Hub and Spoke
A new model to cure disease
MIT’s Dr. Andrew Lo, one of the leading advocates of the portfolio approach, gives a lecture that goes like this: The ‘omics’ revolution is a marker of tremendous progress in the life sciences. There is genomics – the study of the sequence of the human genome, epigenomics – the study of the on/off switches that cause certain genes to be expressed and others to be suppressed, transcriptomics – the study of how these gene sequences get translated into proteins, proteomics – the study of the 20 to 25,000 different proteins that make up the human body, metabolomics – the study of all the chemical reactions that occur to make life possible, and, most recently, microbiomics – the study of the bacterial colonies that inhabit the body and provide us with all sorts of important functions. All of these ‘omics’ have experienced tremendous advances over the last few years, with the exception of one, and that exception is econ-omics. The fact that we still need to figure out better ways of paying for all of these therapeutics is where the bottleneck occurs.
A successful new drug might pay off US$2 billion per year for a decade and only cost US$200 million to create. However, the chance of success is low (5%); even with that payoff, many investors balk at the risk.
The essential question is: what if you could pool the risk? Lo proposed creating a US$30 billion fund to finance 150 biotech startups (US$200 million each). The key insight was that each startup had to target a different (and unrelated) disease. Lo wanted all of the startup bets to be completely uncorrelated, meaning failure by one would have zero effect or relation with another. Using this model, his research showed that the odds of finding one successful drug would be greater than 99%. The odds of finding five drugs would be over 87%. This approach effectively de-risked biotech funding for the most conservative and largest investors in the world.
With this knowledge, Neil Kumar, one of Dr. Lo’s students, went on to found Bridge Bio, which alongside Roivant Sciences and PureTech Health, are pioneering the execution of the portfolio model. Others like Elevate Bio have followed with a US$525 million series C and Centessa with their US$250 million series A, founded by Moncef Slaoui, who ran operation warp speed during the Trump administration.
Vertex Ventures HC managing director Carolyn Ng has taken notice of the promise in the space. “There are ways of conceiving platform concepts with unique business models. This perspective led to our investment in Elevate Bio’s Series B last year. They have a central cell and gene manufacturing facility called Basecamp on one hand, and about half a dozen cell and gene therapy programs incubated and founded with different scientific founders on the other. Not only does the central facility Basecamp serve process development and manufacturing needs of its in-house incubatee companies, it also provides such services to non-Elevate companies,” NG commented.
One of the key reasons this model is gaining so much traction is due to the success of the early movers in the space. PureTech Health, for example, has 22 therapeutics and therapeutic candidates of which 15 are clinical stage and 2 have been granted FDA clearance and European marketing authorization. In conversation with PureTech’s founder and CEO, Daphne Zohar, she explained that the group decided that, given the fund’s initial scarcity of resources, it would fund new medicines that it developed by putting them into subsidiaries (Founded Entities). This allowed the company to share the cost of development with investors to advance those medicines. As those programs progressed and PureTech developed a track record of multiple clinical successes, that generated more resources and consequently, they have been able to keep ownership of new programs and develop those internally. These make up their wholly owned pipeline.
Bharatt Chowira, who joined PureTech as president and chief of business and strategy after a stint running Synlogic, highlighted the fact that because of PureTech’s model, its Founded Entities are very well funded and have excellent independent management teams. “We see them as partnered programs that are generating value for us but do not require a great amount of our resources at this point. For example, we brought in about US$347 million from the sale of equity in Karuna in 2020. We are still a major shareholder in Karuna and we still have equity and royalties, but that gave us flexibility that many biotech companies do not have,” said Chowira.
In the case of Roivant Sciences, they are organized as a decentralized family of biotech business units that they call Vants. Their view is that innovation in biopharma most often occurs through small teams with skin in the game. Their model is designed to recruit top talent and incentivize management teams based off of the individual projects they are working on. Under the leadership of Matthew Gline, who replaced Vivek Ramaswamy as CEO this year, the company will continue its Vant portfolio approach. However, the intent is also to build out its capacity in computational drug discovery and tech-enabled clinical trial monitoring. In their view, they are building one of the first large scale pharma-tech companies.
In Matt Gline’s words: “Historically, when our team came up with an idea, such as targeting the neonatal Fc receptor, we would boil the ocean and find drugs at academic centers, biotech companies, and big pharma that matched our hypothesis. We then would in-license, acquire or partner on those therapies. That is still a big part of who we are as a business, however, we started to realize that our engine for finding promising targets would sometimes produce a target that we could not acquire. For the most part, up until recently, what we did with those targets was to put them in the discard bin. The discard bin eventually became full, and at the same time some of the data scientists working on target identification made the case that we could do better at using machine learning to design new medicines.”
With that insight, Roivant formed a unit called VantAI to discover and develop more medicines in house, and notably acquired Silicon Therapeutics in February. The company has what Roivant believes is the most precise computational molecular dynamics toolkit in existence. “Now we can take a new and difficult problem like degrading a tough to hit protein like p300-CBP, and we can simulate that system’s atom-by-atom design using Silicon Therapeutics’ toolkit. Consequently, we get this unique flywheel that comes from the combination of molecular dynamics, medicinal chemistry, wetlab and machine learning, which is a rarity for a company to have all under one roof,” Gline affirmed.
“Deciding to focus on Phase 2 and Phase 1 assets requires us to assume risk and be patient. There are two critical factors that matter as we think about a monetization transaction: 1) Is there a pharmaceutical partner or well-funded biotech doing the clinical development work? 2) How predictive is early data of a positive ultimate outcome? Not all therapeutic areas are created equal in that respect.”
James R. Neal, CEO, XOMA
Another form of portfolio construction gaining attention over the past year is the royalty monetization model. There have long been well-established royalty businesses, yet most have been privately held. 2020 marked a resurgence of interest in royalty aggregators as an investment vehicle when Royalty Pharma’s IPO was valued around US$30 billion, one of the largest of the year. XOMA is another of the pure-play royalty aggregators in the biotech space. Their CEO James Neal explained: “We help biotech companies fund their businesses by employing our milestone and royalty monetization model, which is unique from other royalty aggregators in this space. In simple terms, royalty monetization is the exchange of the potential future at-risk economics for cash today.”
This can be an extremely important form of financing because companies who license their invention to another typically put that up-front capital to use by funding innovation and clinical trials. Neal elaborated: “The originator, the company who is entitled to receive economics on the out-licensed asset, may decide it is in their best interest to sell the potential future license agreement economics in exchange for cash today, versus waiting for what could be five-plus years to see meaningful financial returns.”
Image courtesy of Insmed