Q&A: Pharmaceutical/Biotech Industry

I do not since I'm usually on the other side of the fence doing the corporate strategy for companies that are either well or somewhat established. What I can tell you from seeing some smaller biotech clients in their early days is that the main success factors are usually:

• Being able to identify your target population and the true unmet need in it
• Bring something new or innovative to the table. I don't mean something curative and ground breaking, but even something that is reformulated and goes from once daily dosing to once monthly is a huge plus for certain patients (although with benefits like this, do not expect outstanding prices)
• Having a solid game plan for clinical trial development and concrete timelines. Tied to this is also realistic expectations of how you will bring something to market if it succeeds (e.g., knowing which companies to partner with etc.)

sellslider

Thanks a ton for doing this. I am newish to the space (and on sellside), feel free to ignore if my questions are off-base.

1. You mentioned in a different post that there are things to look for in companies that will either succeed or flop - would you mind sharing what those are?
2. What's your stock screening process like? How do you find potentially investable therapeutic areas and specific companies? 
3. How do you identify shorts with lead assets that are still in the clinic? Overly rosy market/pricing assumptions by the sellside? Too high of an implied PoS based on where shares are trading? Sketchy safety profile? Label concerns? Something else? 
4. How much value, if any, do you place on preclinical data, particularly in very early-stage biotech companies?
5. Kind of an offshoot of the above question, but what is your DD process for companies/drug classes that have very little clinical data? Like for example, how do you think about things like solid tumor-targeting and/or allogeneic CAR-T?  
6. How much weight, if any, do you place on doc/KOL calls? What do you look for when selecting experts to talk to? 

To add onto q1- what would you say are the biggest red flags for an investor looking into a small biotech name? 

1. Have shared some above in other comments :) In a nutshell, the robustness of their clinical trial design which directly influences coverage and reimbursement 
2. For specific companies, it is much of the same things mentioned above for general success or failure. For therapy areas, orphan diseases are quite popular now but everyone things they can launch shit drugs and still get great pricing. Within orphan drugs always look for something that is truly an unmet need and whether the drug is unique compared to others. For example, avexitide is a drug being tested for post-bariatric surgery hypoglycaemia (PBH) and being marketed as an orphan drug because of the small prevalence of the indication. But the truth is that PBH is no different to standard hypoglycaemia for which there are cheap generics available. If this drug launches, some payers might drink the cool-aid whilst others will catch on pretty quickly, call bullshit and not reimburse it (or with severe restrictions).
3. Yes, a combination of them all. At this stage you mainly look at how robust the clinical trial is and whether it has surrogate endpoints (see my comments above as to why), size of the trial, whether it is exploring differing patient populations (e.g. mild-moderate vs moderate-severe). 
4. Quite limited to be honest. Plenty of companies get overexcited with new technologies (e.g. Gilead and Kite Pharma - Yescarta is not doing great and neither is the rest of the pipeline they bought). With early stage companies it's a bit of a gamble because a fair amount of pre-clinical stuff doesn't do so well in the clinic.
5. Same as above to be honest. Even interim results can give you an idea of how things are and you can understand the likelihood of success even from a single Ph3 trial.
6. Super important. When doing small studies we look for KOLs who are at the top of their field, influence guideline publications and are involved in clinical trials. This is because they have their pulse on both the medical side of things as well as a strong commercial understanding and can give us an initial idea of pricing and coverage potential. In larger studies, speaking to many doctors (30+) you get a sense of what the clinical situation is actually like. A company may be launching drug A and see drugs X, Y and Z as competitors. But then speaking to physicians you understand that drug X is rarely used due to safety concerns and compliance is low with Y due to shitty dosing. So now you know you need to focus on beating Z as a priority.

Not going to lie, it does help quite a bit. It helps in terms of speed more than anything. I can look at a trial and understand what the main points are, what certain red flags are (medically speaking) faster compared to a non-stem background. But generally speaking, the level of science covered does not exceed that of UG education. Having a PhD is not necessary at all and is mainly used as a marketing tool to win projects. I truly don't mean to brag, but I have a combined medical and business background and run circles around freshly minted PhDs who only understand the science side of things, especially when it comes to M&A advisory and the need to understand the business rationale behind decisions. The gap narrows as time goes on, but it is quite evident at the start. Same with non-STEM people.

I also work in the field, doing primarily buy side M&A and licensing. I did not study a scientific subject in undergrad or have a 'healthcare' focus in my MBA. It has not made a bit of difference in dealing with my clinical colleagues. Either you can hang, or not.

PE funds rarely venture into pharma/biotech because of how risky it is and the long timelines before you get a return on your investment. When they do buy companies, it is mainly about internal restructuring, optimizing operations in preparation for successful launches or optimizing their on-the-market portfolio. You can break in by doing CDD work, operational projects and portfolio optimization work.

Good question. I'd say, besides the nature of the endpoints (composite, surrogate etc.) maybe also look at the general safety data, secondary endpoints, quality of life measures (super important in Germany and France for reimbursement) as well as what patient advocacy groups have to say. Benlysta was the first treatment for Lupus and was given pretty solid reimbursement in Europe. The issue is that Lupus patient advocacy groups pressured incredibly hard for it to be reimbursed even if the clinical data was a bit shit. On top of that, it has major safety concerns so many physicians are hesitant to use it freely. Remember, hitting the primary endpoint doesn't always mean the drug is good in the same way that missing it doesn't mean its shit. 

Another key thing to look at is the nature of the trial. What it vs placebo or an active comparator? How relevant is the active comparator? Payers don't love placebo controlled trials, especially if there are drugs for that indication on the market. I've also seen a fair share of drugs with active comparators get crappy coverage. Why? Because they may have been the 4th drug to launch and ran their trial vs the 1st drug which launched 10-15 years prior. Payers see through this. 

bioRxiv is another good source for papers published prior to peer review

It depends on the role, but generally you'll find that most do. Thing is, many of the have MBAs which they may have been sponsored for when courting the C-suite role. However, there are notable exceptions. The CEO of Incyte ($20Bn) just has a bachelors and so do the CFO of BioMarin, CBO and CFO of Ipsen as well as CFO of Regeneron to name a few. In those cases, it's pure grinding your way to the top.

In the consulting space, it's more about experience. Hell, I boss around PhD students simply because I have the consulting years under my belt.

1. A biomedical background is helpful for sure so studying biomedical sciences, biochemistry, biology, pharmacology etc. helps
2. Don't know many really small ones in this space, but a couple to look out for are Karyopharma, Clovis Oncology and NantKwest. Karyopharma has a few marketed products and some close to approval, Clovis' PARP inhibitor is gaining more popularity and there's a good chance they may be bought out whilst NantKwest has show spectacular early data with thier cancer platform. If they keep it up they can really bring about a paradigm shift in oncology treatments.
3. None come to mind right now, will have a think.
4. No. Investors bet big on many companies because some will inevitably succeed but the market is pretty self regulating in that most will end up failing on their own. I don't doubt that some of them are overvalued, but it is nowhere near the tech /fin-tech bubble.

They're pretty smart, they have a good business model that is quite successful on a small scale (not really possible on a large scale - did my postgraduate thesis on this). Royalties for pharma will always be lucrative because we're still taking about billions. If drug prices were slashes, companies would make less money but still enough to keep the industry being one of the most attractive out there. COVID hasn't really brought on a "lack of regulation" per se, it has found ways to expedite a slow process only for extreme emergencies in a similar way to what happened (on a smaller scale) for Zika and Ebola drug development. Post-COVID drugs will still need the usual 10-15 years and $1-2Bn for approval.

They do pretty well in their specific roles (due to the skillset IB provides, you're still stuck of a finance-based role most of the time). In small companies you could be CFO or some high level finance role to guide companies through funding processes or transactions. In larger companies you have more finance roles so more to pick. A big one for many is to work on transaction teams that do internal M&A. Companies like UCB, Roche and Gilead have dedicated teams for this (many other do too). Worth checking them out.

Good Qs. Here's my thinking:

1. Not much. The key to remember here is that there are plenty of companies that make a very large portion of their revenue from Europe where nationalized healthcare means lower prices and lower revenue per patient compared to the US. Yes, the US is still a priority for many companies but not by a huge margin for some. Nationalizing healthcare simply puts everyone on the same playing field. Since you can't compete excessively on price (by this I mean that your pricing will be judge more harshly based on the quality of your product) you have to compete on quantity. The only way to succeed on quantity is by having a safety and efficacious product that becomes the standard of care for that condition because of how great it is. If anything I think innovation will go up. I'll give you an example. Exondys 51 is a drug for DMD - a rare genetic disease that leads to muscular issues in boys. It's shit. Just plain shit drug with poor clinical efficacy. So poor that the EMA refused to approve it (and the EMA/FDA approve almost anything). A drug that can't even pass the very low bar of EMA/FDA approval shouldn't be on the market. Yet, because Sarepta knew that the FDA would likely approve it and that, due to a non-nationalized healthcare system, some US payers would cover it at a ridiculous price it became lucrative as a "US Only" drug. Other companies have followed this path which is the most toxic approach to medical innovation. In a system where having a shit drug means low prices and no coverage and where producing a high quality drug is the only way to make money, you'll see an increase in innovation.
2. For all 3, I would say Europe and I'm bias because I'm a European living in the UK. I would gladly go to the NHS for a regular check up and have chronic treatment or an elective procedure done in the private sector. If you can afford private insurance, then care in Europe is pretty much the same as private care around in the US. If I had to have both a chronic treatment and elective surgery done by a national healthcare system, I would probably opt for Germany, Switzerland or Italy. 

What is your take on whether an MD/PhD is necessary in order to make successful investments in clinical stage companies (public or private)? 

Happy to help! I think immunology conditions such as rheumatoid arthritis, psoriasis and psoriatic arthritis are an absolute money pit. Anyone investing in those is wasting money because you have a huge number of high quality established players (many of whom are going generic or biosimilar) and no need for new drugs. Same goes for many of the common cancers (breast, colorectal, NSCLC etc). The key with cancer is early detection - if you catch it early, standard chemo does the trick. Yes, some drugs have brought about step changes e.g. the first couple PDL1s or ALK inhibitors. But the market is becoming very crowded.

Bacterial infections don't get much love, but to be honest it's a very challenging proposition. Most antibiotics are old as hell and generic meaning that willingness to pay is generally low. Additionally, when you find something that works you have to restrict use if not you risk developing resistance. Those two things make for a crappy commercial proposition. That's why NGOs and medical associations have to pitch in for bacterial infection R&D. If you can find something that does not lead to bacterial resistance, then you've hit the jackpot.

Exposure is key. If you start at a generalist firm, try and land on as many HC projects as you can. Nail them and show a genuine interest for the industry. This was you can specialise quickly and end up working for pharma/HC teams in consulting firms.

1. In most cases a PhD/MD will likely be very advantageous, unless you can find someone internally willing to bat for you just back on your professional background.
2. Predominantly the Ph1/2 assets simply because those are the advanced ones. Many companies might non even disclosed the number if IND enabling assets in the pipeline and just say something like "many assets" or "10+". Their value is not 0, but close to it.

1. How do you value a Pharmaceutical/Biotech stock?

2. What are the most important metrics you consider when looking at a stock?

3. I majored in math. Is it possible to break into Biotech HF/ HC IB?

3. Yes, if you're actually really good, went to a top school, and have ideas on how to implement your quantitative skills to biotech. But it'd probably be better if you went to a quant fund. 

1. and 2. Mostly what I said above - you look at the clinical data and attractiveness of the commercial proposition.

Thanks man! Hope all is good on your end too

What do you mean by this exactly? Will the Biden administration be favourable for domestic pharma companies?

1. I don't think so. At least not in the next 3-5 years. Although mRNA is Modern's bread and butter (and got a lot of media attention), the legacy big players in the vaccine game still use proteins or attenuated version of viruses. You can check out Sanofi's and GSK's pipeline to see that mRNA is not the mechanism of focus (only GSK has one mRNA candidate in the pipeline). mRNA is an incredibly delicate molecule, hence why it needs to be stored at very low temperatures. It may be an effective vaccine option, but no better (as far as we currently know) than others and a massive pain in the ass to deal with. It would be very unlikely to make a mRNA vaccine for diseases like Yellow Fever, Ebola and others that are prevalent in low income countries. Effective deployment would be almost impossible.
2. I don't think so. Remember that CRISPR is simply a tool for very accurate gene targeting and editing. Perhaps it may help development for RNAi or gene therapy candidates, but for the most part it won't affect the system. Most companies take all candidates that work and test them at the same time so do not need to go back to the drawing board if one asset fails. Additionally, speed has pretty much reached a peak with high-throughput screening of early stage candidates. That's one of the fastest ways to find all potential candidates. 

I honestly don't know...I'd use FierceBiotech and FiercePharma to learn about companies. Cowen issues massive reports by therapeutic area but I think they aren't free. YouTube is probably a good source to understand the basic science behind some of the newer technologies. 

The quickest and easiest thing is to go look at the investor decks that companies put out to present clinical trial results for the areas you're interested in.

Thanks man, really appreciate the kind words!

FiercePharma, FierceBiotech, Bio Space, Bussiness Wire's healthcare section, PharmaTimes and PM Live. Those are the main ones.

I'd read websites like FiercePharma/FierceBiotech and google ER reports or industry primers. Consulting firms also issue large industry overview pieces (e.g. PwC, Kx Advisors etc). I covered it because it's one of the most interest ones out there. So many innovative drugs and companies in the market, paradigm shifting changes in improvement in QOL and survival. It is also a pretty recession-proof industry so business is always good.

Potentially yes. You're modelling skills will certainly come in useful for healthcare IB. If you can solidify your scientific knowledge that will also give you a big boost when it comes to recruitment.

If you come from IB, PE is quite easy provided you can show a track record of healthcare/biotech deals. VC is also not that challenging from IB, but the industry has some different dyamics and is based a lot on connections and referrals. From consulting, both paths are doable but you need to showcase some financial prowess as well as experience with due diligence, operations and growth strategy projects.

I think so. If you have a true passion for industry, developing investment theses and understanding the inherent strategy behind many companies, then ER is for you. That being said, the top earning bracket in ER takes many many years to reach and is also reserved for the absolute cream of the crop. I wouldn't go into ER with the idea that you can make a lot of money because the quickest route to $1M+ compensation is probably IB -> HF. But don't sleep on ER as a career path, it can be very interesting and lead to great exit opportunities.

Dud. Biogen jacked the price up way too much and the FDA went from hating it to approving it with an insanely broad label. I really don't think it will see much use and it will face massive access hurdles once it comes to plan coverage. Wait until the EMA deal with it. If they approve it, no country in Europe will reimburse it unless it has an incredibly narrow reimbursement label and they cut their legs off at price negotiations. I think the approval came from political pressure to approve "something". But the market often self-corrects in these cases; Benlysta was approved and reimbursed for Lupus a few years ago due to pressure from patient groups who has no other choice. Since the drug was quite shit, it got poor coverage and reimbursement across the world. Aducanumab is likely going to face the same fate.