need to make sure they're preserving and utilizing every dime they have at this point.

Dr. Michelle McMurry-Heath (03:46):

Efficient is the key word here. Emerging biotech companies already face incredible challenges both in terms of capital and the time it takes to create a drug that is clinically successful. Today's investment climate means that they may have to do so with less support.

Bill Newell (04:06):

You have to be prepared to accept financial terms that are less than what you may think is fair. And by that, I mean a year ago, many of the companies in the biotech sector were worth 30, 40, or even 50% more than they are today. Now fundamentally, their science hasn't changed or gotten worse. Fundamentally their programs haven't failed. Fundamentally many of their programs have moved forward with successful milestones being achieved. And yet the overall sector is down. So even if you are operating and delivering on the clinical development strategy or the pipeline strategy that you have, you'll find that investors are prepared to pay less today than they were in the past. So it's a more challenging environment for sure and one that just requires an understanding of where to go.

Dr. Michelle McMurry-Heath (05:03):

Investors want to pay less and avoid risk.

Bill Newell (05:07):

I think it's fair to say that investors have a risk off mentality meaning they're looking for safer investment opportunities where the returns are more certain and less speculative. Given the length of time that it takes to develop an antibody drug conjugate or another medicine, that means investors have to be very patient and they have to know that the probabilities of success, even for companies like Sutro Biopharma, where we have four programs in clinical development, the probabilities of success are against us as a general rule. And so for every drug that succeeds, that enters clinical development, and that makes it all the way through to commercialization, there are nine other drugs that entered clinical development and never made it all that way. So in a risk off environment where investors find it as difficult to pick the winners and the losers, and don't feel that they can properly assess the drug's potential at early stages, it's not surprising that they are not as willing to make investments.

Bill Newell (06:21):

And that risk off environment really is a function of the overall economic constraints that we're seeing and it's exacerbated by declines in the stock market, it's exacerbated by supply chain issues, it's exacerbated by uncertainties in the geopolitical environment in particular, the Russian invasion of Ukraine, it's exacerbated by the fear of prolonged inflation. And so under those circumstances, none of which have anything to do with the work that we do in our labs and that we do in our clinical trials, all of those create a more risk off mentality for investors and that necessarily translates into reduced fundraising opportunities to sustain development, to sustain innovation, and to bring new medicines to patients.

Dr. Michelle McMurry-Heath (07:16):

Sougato suggests that risk avoidance has led to a different approach by investors.

Sougato Das (07:22):

The types of companies that have attracted large influences of capital over the last, I think more than couple of years, maybe even the last decade, have tended to be platform companies. Platform companies really are very cash intensive and require a lot of cash to develop those robust platforms that can eventually spit out a number of development candidates for development or out licensing.

Sougato Das (07:49):

But I think what we're going to see is a change in that. We're going to see investment go from maybe a 50:50 platform to asset ratio, to more of an 80:20 asset to platform ratio, where investors are going to be more reluctant to invest in platforms and they'll prefer assets or they'll prefer platforms that, it's pretty clear that in two or three years, could spit out some licensable assets. So I think that's where we're going to see a big shift in early stage investing, away from platforms for platform's sake to platform for relatively quick asset sake, or going to pure asset play. But platform for platform play, that means it's a platform that's going to take five or 10 years to develop, I think that's going to go by the wayside for a while now.

Dr. Michelle McMurry-Heath (08:49):

Although the market volatility we're experiencing today seems harsh, it actually pales in comparison to where the industry was 30 years ago. And yet we have many success stories from those years. Lisa Drakeman was there.

Lisa Drakeman (09:05):

In the early days of the biotech industry in the 90s, the industry really wasn't proven and the investment climate was much more fragile than it is now. Antibodies were a product that no one believed in and didn't think could treat anything very successfully. As a matter of fact, when we were working on the IPO and raising funds for the platform company that I worked with, we used to try to think of a synonym for antibodies so we could call them something else because people were so skeptical. I met with two distinguished researchers at the Cancer Research Council in the UK, trying to encourage them to participate in our clinical trials and research. They told me that antibodies would never treat solid tumors, of course we know what happened with that.

Lisa Drakeman (09:54):

So when we compare that kind of environment with the current investment landscape, instead of a roller coaster where funding opportunities could disappear overnight, there's been a really sustained financing opportunity over the past decade. Even though the market isn't strong right now, I don't think it's as delicate as it was in the time that I was working.

Dr. Michelle McMurry-Heath (10:17):

The market may be better than it was 30 years ago, but it is challenging nonetheless. Fewer investments in early stage biotech companies can literally be the difference between life and death. How many research programs will be put on the shelf for lack of funding? What life saving cure will not happen because there was no way to move forward without cash?

Dr. Michelle McMurry-Heath (10:55):

When we come back from a break, we will hear more from our guests on how to beat a bear market.

Dr. Michelle McMurry-Heath (11:09):

In February of this year, our guest Lisa Drakeman co-authored a book called From Breakthrough to Blockbuster. In it, she explains how new medicines come into being, why the process is so breathtakingly expensive, and how small entrepreneurial ventures can compete in one of the world's most heavily regulated industries. Available on Amazon and Oxford University Press or visit thebusinessofbiotechnology.com.

Dr. Michelle McMurry-Heath (11:55):

If you are a small company facing a bear market while trying to get your product across the finish line, what are your options? Bill Newell talked about his company's approach to raising capital.

Bill Newell (12:08):

So I think the Sutro Biopharma story is a pretty typical one in the sense that you start with an idea. In our case, the idea was around a specific technology that is called cell free protein synthesis. It's a unique way of making cancer medicines that are antibody based and it was a technology that was in its infancy when the company was founded in 2003.

Bill Newell (12:37):

Along the way, we've had to figure out how to fund the company and how to grow the company. So if you think back to the early days, there were a couple of people who started the company. When I joined in 2009, I was the 19th employee and today we are 250 employees. We have our own manufacturing facility as well.

Bill Newell (12:59):

So when you think about how you move a company forward without product sales, you have to think of funding and various cycles and so part of our funding came from private investors who understood the promise of our technology and the promise to develop new therapeutics. We raised almost $200 million from private investors. Along the way we also realized that our platform technology could be very beneficial to work in collaboration with large pharmaceutical companies like Merck & Co. or Bristol Myers Squibb, or even EMD Serono, all of whom are our partners. And they've provided us with over $400 million in funding as part of collaboration agreements we have with them on next generation cancer therapeutics of interest to them.

Bill Newell (13:49):

And then finally, we've been fortunate to be able to be a publicly listed company and in the public capital markets, we've raised over $350 million. So there isn't one way to make a company financially viable for 19 years, you really need to cobble together a series of fundraising strategies and that's exactly what we've done. By the way, I might add that we are still several years away from having our first product approval opportunity. So we will look to add additional capital to the company, even beyond the almost billion dollars that has been raised to date.

Dr. Michelle McMurry-Heath (14:30):

Lisa echoed Bill's suggestion that companies look to partnerships instead of the investment market.

Lisa Drakeman (14:37):

In a bear market, it might be better to think about looking at partnership opportunities and I think that's a great opportunity now. Because the industry has proven itself so well, the biotech companies don't meet the kind of skepticism from the pharmaceutical industry they used to and we've talked about the fact that so many new products have come from the biotech industry. We know that partnerships in the 90s were about 500 a year, and now there are about 2,500 new partnerships a year. I think that it's a good relatively non-dilutive, it's possible you might have to give up some equity in a partnership, but relatively non-dilutive way to keep your projects and your company afloat while you wait for the market to return.

Dr. Michelle McMurry-Heath (15:24):

In his roles at both PRISM.science and BIO, Sougato has worked with experts in biotech financing who have provided good advice, some of which he shares with us.

Sougato Das (15:36):

The pitch deck is a very important tool. It's really your instrument to let your suitor know what it is that you have. And the top things that you really need to make sure about your pitch deck is you need to demonstrate an understanding of how to differentiate your asset versus the landscape. You have to know where you're going. You have to know how you're going to be better. You have to understand who's ahead of you. When are they going to have their data read out? And how are you going to differentiate yourself? How are you going to overcome the standard of care? These are the things that are really important.

Sougato Das (16:23):

It's important that you've taken the time to really cost out how much your development plan is going to take with people who are really well versed in the space and they have to be people who are well versed in the recent environment with supply chain slowdowns and so forth. If there was someone who was an expert five or 10 years ago, but hasn't worked in the field since then, that's no good. It has to be someone with knowledge of what's going on right now. You have to make sure you have a team that you present in your pitch deck that you can rely on as advisors and that you've really worked with them to do the diligence to make sure that what you have is really viable and you really need to be open about what your go, no go criteria are.

Dr. Michelle McMurry-Heath (17:20):

The pitch deck is critical. So is where you deliver it.

Sougato Das (17:25):

Well, I think the one point of advice I'd give right now is companies navigating a bear market have at a very high level, two ways of doing it. They could do it in person, or they could do it virtually. Now there have been a lot of deals happening during COVID. So it's not that you can't do things virtually. You certainly can. We're doing this podcast virtually.

Sougato Das (17:50):

But there's competition out there. And when it's your asset versus another equally attractive asset and you meet with investor virtually, and someone else meets with them in person, the in-person meeting is going to have the advantage. There's a connection, a bond that's made at in person meetings that really just doesn't happen virtually. So I would suggest to everyone to get to the BIO International Convention, the first big in-person partnering event, since JP Morgan 2020 and beat your competitor by simply being in person.

Dr. Michelle McMurry-Heath (18:39):

Bill Newell can attest to the benefits of BIO's partnering system.

Bill Newell (18:44):

As a small company, I knew from the beginning of my time here at Sutro Biopharma, that we wouldn't be successful if we tried to go it alone. And so we always set out to have a strategy that would allow us to collaborate with other companies in our industry because no one company has all of the right skills and people and knowledge to be successful.

Bill Newell (19:13):

So events like BIO international, which allow us to meet with our colleagues at big and small companies really give us an opportunity to create win-win scenarios for both companies. I mentioned a little while ago that Sutro has benefited from over $400 million in collaboration revenue from large companies, Merck, EMD Serono, Bristol Myers Squibb are our current and most significant partners. We met them and sustained relationships with them through connections made at conventions like the BIO International Convention and many partnering discussions go on at a convention like this. Because while the fundraising environment may be constrained, our industry continues to look for new medicines and continues to find ways that companies large and small can collaborate.

Bill Newell (20:15):

And so the BIO International Convention and the Business Forum where partnering takes place are really fundamental to the life cycle of our industry and to continuing the development of new therapeutics. I would argue that in an environment where the capital markets are constricting, such as we have today, partnering is a ever more important option for companies to continue to develop the drugs that we want to bring to patients.

Dr. Michelle McMurry-Heath (20:46):

BIO has made collaborating at convention seamless through our One-on-One Partnering System. Here's Sougato again, who was one of the partnering system's founders.

Sougato Das (20:56):

The BIO partnering system is I would say one of the phenomenons in the industry that's little understood outside of that core group of the biotech ecosystem that comes to the BIO events. It's really something that drives innovation in the industry and helps bring life saving therapeutics to the world. It's always interesting that these mechanisms that underlie our everyday health are so little understood.

Sougato Das (21:28):

But at a very high level, it's a very simple system. It's a system that contains profiles of thousands of biotechs, thousands of pharmaceutical inlicensers, thousands of investors, thousands of patient advocacy groups, tech transfer offices, investment banks, angel investors, economic development agencies, basically everything you want to have a happy biotech life, everything you need to make the connections and the partnerships in order to take an asset from a patent all the way to the market.

Sougato Das (22:09):

The system itself, as I said, involves profiles of the various companies and participants who are in the system and then a calendar, which lets you mark when you're available to have a meeting. If you're attending a BIO event, it consists of a search functionality which gives you extremely granular and advanced functionality to help pinpoint the kind of partners or companies that are ideal for you. And then it has something called the message center where you can send requests to have meetings with the companies or institutions that interest you.

Dr. Michelle McMurry-Heath (22:56):

BIO's partnering system has helped make BIO's convention the largest biotech business gathering in the world. But as Lisa shared with us, it wasn't always that way.

Lisa Drakeman (23:07):

You know, I went to give a talk at the Toronto conference, it was the fourth conference. 500 people were expected. People were very excited about that increase in attendance, which I think is a far cry from probably the 20,000 or more that you see nowadays. So you have to remember, this was a very small group of people who banded together to help the industry succeed.

Lisa Drakeman (23:31):

Having said that, even though we were struggling for attention and for funding for the companies, this industry really heralded a golden age of drug development and BIO was hand in hand making that happen. I don't know if you realize that biotech companies have outperformed pharma in terms of research productivity by about 40%. We took a look at the approval of priority drugs, drugs that really make a difference in treating patients and we found that over a long period of time that most of those drugs were coming from the biotech industry. So this is an industry that the BIO organization helped survive and thrive and now look what we've done for patients everywhere.

Dr. Michelle McMurry-Heath (24:21):

BIO will always provide ways to ensure the industry continues to thrive. And I can't wait to see you all in San Diego in less than two weeks for the 2022 BIO International Convention. This is the last episode of our season. We look forward to you joining us on September 13th for our fall season. And thank you for listening to I am BIO.

Dr. Michelle McMurry-Heath (24:50):

Make sure to subscribe, rate, and or review this podcast and follow us on Twitter, Facebook and LinkedIn at IAmBiotech. And subscribe to Good Day BIO at bio.org/goodday. This episode was developed by executive producer, Theresa Brady and producers, Connor McCoy and Marilyn Sawyer. Sound design and mixing by Jay Goodman. Theme music created by Luke Smith and Sam Brady.